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 March 31, 1999
[ ] 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 May 10, 1999, the Registrant had outstanding
9,516,357 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)
3/31/99 12/31/98
(Unaudited)
----------- --------
ASSETS
Cash and due from banks $ 26,475 $ 25,355
Federal funds sold 1,688 17,476
--------- ---------
Cash and cash equivalents 28,163 42,831
Time deposits in other
financial institutions 6,131 6,127
Securities:
Available for sale-at market
(cost of $237,415 for 1999 and
$236,417 for 1998) 238,888 239,770
Held to maturity-at cost
(approximate market value of $2,860
for 1999 and $2,871 for 1998) 2,718 2,718
Loans and leases:
Held for sale 11,425 10,985
Held to maturity 633,488 579,148
Allowance for possible loan and
lease losses (8,458) (7,945)
--------- ---------
Loans and leases, net 636,455 582,188
Assets under operating leases 35,656 34,622
Premises, furniture and equipment, net 20,163 19,780
Other real estate, net 800 857
Other assets 26,161 24,892
--------- ---------
TOTAL ASSETS $995,135 $953,785
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 74,676 $ 70,871
Savings 303,417 292,852
Time 357,487 354,154
--------- ---------
Total deposits 735,580 717,877
Short-term borrowings 104,109 75,920
Accrued expenses and other liabilities 17,099 18,095
Other borrowings 54,200 57,623
--------- ---------
TOTAL LIABILITIES 910,988 869,515
--------- ---------
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 March 31, 1999,
and December 31, 1998) 9,707 9,707
Capital surplus 14,984 14,984
Retained earnings 61,532 60,154
Accumulated other comprehensive income 905 2,107
Treasury stock at cost
(188,447 and 172,173 shares at March
31, 1999, and December 31, 1998,
respectively) (2,981) (2,682)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 84,147 84,270
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $995,135 $953,785
========= =========
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
3/31/99 3/31/98
-------- --------
INTEREST INCOME:
Interest and fees on loans and leases $ 12,821 $ 12,207
Interest on securities:
Taxable 3,020 2,816
Nontaxable 292 293
Interest on federal funds sold 53 373
Interest on interest bearing deposits
in other financial institutions 101 57
-------- --------
TOTAL INTEREST INCOME 16,287 15,746
-------- --------
INTEREST EXPENSE:
Interest on deposits 7,192 6,670
Interest on short-term borrowings 1,014 1,188
Interest on other borrowings 880 698
-------- --------
TOTAL INTEREST EXPENSE 9,086 8,556
-------- --------
NET INTEREST INCOME 7,201 7,190
Provision for possible loan
and lease losses 534 350
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
AND LEASE LOSSES 6,667 6,840
-------- --------
OTHER INCOME:
Service charges and fees 866 698
Trust fees 594 496
Brokerage commissions 105 72
Insurance commissions 202 253
Securities gains, net 523 661
Rental income on operating leases 3,623 398
Gain on sale of loans 407 273
Other 206 97
-------- --------
TOTAL OTHER INCOME 6,526 2,948
-------- --------
OTHER EXPENSES:
Salaries and employee benefits 4,417 3,562
Occupancy 463 377
Furniture and equipment 531 495
Depreciation on equipment under
operating leases 2,640 284
Outside services 449 260
FDIC deposit insurance assessment 31 32
Advertising 263 175
Other operating expenses 1,339 1,028
-------- --------
TOTAL OTHER EXPENSES 10,133 6,213
-------- --------
INCOME BEFORE INCOME TAXES 3,060 3,575
Income taxes 921 1,094
-------- --------
NET INCOME $ 2,139 $ 2,481
======== ========
EARNINGS PER COMMON SHARE-BASIC $ 0.22 $ 0.26
EARNINGS PER COMMON SHARE-DILUTED 0.22 0.26
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.08 $ 0.075
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 1998 $ 4,854 $13,706 $58,914
Net Income-First three months
1998 2,481
Unrealized gain (loss) on
securities available for sale
Reclassification adjustment for
gains realized in net income
Income taxes
Comprehensive income
Cash dividends declared(1):
Common, $.075 per share (711)
Purchase of 21,964 shares
of common stock
Sale of 2,396 shares
of common stock 24
------- ------- -------
Balance at March 31, 1998 $ 4,854 $13,730 $60,684
======= ======= =======
Balance at January 1, 1999 $ 9,707 $14,984 $60,154
Net Income-First three months
1999 2,139
Unrealized gain (loss) on
securities available for sale
Reclassification adjustment for
gains realized in net income
Income taxes
Comprehensive income
