SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Exchange Class)
None
(Name of Each Exchange on which Registered)
Common Stock $1.00 par value
(Title of Class)
<PAGE>
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The index to exhibits follows the signature page.
As of March 24, 1997, the Registrant had issued and outstanding
4,734,948 shares of the Registrant's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the
Registrant as of March 24, 1997, was $78,887,327.* Such figures
include 459,540 shares of the Registrant's Common Stock held in a
fiduciary capacity by the Trust Department of the Dubuque Bank &
Trust Company, a wholly-owned subsidiary of the Registrant.
*Based on the last reported price of an actual transaction in
Registrant's Common Stock on February 28, 1997, and reports of
beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the
outstanding shares of Common Stock of Registrant; however, such
determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares
of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Business
A. General Description
B. Recent Developments
C. Market Areas
D. Competition
E. Employees
F. Accounting Standards
G. Supervision and Regulation
H. Governmental Monetary Policy and Economic Conditions
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
<PAGE>
PART I.
ITEM 1.
BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. ("Heartland"), reincorporated in
the state of Delaware in 1993, is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). Heartland has four wholly-owned bank subsidiaries which
are located in Dubuque, Iowa, Cottage Grove, Wisconsin and Galena
and Rockford, Illinois and one wholly-owned federal savings bank
subsidiary which is located in Keokuk, Iowa (collectively, the
"Bank Subsidiaries"). All five Bank Subsidiaries are members of
the Federal Deposit Insurance Corporation ("FDIC"). Dubuque Bank
and Trust Company ("DB&T") is chartered under the laws of the
State of Iowa and has three wholly-owned subsidiaries: DB&T
Insurance, Inc. ("DB&T Insurance"), a multi-line insurance
agency; DBT Investment Corporation ("DBT Investment"), an
investment management company; and DB&T Community Development
Corp. ("DB&T Development"), majority owner of a senior housing
project. Galena State Bank and Trust Company, Galena, Illinois,
("Galena") and Riverside Community Bank, Rockford,Illinois,
("Riverside") are chartered under the laws of the State of
Illinois. Keokuk Bancshares, Inc. ("Keokuk") is a savings and
loan holding company within the meaning of the Home Owner's Loan
Act, as amended ("HOLA") with a wholly-owned federal savings bank
subsidiary, First Community Bank, FSB ("First Community"),
organized under the laws of the United States. First Community
has one wholly-owned subsidiary, KFS Services, Inc. Cottage Grove
State Bank is chartered under the laws of the State of Wisconsin.
The Bank Subsidiaries operate 17 banking locations in Iowa,
Illinois and Wisconsin. Heartland has two wholly-owned non-bank
subsidiaries. Citizens Finance Co. ("Citizens"), previously doing
business as Tri-State Community Credit Corp., is a consumer
finance company. Subsequent to year end 1996, Citizens was
dividended up to Heartland from DB&T. Heartland also acquired
the assets of ULTEA, LLC, a fleet leasing company headquartered
in Madison, Wisconsin, in December, 1996.
The Bank Subsidiaries provide full service retail banking within
Dubuque and Lee Counties in Iowa, within Jo Daviess, Hancock and
Winnebago Counties in Illinois and within Dane County in
Wisconsin. Deposit products include checking and other demand
deposit accounts, NOW accounts, savings accounts, money market
accounts, certificates of deposit, individual retirement accounts
and other time deposits. The deposits in the Bank Subsidiaries
are insured by the FDIC to the full extent permitted by law.
Loans include commercial and industrial, agricultural, real
estate mortgage, consumer, home equity, credit cards and lines of
credit. Other products and services include VISA debit cards,
automatic teller machines, safe deposit boxes and trust services.
The principal service of the Bank Subsidiaries consists of making
loans to businesses and individuals. These loans are made at the
offices of the Bank Subsidiaries. The Bank Subsidiaries also
engage in activities that are closely related to banking,
including investment brokerage.
Although each of the subsidiaries of Heartland operates under the
direction of its own Board of Directors, Heartland has standard
operating policies regarding asset/liability management,
liquidity management, investment management, lending policies and
deposit structure management. Heartland has historically
centralized certain operations where economies of scale can be
achieved.
Operating Strategy
Corporate policy, strategy and goals are established by the Board
of Directors of Heartland (the "Heartland Board"). Pursuant to
Heartland's philosophy, operational and administrative policies
for the Bank Subsidiaries are also established by the Heartland
Board. Within this framework, each of the Bank Subsidiaries
focuses on providing personalized services and quality products
to its customers to meet the needs of the communities which it
serves.
Heartland operates its banking subsidiaries as traditional
community banks with conveniently located facilities and
professional, highly motivated staffs which are active in the
communities in which they are located. Heartland focuses on long-
term relationships with customers and provides individualized
quality service. In addition, within credit and rate of return
parameters, Heartland attempts to ensure that each of the Bank
Subsidiaries meets the credit needs of its communities and
invests in local municipal obligations.
Heartland uses a variety of marketing strategies to attract and
retain customers, with a particular emphasis on a strong sales
culture within the Bank Subsidiaries and an outside officer
calling program. Many of Heartland's sales employees work on a
salary plus commission basis, thus providing them with a strong
incentive to aggressively market Heartland's financial products.
Officers of each of the Bank Subsidiaries also regularly call on
customers and potential customers of the institutions to maintain
and develop deposit and other special service relationships,
including cash management, employee benefit plan administration,
and trust services.
Heartland has an internal data processing division and has
attempted to remain at the forefront of the banking industry in
new technological innovations. Heartland believes that retaining
control of its data processing leads to decreased operating costs
and more effective service to its customers. Accordingly, during
1997, all Bank Subsidiaries are scheduled to convert to the
Comprehensive Banking system program purchased from Fiserv, a
national leader in bank software technology. To provide a high
level of customer service and to manage effectively its growth,
acquisition and operating strategies, Heartland also focuses on
continued improvement of the internal operating systems of the
Bank Subsidiaries.
Acquisition and Expansion Strategy
Heartland seeks to diversify both its market area and asset base
while increasing profitability through acquisitions and
expansion. Heartland's goal is to expand through the acquisition
of established financial service organizations, primarily
commercial banks or thrifts, to the extent suitable candidates
can be identified and acceptable business terms negotiated.
Heartland's acquisition strategy is focused on traditional
community banks and thrifts located in stable and growing areas
of Iowa, Wisconsin, Minnesota and Illinois. It is possible that
as a result of consolidation within the banking industry
generally, as well as in Heartland's current market areas,
Heartland may in the future look beyond these geographic areas
for acquisition opportunities. In addition to price and terms,
other factors considered by Heartland in determining the
desirability of an acquisition candidate include financial
condition, earnings potential, quality of management, market area
and competitive environment.
The Heartland Board may in the future consider establishing
branches, loan production offices or other business facilities as
a means of expanding its presence in current or new market areas.
The Heartland Board may also investigate expansion into other
lines of business closely related to banking if it believes these
lines could be profitable without undue risk to Heartland and if
Heartland can be competitive. Heartland does not currently have
any definitive understandings or agreements for any acquisitions
material to Heartland. However, Heartland will continue to look
for further expansion opportunities.
Lending Activities
General
The Bank Subsidiaries provide a range of commercial and retail
lending services to corporations, partnerships and individuals.
These credit activities include agricultural, commercial,
residential real estate and installment loans, as well as loan
participations and lines of credit.
The Bank Subsidiaries aggressively market their services to
qualified lending customers. Lending officers actively solicit
the business of new companies entering their market areas as well
as long-standing members of the Bank Subsidiaries' respective
business communities. Through professional service and
competitive pricing, the Bank Subsidiaries have been successful
in attracting new lending customers. Heartland also actively
pursues consumer lending opportunities. With convenient
locations, advertising and customer communications, the Bank
Subsidiaries have been successful in capitalizing on the credit
needs of their market areas.
Commercial Loans
The Bank Subsidiaries have a strong commercial loan base and
DB&T, in particular, continues to be a premier commercial lender
in the tri-state area of northeast Iowa, northwest Illinois and
southwest Wisconsin. The Bank Subsidiaries' areas of emphasis
include, but are not limited to, loans to wholesalers, hotel and
real estate developers, manufacturers, building contractors,
business services companies and retailers. The Bank Subsidiaries
provide a wide range of business loans, including lines of credit
for working capital and operational purposes and term loans for
the acquisition of equipment and real estate. Loans may be made
on an unsecured basis where warranted by the overall financial
condition of the borrower. Terms of commercial business loans
generally range from one to five years. The majority of the Bank
Subsidiaries' commercial business loans have floating interest
rates or reprice within one year.
DB&T has also generated loans which are guaranteed by the U.S.
Small Business Administration and has been certified as one of
that agency's Preferred Lenders. Management believes that making
these guaranteed loans helps its local communities as well as
provides Heartland with a source of income and solid future
lending relationships as such businesses grow and prosper. DB&T
is also currently one of the state of Iowa's top lenders in the
"Linked Investment for Tomorrow" program. This state-sponsored
program offers interest rate reductions to businesses opened by
minorities and those in rural areas.
The primary repayment risk for commercial loans is the failure of
the business due to economic or financial factors. In most cases,
the Bank Subsidiaries have collateralized these loans and/or
taken personal guarantees to help assure repayment.
As the credit portfolios of the Bank Subsidiaries have continued
to grow, several changes have been made in their lending
departments resulting in an overall increase in these
departments' skill levels. Loan review personnel and commercial
lenders interact with their respective Boards of Directors each
month. Heartland also utilizes an internal loan review function
to analyze credits of the Bank subsidiaries. Management has
attempted to identify problem loans at an early date and to
aggressively seek a resolution of these situations. The result
has been a significantly below average level of problem loans
compared to the Heartland Banks' industry peer groups in recent
years.
Agricultural Loans
DB&T is one of the largest agricultural lenders in the state of
Iowa. Agricultural loans continue to be emphasized by both DB&T
and Galena due to their concentration of customers in rural
markets. Agricultural loans remain balanced, however, in
proportion to the rest of Heartland's consolidated loan
portfolio. In connection with their agricultural lending, all of
the Bank Subsidiaries have remained close to their traditional
geographic market areas. The majority of the outstanding
agricultural operating and real estate loans are within 60 miles
of their main or branch offices.
Agricultural loans, many of which are secured by crops, machinery
and real estate, are provided to finance capital improvements and
farm operations as well as acquisitions of livestock and
machinery. The agricultural loan departments work closely with
all agricultural customers, including companies and individual
farmers, and review the preparation of budgets and cash flow
projections for the ensuing crop year. These budgets and cash
flow projections are monitored closely during the year and
reviewed with agricultural customers at least once a year. In
addition, the Bank Subsidiaries work closely with governmental
agencies, including the Farmers Home Administration, to assist
agricultural customers in obtaining credit enhancement products
such as loan guarantees.
Real Estate Mortgage Loans
Mortgage lending has been a focal point of the Bank Subsidiaries
as each of them continues to build real estate lending business.
A stable rate environment along with expanded production
capabilities at Riverside combined to increase the number of loan
originations as compared to prior years. Residential mortgage
outstandings grew as customers elected to take three-, five- and
seven-year mortgages which were retained in the loan portfolios.
During prior years, the majority of home loans generated by the
Bank Subsidiaries were sold to government agencies in the
secondary mortgage market with servicing rights retained.
Management believes that the retention of mortgage servicing
provides the Bank Subsidiaries with a relatively steady source of
fee income as compared to fees generated solely from mortgage
origination operations. Moreover, the retention of such servicing
rights allows each of the Bank Subsidiaries to continue to have
regular contact with mortgage customers.
Consumer Lending
The Bank Subsidiaries' consumer lending departments provide all
types of consumer loans including motor vehicle, home
improvement, home equity, student loans, credit cards, signature
loans and small personal credit lines.
Consumer loan demand is also serviced through Citizens which
currently serves the consumer credit needs of over 1,800
customers in the three state area of Iowa, Illinois and Wisconsin
from its Dubuque, Iowa, and Madison, Wisconsin, offices.
Trust Departments
The trust departments for DB&T and Galena have been providing
trust services to their respective communities for a number of
years. First Community received full trust powers from the Office
of Thrift Supervision (the "OTS") in February, 1995. Currently,
the Bank Subsidiaries have over $366 million of consolidated
assets under management and provide a full complement of trust
and investment services for individuals and corporations.
The trust department of DB&T is nationally recognized as a
leading provider of socially responsible investment services and
manages investment portfolios for religious and other non-profit
organizations located throughout the United States. The Bank
Subsidiaries' trust departments are also active in the management
of employee benefit and retirement plans in their market areas.
The Bank Subsidiaries have targeted their trust departments as
primary areas for future growth.
Brokerage and Other Services
In 1995, DB&T contracted with a new third-party vendor, Focused
Investments LLC, an affiliate of Wayne Hummer & Co., to operate
an independent securities office within DB&T's main office and
Kennedy Mall branch office and Galena's main office. During 1996,
DB&T's Grandview branch office was added to the bank locations
offering brokerage services, and DB&T's Farley, Iowa office
scheduled regular hours for a broker to be available to meet with
customers. Focused Investments LLC offers full-service stock and
bond trading, direct investments, annuities and mutual funds.
DB&T Insurance has continued to grow its personal and commercial
insurance lines and the number of independent insurance companies
it represents. DB&T Insurance is a multi-line insurance agency in
the Dubuque area and offers a complete array of vehicle, property
and casualty, life and disability insurance, as well as
commercial lines and tax-free annuities.
B. MARKET AREAS
DB&T is located in the Dubuque County, Iowa, area, which
encompasses the city of Dubuque and a number of surrounding rural
communities. The city of Dubuque is located in northeastern Iowa,
on the Mississippi River, approximately 175 miles west of
Chicago, Illinois, and approximately 200 miles northeast of Des
Moines, Iowa. It is strategically situated at the intersection of
the state borders of Iowa, Illinois and Wisconsin. Based upon the
results of the 1990 census, the city of Dubuque had a total
population of approximately 61,000.
In addition to its main banking office, DB&T has eight branch
offices, all of which are located in the Dubuque County area. As
a subsidiary of DB&T, DB&T Insurance has substantially the same
market area as the parent organization. Citizens also operates
within this market area, and, in addition, an office was opened
in Madison, Wisconsin, during June, 1996.
Galena is located in Galena, Illinois, which is less than five
miles from the Mississippi River, approximately 20 miles east of
Dubuque and 155 miles west of Chicago. Galena also has an office
in Stockton, Illinois, and as such, services customers in Jo-
Daviess County, Illinois. Based on the 1990 census, the county
had a population of approximately 22,000 people.
First Community's main office is in Keokuk, Iowa, which is
located in the southeast corner of Iowa near the borders of Iowa,
Missouri and Illinois. Due to its location, First Community
serves customers in the tri-county region of Lee County, Iowa,
Hancock County, Illinois and Clark County, Missouri. Lee, Hancock
and Clark Counties have populations of approximately 43,100,
23,900 and 8,500, respectively. First Community has one branch
office in Keokuk and in the city of Carthage in Hancock County,
Illinois. Keokuk is an industrial community with a population of
approximately 13,500.
Riverside is located on the northeast edge of Rockford, Illinois,
which is approximately 75 miles west of Chicago in Winnebago
County. Based on the 1990 census, the county had a population of
284,000 and the city of Rockford had a population of 140,000.
Cottage Grove State Bank operates one office from its location in
Cottage Grove, Wisconsin, which is approximately 10 miles east of
Madison in Dane County. The county had a population of 390,000
and the village of Cottage Grove had a population of 1,100
according to the 1990 census.
C. COMPETITION
Heartland encounters competition in all areas of its business
pursuits. In order to compete effectively, to develop its market
base, to maintain flexibility and to move in pace with changing
economic and social conditions, Heartland continuously refines
and develops its products and services. The principal methods of
competition in the financial services industry are price, service
and convenience.
The Bank Subsidiaries' combined market area is highly
competitive. Many financial institutions based in the communities
surrounding Dubuque, Galena, Riverside, Cottage Grove and Keokuk
actively compete for customers within Heartland's market area.
The Bank Subsidiaries also face competition from finance
companies, insurance companies, mortgage companies, securities
brokerage firms, money market funds, loan production offices and
other providers of financial services.
Heartland competes for loans principally through the range and
quality of the services it provides, interest rates and loan
fees. Heartland believes that its long-standing presence in the
community and personal service philosophy enhance its ability to
compete favorably in attracting and retaining individual and
business customers. Heartland actively solicits deposit-oriented
clients and competes for deposits by offering customers personal
attention, professional service and competitive interest rates.
D. EMPLOYEES
At December 31, 1996, Heartland employed 312 full-time equivalent
employees. Heartland places a high priority on staff development
which involves extensive training, including customer service
training. New employees are selected on the basis of both
technical skills and customer service capabilities. None of
Heartland's employees are covered by a collective bargaining
agreement with Heartland. Heartland offers a variety of employee
benefits and management considers its employee relations to be
excellent.
E. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets to be
Disposed of" ("SFAS No. 121") was effective for Heartland for the
year beginning January 1, 1996, and requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset is not recoverable. SFAS No.
122 "Accounting for Mortgage Servicing Rights", an amendment of
SFAS No. 65 ("SFAS No. 122") was effective for Heartland for the
year beginning January 1, 1996, and required the allocation of
basis between a loan and the related servicing right when a loan
is sold with servicing retained. SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123") was effective for
Heartland for transactions entered into after December 15, 1995,
and for disclosure requirements beginning January 1, 1996. SFAS
No. 123 established a fair value based method of accounting for
stock-based compensation plans. The adoption of SFAS Nos. 121,
122 and 123 did not have a material effect on Heartland.
SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125") will
be effective for Heartland for transactions occurring after
December 31, 1996, and provides standards for accounting
recognition or derecognition of assets and liabilities. Heartland
expects to adopt SFAS No. 125 when required, and management
believes adoption will not have a material effect on Heartland's
financial position and results of operations, nor will adoption
require additional capital resources.
F. SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are
extensively regulated under federal and state law. As a result,
the growth and earnings performance of Heartland and the Bank
Subsidiaries can be affected not only by management decisions and
general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the
policies of various governmental regulatory authorities
including, but not limited to, the Board of Governors of the
Federal Reserve System (the "FRB"), the FDIC, the Office of
Thrift Supervision ("OTS"), the Iowa Superintendent of Banking
(the "Superintendent"), the Illinois Commissioner of Banks and
Real Estate (the "Commissioner"), the State of Wisconsin
Department of Financial Institutions, the Internal Revenue
Service and state taxing authorities and the Securities and
Exchange Commission (the "SEC"). The effect of such statutes,
regulations and policies can be significant, and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as Heartland and the Bank
Subsidiaries, regulate, among other things, the scope of
business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to
Heartland and the Bank Subsidiaries establishes a comprehensive
framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance
funds and the depositors, rather than the shareholders, of
financial institutions.
The following references to material statutes and regulations
affecting Heartland and the Bank Subsidiaries are brief summaries
thereof and do not purport to be complete, and are qualified in
their entirety by reference to such statutes and regulations. Any
change in applicable law or regulations may have a material
effect on the business of Heartland and the Bank Subsidiaries.
The following discussion does not include references to Cottage
Grove State Bank, which was acquired in 1997.
Recent Regulatory Developments
On September 30, 1996, President Clinton signed into law the
"Economic Growth and Regulatory Paperwork Reduction Act of 1996"
(the "Regulatory Reduction Act"). Subtitle G of the Regulatory
Reduction Act consists of the "Deposit Insurance Funds Act of
1996" (the "DIFA"). The DIFA provides for a one-time special
assessment on each depository institution holding deposits
subject to assessment by the FDIC for the Savings Association
Insurance Fund (the "SAIF") in an amount which, in the aggregate,
will increase the designated reserve ratio of the SAIF (i.e., the
ratio of the insurance reserves of the SAIF to total SAIF-insured
deposits) to 1.25% on October 1, 1996. Subject to certain
exceptions, the special assessment was payable in full on
November 27, 1996. As a SAIF-member, First Community was subject
to the special assessment. DB&T, Galena and Riverside, however,
hold no SAIF-assessable deposits and, therefore, were not subject
to the special assessment.
Under the DIFA, the amount of the special assessment payable by
an institution was determined on the basis of the amount of SAIF-
assessable deposits held by the institution on March 31, 1995, or
acquired by the institution after March 31, 1995 from another
institution which held the deposits on March 31, 1995, but was no
longer in existence on November 27, 1996. The DIFA provides for a
20% discount in calculating the SAIF-assessable deposits of
certain "Oakar" banks (i.e., Bank Insurance Fund ("BIF") member
banks that hold deposits acquired from a SAIF member that remain
SAIF insured) and certain "Sasser" banks (i.e., institutions that
converted from thrift to bank charters but remain SAIF members).
The DIFA also exempts certain institutions from payment of the
special assessment (including institutions that are
undercapitalized or that would become undercapitalized as a
result of payment of the special assessment), and allows an
institution to pay the special assessment in two installments if
there is a significant risk that by paying the special assessment
in a lump sum, the institution or its holding company would be in
default under or in violation of terms or conditions of debt
obligations or preferred stock issued by the institution or its
holding company and outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation
implementing the SAIF special assessment. In that regulation, the
FDIC set the special assessment rate at 0.657% of SAIF-assessable
deposits held on March 31, 1995. The amount of the special
assessment paid by First Community was $545,000, the full amount
of which was recorded as a charge against earnings for the
quarter ended September 30, 1996. As discussed below, however,
the recapitalization of the SAIF resulting from the special
assessment should significantly reduce First Community's ongoing
deposit insurance expense.
In light of the recapitalization of the SAIF pursuant to the
special assessment authorized by the DIFA, the FDIC, on December
11, 1996, took action to reduce regular semi-annual SAIF
assessments from the range of 0.23% - 0.31% of deposits to a
range of 0% - 0.27% of deposits. The new rates were effective
October 1, 1996, for Oakar and Sasser banks, but did not take
affect for other SAIF-assessable institutions until January 1,
1997. From October 1, 1996, through December 31, 1996,
assessments payable by SAIF-assessable institutions other than
Oakar and Sasser banks ranged from 0.18% to 0.27% of deposits,
which represents the amount the FDIC calculates as necessary to
cover the interest due for that period on outstanding obligations
of the Financing Corporation (the "FICO"), discussed below.
Because SAIF-assessable institutions were previously assessed at
higher rates (i.e., 0.23% - 0.31% of deposits) for the semi-
annual period ending December 31, 1996, the FDIC will refund or
credit back the amount collected from such institutions for the
period from October 1, 1996, through December 31, 1996, which
exceeds the amount due for that period under the reduced
assessment schedule. As a result of the FDIC's action, the
deposit insurance assessments payable by First Community have
been reduced significantly.
Prior to the enactment of the DIFA, a substantial amount of the
SAIF assessment revenue was used to pay the interest due on bonds
issued by the FICO, the entity created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance
Corporation (the "FSLIC"), the SAIF's predecessor insurance fund.
Pursuant to the DIFA, the interest due on outstanding FICO bonds
will be covered by assessments against both SAIF and BIF member
institutions beginning January 1, 1997. Between January 1, 1997,
and December 31, 1999, FICO assessments against BIF-member
institutions cannot exceed 20% of the FICO assessments charged
SAIF-member institutions. From January 1, 2000, until the FICO
bonds mature in 2019, FICO assessments will be shared by all FDIC-
insured institutions on a pro rata basis. It has been estimated
that the FICO assessments for the period January 1, 1997, through
December 31, 1999, will be approximately 0.013% of deposits for
BIF members versus approximately 0.064% of deposits for SAIF
members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on
January 1, 1999, provided there are no state or federally
chartered, FDIC-insured savings associations existing on that
date. To facilitate the merger of the BIF and the SAIF, the DIFA
directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along
with appropriate legislative recommendations, to the Congress by
March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a
number of statutory changes designed to eliminate duplicative,
redundant or unnecessary regulatory requirements. Among other
things, the Regulatory Reduction Act establishes streamlined
notice procedures for the commencement of new nonbanking
activities by bank holding companies, and generally exempts bank
holding companies that own one or more savings associations from
regulation by the OTS as savings and loan holding companies. The
Regulatory Reduction Act also removes the percentage of assets
limitations on the aggregate amount of credit card and education
loans that may be made by a savings association, such as First
Community; increases from 10% to 20% of total assets the
aggregate amount of commercial loans that a savings association
may make, provided that any amount in excess of 10% of total
assets represents small business loans; allows education, small
business and credit card loans to be counted in full in
determining a savings association's compliance with the qualified
thrift lender ("QTL") test; and provides that a savings
association may be deemed to meet the QTL test if it qualifies as
a domestic building and loan association under the Internal
Revenue Code. Finally, the Regulatory Reduction Act establishes
time frames within which the FDIC must act on applications by
state banks to engage in activities which, although permitted for
state banks under applicable state law, are not permissible
activities for national banks, excludes ATM closures and certain
branch office relocations from the requirements applicable to
branch closings and clarifies the liability of a financial
institution, when acting as a lender or in a fiduciary capacity,
under the federal environmental laws. Although the full impact of
the Regulatory Reduction Act on the operations of Heartland and
the Bank Subsidiaries cannot be determined at this time,
management believes that the legislation may reduce compliance
costs to some extent and allow Heartland and the Bank
Subsidiaries somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small
Business Job Protection Act of 1996 (the "Job Protection Act").
Among other things, the Job Protection Act eliminates the percent-
of-taxable-income ("PTI") method for computing additions to a
savings association's tax bad debt reserves for tax years
beginning after December 31, 1995, and requires all savings
associations that have used the PTI method to recapture, over a
six year period, all or a portion of their tax bad debt reserves
added since the last taxable year beginning before January 1,
1988. The Job Protection Act allows a savings association to
postpone the recapture of bad debt reserves for up to two years
if the institution meets a minimum level of mortgage lending
activity during those years. First Community believes that it
will engage in sufficient mortgage lending activity during 1996
and 1997 to be able to postpone any recapture of its bad debt
reserves until 1998. As a result of these provisions of the Job
Protection Act, First Community will determine additions to its
tax bad debt reserves using the same method as a commercial bank
of comparable size, and, if First Community were to decide to
convert to a commercial bank charter, the changes in the tax bad
debt recapture rules enacted in the Job Protection Act should
make such conversion less costly.
Heartland
General
Heartland, as the sole stockholder of DB&T, Galena and Riverside,
is a bank holding company. As a bank holding company, Heartland
is registered with, and is subject to regulation by, the FRB
under the BHCA. In accordance with FRB policy, Heartland is
expected to act as a source of financial strength to the Bank
Subsidiaries and to commit resources to support the Bank
Subsidiaries in circumstances where Heartland might not do so
absent such policy. Under the BHCA, Heartland is subject to
periodic examination by the FRB and is required to file with the
FRB periodic reports of its operations and such additional
information as the FRB may require. Further as the sole
stockholder of Galena and Riverside, Heartland is subject to the
requirements of the Illinois Bank Holding Company Act, as
amended.
Heartland's ownership of First Community makes Heartland a
savings and loan holding company, as defined in the Home Owners'
Loan Act, as amended (the "HOLA"), and prior to September 30,
1996, Heartland was subject to OTS examination, supervision and
reporting requirements under the HOLA. Effective September 30,
1996, the Regulatory Reduction Act exempts companies, like
Heartland, that are both bank holding companies and savings and
loan holding companies from OTS regulation, but requires the FRB
and the OTS to cooperate in any enforcement actions taken against
such companies.
Investments and Activities
Under the BHCA, a bank holding company must obtain FRB approval
before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating
with another bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by
the BHCA), the FRB may allow a bank holding company to acquire
banks located in any state of the United States without regard to
whether the acquisition is prohibited by the law of the state in
which the target bank is located. In approving interstate
acquisitions, however, the FRB is required to give effect to
applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company
and its insured depository institution affiliates in the state in
which the target bank is located or which require that the target
bank have been in existence for a minimum period of time (not to
exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also prohibits, with certain exceptions, Heartland from
acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their
subsidiaries. The principal exception to this prohibition allows
bank holding companies to engage in, and own shares of companies
engaged in, certain businesses found by the FRB to be "so closely
related to banking ... as to be a proper incident thereto." Under
current regulations of the FRB, Heartland and its non-bank
subsidiaries are permitted to engage in, among other activities,
such banking-related businesses as the operation of a thrift,
sales and consumer finance, equipment leasing, the operation of a
computer service bureau, including software development, and
mortgage banking and brokerage. The BHCA generally does not place
territorial restrictions on the activities of non-bank
subsidiaries of bank holding companies.
Federal legislation also prohibits acquisition of "control" of a
bank holding company, such as Heartland, without prior notice to
certain federal bank regulators. "Control" is defined in certain
cases as acquisition of 10% of the outstanding shares of a bank
holding company.
Capital Requirements
Bank holding companies are required to maintain minimum levels of
capital in accordance with FRB capital adequacy guidelines. If
capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a
risk-based requirement expressed as a percentage of total
risk-weighted assets, and a leverage requirement expressed as a
percentage of total assets. The risk-based requirement consists
of a minimum ratio of total capital to total risk-weighted assets
of 8%, of which at least one-half must be Tier 1 capital. The
leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others.
For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible
assets (other than certain mortgage servicing rights and
purchased credit card relationships) and total capital means Tier
1 capital plus certain other debt and equity instruments which do
not qualify as Tier 1 capital and a portion of the company's
allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. Further, any banking
organization experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible
capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of December 31, 1996, Heartland had regulatory capital in
excess of the FRB's minimum requirements, with a risk-based
capital ratio of 14.28% and a leverage ratio of 9.81%.
Dividends
The FRB has issued a policy statement with regard to the payment
of cash dividends by bank holding companies. In the policy
statement, the FRB expressed its view that a bank holding company
should not pay cash dividends exceeding its net income or which
can only be funded in ways that weaken the bank holding company's
financial health, such as by borrowing. Additionally, the FRB
possesses enforcement powers over bank holding companies and
their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding
companies. In addition to the restrictions on dividends that may
be imposed by the FRB, the Delaware General Corporation Law would
allow Heartland to pay dividends only out of its surplus, or if
Heartland has no such surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Federal Securities Regulation
Heartland's common stock is registered with the SEC under the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently,
Heartland is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the
SEC under the Exchange Act.
The Bank Subsidiaries
General
DB&T is an Iowa-chartered bank and is subject to supervision and
regulation by the Superintendent, the chartering authority for
Iowa banks. Galena and Riverside are both Illinois-chartered
banks and are subject to supervision and regulation by the
Commissioner, the chartering authority for Illinois banks. The
deposit accounts of DB&T, Galena and Riverside are insured by the
BIF of the FDIC and, as BIF-insured institutions, DB&T, Galena
and Riverside are subject to the examination, supervision,
reporting and enforcement requirements of the FDIC, as
administrator of the BIF. First Community is a federally
chartered savings association, the deposits of which are insured
by the SAIF of the FDIC. As a SAIF-insured, federally chartered
savings association, First Community is subject to the
examination, supervision, reporting and enforcement requirements
of the OTS, as the chartering authority for federal savings
associations, and the FDIC as administrator of the SAIF.
DB&T, Galena and First Community are also members of the Federal
Home Loan Bank System, which provides a central credit facility
primarily for member institutions.
Deposit Insurance
As FDIC-insured institutions, the Bank Subsidiaries are required
to pay deposit insurance premium assessments to the FDIC. The
FDIC has adopted a risk-based assessment system under which all
insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their
respective levels of capital and supervisory evaluations.
Institutions classified as well-capitalized (as defined by the
FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as
defined by the FDIC) and considered of substantial supervisory
concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual
assessment period.
During the year ended December 31, 1996, BIF assessments ranged
from 0% of deposits to 0.27% of deposits. The FDIC has announced
that for the semi-annual assessment period beginning January 1,
1997, BIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits. During the period January 1, 1996,
through September 30, 1996, SAIF assessment rates ranged from
0.23% of deposits to 0.31% of deposits. As a result of the
recapitalization of the SAIF on October 1, 1996, SAIF assessment
rates were reduced, effective October 1, 1996, to a range of
0.18% of deposits to 0.27% of deposits and were further reduced,
effective January 1, 1997, to a range of 0% of deposits to 0.27%
of deposits. See "--Recent Regulatory Developments."
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing,
that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no
tangible capital. Management of Heartland is not aware of any
activity or condition that could result in termination of the
deposit insurance of any of the Bank Subsidiaries.
FICO Assessments
Since 1987, a portion of the deposit insurance assessments paid
by SAIF members has been used to cover interest payments due on
the outstanding obligations of the FICO, the entity created to
finance the recapitalization of the FSLIC, the SAIF's predecessor
insurance fund. Pursuant to federal legislation enacted September
30, 1996, commencing January 1, 1997, both SAIF members and BIF
members will be subject to assessments to cover the interest
payment on outstanding FICO obligations. Such FICO assessments
will be in addition to amounts assessed by the FDIC for deposit
insurance. Until January 1, 2000, the FICO assessments made
against BIF members may not exceed 20% of the amount of the FICO
assessments made against SAIF members. It is estimated that SAIF
members will pay FICO assessments equal to 0.064% of deposits
while BIF members will pay FICO assessments equal to 0.013% of
deposits. Between January 1, 2000 and the maturity of the
outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on
a pro rata basis. It is estimated that FICO assessments during
this period will be less than 0.025% of deposits.
Capital Requirements
The FDIC has established the following minimum capital standards
for state-chartered insured non-member banks, such as DB&T,
Galena and Riverside: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with minimum requirements of 4% to 5% for
all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. For
purposes of these capital standards, Tier 1 capital and total
capital consist of substantially the same components as Tier 1
capital and total capital under the FRB's capital guidelines for
bank holding companies (see "--Heartland--Capital Requirements").