Cash dividends declared:
Common, $.08 per share (761)
Purchase of 16,301 shares
of common stock
Sale of 27 shares
of common stock
------- ------- -------
Balance at March 31, 1999 $ 9,707 $14,984 $61,532
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- -------- -----
Balance at January 1, 1998 $ 2,545 $(2,247) $77,772
Net Income-First three months
1998 2,481
Unrealized gain (loss) on
securities available for sale 53 53
Reclassification adjustment for
gains realized in net income (661) (661)
Income taxes 207 207
-------
Comprehensive income 2,080
Cash dividends declared (1):
Common, $.075 per share (711)
Purchase of 21,964 shares
of common stock (645) (645)
Sale of 2,396 shares
of common stock 42 66
------- ------- -------
Balance at March 31, 1998 $ 2,144 $(2,850) $78,562
======= ======= =======
Balance at January 1, 1999 $ 2,107 $(2,682) $84,270
Net Income-First three months
1999 2,139
Unrealized gain (loss)on
securities available for sale (1,298) (1,298)
Reclassification adjustment for
gains realized in net income (523) (523)
Income taxes 619 619
-------
Comprehensive income 937
Cash dividends declared:
Common, $.08 per share (761)
Purchase of 16,301 shares
of common stock (300) (300)
Sale of 27 shares
of common stock 1 1
------- ------- -------
Balance at March 31, 1999 $ 905 $(2,981) $84,147
======= ======= =======
(1) Restated to reflect 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 CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
3/31/99 3/31/98
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET CASH PROVIDED FROM OPERATING
ACTIVITIES $ 2,759 $ 6,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (4) -
Proceeds on maturities of time
deposits - -
Proceeds from the sale of
securities available for sale 9,340 1,144
Proceeds from the maturity of and
principal paydowns on
securities held to maturity - 306
Proceeds from the maturity of and
principal paydowns on
securities available for sale 16,472 5,999
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities held to maturity - 204
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 21,367 6,459
Purchase of securities available
for sale (37,526) (2,245)
Purchase of mortgage-backed
securities available for sale (9,667) (15,692)
Net increase in loans and leases (54,645) (10,164)
Net increase in assets under operating
leases (3,674) (1,536)
Capital expenditures (867) (346)
Proceeds on sale of fixed assets - 8
Proceeds on sale of repossessed assets 136 4
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (59,068) (15,859)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts 14,370 (4,698)
Net increase in time deposit accounts 3,333 8,420
Net increase in other borrowings 2,172 4,327
Net increase (decrease) in short-term
borrowings 22,594 (19,871)
Purchase of treasury stock (300) (645)
Proceeds from sale of treasury stock 233 296
Dividends (761) (711)
--------- ---------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 41,641 (12,882)
--------- ---------
Net decrease in cash and cash
equivalents (14,668) (22,266)
Cash and cash equivalents at
beginning of year 42,831 57,185
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 28,163 $ 34,919
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 73 $ 245
========= =========
Cash paid for interest $ 9,123 $ 8,532
========= =========
Other borrowings transferred to
short-term borrowings $ 5,595 $ 823
========= =========
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, 1998,
included in Heartland Financial USA, Inc.'s ("the Company") Form
10-K filed with the Securities and Exchange Commission on March
31, 1999. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the audited
consolidated financial statements has been omitted.
The financial information of 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 March
31, 1999, are not necessarily indicative of the results expected
for the year ending December 31, 1999.
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 quarters ended March 31, 1999 and 1998, are
shown in the table below:
Three Months Ended
3/31/99 3/31/98
------- -------
Net Income $ 2,139 $ 2,481
======= =======
Weighted average common shares
outstanding (000's) 9,519 9,472
Assumed incremental common shares issued
upon exercise of stock options (000's) 191 189
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,710 9,661
======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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.