The OTS has established the following minimum capital standards
for savings associations, such as First Community: a core capital
requirement, consisting of a minimum ratio of core capital to
total assets of 3%; a tangible capital requirement consisting of
a minimum ratio of tangible capital to total assets of 1.5%; and
a risk-based capital requirement, consisting of a minimum ratio
of total capital to total risk-weighted assets of 8%, at least
one-half of which must consist of core capital. For purposes of
these capital standards, core capital consists primarily of
permanent stockholders' equity less intangible assets other than
certain supervisory goodwill, certain mortgage servicing rights
and certain purchased credit card relationships and less
investments in subsidiaries engaged in activities not permitted
for national banks; tangible capital is substantially the same as
core capital except that all intangible assets other than certain
mortgage servicing rights must be deducted; and total capital
means core capital plus certain debt and equity instruments that
do not qualify as core capital and a portion of First Community's
allowances for loan and lease losses.
The capital requirements described above are minimum
requirements. Higher capital levels will be required if warranted
by the particular circumstances or risk profiles of individual
institutions. For example, the regulations of the FDIC and the
OTS provide that additional capital may be required to take
adequate account of interest rate risk or the risks posed by
concentrations of credit or nontraditional activities.
During the year ended December 31, 1996, none of the Bank
Subsidiaries was required by its primary federal regulator to
increase its capital to an amount in excess of the minimum
regulatory requirements. As of December 31, 1996, each of the
Bank Subsidiaries exceeded its minimum regulatory capital
requirements, as follows:
<TABLE>
<CAPTION>
Total Risk- Leverage/ Tangible
Based Capital Core Capital Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
DB&T 12.67% 8.58% N/A
Galena 13.74% 7.63% N/A
Riverside 19.42% 20.45% N/A
First Community 15.17% 11.17% 6.00%
</TABLE>
Federal law provides the federal banking regulators with broad
power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which
an institution is assigned, the regulators' corrective powers
include: requiring the submission of a capital restoration plan;
placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated
debt; and ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for
any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with the default of commonly controlled
FDIC insured depository institutions or any assistance provided
by the FDIC to commonly controlled FDIC insured depository
institutions in danger of default.
Dividends
The Iowa Banking Act provides that an Iowa-chartered bank, such
as DB&T, may not pay dividends in an amount greater than its
accumulated undistributed net profits. Under the Illinois Banking
Act, Illinois-chartered banks, such as Galena and Riverside, are
subject to a substantially similar dividend restriction.
OTS regulations impose limitations upon all capital distributions
by savings associations, such as First Community, including cash
dividends. The rule establishes three tiers of institutions. An
institution that exceeds all fully phased-in capital requirements
before and after the proposed capital distribution (a "Tier 1
Institution") could, after prior notice to, but without the
approval of, the OTS, make capital distributions during a
calendar year of up to the higher of (i) 100% of its net income
to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (i.e., the excess
capital over its fully phased-in capital requirements) at the
beginning of the calendar year, or (ii) 75% of its net income
over the most recent preceding four quarter period. Any
additional capital distributions would require prior regulatory
approval. As of December 31, 1996, First Community was a Tier 1
Institution.
The payment of dividends by any financial institution is affected
by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a
financial institution generally is prohibited from paying any
dividends if, following payment thereof, the institution would be
undercapitalized. As described above, each of the Bank
Subsidiaries exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1996. Further, under
applicable regulations of the OTS, First Community may not pay
dividends in an amount which would reduce its capital below the
amount required for the liquidation account established in
connection with First Community's conversion from the mutual to
the stock form of ownership in 1991. As of December 31, 1996,
approximately $28.1 million was available to be paid as dividends
to Heartland by the Bank Subsidiaries. Notwithstanding the
availability of funds for dividends, however, the federal banking
regulators may prohibit the payment of any dividends by the Bank
Subsidiaries if they determine such payment would constitute an
unsafe or unsound practice.
Insider Transactions
The Bank Subsidiaries are subject to certain restrictions imposed
by the Federal Reserve Act on extensions of credit to Heartland
and its subsidiaries, on investments in the stock or other
securities of Heartland and its subsidiaries and the acceptance
of the stock or other securities of Heartland or its subsidiaries
as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank
Subsidiaries to their respective directors and officers, to
directors and officers of Heartland and its subsidiaries, to
principal stockholders of Heartland, and to "related interests"
of such directors, officers and principal stockholders. In
addition, such legislation and regulations may affect the terms
upon which any person becoming a director or officer of Heartland
or one of its subsidiaries or a principal stockholder of
Heartland may obtain credit from banks with which any of the Bank
Subsidiaries maintains a correspondent relationship.
Safety and Soundness Standards
The FDIC and OTS have adopted guidelines which establish
operational and managerial standards to promote the safety and
soundness of state non-member banks and savings associations,
respectively. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an
institution fails to comply with any of the standards set forth
in the guidelines, the agency may require the institution to
submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to
require a compliance plan from an institution whose failure to
meet one or more of the guidelines is of such severity that it
could threaten the safety and soundness of the institution.
Failure to submit an acceptable plan, or failure to comply with a
plan that has been accepted by the agency, would constitute
grounds for further enforcement action.
Branching Authority
Iowa law strictly regulates the establishment of bank offices.
Under the Iowa Banking Act, an Iowa state bank, such as DB&T, may
not establish a bank office outside the boundaries of the
counties contiguous to or cornering upon the county in which the
principal place of business of the bank is located. Further, Iowa
law prohibits an Iowa bank from establishing de novo branches in
a municipality other than the municipality in which the bank's
principal place of business is located, if another bank already
operates one or more offices in the municipality in which the
proposed de novo branch is to be located. The number of offices
an Iowa bank may establish in a particular municipality is also
limited depending upon the municipality's population. Illinois
banks, such as Galena and Riverside, have the authority under
Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory
approvals.
Effective June 1, 1997, (or earlier if expressly authorized by
applicable state law), the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows
banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits
that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo
interstate branches or the acquisition of individual branches of
a bank in another state (rather than the acquisition of an out-of-
state bank in its entirety) is allowed by the Riegle-Neal Act
only if specifically authorized by state law. The legislation
allows individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997. Illinois and Iowa have both enacted legislation
permitting interstate mergers beginning on June 1, 1997, subject
to certain conditions.
Federally chartered savings associations, such as First
Community, which qualify as "domestic building and loan
associations," as defined in the Internal Revenue Code, or meet
the qualified thrift lender test (see "-The Bank Subsidiaries --
Qualified Thrift Lender Test") have the authority, subject to
receipt of OTS approval, to establish branch offices anywhere in
the United States, either de novo or through acquisitions of all
or part of another financial institution. If a federal savings
association fails to qualify as a "domestic building and loan
association," as defined in the Internal Revenue Code, or fails
to meet the qualified thrift lender test, the association
generally may establish a branch in a state other than the state
of its home office only to the extent authorized by the law of
the state in which the branch is to be located. As of December
31, 1996, First Community qualified as a "domestic building and
loan association," as defined in the Internal Revenue Code, and
met the qualified thrift lender test.
State Bank Activities
Under federal law and FDIC regulations, FDIC insured state banks
are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are
not permissible for a national bank. Federal law and FDIC
regulations also prohibit FDIC insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as
principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and
continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant
risk to the deposit insurance fund of which the bank is a member.
Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC. These
restrictions have not had, and are not currently expected to
have, a material impact on the operations of DB&T, Galena or
Riverside.
Qualified Thrift Lender Test
Under the QTL test in effect prior to September 30, 1996, First
Community generally was required to invest at least 65% of its
portfolio assets in "qualified thrift investments," as measured
on a monthly average basis in nine out of every 12 months.
Qualified thrift investments for purposes of the QTL test consist
principally of residential mortgage loans, mortgage-backed
securities and other housing and consumer-related investments.
The term "portfolio assets" is statutorily defined to mean a
savings association's total assets less goodwill and other
intangible assets, the association's business property and a
limited amount of its liquid assets. Under amendments to the HOLA
enacted September 30, 1996, First Community will be deemed to
satisfy the QTL test if it either holds qualified thrift
investments equaling 65% or more of its portfolio assets or
qualifies as a domestic building and loan association under the
Internal Revenue Code. The new legislation also expanded somewhat
the definition of qualified thrift investments. See "--Recent
Regulatory Developments." As of December 31, 1996, First
Community satisfied the QTL test, with a ratio of qualified
thrift investments to portfolio assets of 76.52% and qualified as
a "domestic building and loan association," as defined in the
Internal Revenue Code.
Liquidity Requirements
OTS regulations currently require each savings association to
maintain, for each calendar month, an average daily balance of
liquid assets (including cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or
federal agency obligations) equal to at least 5% of the average
daily balance of its net withdrawable accounts plus short-term
borrowings (i.e., those repayable in 12 months or less) during
the preceding calendar month. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range
of 4% to 10% of such accounts and borrowings, depending upon
economic conditions and the deposit flows of savings
associations. OTS regulations also require each savings
association to maintain, for each calendar month, an average
daily balance of short-term liquid assets (generally liquid
assets having maturities of 12 months or less) equal to at least
1% of the average daily balance of its net withdrawable accounts
plus short-term borrowings during the preceding calendar month.
Penalties may be imposed for failure to meet liquidity ratio
requirements. At December 31, 1996, First Community was in
compliance with OTS liquidity requirements, with an overall
liquidity ratio of 10.67% and a short-term liquidity ratio of
2.78%.
Federal Reserve System
FRB regulations, as presently in effect, require depository
institutions to maintain non-interest earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $49.3
million or less, the reserve requirement is 3% of total
transaction accounts; and for transaction accounts aggregating in
excess of $49.3 million, the reserve requirement is $1.479
million plus 10% of the aggregate amount of total transaction
accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances are exempted from the reserve
requirements. These reserve requirements are subject to annual
adjustment by the FRB. Each of the Bank Subsidiaries is in
compliance with the foregoing requirements. The balances used to
meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed on First Community by the
OTS.
G. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of Heartland are affected by the policies of
regulatory authorities, including the Federal System whose
monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to
continue to do so in the future. Because of changing conditions
in the economy and in the money markets, as a result of actions
by monetary and fiscal authorities, interest rates, credit
availability and deposit levels may change due to circumstances
beyond the control of Heartland. Future policies of the Federal
Reserve System and other authorities cannot be predicted, nor can
their effect on future earnings be predicted.
ITEM 2.
PROPERTIES
The principal offices of Heartland are located in DB&T's main
office at 1398 Central Avenue, Dubuque, Iowa 52001. This office
is owned by DB&T and consists of a three-story glazed terra cotta
building constructed in 1922. The main office building currently
comprises approximately 59,500 square feet, all of which is
occupied by DB&T and Heartland. Construction of a three-story
addition of approximately 32,000 square feet was completed in
1994. The cost of this new addition and remodeling of the
existing main office building was approximately $4.9 million.
DB&T has a total of eight branch offices in addition to its main
office. Five of these offices are located in the city of Dubuque,
and three branches are located in the surrounding Iowa
communities of Epworth, Farley and Holy Cross. DB&T owns all of
its branch offices without material encumbrances, except its
branch located at Kennedy Mall. DB&T owns the buildings but
leases the land under long term agreements at its Kennedy Mall
branch and Main Street office location. The DB&T subsidiaries,
operate out of the main office.
Citizens' Dubuque office is located in a leased building at 1477
Locust Street, Dubuque, Iowa 52001. The Madison office for
Citizens is located in a leased building at 1771 Thierer Road,
Madison, Wisconsin 53707.
Galena's main office is located at 971 Gear Street on the west
side of Galena, Illinois. Construction of this new 18,000 square
foot brick banking facility was completed in 1996. A drive-up
facility is also located in downtown Galena. One branch office is
located in Stockton, Illinois, which is located approximately 24
miles east of Galena. Each of these offices is owned without
material encumbrances.
The principal offices of Keokuk are located at the main office of
First Community at 4th and Concert Street, Keokuk, Iowa 52632.
The property was purchased by First Community in 1983 and
consists of a one-story brick building constructed in 1951. This
building comprises approximately 6,000 square feet, all of which
is occupied by First Community. During 1996, First Community
opened a 2,100 square foot branch on the northwest side of
Keokuk. First Community also has one branch office located in
Carthage, Illinois, which is located approximately 15 miles east
of Keokuk, Iowa. The one-story wooden frame building constructed
in 1976 comprises approximately 3,000 square feet, all of which
is occupied by First Community. Each of these offices are owned
without material encumbrances.
Riverside moved from its temporary facility to its permanent
facility in September, 1996. This 8,000 square foot one-story
brick building is located at 6700 East Riverside Boulevard,
Rockford, Illinois 61114.
ULTEA leases a facility at 2976 Triverton Pike, Madison,
Wisconsin 53711.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
Heartland or any of its subsidiaries is a party or of which any
of their property is the subject.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a
vote of security holders.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Heartland's Common Stock was held by approximately 700
shareholders of record as of March 24, 1997, and is traded in the
over-the-counter market.
The following table shows, for the periods indicated, the range
of reported prices per share of Heartland's Common Stock in the
over-the-counter market. These quotations represent inter-dealer
prices without retail markups, markdowns or commissions and do
not necessarily represent actual transactions.
Heartland Common Stock Actual
<TABLE>
<CAPTION>
Calendar Quarter High Low
1995:
<S> <C> <C>
First $16 $14 19/32
Second 17 15 1/2
Third 17 1/4 17
Fourth 17 1/4 17 1/4
1996:
First 17 11/16 16 3/16
Second 20 17 1/4
Third 25 17 1/4
Fourth 24 3/4 24
</TABLE>
Cash dividends have been declared by Heartland quarterly during
the past two years ending December 31, 1996, with a special
dividend having also been paid in the first quarter of 1995. The
following table sets forth the cash dividends per share paid on
Heartland's Common Stock for the past two years:
<TABLE>
<CAPTION>
Calendar Quarter
1995:
<S> <C>
First $ .19
Second .075
Third .075
Fourth .075
1996:
First $ .10
Second .10
Third .10
Fourth .10
</TABLE>
ITEM 6.
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
--------------------------------
STATEMENT OF INCOME DATA
<S> <C> <C> <C>
Interest income $ 51,886 $ 49,149 $ 43,373
Interest expense 27,644 25,529 20,128
-------- -------- --------
Net interest income 24,242 23,620 23,245
Provision for loan and
lease losses 1,408 820 811
-------- -------- --------
Net interest income after
provision for loan and
lease losses 22,834 22,800 22,434
Noninterest income 7,364 4,981 4,965
Noninterest expense 19,507 17,323 17,244
Provision for income taxes 2,685 2,884 3,015
-------- -------- --------
Net income 8,006 $ 7,574 $ 7,140
======== ======== ========
PER COMMON SHARE DATA (1)
Net income $ 1.70 $ 1.58 $ 1.47
Cash dividends .40 .30 0.26
Dividend payout ratio 23.53% 19.03% 17.99%
Book value $ 14.84 $ 13.76 $ 11.76
Weighted average shares
outstanding 4,715,009 4,805,184 4,845,648
BALANCE SHEET DATA
Investments and federal
funds sold $183,966 $171,726 $162,968
Total loans and leases,
net of unearned 484,085 454,905 422,216
Allowance for loan and lease
losses 6,191 5,580 5,124
Total assets 736,552 677,313 626,490
Total deposits 558,343 534,587 513,239
Long-term obligations 42,506 45,400 23,562
Redeemable preferred stock - - -
Stockholders' equity 70,259 64,506 56,930
EARNINGS PERFORMANCE DATA
Return on average total assets 1.16% 1.18% 1.18%
Return on average stockholders'
equity 12.00 12.28 12.82
Net interest margin ratio (2) 3.98 4.13 4.32
ASSET QUALITY RATIOS
Nonperforming assets to total
assets 0.34% 0.28% 0.17%
Nonperforming loans and leases
to total loans and leases 0.41 0.26 0.21
Net loan and lease charge-offs
to average loans and leases 0.17 0.08 0.03
Allowance for loan and lease
losses to total loans and
leases 1.28% 1.23% 1.21%
Allowance for loan and lease
losses to nonperforming
loans and leases 313.63 463.84 580.95
CAPITAL RATIOS
Average equity to average
assets 9.66% 9.59% 9.22%
Total capital to risk-adjusted
assets 14.28 14.46 15.04
Tier 1 leverage 9.81 9.47 9.32
</TABLE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1993 1992
--------------------
STATEMENT OF INCOME DATA
<S> <C> <C>
Interest income $ 43,265 $ 43,432
Interest expense 21,126 24,575
-------- --------
Net interest income 22,139 18,857
Provision for loan and lease losses 1,014 630
-------- --------
Net interest income after provision
for loan and lease losses 21,125 18,227
Noninterest income 5,470 5,826
Noninterest expense 16,338 15,363
Provision for income taxes 3,251 2,558
-------- --------
Net income $ 7,006 $ 6,132
======== ========
PER COMMON SHARE DATA (1)
Net income $ 1.47 $ 1.28
Cash dividends .20 0.14
Dividend payout ratio 13.33% 10.84%
Book value $ 11.52 $ 9.55
Weighted average shares outstanding 4,774,718 4,788,524
BALANCE SHEET DATA
Investments and federal funds sold $211,394 $227,492
Total loans and leases, net of unearned 374,778 331,588
Allowance for loan and lease losses 4,433 3,406
Total assets 620,214 596,627
Total deposits 498,279 499,714
Long-term obligations 25,055 3,209
Redeemable preferred stock 67 68
Stockholders' equity 55,098 45,740
EARNINGS PERFORMANCE DATA
Return on average total assets 1.17% 1.10%
Return on average stockholders' equity 14.20 14.13
Net interest margin ratio (2) 4.11 3.83
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.30% 0.38%
Nonperforming loans and leases
to total loans and leases 0.32 0.47
Net loan and lease charge-offs
to average loans and leases 0.04 0.08
Allowance for loan and lease losses
to total loans and leases 1.18 1.03
Allowance for loan and lease losses
to nonperforming loans and leases 374.09 216.25
CAPITAL RATIOS
Average equity to average assets 8.23% 7.80%
Total capital to risk adjusted assets 14.37 13.24
Tier 1 leverage 8.49 8.01
</TABLE>
(1) Per share data has been restated to reflect the two-for-one
stock split effected in the form of a stock dividend on
March 29, 1996 and the four-for-one stock conversion
effected as part of the reincorporation of Heartland in
Delaware on June 30, 1993.
(2) Tax equivalent using a 34% tax rate.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of
the consolidated financial condition and results of operations of
Heartland Financial USA, Inc. ("Heartland") as of the dates and
for the periods indicated. This discussion should be read in
conjunction with the Selected Financial Data, Heartland's
Consolidated Financial Statements and the Notes thereto and other
financial data appearing elsewhere in this report.
The consolidated financial statements include the accounts of
Heartland and its wholly-owned subsidiaries: Dubuque Bank and
Trust Company ("DB&T"), DB&T Insurance, Inc., DB&T Community
Development Corp., Galena State Bank and Trust Company
("Galena"), Riverside Community Bank ("Riverside"), Keokuk
Bancshares, Inc. ("Keokuk"), First Community Bank, FSB ("FCB"),
Citizens Finance Co. ("Citizens", previously Tri-State Community
Credit Corp.) and ULTEA, Inc. ("ULTEA").
This report, including the Chairman's Report to Stockholders,
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.
Heartland 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 purposes of these safe harbor
provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and
expectations of Heartland are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Heartland'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 Heartland and the 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 Heartland'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
Heartland and its business, including additional factors that
could materially affect Heartland's financial results, is
included in Heartland's filings with the Securities and Exchange
Commission.
OVERVIEW
Heartland reported earnings for the year ended December 31, 1996,
of $8,006,000, an increase of $432,000 (5.70%) from the 1995
total of $7,574,000. On a per common share basis, 1996 net income
increased 7.73% to $1.70 from $1.58 earned in 1995. This
performance reflects significantly improved noninterest income,
partially mitigated by increased costs related to the first full
year of operation of Riverside and the one-time Savings
Association Insurance Fund ("SAIF") assessment at FCB.
Net income increased $434,000 (6.08%)in 1995 from the 1994 total
of $7,140,000. On a per common share basis, 1995 income
increased from $1.47 earned in 1994 to $1.58.
Heartland's strategy of joining independent community banks and
related services together under a common umbrella to become a
viable market competitor continues to evolve. Central to this
strategy is the continued development of Heartland's sales
culture, maintenance of strong asset quality and net interest
margins, and control of net overhead combined with the expansion
of alternative sources of noninterest income. Heartland believes
that continued concentration on these goals will lead to enhanced
returns for stockholders.
The success of Heartland's efforts to implement this strategy is
evidenced by the following:
Total loans and leases outstanding increased $29,180,000
during 1996, an increase of 6.41% from December 31, 1995.
Deposit growth experienced during 1996 was $23,756,000 or
4.44%.
Heartland announced the signing of a definitive agreement to
purchase Cottage Grove State Bank, a $40 million financial
institution located in Cottage Grove, Wisconsin.
The acquisition of ULTEA, LLC, a vehicle fleet leasing company
headquartered in Madison, Wisconsin, was completed in December
1996, expanding Heartland's sources of noninterest income.
Total noninterest income increased 47.84% during 1996. While
gains on sales of securities accounted for 61.94% of this
$2,383,000 change, there were substantial increases in core
noninterest income components. An example was the 22.96% growth
in trust revenues which increased $338,000 during 1996. The
majority of the increases were generated at DB&T.
Concurrent with Heartland's growth, noninterest expense increased
$2,184,000 (12.61%) in 1996, compared to 1995. The majority of
this increase is attributable to costs associated with
Heartland's Riverside subsidiary, the special one-time SAIF
assessment at FCB and a substantial charitable gift at FCB.
While management remains committed to the control of overhead, it
also realizes that resources must be committed to expansion of
the franchise.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest income
earned on earning assets and interest expense paid on interest
bearing liabilities. As such, net interest income is affected by
changes in the volume and yields on earning assets and the volume
and rates paid on interest bearing liabilities. Net interest
margin is the ratio of tax equivalent net interest income to
average earning assets.
Net interest income on a fully tax equivalent basis was
$25,476,000 and $24,721,000 for 1996 and 1995, respectively, an
increase of 3.05%. However, Heartland's net interest margin
expressed as a percentage of average earning assets decreased to
3.98% in 1996, compared to 4.13% in 1995. This decrease occurred
for several reasons:
Less than anticipated loan growth caused a shift from higher-
yielding loans into lower-yielding investments.
The additional investment of nearly $3 million in low-income
housing projects generated substantial tax credits, while
negatively impacting the net interest margin calculation.
One of the primary causes of this reduction was the reduced
return on Heartland's securities portfolio as several higher-
yielding securities matured or were called.
Heartland experienced increased funding costs as rates were
elevated to sustain deposit growth.
Average noninterest bearing deposits grew a modest $1,738,000
or 4.00% during 1996. While this represents an improvement
over the 1.59% growth experienced during 1995, noninterest
bearing deposits expressed as a percentage of average assets
dropped to 6.54% at December 31, 1996, compared to 6.76% at
December 31, 1995.
Heartland continues to manage its balance sheet on a proactive
basis. The quarter ended December 31, 1996, is representative of
this, as the net interest margin expressed as a percentage of
average earning assets increased to 4.17% as compared to 3.96%
for the same quarter during 1995.
The net interest margin expressed as a percentage of average
earning assets decreased to 4.13% for the year ending December
31, 1995, compared to 4.32% for 1994. The primary component of
the 1995 decrease was attributable to higher funding costs, as
the expense associated with total interest bearing liabilities
increased 19.60% from the December 31, 1994, total of 4.03%. One
of the primary components of this change was Heartland's
increased reliance on Federal Home Loan Bank ("FHLB") funding.
This funding source, which is typically more expensive than core
deposits, continued to be a critical component of Heartland's
funding as total average deposits increased by $20,220,000
(4.10%) during 1995, or $25,779,000 short of the $45,999,000
growth experienced in average net loans and leases.
The following table sets forth certain information relating to
Heartland's average consolidated balance sheets and reflects the
yield on average earning assets and the cost of average interest
bearing liabilities for the years indicated. Such yields and
costs are derived by dividing income or expense by the average
balance of assets or liabilities. Average balances are derived
from daily balances, and nonaccrual loans are included in each
respective loan category.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1996
Average
Balance Interest Rate
------- -------- ----
EARNING ASSETS
<S> <C> <C> <C>
Securities:
Taxable $136,107 $ 8,392 6.17%
Tax-exempt (1) 31,005 3,108 10.02
--------- --------- ------
Total securities 167,112 11,500 6.88
--------- --------- ------
Interest bearing deposits 4,332 163 3.76
Federal funds sold 11,532 610 5.29
--------- --------- ------
Loans and leases:
Commercial and commercial
real estate (1) 195,372 17,058 8.73
Residential mortgage 160,511 12,834 8.00
Agricultural and agricultural
real estate (1) 58,975 5,377 9.12
Consumer 41,302 4,250 10.29
Lease financing 7,502 549 7.32
Fees on loans - 779 -
Less: allowance for loan
and lease losses (6,026) - -
--------- --------- ------
Net loans and leases 457,636 40,847 8.93
--------- --------- ------
Total earning assets 640,612 53,120 8.29
--------- --------- ------
NONEARNING ASSETS
Total nonearning assets 50,473 - -
--------- --------- ------
TOTAL ASSETS $691,085 $ 53,120 7.69%
========= ========= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
NOW accounts $ 93,198 $ 3,129 3.36%
Money market accounts 45,956 1,867 4.06
Savings accounts 75,247 2,478 3.29
Time, $100,000 and over 37,806 2,131 5.64
Other time deposits 239,300 13,585 5.68
Short-term borrowings 37,100 1,943 5.24
Other borrowings 41,936 2,511 5.99
--------- --------- ------
Total interest bearing
liabilities 570,543 27,644 4.85
--------- --------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 45,205 - -
Accrued interest and other
liabilities 8,606 - -
--------- --------- ------
Total noninterest bearing
liabilities 53,811 - -
--------- --------- ------
Stockholders' Equity 66,731 - -
--------- --------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $691,085 $ 27,644 4.00%
========= ========= ======
Net interest income (1) $ 25,476
=========
Net interest income
to total earning assets (1) 3.98%
======
Interest bearing liabilities
to earning assets 89.06%
=========
</TABLE>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS & RATES (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1995
Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
EARNING ASSETS
Securities:
Taxable $116,683 $ 7,562 6.48%
Tax-exempt (1) 25,518 2,671 10.47
-------- ------- ------
Total securities 142,201 10,233 7.20
-------- ------- ------
Interest bearing deposits 3,059 116 3.79
Federal funds sold 12,765 740 5.80
-------- -------- ------
Loans and leases:
Commercial and commercial
real estate (1) 186,062 16,403 8.82
Residential mortgage 155,208 12,211 7.87
Agricultural and agricultural
real estate (1) 60,171 5,422 9.01
Consumer 35,881 3,650 10.17
Lease financing 9,362 670 7.16
Fees on loans - 805 -
Less: allowance for loan
and lease losses (5,454) - -
--------- -------- ------
Net loans and leases 441,230 39,161 8.88
--------- -------- ------
Total earning assets 599,255 50,250 8.39
--------- -------- ------
NONEARNING ASSETS
Total nonearning assets 43,501 - -
--------- -------- ------
TOTAL ASSETS $642,756 $50,250 7.82%
========= ======== ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
NOW accounts $ 85,023 $ 2,842 3.34%
Money market accounts 41,208 1,723 4.18
Savings accounts 80,122 2,773 3.46
Time, $100,000 and over 30,091 1,658 5.51
Other time deposits 233,983 13,033 5.57
Short-term borrowings 21,665 1,236 5.71
Other borrowings 37,253 2,264 6.08
--------- -------- ------
Total interest bearing
liabilities 529,345 25,529 4.82
--------- -------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 43,467 - -
Accrued interest and other
liabilities 8,281 - -
--------- -------- ------
Total noninterest bearing
liabilities 51,748 - -
--------- -------- ------
Stockholders' Equity 61,663 - -
--------- -------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $642,756 $25,529 3.97%
========= ======== ======
Net interest income (1) $24,721
========
Net interest income 4.13%
to total earning assets (1) ======
Interest bearing liabilities
to earning assets 88.33%
=========
</TABLE>
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS & RATES (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1994
Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
EARNING ASSETS
Securities:
Taxable $137,865 $ 8,247 5.98%
Tax-exempt (1) 26,802 3,210 11.98
-------- ------- ------
Total securities 164,667 11,457 6.96
-------- ------- ------
Interest bearing deposits 2,621 72 2.75
Federal funds sold 4,416 192 4.35
Loans and leases:
Commercial and commercial
real estate (1) 166,241 13,327 8.02
Residential mortgage 134,101 10,305 7.68
Agricultural and agricultural
real estate (1) 57,526 4,703 8.18
Consumer 35,208 3,363 9.55
Lease financing 7,014 493 7.03
Fees on loans - 726 -
Less: allowance for loan
and lease losses (4,859) - -
--------- -------- ------
Net loans and leases 395,231 32,917 8.33
--------- -------- ------
Total earning assets 566,935 44,638 7.87
--------- -------- ------
NONEARNING ASSETS
Total nonearning assets 37,274 - -
--------- -------- ------
TOTAL ASSETS $604,209 $44,638 7.39%
========= ======== ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
NOW accounts $ 81,634 $ 2,064 2.53%
Money market accounts 42,738 1,314 3.07
Savings accounts 83,340 2,145 2.57
Time, $100,000 and over 22,118 1,020 4.61
Other time deposits 221,059 11,263 5.10
Short-term borrowings 24,508 960 3.92
Other borrowings 24,175 1,362 5.63
--------- -------- ------
Total interest bearing
liabilities 499,572 20,128 4.03
--------- -------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 42,785 - -
Accrued interest and other
liabilities 6,158 - -
--------- -------- ------
Total noninterest bearing
liabilities 48,943 - -
--------- -------- ------
Stockholders' Equity 55,694 - -
--------- -------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $604,209 $20,128 3.33%
========= ======== ======
Net interest income (1) $24,510
========
Net interest income 4.32%
to total earning assets (1) ======
Interest bearing liabilities
to earning assets 88.12%
=========
</TABLE>
(1) Tax equivalent basis was calculated using an effective tax
rate of 34%.
The following table allocates the changes in net interest income
to differences in either average balances or average rates for
earning assets and interest bearing liabilities. The changes have
been allocated proportionately to the change due to volume and
change due to rate. Interest income is measured on a tax
equivalent basis using a 34% tax rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1996 Compared to 1995
Change Due to
Volume Rate Net
-----------------------
<S> <C> <C> <C>
EARNING ASSETS/
INTEREST INCOME
Securities
Taxable $1,260 $ (430) $ 830
Tax-exempt 574 (137) 437
Interest bearing deposits 48 (1) 47
Federal funds sold (71) (59) (130)
Loans and leases 1,456 230 1,686
------- ------- -------
TOTAL EARNING ASSETS 3,267 (397) 2,870
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
NOW accounts 273 14 287
Money market accounts 199 (55) 144
Savings accounts (169) (126) (295)
Time, $100,000 and over 425 48 473
Other time deposits 296 256 552
Short term borrowings 883 (176) 707
Other borrowings 285 (38) 247
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 2,192 (77) 2,115
------- ------- -------
NET INTEREST INCOME $1,075 ($320) $ 755
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1995 Compared to 1994
Change Due to
Volume Rate Net
-----------------------
<S> <C> <C> <C>
EARNING ASSETS/
INTEREST INCOME
Securities
Taxable ($1,267) $ 582 $ (685)
Tax-exempt (154) (385) (539)
Interest bearing deposits 12 32 44
Federal funds sold 363 185 548
Loans and leases 3,831 2,413 6,244
-------- ------- -------
TOTAL EARNING ASSETS 2,785 2,827 5,612
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
NOW accounts 86 692 778
Money market accounts (47) 456 409
Savings accounts (83) 711 628
Time, $100,000 and over 368 270 638
Other time deposits 658 1,112 1,770
Short term borrowings (111) 387 276
Other borrowings 737 165 902
-------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 1,608 3,793 5,401
------- ------- -------
NET INTEREST INCOME $ 1,177 ($ 966) $ 211
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1994 Compared to 1993
Change Due to
Volume Rate Net
-----------------------
<S> <C> <C> <C>
EARNING ASSETS/
INTEREST INCOME
Securities
Taxable ($1,921) ($286) ($2,207)
Tax-exempt 316 321 637
Interest bearing deposits 30 (61) (31)
Federal funds sold (288) 59 (229)
Loans and leases 3,602 (1,370) 2,232
-------- -------- --------
TOTAL EARNING ASSETS 1,739 (1,337) 402
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
NOW accounts (190) (234) (424)
Money market accounts (496) 6 (490)
Savings accounts 88 (204) (116)
Time, $100,000 and over 50 84 134
Other time deposits 149 (962) (813)
Short term borrowings 60 155 215
Other borrowings 552 (56) 496
-------- -------- --------
TOTAL INTEREST BEARING
LIABILITIES 213 (1,211) (998)
-------- -------- --------
NET INTEREST INCOME $1,526 ($ 126) $ 1,400
======== ======== ========
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
The $433,000 (118.96%)increase in net charge-offs in 1996 was
primarily attributable to a $469,000 writedown on a pool of
leases purchased from the Bennett Funding Group. The $233,000
(177.86%) increase in net charge-offs in 1995, was in large part
because of charge-offs on consumer loans, including those at
Citizens, a consumer finance subsidiary. The allowance for loan
and lease losses as a percentage of total loans and leases was
1.28% at December 31, 1996, and 1.23% at December 31, 1995.
NONINTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1996 1995 1994
------------------------
<S> <C> <C> <C>
Service charges and fees $ 2,437 $ 2,106 $ 2,013
Trust income 1,810 1,472 1,436
Brokerage income 212 110 229
Insurance income 650 611 637
Securities gains, net 1,889 413 802
Trading securities losses, net - - (359)
Gains on sales of loans 131 73 63
Other noninterest income 235 196 144
-------- -------- --------
Total noninterest income $ 7,364 $ 4,981 $ 4,965
======== ======== ========
</TABLE>
The above table shows Heartland's noninterest income for the
years indicated.