At March 31, 1999, the Company stood on the threshold of becoming
a $1 billion company, as total assets grew to $995,135, up
$41,350 or 4.34% from year-end 1998. At the same time, the loan
portfolio experienced significant growth, with an increase of
$54,780 or 9.28% to $644,913 at the end of the quarter. These
increases are consistent with the Company's growth strategies and
confirm the general acceptance of the Company's community bank
philosophy in the communities served.
Earnings for the first quarter of 1999 totaled $2,139 or $.22 on
a basic per common share basis. Return on common equity was
10.28% and return on assets was .91% for the first three months
of 1999. For the same period in 1998, earnings totaled $2,481 or
$.26 on a basic per common share basis, return on equity was
12.81% and return on assets was 1.19%. Operating results for
1999 were negatively impacted by a reduction in the net interest
margin and increased overhead costs associated with the growth
initiatives underway.
NET INTEREST INCOME
Exclusive of the interest recorded on debt at ULTEA, Inc., the
Company's fleet management company, net interest margin expressed
as a percentage of average earning assets increased to 3.76%
during the first quarter of 1999 compared to 3.62% during the
last quarter of 1998. The third-quarter 1998 acquisition of Lease
Associates Group ("LAG") by ULTEA significantly increased the
amount of debt required. The debt at ULTEA is necessary to fund
its vehicles under operating leases, while the income derived
from these leases is recorded as noninterest income. Total net
interest margin decreased to 3.51% during the first quarter of
1999, compared to 3.82% for the first quarter of 1998 and 3.58%
for the year ended December 31, 1998.
NONINTEREST INCOME
Noninterest income increased $3,578 or 121.37% during the first
quarter of 1999 compared to the same period in 1998. Rental
income on operating leases accounted for 90.13% or $3,225 of this
increase and reflects the operations at ULTEA.
During the first quarter of 1999, the Company recorded mortgage
loan servicing rights of $212, which was included in gains on
sale of loans. As the mortgage loans serviced for others
portfolio continued to grow, the Company determined that the
mortgage servicing rights associated with these loans will have a
material effect on the financial position and operating results
of the Company going forward and, as such, must be recorded. The
mortgage loans serviced for others increased from $119,153 at
March 31, 1998, to $167,590 at March 31, 1999.
NONINTEREST EXPENSE
The strong growth in noninterest income was offset by the $3,920
or 63.09% increase in noninterest expense during the periods
under comparison. The largest component of this increase was
also related to the operations of ULTEA, as depreciation on
equipment under operating leases increased $2,356 or 829.58%.
Salaries and employee benefits, the largest component of
noninterest expense, increased $855 or 24.00% for the periods
under comparison. This increase was primarily attributable to
the establishment of New Mexico Bank and Trust ("NMB") in
Albuquerque, New Mexico in May of 1998, ULTEA's acquisition of
LAG during the third quarter of 1998 and Wisconsin Community
Bank's ("WCB") preparation for the opening of a branch in
Sheboygan, Wisconsin.
INCOME TAX EXPENSE
Income tax expense for the first three months of 1999 decreased
$173 or 15.81% over the same period in 1998, primarily as a
result of corresponding decreases in pre-tax earnings. The
Company's effective tax rate was 30.60% and 30.10% for the three
month periods ended March 31, 1998 and 1999, respectively.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Net loans and leases experienced a $54,780 or 9.28% increase
during the first quarter of 1999. The commercial and commercial
real estate loan portfolio made up $48,652 or 88.81% of this
increase. The 17.52% change in commercial loan outstandings was
primarily the result of aggressive calling efforts and the
Company's expansion into new markets. The other loan category to
experience an increase during the quarter, consumer loan
outstandings, grew $6,507 or 8.96%. Indirect paper was
responsible for the majority of this growth.
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 loans from relatively lower-risk
residential real estate loans; ii) the entrance into new markets
in which the Company had little or no previous lending
experience; and iii) 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 March 31, 1999. The allowance for loan and lease
losses was increased $513 or 6.46% during the first quarter of
1999.
The Company's provision for loan and lease losses was $534 for
the three months ended March 31, 1999, compared to $350 for the
same period in 1998. Net charge-offs were $21 during the first
quarter of 1999 compared to $44 during the first quarter of 1998.