Total noninterest income increased $2,383,000 (47.84%) in 1996,
as compared to 1995. Total noninterest income during 1995
remained stable as compared to the prior year.
One of the most significant components of noninterest income is
service charges and fees which totaled $2,437,000 and $2,106,000
in 1996 and 1995, respectively. Increases expressed as a
percentage were 15.72% and 4.62% for those years. The relatively
strong growth experienced in 1996 reflects the addition of new
merchants in the credit card processing area, in addition to the
increased emphasis Heartland has placed on enhancing revenues
from services provided to customers.
Trust income increased 22.96% to $1,810,000 in 1996, as compared
to the prior year's total of $1,472,000. This strong performance
resulted from the increase in assets under management, ending
1996 at $366,000,000, an increase of $77,000,000 (26.64%) during
1996 and $41,000,000 (16.53%) during 1995. This growth reflects
especially strong equity and debt markets, combined with the
development of new trust relationships through aggressive calling
efforts. Minimal growth in assets under management in 1994
contributed to the less significant increase of 2.51% in gross
revenues during 1995 as compared to the prior year.
Brokerage income increased $102,000 (92.73%) in 1996, from the
previous year's total. Results for 1996 benefited from the
replacement of two sales personnel lost in 1995, combined with
the full integration of the brokerage area into the retail
division. Income in 1995 was $119,000 (51.97%) less than in 1994.
This significant decrease was primarily caused by the departure
of the two brokerage personnel, combined with the transition to a
new third party vendor.
Securities gains totaled $1,889,000, $413,000 and $443,000 in
1996, 1995 and 1994, respectively. The significant increase
experienced during 1996 resulted from the strong performance of
the equity portfolio at Keokuk which included a $1,174,000 gain
recognized on the sale of Federal Home Loan Mortgage Corporation
common stock. Included in 1994 was a $359,000 loss experienced in
the trading account at DB&T and is a direct result of the
significant downturn in the bond market during the first quarter.
DB&T's trading portfolio was liquidated during 1995.
NONINTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1996 1995 1994
------------------------
<S> <C> <C> <C>
Salaries and employee
benefits $11,035 $ 9,730 $ 9,481
Occupancy expense, net 1,268 1,059 976
Furniture and equipment
expense 1,336 1,315 1,209
Outside services 1,155 1,164 1,254
FDIC deposit insurance
assessment 746 681 1,117
Advertising 996 696 587
Other noninterest expense 2,971 2,678 2,620
-------- -------- --------
Total noninterest expense $19,507 $17,323 $17,244
======== ======== ========
Efficiency ratio (1) 63.03% 59.15% 59.29%
======== ======== ========
</TABLE>
(1) Noninterest expense divided by the sum of net interest
income on a tax equivalent basis and noninterest income less
security gains.
The above table shows Heartland's noninterest expense for the
years indicated.
Noninterest expense increased $2,184,000 (12.61%) in 1996 as
compared to 1995. Total 1995 noninterest expense represented a
mere increase of $79,000 (.46%) from the 1994 total.
Salaries and employee benefit expense represented 56.57% of the
total 1996 noninterest expense, increasing $1,305,000 (13.41%)
from the total for 1995. This increase was attributable to merit
and cost of living raises and the addition of personnel at
Riverside. Heartland continues to closely monitor compensation
to ensure that employees are appropriately utilized and
adequately remunerated for their services.
The $209,000 (19.74%) increase in occupancy costs for 1996
represented additional depreciation and property tax costs
associated with the construction of new facilities at the
subsidiary banks.
The one-time special assessment on all savings associations to
capitalize the SAIF amounted to $545,000 at FCB and was recorded
during 1996. Exclusive of this one-time charge, FDIC premiums
decreased $480,000 (70.48%) in 1996 compared to 1995. During
1995, FDIC premium expense also experienced a reduction,
decreasing $436,000 (39.03%). The FDIC premium expense was
reduced when the premium charged to members of the Bank Insurance
Fund ("BIF") dropped from .23% to .04% of deposits and
subsequently to $2,000 per year for well capitalized banks. Three
of Heartland's four banks were affected by this reduction, which
took effect in September of 1995. FCB, as a SAIF member,
experienced a reduction in FDIC premium expense on January 1,
1997, when the assessment dropped from .23% to .065% of deposits.
Advertising and public relations expense experienced the largest
single percentage increase within the noninterest expense
category, rising $300,000 (43.10%) in 1996, compared to the 1995
total. The primary component of this increase was the
contribution of stock from FCB's securities portfolio to a public
charitable trust at a cost basis of $220,000 with an associated
market value of $820,000. The $109,000 (18.57%) increase during
1995 resulted primarily from efforts to publicize a new retail
delivery package and the building addition at DB&T, along with
the opening of Riverside.
The $293,000 (10.94%) increase in other noninterest expense
during 1996 was attributable to expenses incurred to grow the
merchant credit card processing area and the opening of
Riverside.
INCOME TAXES
The $199,000 (6.90%) decrease in total tax expense for 1996,
despite the increase in net income, was driven primarily by the
addition of $195,000 in tax credits associated with the
investment in low-income housing projects. The contribution of
appreciated property to a public charitable trust also aided in
this decrease. Income taxes for 1995 decreased $131,000 (4.34%)
from the 1994 total due to $247,000 of tax credits associated
with two of the low-income housing projects.
FINANCIAL CONDITION
LENDING ACTIVITIES
Heartland's major source of income is interest on loans and
leases. Heartland's loan and lease portfolio represents the
communities served by the Heartland banks and their continued
emphasis on commercial and agricultural lending. The table below
presents the composition of Heartland's loan portfolio at the end
of the years indicated.
With the exception of agricultural loans and lease financing, all
loan categories experienced growth during 1996. The largest
dollar growth occurred in commercial and commercial real estate
loans, which increased $14,657,000 (7.64%)compared to $20,868,000
(12.20%) during 1995. The reduced growth in 1996 reflects
softness in the local economies of the Heartland banks, primarily
at DB&T.
Heartland's residential mortgage loans consist of multi-family
and residential real estate mortgage loans. A stable rate
environment along with expanded production capabilities at
Riverside combined to increase the number of loan originations to
873 and 717 in 1996 and 1995, respectively. Residential mortgage
loans outstanding continued to grow as customers elected to take
three-, five- and seven-year mortgages which were retained in
inventory. In 1996 and 1995 Heartland's total outstanding
residential mortgage loans increased $8,675,000 (5.48%) and
$8,177,000 (5.45%), respectively.
While the Heartland banks continued to emphasize agricultural
loans and agricultural real estate loans, these loans experienced
a slight decrease of $1,563,000 (2.65%) from the December 31,
1995, total. While this decrease was minimal, it reflected the
consolidation occurring in the agricultural sector and strong
commodity prices. These loans increased $2,353,000 (4.15%) during
1995 from the December 31, 1994, total.
Consumer loan outstandings grew $9,373,000 (24.04%) during 1996
when compared to the December 31, 1995, total. This increase in
outstandings was attributed to significant growth in consumer
lines of credit and dealer paper, combined with the integration
of consumer loans into the retail delivery system and the
expansion of Citizens into Madison, Wisconsin. The 1995 figure
represents a $2,920,000 (8.10%) increase compared to the December
31, 1994, total. Citizen's loans reflected in these consolidated
totals were $8,937,000, $6,783,000 and $6,337,000 at December 31,
1996, 1995 and 1994, respectively.
Although the risk of nonpayment for any reason exists with
respect to all loans, specific risks are associated with each
type of loan. The primary risks associated with commercial and
agricultural loans are the quality of the borrower's management
and the impact of national and regional economic factors. Risks
associated with real estate loans include fluctuating land values
and concentrations of loans in a specific type of real estate.
Consumer loans also have risks associated with concentrations of
loans in a single type of loan and the risk of a borrower's
unemployment as a result of deteriorating economic conditions.
Heartland monitors its loan concentrations and does not believe
it has concentrations in any specific industry other than
agriculture.
Heartland's strategy with respect to the management of these
types of risks, whether loan demand is weak or strong, is to
encourage the Heartland banks to follow tested and prudent loan
policies and underwriting practices which include: (i) granting
loans on a sound and collectible basis; (ii) investing funds
profitably for the benefit of stockholders and the protection of
depositors; (iii) serving the needs of the community and each
bank's general market area while obtaining a balance between
maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the
amount of the loan; (v) administering loan policies through a
Board of Directors and an officers' loan committee; (vi)
developing and maintaining adequate diversification of the loan
portfolio as a whole and of the loans within each loan category;
and (vii) ensuring that each loan is properly documented and, if
appropriate, guaranteed by government agencies and that insurance
coverage is adequate.
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
At
December 31, 1996
Amount Percent
------ -------
<S> <C> <C>
Commercial and commercial real estate $206,523 42.46%
Residential mortgage 166,999 34.33
Agricultural and agricultural real estate 57,526 11.83
Consumer 48,361 9.94
Lease financing, net 7,042 1.44
-------- --------
Gross loans and leases 486,451 100.00%
Unearned discount (1,962)
Deferred loan fees (404)
---------
Total loans and leases 484,085
---------
Allowance for loan and lease losses (6,191)
---------
Loans and leases, net $477,894
=========
</TABLE>
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
At
December 31,
1995 1994
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial and commercial
real estate $191,866 42.00% $170,998 40.32%
Residential mortgage 158,324 34.66 150,147 35.41
Agricultural and
agricultural real estate 59,089 12.94 56,736 13.38
Consumer 38,988 8.54 36,068 8.51
Lease financing, net 8,530 1.86 10,076 2.38
-------- ------- -------- -------
Gross loans and leases 456,797 100.00% 424,025 100.00%
======= =======
Unearned discount (1,510) (1,438)
Deferred loan fees (382) (371)
--------- ---------
Total loans and leases 454,905 422,216
Allowance for loan and
lease losses (5,580) (5,124)
--------- ---------
Loans and leases, net $449,325 $417,092
========= =========
</TABLE>
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
At
December 31,
1993 1992
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial and commercial
real estate $156,117 41.49% $122,783 36.84%
Residential mortgage 124,118 32.98 124,325 37.31
Agricultural and
agricultural real estate 54,998 14.61 47,927 14.38
Consumer 36,236 9.63 33,870 10.16
Lease financing, net 4,855 1.29 4,354 1.31
-------- ------- -------- -------
Gross loans and leases 376,324 100.00% 333,259 100.00%
======= =======
Unearned discount (1,256) (1,415)
Deferred loan fees (290) (256)
--------- ---------
Total loans and leases 374,778 331,588
Allowance for loan and
lease losses (4,433) (3,406)
--------- ---------
Loans and leases, net $370,345 $328,182
========= =========
</TABLE>
The table below sets forth the remaining maturities by loan and
lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1)
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Over 1 Year
Through 5 Years
One Year Fixed Floating
or less Rate Rate
------------------------------
<S> <C> <C> <C>
Commercial and commercial
real estate $ 81,006 $ 66,585 $ 35,747
Residential mortgage 11,032 15,871 14,213
Agricultural and
agricultural real estate 31,992 15,124 5,002
Consumer 12,583 22,409 1,342
Lease financing, net 2,560 4,478 -
-------- -------- --------
Total $139,173 $124,467 $ 56,304
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Over 5 Years
Fixed Floating
Rate Rate Total
-------------------------------
<S> <C> <C> <C>
Commercial and commercial
real estate $ 4,842 $ 18,343 $206,523
Residential mortgage 27,612 98,271 166,999
Agricultural and
agricultural real estate 937 4,471 57,526
Consumer 1,020 11,007 48,361
Lease financing, net 4 - 7,042
-------- -------- --------
Total $ 34,415 $132,092 $486,451
======== ======== ========
</TABLE>
(1) Maturities based upon contractual dates.
NONPERFORMING LOANS AND LEASES AND OTHER NONPERFORMING ASSETS
The table below sets forth the amounts of nonperforming loans and
leases and other nonperforming assets on the dates indicated.
Under Heartland's internal loan review program, a loan review
officer is responsible for reviewing existing loans and leases,
identifying potential problem loans and leases and monitoring the
adequacy of the allowance for possible loan and lease losses at
each of the Heartland banks.
Heartland constantly monitors and continues to develop systems to
oversee the quality of its loan portfolio. One integral part is a
loan rating system which assigns a rating on each loan and lease
within the portfolio based on the borrower's repayment ability,
collateral position and repayment history. This emphasis on
quality is reflected in Heartland's credit quality figures which
compare very favorably to peer data in the September 1996 Bank
Holding Company Performance Report published by the Federal
Reserve Board for bank holding companies with assets of $500
million to $1 billion. For December 31, 1996, 1995 and 1994,
Heartland reported nonperforming assets to total assets of 0.34%,
0.28% and 0.17%, respectively, which compares very favorably with
the peer group numbers of .61%, .58% and .81% for September 30,
1996, December 31, 1995 and 1994, respectively.
NONPERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
----------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and
leases $1,697 $ 977 $ 748 $ 979 $1,300
Loan and leases
contractually past
due 90 days or more 247 226 134 206 275
Restructured loans
and leases 30 - - - -
------ ------ ------ ------ ------
Total nonperforming
loans and leases 1,974 1,203 882 1,185 1,575
Other real estate 532 640 134 623 673
Other repossessed assets 21 51 39 23 -
------ ------ ------- ------ ------
Total nonperforming assets $2,527 $1,894 $1,055 $1,831 $2,248
====== ====== ====== ====== ======
Nonperforming loans and
leases to total loans
and leases 0.41% 0.26% 0.21% 0.32% 0.47%
Nonperforming assets
to total loans and
leases plus repossessed
property 0.52% 0.42% 0.25% 0.49% 0.68%
Nonperforming assets
total assets 0.34% 0.28% 0.17% 0.30% 0.38%
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The adequacy of the allowance for loan and lease losses is
determined by an internally-developed system which equally weighs
formulas established by the Office of the Comptroller of the
Currency and The Bank Administration Institute, in addition to
Heartland's historical charge-offs. This system addresses loan
portfolio composition, loan and lease delinquencies, potential
and existing internally classified credits and other factors
that, in management's judgment, deserve evaluation in estimating
loan and lease losses. 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 Heartland Board of Directors.
Heartland increased its allowance for loan and lease losses
during 1996, 1995 and 1994 due to a number of factors considered
by the Heartland Loan Review Committee, including the following:
(i) increases in higher-risk consumer and more-complex commercial
loans of $24,030,000 (10.41%) and $23,788,000 (11.49%) in 1996
and 1995, respectively; (ii) the economies in Heartland's primary
market areas have been stable since 1989, and the growth of the
allowance anticipates the cyclical nature of any economy; and
(iii) the third consecutive year of increases in the amount of
net charge-offs combined with a substantial increase in
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 December 31, 1996. While management uses available
information to provide for loan and lease losses, the ultimate
collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the allowance for loan and lease losses
carried by the Heartland subsidiaries. Such agencies may require
Heartland to make additional provisions to the allowance based
upon their judgment about information available to them at the
time of their examinations.
The table below summarizes activity in the allowance for loan and
lease losses for the years indicated, including amounts of loans
and leases charged off, amounts of recoveries, additions to the
allowance charged to income and the ratio of net charge-offs to
average loans and leases outstanding.
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
--------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at
beginning of year $5,580 $5,124 $4,433 $3,406 $2,567
Charge-offs:
Commercial and
commercial real
estate 578 108 94 4 100
Residential mortgage 23 6 16 48 103
Agricultural and
agricultural
real estate 2 - - 35 23
Consumer 323 381 244 214 234
Lease financing - - - - -
------ ------ ------ ------ ------
Total charge-offs 926 495 354 301 460
------ ------ ------ ------ ------
Recoveries:
Commercial and
commercial
real estate 16 22 27 50 47
Residential mortgage 1 15 5 23 5
Agricultural and
agricultural
real estate 45 8 43 5 39
Consumer 67 86 148 96 124
Lease financing - - - - -
------ ------ ------ ------ ------
Total recoveries 129 131 223 174 215
------ ------ ------ ------ ------
Net charge-offs 797 364 131 127 245
Provision for loan
and lease losses 1,408 820 811 1,014 630
Additions related
to acquisitions - - - 140 454
Keokuk merger
adjustments - - 11 - -
------ ------ ------ ------ ------
Allowance at end
of period $6,191 $5,580 $5,124 $4,433 $3,406
====== ====== ====== ====== ======
Net charge-offs to
average loans and
leases 0.17% 0.08% 0.03% 0.04% 0.08%
====== ====== ====== ====== ======
</TABLE>
The table below shows Heartland's allocation of the allowance for
loan and lease losses by types of loans and leases and the amount
of unallocated reserves.