The allowance for loan and lease losses as a percentage of total
loans was 1.31% as of March 31, 1999, 1.35% as of December 31,
1998, and 1.36% as of March 31, 1998.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, decreased from
$1,750 at December 31, 1998, to $1,714 at March 31, 1999, a
decrease of $36 or 2.06%. As a percentage of total loans and
leases, nonperforming loans were at .27% on March 31, 1999, and
.30% at December 31, 1998.
SECURITIES
The primary objective of the securities portfolio continues to be
to provide the Company's bank subsidiaries with a source of
liquidity given their high loan-to-deposit ratios. Securities
represented 24.28% of total assets at March 31, 1999, as compared
to 25.42% at December 31, 1998. During the first quarter of
1999, the composition of the portfolio was maintained at
essentially the same levels as at December 31, 1998.
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $17,703 of 2.47% during
the first quarter of 1999. Demand deposits experienced an
increase of $3,805 or 5.37% while savings deposits grew $10,565
or 3.61%. Growth in these two deposit categories was primarily
attributable to efforts at the Company's lead bank, Dubuque Bank
and Trust Company ("DB&T"), and the Company's de novo community
banks, Riverside Community Bank ("RCB") and NMB. Certificates of
deposit remained stable, increasing $3,333 or .94% over the
December 31, 1998, total. Growth in this type of deposit
continues to diminish as customers are drawn to alternative
investment products.
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 three month period ended March 31, 1999, the balance in
this account had increased $28,189 or 37.13%. This change was
primarily the result of an increase in the amount of repurchase
agreements requested by the corporate cash management customers
of DB&T.
Other borrowings decreased $3,423 or 5.94% during the first
quarter of 1999. Included in these borrowings are long-term FHLB
advances which decreased during the first quarter of 1999 due to
the transfer of $5,000 to short-term borrowings. The long-term
FHLB advances totaled $21,113 on March 31, 1999, with a weighted
average remaining term of 5.10 years and a weighted average rate
of 6.03%.
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)
3/31/99 12/31/98
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 81,766 10.61% $ 81,149 11.05%
Tier 1 capital minimum
requirement 30,832 4.00% 29,379 4.00%
-------- ------ -------- ------
Excess $ 50,934 6.61% $ 51,770 7.05%
======== ====== ======== ======
Total capital $ 90,223 11.70% $ 89,093 12.13%
Total capital minimum
requirement 61,665 8.00% 58,757 8.00%
-------- ------ -------- ------
Excess $ 28,558 3.70% $ 30,336 4.13%
======== ====== ======== ======
Total risk adjusted assets $770,810 $734,463
======== ========
Leverage Capital Ratios:(2)
Tier 1 capital $ 81,766 8.60% $ 81,149 8.58%
Tier 1 capital minimum
requirement(3) 38,024 4.00% 37,810 4.00%
-------- ------ -------- ------
Excess $ 43,742 4.60% $ 43,339 4.58%
======== ====== ======== ======
Average adjusted assets
(less goodwill) $950,609 $945,242
======== ========
(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
WCB in March of 1997, the Company has cash payments remaining
under the agreement of $594 in 2000 and $584 in 2001, plus
interest at rates of 7.00% to 7.50%. The acquisition and merger
of LAG into ULTEA in July of 1998 included an agreement to three
equal cash payments of $643 in 1999, 2000 and 2001, plus interest
at 7.50%.
In February, WCB entered into an office purchase and assumption
agreement with Bank One Wisconsin to acquire its Monroe bank. The
transaction is anticipated to close in July with a cash payment
of $11,487 and an additional capital investment of approximately
$7,000. All necessary regulatory approval has been received.
Construction of branch facilities are underway at two of the
Company's subsidiary banks. NMB has begun construction of a
$1,700 facility in Rio Rancho, New Mexico, a suburb northwest of
Albuquerque, with completion scheduled in June. RCB is in the
process of constructing a $1,300 facility in southeast Rockford,
Illinois, with completion also targeted for June.
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 increased $43,209
during the first three months of 1999 compared to the same period
in 1998. The net increase in loans and leases was $54,645 during
the first three months of 1999 compared to $10,164 during the
same period in 1998, a $44,481 change. During the first three
months of 1999, proceeds from the sale and maturity of securities
increased $33,067 compared to the same period in 1998, as the
purchases of securities increased $29,256 for the periods under
comparison.