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
As of December 31,
1996 1995
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and
commercial real
estate $1,568 42.46% $1,430 42.00%
Residential
mortgage 590 34.33 500 34.66
Agricultural and
agricultural real
estate 480 11.83 518 12.94
Consumer 818 9.94 618 8.54
Lease financing(1) 28 1.44 34 1.86
Unallocated 2,707 --- 2,480 -
------- ------- ------- -------
$6,191 100.00% $5,580 100.00%
======= ======= ======= =======
</TABLE>
1) Prior to 1994, reserve allocations for lease financing
receivables were included in the commercialand commercial
real estate allocations.
<TABLE>
<CAPTION>
As of December 31,
1994 1993
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Commercial and
commercial real
estate $1,321 40.32% $1,535 41.49%
Residential
mortgage 501 35.41 547 32.98
Agricultural and
agricultural real
estate 423 13.38 395 14.61
Consumer 593 8.51 659 9.63
Lease financing(1) 45 2.38 - 1.29
Unallocated 2,241 - 1,297 -
------- ------- ------- -------
$5,124 100.00% $4,433 100.00%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1992
--------------------------
Loan/
Lease
Category
to Gross
Loans &
Amount Leases
------- --------
<S> <C> <C>
Commercial and commercial
real estate $1,260 36.84%
Residential mortgage 534 37.31
Agricultural and agricultural
real estate 267 14.38
Consumer 607 10.16
Lease financing(1) - 1.31
Unallocated 738 -
------- -------
$3,406 100.00%
======= =======
</TABLE>
SECURITIES
The dual objectives of the security portfolio are to provide
Heartland with a source of liquidity and earnings. Securities
represented 24.98% of total assets at December 31, 1996, as
compared to 21.88% at December 31, 1995. This increase in the
investment portfolio is a product of less than expected loan
demand at Heartland's subsidiary banks. For the year ended
December 31, 1995, investments decreased by $4,242,000 (2.78%)
from the December 31, 1994, total, which was attributable to
significant loan growth.
The composition of the portfolio shifted significantly during
1996, as Heartland attempted to maximize the return on the
portfolio while maintaining its conservative investment
philosophy. The most dramatic shift occurred in the mortgage-
backed securities area which increased $35,564,000 (90.14%)
during 1996, as compared to 1995. Management elected to increase
its investment in fixed-rate collateralized mortgage obligations
("CMO's"). To reduce its exposure to prepayments, Heartland
purchased tightly structured tranches in well-seasoned CMO's.
These investments closely resemble treasury securities in their
repayment predictability and accordingly are less volatile to
interest rate fluctuations, while still providing an increased
spread when compared to U.S. treasuries with similar maturities.
Additionally, Heartland increased its investment in U.S.
government agencies by $13,827,000 (29.11%) during 1996. While
spreads between agencies and comparable CMO's are typically wide,
the state tax-exempt nature on selected agencies purchased for
Heartland's Illinois bank subsidiaries made them attractive.
Management determined that its investment in mutual funds
provided insufficient returns compared to other investments of
similar duration. Accordingly, the total investment in mutual
funds was reduced by $6,617,000 (92.88%) during 1996. Heartland
also reduced its investment in state and political subdivisions
from 15.37% ($22,782,000) of the portfolio at December 31, 1995,
to 10.23% ($18,812,000) at December 31, 1996. This decrease was
driven by calls on these securities and more attractive returns
on other comparable maturity investments.
The following tables present the composition and maturities of
the securities portfolio by major category.
SECURITIES PORTFOLIO COMPOSITION AND MATURITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
----------------------------------------------
% of % of % of
Portfolio Portfolio Portfolio
Amount Amount Amount
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury
securities $14,117 7.66% $ 11,501 7.75%$ 15,564 10.21%
U. S. government
agencies 61,332 33.34 47,505 32.05 38,506 25.26
Mortgage-backed
securities 75,017 40.78 39,453 26.62 45,831 30.06
Mutual funds 507 0.28 7,124 4.81 9,301 6.10
States and
political
subdivisions 18,812 10.23 22,782 15.37 26,226 17.20
Other securities 14,181 7.71 19,861 13.40 17,040 11.17
-------- ------- ------- ------- ------- -------
Total $183,966 100.00% $148,226 100.00%$152,468 100.00%
======== ======= ======== ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
% of % of
December 31, 1996 Amount Portfolio Amount Portfolio
---------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ - -% $ 14,117 7.66%
U.S. government
agencies - - 61,332 33.34
Mortgage-backed
securities - - 75,017 40.78
Mutual funds - - 507 0.28
States and political
subdivisions 2,151 1.17 16,661 9.06
Other securities - - 14,181 7.71
------ ------- -------- -------
Total $2,151 1.17% $181,815 98.83%
====== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Total
% of
December 31, 1996 Amount Portfolio
-------------------
<S> <C> <C>
U.S. Treasury securities $ 14,117 7.66%
U.S. government agencies 61,332 33.34
Mortgage-backed securities 75,017 40.78
Mutual funds 507 0.28
States and political
subdivisions 18,812 10.23
Other securities 14,181 7.71
-------- -------
Total $183,966 100.00%
======== =======
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
% of % of % of
December 31, 1995 Amount Portfolio Amount Portfolio
---------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ - -% $ 11,501 7.75%
U.S. government
agencies - - 47,505 32.05
Mortgage-backed
securities - - 39,453 26.62
Mutual funds - - 7,124 4.81
States and political
subdivisions 2,369 1.60 20,413 13.77
Other securities - - 19,861 13.40
------ ------- -------- ------
Total $2,369 1.60% $145,857 98.40%
====== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
Total
% of%
December 31, 1995 Amount Portfolio
-----------------
<S> <C> <C>
U.S. Treasury
securities $ 11,501 7.75%
U.S. government
agencies 47,505 32.05
Mortgage-backed
securities 39,453 26.62
Mutual funds 7,124 4.81
States and political
subdivisions 22,782 15.37
Other securities 19,861 13.40
--------- -------
Total $148,226 100.00%
========= =======
</TABLE>
<TABLE>
<CAPTION>
After One But
Within One Year Within Five Years
--------------- -----------------
December 31, 1996 Amount Yield Amount Yield
------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 1,997 5.74% $12,120 6.22%
U.S. government
agencies 16,495 5.79 43,128 6.29
Mortgage-backed
securities 600 8.47 8,636 7.02
States and political
subdivisions (1) 203 8.73 3,981 10.72
Other securities 606 7.32 735 8.42
------- ------- ------ -------
Total $19,901 5.94% $68,600 6.65%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
After Five But
Within Ten Years After Ten Years
---------------- -----------------
December 31, 1996 Amount Yield Amount Yield
------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ - -% $ - -%
U.S. government
agencies 1,688 3.56 21 10.25
Mortgage-backed
securities 16,073 7.96 49,708 6.77
States and political
subdivisions 3,523 8.40 11,105 9.12
Other securities - - - -
------- ------- ------- ------
Total $21,284 7.68% $60,834 7.20%
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Total
December 31, 1996 Amount Yield
-------------------
<S> <C> <C>
U.S. Treasury securities $ 14,117 6.15%
U.S. government agencies 61,332 6.08
Mortgage-backed securities 75,017 7.06
States and political
subdivisions 18,812 9.32
Other securities 1,341 7.92
-------- -------
Total 170,619 6.89%
=======
Mutual funds 507
Equity securities 12,840
--------
Total $183,966
========
</TABLE>
(1)Rates on obligations of states and political subdivisions
have been adjusted to tax equivalent yields using a 34%
income tax rate.
DEPOSITS AND BORROWED FUNDS
Heartland has a relatively stable core deposit base drawn
primarily from within its market areas. Total average deposits
increased $22,818,000 (4.44%) from the total average deposits
during 1995. Average noninterest bearing deposits increased
$1,738,000 (4.00%) while average interest bearing deposits
increased $21,080,000 (4.48%). Much of the deposit growth
experienced during 1996 was a direct result of the success
Riverside experienced in its first full year of operation.
Average deposits at this location increased $10,926,000 ending
the period December 31, 1996, at $11,055,000 which represents
47.88% of Heartland's total deposit growth. Heartland's other
subsidiary banks experienced only moderate growth driven by
continued nationwide customer dissatisfaction with deposit rates
and the attractiveness of alternative investment products such as
mutual funds. Total average deposits increased by $20,220,000
(4.10%) from 1994 to 1995.
For each of the years ended December 31, 1996, 1995 and 1994,
respectively, the mix of individual account balances to total
deposits has remained very constant. For each of these same
periods, average savings accounts have decreased as a percentage
of total deposits driven primarily by the customer's interest in
higher-yielding products combined with a reluctance to pay
service charges on low balance accounts. Conversely, average
time deposits of $100,000 or more for the periods under
discussion have grown, ending 1996 at 7.04% of total deposits
compared to 5.86% at December 31, 1995. This continued growth
supports management's contention that these deposits have tended
to be stable sources of funds when drawn from Heartland's market
areas. The following table sets forth the amounts and maturities
of time deposits of $100,000 or more at December 31, 1996.
Time Deposits $100,000 and Over
(Dollars in thousands)
December 31,
1996
-------------
3 months or less $ 5,141
Over 3 months through 6 months 7,451
Over 6 months through 12 months 10,714
Over 12 months 12,781
--------
Total $ 36,087
========
The table below sets forth the distribution of Heartland's
average deposit account balances and the average interest rates
paid on each category of deposits for the years indicated.
AVERAGE DEPOSITS
(Dollars in thousands)
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Percent
Average of
Balance Deposits Rate
------------------------
<S> <C> <C> <C>
Demand deposits $ 45,205 8.42% 0.00%
Savings accounts 75,247 14.02 3.29
NOW and MMDA accounts 139,154 25.93 3.59
Time deposits less than $100,000 239,300 44.59 5.68
Time deposits of $100,000 or more 37,806 7.04 5.64
-------- -------
Total Deposits $536,712 100.00%
======== =======
</TABLE>
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Percent
Average of
Balance Deposits Rate
------------------------
<S> <C> <C> <C>
Demand deposits $ 43,467 8.46% 0.00%
Savings accounts 80,122 15.59 3.46
NOW and MMDA accounts 126,231 24.56 3.61
Time deposits less than $100,000 233,983 45.53 5.57
Time deposits of $100,000 or more 30,091 5.86 5.51
-------- -------
Total deposits $513,894 100.00%
======== =======
</TABLE>
For the year ended December 31, 1994
<TABLE>
<CAPTION>
Percent
Average of
Balance Deposits Rate
------------------------
<S> <C> <C> <C>
Demand deposits $ 42,785 8.67% 0.00%
Savings accounts 83,340 16.88 2.57
NOW and MMDA accounts 124,372 25.19 2.72
Time deposits less than $100,000 221,059 44.78 5.10
Time deposits of $100,000 or more 22,118 4.48 4.61
-------- -------
Total deposits $493,674 100.00%
======== =======
</TABLE>
The Heartland banks own stock in the FHLB of Des Moines and of
Chicago, enabling them to borrow funds from their respective FHLB
for short- or long-term purposes under a variety of programs.
During 1996, Heartland used additional FHLB advances sparingly as
deposit growth matched loan demand. Total FHLB borrowings at
December 31, 1996 and 1995, were $51,900,000 and $47,400,000,
respectively.
Heartland also utilizes securities sold under agreements to
repurchase as a source of funds. DB&T and Riverside provide
repurchase agreements to their customers as a cash management
tool, sweeping excess funds from demand deposit accounts into
these agreements. This source of funding does not increase
Heartland's reserve requirements, nor does it create an expense
relating to FDIC premiums on deposits. Although the aggregate
balance of repurchase agreements is subject to variation, the
account relationships represented by these balances are
principally local and have been maintained for relatively long
periods of time.
The following table reflects short-term borrowings which in the
aggregate have average balances during the period greater than
30% of stockholders' equity at the end of the period.
SHORT-TERM BORROWINGS
(Dollars in thousands)
At or for the
Year Ended December 31,
1996 1995 1994
------------------------
Balance at end of period $56,358 $23,241 $24,277
Maximum month-end amount
outstanding 56,358 42,205 36,756
Average month-end amount
outstanding 42,025 25,965 26,750
Weighted average interest
rate at end of period 5.24% 5.56% 5.74%
Weighted average interest
rate for the year ended 5.76 5.71% 3.92%
CAPITAL RESOURCES
Heartland's risk-based capital ratios, which take into account
the different credit risks among banks' assets, have remained
strong over the past three years. Tier 1 and total risk-based
capital ratios were 13.10% and 14.28%, respectively, on December
31, 1996, compared with 13.28% and 14.46% at December 31, 1995,
and 13.85% and 15.04% for December 31, 1994. At December 31,
1996, Heartland's leverage ratio, the ratio of Tier 1 capital to
total average assets, was 9.81% compared to 9.47% and 9.32% at
December 31, 1995, and 1994 respectively.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. During the second quarter of 1996,
Heartland entered into a license and service agreement for the
installation of Fiserv's Comprehensive Banking Systems software,
and additional complementary auxiliary products. Approximately
$700,000 of the total project cost of $1,400,000 remains to be
paid during 1997. The conversion process began in October of
1996 and is scheduled for completion in the spring of 1997,
providing Heartland the enhanced technology necessary to remain
competitive.
Heartland completed the acquisition of Cottage Grove State Bank
in Cottage Grove, Wisconsin in March 1997. The agreement
requires cash payments of $4,892,000 in 1997, $867,000 in 1998,
$867,000 in 1999, $683,000 in 2000 and $627,000 in 2001.
Additional expenditures relating to expansion efforts are not
estimable at this time.
Heartland's capital ratios are detailed in the tables below.
RISK-BASED CAPITAL RATIOS(1)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------
Capital Ratios:
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $ 67,701 13.10% $ 60,780 13.28% $ 57,406 13.85%
Tier 1 capital
minimum
requirement 20,667 4.00 18,302 4.00 16,578 4.00
-------- ------ -------- ------ -------- ------
Excess $ 47,034 9.10% $ 42,478 9.28% $ 40,828 9.85%
======== ====== ======== ====== ======== ======
Total capital $ 73,777 14.28% $ 66,165 14.46% $ 62,328 15.04%
Total capital
minimum
requirement 41,334 8.00 36,603 8.00 33,156 8.00
-------- ------ -------- ------ -------- ------
Excess $ 32,443 6.28% $ 29,562 6.46% $ 29,172 7.04%
======== ====== ======== ====== ======== ======
Total risk-
adjusted
assets $516,678 $457,539 $414,445
======== ======== ========
</TABLE>
(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%.
LEVERAGE RATIOS (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------
Capital Ratios:
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $ 67,701 9.81% $ 60,780 9.47% $ 57,406 9.32%
Tier 1 capital
minimum
requirement (2) 27,594 4.00 25,666 4.00 24,644 4.00
-------- ------ -------- ------ -------- -----
Excess $ 40,107 5.81% 35,114 5.47% 32,762 5.32%
======== ====== ======== ====== ======== ======
Average adjusted
assets $689,854 $641,650 $616,110
======== ======== ========
</TABLE>
(1)The leverage ratio is defined as the ratio of Tier 1 capital
to average total assets.
(2)Management of Heartland 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 an additional cushion
of at least 100 basis points.
LIQUIDITY
Liquidity refers to Heartland's ability to maintain a cash flow
which is adequate to meet maturing obligations and existing
commitments, to withstand fluctuations in deposit levels, to fund
operations and to provide for customers' credit needs.
Heartland's usual and primary sources of funding have been
deposits, loan and mortgage-backed security principal repayments,
sales of loans, cash flow generated from operations and, more
recently, FHLB borrowings.
Heartland's short-term borrowing balances are dependent on
commercial cash management and smaller correspondent bank
relationships and, as such, will normally fluctuate. Heartland
believes these balances, on average, to be stable sources of
funds; however, it intends to rely on deposit growth and
additional FHLB borrowings in the future.
In the event of short-term liquidity needs, the Heartland banks
may purchase federal funds from each other or from correspondent
banks. This source is used from time to time on a limited basis.
The Heartland banks may also borrow money from the Federal
Reserve Bank, but have not done so during any period covered in
this report. Finally, the Heartland banks' FHLB memberships give
them the ability to borrow funds for short- or long-term purposes
under a variety of programs.
ASSET/LIABILITY MANAGEMENT
Movements in general market interest rates are a key element in
changes in the net interest margin. The impact on earnings of
changes in interest rates, known as interest rate risk, must be
measured and managed to avoid unacceptable levels of risk. This
process is aided by analysis of the interest sensitivity of
assets relative to that of liabilities. Heartland uses two
approaches to analyze the effect of changes in interest rates on
net interest income and to manage interest rate risk.
First, on a monthly basis interest rate risk is analyzed by
examining the extent to which assets and liabilities are interest
rate sensitive. The interest sensitivity gap is defined as the
difference between the amount of interest bearing assets and
liabilities repricing within a given time period. A gap is
considered positive when the amount of interest sensitive assets
exceeds the amount of interest sensitive liabilities. A gap is
considered negative when the amount of interest sensitive
liabilities exceeds the amount of interest sensitive assets. This
approach assumes that all assets and liabilities would reprice by
the same magnitude in the event of a change in market interest
rates. Generally speaking, a negative gap would tend to result in
an increase in net interest income in a falling interest rate
environment, while a positive gap would tend to adversely affect
net interest income. Second, Heartland periodically uses a model
to simulate changes in net interest income in response to various
interest rate scenarios. This analysis considers current
portfolio rates, existing maturities, repricing opportunities and
market interest rates, in addition to prepayments and growth
under different interest rate assumptions. Through the use of
this simulation, Heartland has determined that the balance sheet
is structured such that changes in net interest margin in
response to changes in interest rates would be minimal, all other
factors being held constant.
The table below does not necessarily indicate the future impact
of general interest rate movements on Heartland's net interest
income because certain assets and liabilities indicated as
repricing within the same period may in fact reprice at different
times and at different rate levels. Assets and liabilities are
reported in the earliest time frame in which maturity or
repricing may occur.
Heartland manages the balance sheet to minimize the impact
fluctuations in interest rates would have on Heartland's net
interest margin, including the acquisition of longer-term FHLB
advances and the growth of longer-term certificates of deposit.
Reports to management and the Heartland Board include both of the
above described analytical approaches. Of the two approaches, the
simulation provides the best analysis of all factors, while the
gap analysis provides an objective, static perspective.
INTEREST SENSITIVITY GAP ANALYSIS (1)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996
0-3 4-12 1-5 Over 5
Mos. Mos. Years Years Total
-----------------------------------------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest bearing
deposits in
other banks $ 167 $ - $ - $ - $ 167
Securities 19,478 21,412 75,642 67,434 183,966
Total loans and
leases, net 133,530 103,198 212,189 28,977 477,894
-------- -------- -------- -------- --------
TOTAL EARNING
ASSETS $153,175 $124,610 $287,831 $ 96,411 $662,027
======== ======== ======== ======== ========
INTEREST BEARING
LIABILITIES
Interest bearing
deposits:
NOW and MMDA
accounts $150,064 - - - $150,064
Savings accounts 74,253 - - - 74,253
Time deposits
of $100,000
or more 10,450 18,059 7,460 118 36,087
Time deposits
less than
$100,000 30,792 91,784 119,019 862 242,457
-------- -------- -------- -------- --------
Total interest
bearing deposits 265,559 109,843 126,479 980 502,861
Federal funds
purchased and
securities sold
under repurchase
agreements 56,358 - - - 56,358
Other borrowings - - 38,106 4,400 42,506
-------- -------- -------- -------- --------
TOTAL INTEREST
BEARING
LIABILITIES $321,917 $109,843 $164,585 $ 5,380 $601,725
======== ======== ======== ======== ========
Interest
sensitivity gap $(168,742)$ 14,767 $123,246 $ 91,031 $ 60,302
Cumulative gap (168,742)(153,975) (30,729) 60,302 60,302
Interest
sensitivity gap
to total assets (22.91%) 2.00% 16.73% 12.36%
8.18%
Cumulative
sensitivity gap
to total assets (22.91%) (20.91%) (4.18%) 8.18% 8.18%
</TABLE>
(1) Callable securities are reported at the earlier of maturity
or call date. Securities, loans and leases are placed in
the earliest time frame in which maturity or repricing may
occur.
EFFECTS OF INFLATION
Consolidated financial data included in this report has been
prepared in accordance with generally accepted accounting
principles. Presently, these principles require reporting of
financial position and operating results in terms of historical
dollars. Changes in the relative value of money due to inflation
or recession are generally not considered.
In management's opinion, changes in interest rates affect the
financial condition of a financial institution to a far greater
degree than changes in the inflation rate. While interest rates
are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on
changes in the expected rate of inflation, as well as on changes
in monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates
is a good indicator of its capability to perform in today's
volatile economic environment. Heartland seeks to insulate itself
from interest rate volatility by ensuring that rate-sensitive
assets and rate-sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Notes 1996 1995
----- -------- --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks 3 $ 40,080 $ 31,305
Federal funds sold - 23,500
--------- ---------
Cash and cash equivalents 40,080 54,805
Time deposits in other
financial institutions 167 145
Securities: 4
Available for sale-at market
(cost of $179,697 for 1996
and $141,680 for 1995) 181,815 145,857
Held to maturity-at cost
(approximate market value
of $2,245 for 1996 and
$2,503 for 1995) 2,151 2,369
Loans and leases: 5
Held for sale 2,412 790
Held to maturity 481,673 454,115
Allowance for possible
loan and lease losses 6 (6,191) (5,580)
--------- ---------
Loans and leases, net 477,894 449,325
Premises, furniture and
equipment, net 7 16,715 12,519
Other real estate, net 532 640
Other assets 17,198 11,653
--------- ---------
TOTAL ASSETS $736,552 $677,313
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: 8
Demand $ 55,482 $ 49,283
Savings 224,317 210,853
Time 278,544 274,451
--------- ---------
Total deposits 558,343 534,587
Short-term borrowings 9 56,358 23,241
Accrued expenses and other
liabilities 9,086 9,579
Other borrowings 11 42,506 45,400
--------- ---------
TOTAL LIABILITIES 666,293 612,807
--------- ---------
STOCKHOLDERS' EQUITY: 13,14,16
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 and 2,426,813
shares at December 31, 1996, and
December 31, 1995, respectively) 4,854 2,427
Capital surplus 13,366 13,090
Retained earnings 52,864 49,171
Net unrealized gain on
securities available for sale 1,327 2,620
Treasury stock at cost
(118,066 and 83,326 shares
at December 31, 1996, and
December 31, 1995, respectively) (2,152) (2,802)
---------
- ---------
TOTAL STOCKHOLDERS' EQUITY 70,259 64,506
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $736,552 $677,313
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Notes 1996 1995 1994
----- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on
loans and leases 5 $40,670 $38,968 $32,715
Interest on
securities:
Taxable 8,392 7,552 8,038
Nontaxable 2,051 1,763 2,147
Interest on trading
account securities - 10 209
Interest on federal funds sold 610 740 192
Interest on interest bearing
deposits in other financial
institutions 163 116 72
------- ------- -------
TOTAL INTEREST INCOME 51,886 49,149 43,373
------- ------- -------
INTEREST EXPENSE:
Interest on deposits 8 23,190 22,029 17,806
Interest on short-term
borrowings 1,943 1,236 960
Interest on other borrowings 2,511 2,264 1,362
------- ------- -------
TOTAL INTEREST EXPENSE 27,644 25,529 20,128
------- ------- -------
NET INTEREST INCOME 24,242 23,620 23,245
Provision for possible
loan and lease losses 6 1,408 820 811
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
AND LEASE LOSSES 22,834 22,800 22,434
------- ------- -------
OTHER INCOME:
Service charges 2,437 2,106 2,013
Trust fees 1,810 1,472 1,436
Brokerage commissions 212 110 229
Insurance commissions 650 611 637
Investment securities
gains, net 1,889 413 443
Gain on sale of loans 131 73 63
Other 235 196 144
------- ------- -------
TOTAL OTHER INCOME 7,364 4,981 4,965
------- ------- -------
OTHER EXPENSES:
Salaries and employee
benefits 12 11,035 9,730 9,481
Occupancy 13 1,268 1,059 976
Equipment 1,336 1,315 1,209
Outside services 1,155 1,164 1,254
FDIC assessment 746 681 1,117
Advertising 996 696 587
Other operating expense 2,971 2,678 2,620
------- ------- -------
TOTAL OTHER EXPENSES 19,507 17,323 17,244
------- ------- -------
Income before income taxes 10,691 10,458 10,155
Income taxes 10 2,685 2,884 3,015
------- ------- -------
NET INCOME $ 8,006 $ 7,574 $ 7,140
======= ======= =======
NET INCOME AVAILABLE FOR
COMMON STOCK $ 8,006 $ 7,574 $ 7,136
======= ======= =======
NET INCOME PER COMMON SHARE $ 1.70 $ 1.58 $ 1.47
======= ======= =======
CASH DIVIDENDS DECLARED PER
COMMON SHARE $ 0.40 $ 0.30 $ 0.26
======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,715,009 4,805,184 4,845,648
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Capital Retained
Notes Stock Surplus Earnings
----- ------ ------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $2,401 $12,991 $36,689
Net Income - 1994 7,140
Keokuk earnings adjustment 2 525
Cash dividends declared:(1)
Common, $.26 per share (1,282)
Preferred, $.06 per share (4)
Purchase of 6,365 shares of
common stock
Sale of 112 shares of common
stock
Net unrealized loss on
securities available for
sale (net of tax benefit
of $2,729)
Principal payment on employee
stock ownership plan
borrowing
Keokuk stock options
exercised 2 26 98 (33)
------- -------- --------
Balance at December 31, 1994 2,427 13,089 43,035
Net Income - 1995 7,574
Cash dividends declared:(1)
Common, $.30 per share (1,438)
Purchase of 85,138 shares of
common stock
Sale of 8,065 shares of 1
common stock
Net unrealized gain on
securities available for
sale (net of tax of $2,415)
------- -------- --------
Balance at December 31, 1995 2,427 13,090 49,171
Net Income - 1996 8,006
Cash dividends declared:
Common, $.40 per share (1,886)
Two-for-one stock split 2,427 (2,427)
Purchase of 32,446 shares
of common stock
Sale of 64,943 shares of common
stock 276
Net unrealized loss on securities
available for sale (net of tax
benefit of $769)
------- -------- --------
BALANCE AT DECEMBER 31, 1996 $ 4,854 $ 13,366 $ 52,864
</TABLE>
======= ======== ========
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on Securities
Available Treasury
For Sale Stock
------------- --------
<S> <C> <C> <C>
Balance at January 1, 1994 $ 3,149 $ (75)
Net Income - 1994
Keokuk earnings adjustment 2
Cash dividends declared: (1)
Common, $.26 per share
Preferred, $.06 per share
Purchase of 6,365 shares of
common stock (185)
Sale of 112 shares of common stock 3
Net unrealized loss on
securities available for
sale (net of tax benefit
of $2,729)
Principal payment on
employee stock ownership
plan borrowing (4,588)
Keokuk stock options
exercised 2 75
-------- --------
Balance at December 31, 1994 (1,439) (182)
Net Income - 1995
Cash dividends declared: (1)
Common, $.30 per share
Purchase of 85,138 shares of
common stock (2,855)
Sale of 8,065 shares of
common stock 235
Net unrealized gain on
securities available for
sale (net of tax of $2,415) 4,059
-------- --------
Balance at December 31, 1995 2,620 (2,802)
Net Income - 1996
Cash dividends declared:
Common, $.40 per share
Two-for-one stock split
Purchase of 32,446 shares
of common stock (759)
Sale of 64,943 shares of
common stock 1,409
Net unrealized loss on
securities available
for sale (net of tax
benefit of $769) (1,293)
-------- --------
BALANCE AT DECEMBER 31, 1996 $ 1,327 $(2,152)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Unearned
ESOP
Shares Total
--------- -----
<S> <C> <C> <C>
Balance at January 1, 1994 $ (57) $55,098
Net Income - 1994 7,140
Keokuk earnings adjustment 2 525
Cash dividends declared: (1)
Common, $.26 per share (1,282)
Preferred, $.06 per share (4)
Purchase of 6,365 shares of
common stock (185)
Sale of 112 shares of common
stock 3
Net unrealized loss on
securities available for
sale (net of tax benefit
of $2,729) (4,588)
Principal payment on employee
stock ownership plan
borrowing 57 57
Keokuk stock options
exercised 2 166
-------- --------
Balance at December 31, 1994 - 56,930
Net Income - 1995 7,574
Cash dividends declared:
Common, $.30 per share (1,438)
Purchase of 85,138 shares of
common stock (2,855)
Sale of 8,065 shares of
common stock 236
Net unrealized gain on
securities available for
sale (net of tax of $2,415) 4,059
-------- --------
Balance at December 31, 1995 - 64,506
-------- --------
Net Income - 1996 8,006
Cash dividends declared:
Common, $.40 per share (1,886)
Two-for-one stock split
Purchase of 32,446 shares
of common stock (759)
Sale of 64,943 shares of common
stock 1,685
Net unrealized loss on securities
available for sale (net of tax
benefit of $769) (1,293)
-------- --------
BALANCE AT DECEMBER 31, 1996 $ - $70,259
======== ========
</TABLE>
See accompanying notes to financial statements
(1) Restated to reflect the two-for-one stock split effected in
the form of a stock dividend on March 29, 1996.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1996,1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income $ 8,006 $ 7,574 $ 7,140
Keokuk Bancshares, Inc.
earnings October 1, 1993,
through December 31, 1993 - - 525
Adjustments to reconcile net
income to net cash provided
(used)by operating activities:
Depreciation and amortization 1,341 1,223 1,358
Provision for possible loan
and lease losses 1,408 820 811
Provision for income taxes (393) 141 437
Net accretion of discount
on securities (769) (1,014) (757)
Securities gains, net (1,889) (410) (802)
Market value adjustment on
trading account securities - (3) 359
Additional investment in
trading account - - (5,000)
Proceeds on liquidation of
trading account - 2,578 -
Loans originated for sale (23,408) (13,601) (10,250)
Proceeds on sales of loans 27,672 17,678 17,049
Net gain on sales of loans (131) (74) (95)
(Increase) decrease in accrued
interest receivable (530) (554) 83
Increase in accrued interest
payable 186 570 344
Other, net (1,196) (79) (2)
------- ------- -------
Net cash provided by operating
activities 10,297 14,849 11,200
------- ------- -------
Cash Flows from Investing
Activities:
Proceeds on maturities of time
deposits 100 6 116
Purchase of time deposits (122) (2) (32)
Proceeds from the sale of
securities available for sale 22,747 32,406 9,578
Proceeds from the sale of
mortgage-backed securities
available for sale 1,621 8,414 2,981
Proceeds from the maturity of
and principal paydowns on
securities held to maturity 717 12,135 13,621
Proceeds from the maturity of
and principal paydowns on
securities available for sale 36,384 12,644 28,423
Proceeds from the maturity of
and principal paydowns on
mortgage-backed securities
held to maturity - 868 239
Proceeds from the maturity of
and principal paydowns on
mortgage-backed securities
available for sale 11,767 8,380 18,730
Purchase of securities
held to maturity (500) - (3,105)
Purchase of securities
available for sale (58,841) (55,659) (25,974)
Purchase of mortgage-backed
securities available for sale (49,170) (9,701) (11,672)
Purchase of interest in low-
income housing project (2,865) (3,142) -
Net increase in loans and
leases (33,384) (37,269) (54,142)
Capital expenditures (5,589) (2,209) (4,532)
Net cash paid in acquisition
of subsidiaries (43) - -
Proceeds on sale of fixed assets 2 61
- -
Proceeds on sale of repossessed
assets 208 197 323
Other investing activities - - (3)
-------- -------- --------
Net cash used by
investing activities (76,968) (32,871) (25,449)
Cash Flows from Financing
Activities:
Net increase (decrease) in
demand deposits and savings
accounts 19,663 1,618 (3,836)
Net increase in time deposit
accounts 4,093 19,730 18,796
Net increase (decrease) in
other borrowings 4,500 21,838 (1,493)
Net increase (decrease) in
short-term borrowings 25,039 (1,036) (8,457)
Purchase of treasury stock (759) (2,855) (185)
Proceeds from sale of
treasury stock 1,296 236 3
Issuance of common stock - - 166
Redemption of redeemable
preferred stock - - (67)
Dividends (1,886) (2,360) (1,002)
-------- -------- --------
Net cash provided by
financing activities 51,946 37,171 3,925
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (14,725) 19,149 (10,324)
Cash and cash equivalents at
beginning of year 54,805 35,656 45,980
-------- -------- --------
Cash and cash equivalents at
end of period $40,080 $54,805 $35,656
======== ======== ========
Supplemental disclosures:
Cash paid for income/franchise
taxes $ 3,065 $ 1,754 $ 2,848
Cash paid for interest $27,458 $24,959 $19,784
Securities contributed to
public charitable trust $ 220 - -
Other borrowings transferred to
short-term borrowings $ 8,000 - -
Trading account securities
transferred to investment
securities - - $7,040
Securities transferred from
held to maturity to
available for sale - $23,204 -
Mortgage-backed securities
transferred from held to
maturity to available for sale - $ 4,449 -
</TABLE>
See accompanying notes to financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
ONE
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations-Heartland Financial USA, Inc. ("Heartland")
is a multi-bank holding company primarily operating full-service
retail banking offices in Dubuque and Lee Counties in Iowa and Jo
Daviess, Hancock and Winnebago Counties in Illinois, serving
communities in and around those counties. The principal services
of Heartland, through its subsidiaries, are FDIC-insured deposit
accounts and related services, and loans to businesses and
individuals. The loans consist primarily of commercial and
commercial real estate and residential real estate.
Principles of Presentation-The consolidated financial statements
include the accounts of Heartland and its wholly-owned
subsidiaries: Dubuque Bank and Trust Company ("DB&T"), DB&T
Insurance, Inc., DB&T Community Development Corp., Galena State
Bank and Trust Company ("Galena"), Riverside Community Bank
("Riverside"), Keokuk Bancshares, Inc. ("Keokuk"), First
Community Bank, FSB ("FCB"), Citizens Finance Co.("Citizens",
previously Tri-State Community Credit Corp.) and ULTEA, Inc.