Financing activities provided net cash of $41,641 during the first
quarter of 1999 compared to a net use of $12,882 during the same
period in 1998. A net increase in demand and savings accounts
provided cash of $14,370 during the first quarter of 1999 compared
to a use of $4,698 during 1998. The other category reflecting a
significant change was the change in short-term borrowings from a
provider of $22,594 in cash during 1999 compared to a user of
$19,871 in cash during 1998.
Total cash inflows from operating activities decreased $3,716 for
the first quarter of 1999 compared to the same quarter of 1998.
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 has 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.
YEAR 2000
Heartland began to identify and react to issues related to the
Year 2000 in 1996. A Year 2000 project team, comprised of
individuals from key areas throughout Heartland, was formed. The
mission of the Year 2000 project team was, and is, to identify
issues related to the Year 2000, to initiate remedial measures
necessary to eliminate any adverse effects on Heartland's
operations, and to continue to monitor Year 2000 related
concerns. Following the guidelines established by the Federal
Financial Institutions Examination Council, a Year 2000 Plan was
developed for Heartland and its subsidiaries. The project team
developed a comprehensive, prioritized inventory of all hardware,
software, and material third-party providers that may be
adversely affected by the Year 2000 date change, and has
contacted these vendors requesting their status as it relates to
the Year 2000. This inventory includes both information
technology ("IT") and non-IT systems, such as heating and cooling
systems, alarms, building access systems and elevators, which
typically contain embedded technology such as microcontrollers.
This inventory is periodically reevaluated to ensure that
previously assigned priorities remain accurate and to monitor the
progress each vendor is making in resolving its Year 2000
problems. Heartland relies on software purchased from third-
party vendors rather than internally-generated software. All
mission-critical software has been tested and found to be Year
2000 compliant. Testing was done on a test computer rented
specifically for this purpose, which was connected to Heartland's
existing equipment in a manner similar to the production
computer.
The Year 2000 project team has also developed a communication
plan that updates the directors, management and employees on
Heartland's Year 2000 status. A customer awareness program was
implemented in late 1998 and will continue throughout 1999. In
addition, a separate plan was developed to manage the Year 2000
risks posed by commercial borrowing customers. This plan
identified material loan customers, assessed their preparedness,
evaluated their credit risk to Heartland, and implemented
appropriate controls to mitigate the risk. Surveys of customer
preparedness have been used to identify the customer risk and
will be used on all new credits going forward.
In accordance with regulatory guidelines, the project team has
begun preparing a comprehensive contingency plan in the event
that Year 2000 related failures are experienced. The plan will
list the various strategies and resources available to restore
core business processes. Testing of this plan is scheduled for
completion by July 31, 1999. In conjunction with the development
of this contingency plan, the team continues to monitor Year 2000
progress by public utility providers. As the utility companies
complete their testing in 1999, Heartland will decide the
appropriateness of purchasing or leasing a backup generator for
its main facility. The generator would provide an alternative
source of power for a limited time period. Also being assessed
as part of the contingency plan is the adequacy of Heartland's
sources of liquidity to meet any cash demands the bank
subsidiaries' customers may place on them during the fourth
quarter of 1999.
Management anticipates that the total out-of-pocket expenditures
required for bringing the systems into compliance for the Year
2000 will be approximately $360, of which $60 remains to be
expended during 1999. Management believes that these required
expenditures will not have a material adverse impact on
operations, cash flow, or financial condition. This amount,
including costs for upgrading equipment specifically for the
purpose of Year 2000 compliance, staff expense for testing and
contingency development, and certain administrative expenditures,
has been provided for in Heartland's Year 2000 budget. Although
management feels confident that all necessary upgrades have been
identified, and budgeted accordingly, no assurance can be made
that Year 2000 compliance can be achieved without additional
unanticipated expenditures. It is not possible at this time to
quantify the estimated future costs due to possible business
disruption caused by vendors, suppliers, customers or even the
possible loss of electric power or phone service; however, such
costs could be substantial. As a result of the Year 2000
project, Heartland has not had any material delay regarding its
information systems projects.
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)
Principal Executive Officer
/s/ Lynn B. Fuller
-----------------------
By: Lynn B. Fuller
President
Principal Financial and
Accounting Officer
/s/ John K. Schmidt
-----------------------
By: John K. Schmidt
Executive Vice President
and Chief Financial Officer
Dated: May 14, 1999