("ULTEA"). All significant intercompany balances and transactions
have been eliminated in consolidation.
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and with
general practice within the banking industry. In preparing such
financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible
to significant change relate to the determination of the
allowance for possible loan and lease losses.
Trading Securities-Trading securities represent those which
Heartland intends to actively trade and are stated at fair value
with changes in market value reflected in other income.
Securities-All securities consist of debt or marketable equity
securities.
Securities Available for Sale-Available for sale securities
consist of those securities not classified as held to maturity or
trading, which management intends to hold for indefinite periods
of time or that may be sold in response to changes in interest
rates, prepayments or other similar factors. Such securities are
stated at fair value with any unrealized gain or loss, net of
applicable income tax, reported as a separate component of
stockholders' equity. Security premiums and discounts are
amortized/accreted using the interest method over the period from
the purchase date to the maturity or call date of the related
security. Gains or losses from the sale of available for sale
securities are determined based upon the adjusted cost of the
specific security sold.
Securities Held to Maturity-Securities which Heartland has the
ability and positive intent to hold to maturity are classified as
held to maturity. Such securities are stated at amortized cost,
adjusted for premiums and discounts that are amortized/accreted
using the interest method over the period from the purchase date
to the maturity date of the related security.
Loans and Leases-Interest on loans is accrued and credited to
income based primarily on the principal balance outstanding.
Income from leases is recorded in decreasing amounts over the
term of the contract resulting in a level rate of return on the
lease investment. The policy of Heartland is to discontinue the
accrual of interest income on any loan or lease when, in the
opinion of management, there is a reasonable doubt as to the
timely collection of the interest and principal. When interest
accruals are deemed uncollectible, interest credited to income in
the current year is reversed and interest accrued in prior years
is charged to the allowance for possible loan and lease losses.
Nonaccrual loans and leases are returned to an accrual status
when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt
as to the timely payment of interest and principal.
In 1995, Heartland adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" ("SFAS
Nos. 114 and 118"). Under Heartland's credit policies, all
nonaccrual and restructured loans are considered to meet the
definition of impaired loans under SFAS Nos. 114 and 118. Loan
impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest
rate, except where more practical, at the observable market price
of the loan or the fair value of the collateral if the loan is
collateral dependent. The adoption of SFAS Nos. 114 and 118 did
not have a material effect on the financial position or results
of operations of Heartland.
Net nonrefundable loan and lease origination fees and certain
direct costs associated with the lending process are deferred and
recognized as a yield adjustment over the life of the related
loan or lease.
Loans held for sale are stated at the lower of individual cost or
estimated fair value. Gains and losses are recognized on loans
sold on a nonrecourse basis based on the sale price for the loan
adjusted for any normal servicing fees when servicing is
retained.
Mortgage loan servicing rights retained on loans sold to others,
which are not material to the financial position or results of
operation, are not included in the accompanying consolidated
financial statements. The unpaid principal balances of these
loans as of December 31, 1996 and 1995, were $84,515 and $76,247,
respectively. Custodial escrow balances maintained in connection
with the loan servicing were approximately $511 and $404 as of
December 31, 1996 and 1995, respectively.
Allowance for Possible Loan and Lease Losses-The allowance for
possible loan and lease losses is maintained at a level estimated
by management to provide for known and inherent risks in the loan
and lease portfolios. The allowance is based upon a continuing
review of past loan and lease loss experience, current economic
conditions, volume growth, the underlying collateral value of the
loans and leases and other relevant factors. Loans and leases
which are deemed uncollectible are charged off and deducted from
the allowance. The provision for possible loan and lease losses
and recoveries on previously charged-off loans and leases are
added to the allowance.
Premises, Furniture and Equipment-Premises, furniture and
equipment are stated at cost less accumulated depreciation. The
provision for depreciation of premises, furniture and equipment
is determined by straight-line and accelerated methods over the
estimated useful lives of 18 to 39 years for buildings, 15 years
for land improvements and 3 to 7 years for furniture and
equipment.
Other Real Estate-Other real estate represents property acquired
through foreclosures and settlements of loans. Property acquired
is carried at the lower of the principal amount of the loan
outstanding at the time of acquisition, plus any acquisition
costs, or the estimated fair value of the property, less cost to
dispose. The excess, if any, of such costs at the time acquired
over the fair value is charged against the allowance for possible
loan and lease losses. Subsequent writedowns estimated on the
basis of later evaluations, gains or losses on sales and net
expenses incurred in maintaining such properties are charged to
operations.
Goodwill-Goodwill represents the excess of the purchase price of
acquired subsidiaries' net assets over their fair value. Goodwill
is amortized over fifteen years on the straight-line basis. On a
periodic basis, Heartland reviews goodwill for events or
circumstances that may indicate a change in the recoverability of
the underlying basis.
Income Taxes-Heartland and its subsidiaries file a consolidated
federal income tax return. For state tax purposes, DB&T, Galena,
FCB and Riverside ("Banks")file income or franchise tax returns
as required. The other entities file corporate income or
franchise tax returns as required by the various states.
Heartland has a tax allocation agreement which provides that each
subsidiary of the consolidated group pay a tax liability to, or
receive a tax refund from Heartland, computed as if the
subsidiary had filed a separate return.
Heartland recognizes certain income and expenses in different
time periods for financial reporting and income tax purposes. The
provision for deferred income taxes is based on an asset and
liability approach and represents the change in deferred income
tax accounts during the year, including the effect of enacted tax
rate changes. Deferred tax assets are recognized if their
expected realization is "more likely than not".
Treasury Stock-Treasury stock is accounted for by the cost
method, whereby shares of common stock reacquired are recorded at
their purchase price.
Trust Department Assets-Property held for customers in fiduciary
or agency capacities is not included in the accompanying
consolidated balance sheets, as such items are not assets of the
Banks.
Per Share Data-Net income per common share data has been computed
based upon the weighted average number of common shares
outstanding during the year. All earnings per share data has been
restated to reflect the two-for-one stock split effected in the
form of a stock dividend on March 29, 1996.
Cash Flows-For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
Effect of New Financial Accounting Standards-SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets to be
Disposed of" was effective for Heartland for the year beginning
January 1, 1996, and requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset is not recoverable. SFAS No. 122 "Accounting
for Mortgage Servicing Rights", an amendment of SFAS No. 65
("SFAS 122"), were effective for Heartland for the year beginning
January 1, 1996, and required the allocation of basis between a
loan and the related servicing right when a loan is sold with
servicing retained. SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") was effective for Heartland for
transactions entered into after December 15, 1995, and for
disclosure requirements beginning January 1, 1996. SFAS No. 123
established a fair value based method of accounting for stock-
based compensation plans. The adoption of SFAS Nos. 121, 122 and
123 did not have a material effect on Heartland.
SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," ("SFAS No. 125") will
be effective for Heartland for transactions occurring after
December 31, 1996, and provides standards for accounting
recognition or derecognition of assets and liabilities.
Heartland expects to adopt SFAS No. 125 when required, and
management believes adoption will not have a material effect on
the financial position and results of operations, nor will
adoption require additional capital resources.
TWO
ACQUISITIONS
On December 24, 1996, Heartland acquired all of the assets and
assumed certain liabilities of ULTEA, LLC of Madison, Wisconsin,
in exchange for 16,160 shares of Heartland common stock. ULTEA
had total assets of $1,916 at December 31, 1996. The excess of
the purchase price over the fair value of net assets acquired was
$293. The acquisition has been accounted for as a purchase
transaction and, accordingly, the operations of ULTEA are
included in the consolidated results of operations of Heartland
beginning December 25, 1996. The acquisition did not have a
material effect on the results of operations for the year of
acquisition on either an actual or pro forma basis.
Heartland acquired Cottage Grove State Bank, a $40 million bank
headquartered in Cottage Grove, Wisconsin, at a price of $8
million. The acquisition was completed in March, 1997.
On July 1, 1994, Keokuk was merged with and became a subsidiary
of Heartland. The acquisition of Keokuk was accounted for as a
pooling of interests, and accordingly all prior financial
information was restated. Prior to the combination, Keokuk's
fiscal year ended September 30. In recording the pooling of
interests combination, Keokuk's financial statements for the
twelve months ended December 31, 1994, were combined into
Heartland's for the same period, and Keokuk's financial
statements for the year ended September 30, 1993, were combined
with Heartland's for the year ended December 31, 1993. An
adjustment of $525 was added to stockholders' equity in 1994 to
include the effect of Keokuk's results of operations for the
three months ended December 31, 1993.
THREE
CASH AND DUE FROM BANKS
The Banks are required to maintain certain average cash reserve
balances as a member of the Federal Reserve System. The reserve
balance requirements at December 31, 1996 and 1995, were $4,470
and $4,186 respectively.
FOUR
SECURITIES
The amortized cost, gross unrealized gains and losses and
estimated fair values of held to maturity and available for sale
securities as of December 31, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
1996
<S> <C> <C> <C> <C>
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,151 $ 94 $ - $ 2,245
-------- -------- -------- --------
Total $ 2,151 $ 94 $ - $ 2,245
======== ======== ======== ========
Securities available
for sale:
U.S. Treasury securities $ 14,016 $ 101 $ - $ 14,117
U.S. government
corporations and
agencies 61,431 235 (334) 61,332
Mortgage-backed
securities 74,522 754 (259) 75,017
Obligations of states
and political
subdivisions 15,846 903 (88) 16,661
Corporate debt
securities 1,300 41 - 1,341
-------- -------- --------- --------
Total debt
securities 167,115 2,034 (681) 168,468
Mutual funds 548 - (41) 507
Equity securities 12,034 859 (53) 12,840
-------- -------- --------- --------
Total $179,697 $ 2,893 $ (775) $181,815
======== ======== ========= ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
1995
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,369 $ 134 $ - $ 2,503
-------- -------- -------- --------
Total $ 2,369 $ 134 $ - $ 2,503
======== ======== ======== ========
Securities available
for sale:
U.S. Treasury securities $ 11,206 $ 295 $ - $ 11,501
U.S. government
corporations and
agencies 47,498 575 (568) 47,505
Mortgage-backed
securities 38,830 804 (181) 39,453
Obligations of states
and political
subdivisions 19,569 1,226 (382) 20,413
Corporate debt
securities 6,773 69 - 6,842
-------- -------- --------- --------
Total debt
securities 123,876 2,969 (1,131) 125,714
Mutual funds 7,265 - (141) 7,124
Equity securities 10,539 2,519 (39) 13,019
-------- -------- --------- --------
Total $141,680 $ 5,488 $ (1,311) $145,857
======== ======== ========= ========
</TABLE>
The amortized cost and estimated fair value of debt securities
held to maturity and available for sale at December 31, 1996, by
contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Securities held to maturity:
Due in 1 year or less $ 151 $ 153
Due in 1 to 5 years 630 639
Due in 5 to 10 years 725 757
Due after 10 years 645 696
-------- --------
Total $ 2,151 $ 2,245
======== ========
Securities available for sale:
Due in 1 year or less $ 19,728 $ 19,750
Due in 1 to 5 years 67,204 67,970
Due in 5 to 10 years 20,796 20,559
Due after 10 years 59,387 60,189
-------- --------
Total $167,115 $168,468
======== ========
As of December 31, 1996, securities with a market value of
$92,828 were pledged to secure public and trust deposits, short-
term borrowings and for other purposes as required by law.
Gross gains and losses related to sales of securities for the
years ended December 31, 1996, 1995 and 1994, are summarized as
follows:
1996 1995 1994
-------- -------- --------
Securities sold:
Proceeds from sales $24,368 $40,820 $12,559
Gross security gains 2,240 571 929
Gross security losses 351 158 127
FIVE
LOANS AND LEASES
Loans and leases as of December 31, 1996 and 1995, were as
follows:
1996 1995
------ ------
Loans:
Commercial and commercial
real estate $206,523 $191,866
Residential mortgage 166,999 158,324
Agricultural and agricultural
real estate 57,526 59,089
Consumer 48,361 38,988
--------- ---------
Loans, gross 479,409 448,267
Unearned discount (1,962) (1,510)
Deferred loan fees (404) (382)
--------- ---------
Loans, net 477,043 446,375
--------- ---------
Direct financing leases:
Gross rents receivable 5,603 7,314
Estimated residual value 2,319 2,328
Unearned income (880) (1,112)
--------- ---------
Direct financing leases, net 7,042 8,530
--------- --------
Allowance for possible loan and
lease losses (6,191) (5,580)
--------- ---------
Loans and leases, net $477,894 $449,325
========= =========
Direct financing leases receivable are generally short-term
equipment leases. Future minimum lease payments as of December
31, 1996, are as follows: 1997, $2,881; 1998 $2,030; 1999,
$1,595; 2000, $767; and 2001, $643.
Loans and leases on a nonaccrual status amounted to $1,697 and
$977 at December 31, 1996 and 1995, respectively. The allowance
for loan and lease losses related to these nonaccrual loans was
$198 and $55, respectively. Nonaccrual loans of $1,210 and $617
were not subject to a related allowance for loan and lease losses
at December 31, 1996 and 1995, respectively, because of the net
realizable value of loan collateral, guarantees and other
factors. The average balances of nonaccrual loans for the years
ended December 31, 1996, 1995 and 1994 were $1,212, $758 and
$970, respectively. For the years ended December 31, 1996, 1995
and 1994, interest income which would have been recorded under
the original terms of these loans and leases amounted to
approximately $108, $54 and $40, respectively and interest income
actually recorded amounted to approximately $7, $14 and $41
respectively.
Loans are made in the normal course of business to directors,
officers and principal holders of equity securities of Heartland.
The terms of these loans, including interest rates and
collateral, are similar to those prevailing for comparable
transactions and do not involve more than a normal risk of
collectibility. Changes in such loans during the year ended
December 31, 1996, were as follows:
1996
--------
Balance at beginning of year $21,261
New loans 2,293
Repayments (9,146)
--------
Balance at end of year $14,408
========
SIX
ALLOWANCE FOR POSSIBLE
LOAN AND LEASE LOSSES
Changes in the allowance for possible loan and lease losses for
the years ended December 31, 1996, 1995 and 1994, were as
follows:
1996 1995 1994
------ ------ -------
Balance at beginning of year $5,580 $5,124 $4,433
Provision for possible loan and
lease losses 1,408 820 811
Recoveries on loans and leases
previously charged off 129 131 223
Loans and leases charged off (926) (495) (354)
Keokuk merger adjustment - - 11
-------- ------- -------
Balance at end of year $ 6,191 $5,580 $5,124
======== ======= =======
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of December 31, 1996 and
1995, were as follows:
1996 1995
------- -------
Land and land improvements $ 1,774 $ 1,820
Buildings and building improvements 13,953 10,311
Furniture and equipment 10,034 8,340
------- -------
Total 25,761 20,471
Less accumulated depreciation (9,046) (7,952)
------- -------
Premises, furniture and equipment, net $16,715 $12,519
======= =======
Depreciation expense on premises, furniture and equipment was
$1,221 for 1996, $1,100 for 1995, and $1,067 for 1994.
EIGHT
DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of one hundred thousand dollars or more as of
December 31, 1996 and 1995, were $36,087 and $37,812,
respectively. At December 31, 1996, the scheduled maturities of
time certificates of deposit are as follows:
1996
---------
1997 $143,084
1998 69,395
1999 26,554
2000 19,901
2001 and thereafter 19,610
-------
Total $278,544
========
Interest expense on deposits for the years ended December 31,
1996, 1995 and 1994, was as follows:
1996 1995 1994
------ ------ ------
Savings and insured money
market accounts $ 7,474 $ 7,338 $ 5,523
Time certificates of deposit in
denominations of $100 or more 2,131 1,658 1,020
Other time deposits 13,585 13,033 11,263
------- ------- -------
Interest expense on deposits $23,190 $22,029 $17,806
======= ======= =======
NINE
SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased, borrowings
from the Federal Reserve Bank, U.S. Treasury interest bearing
demand notes, borrowings from the Federal Home Loan Bank
("FHLB"), securities sold under agreements to repurchase and
notes payable on leased assets. Short-term borrowings as of
December 31, 1996 and 1995, were as follows:
1996 1995
------- -------
Securities sold under
agreements to repurchase $18,185 $12,300
Federal funds purchased 23,450 4,900
FHLB short-term advances 10,000 2,000
U.S. Treasury demand note 4,645 4,041
Notes payable on leased assets 78 -
------- -------
Total $56,358 $23,241
======= =======
See Note 11 related to collateral pledged for FHLB advances.
All repurchase agreements as of December 31, 1996 and 1995, were
due within six months.
Average and maximum balances and rates on aggregate short-term
borrowings outstanding during the years ended December 31, 1996,
1995 and 1994 were as follows:
1996 1995 1994
------- ------- -------
Maximum month-end balance $56,358 $42,205 $36,756
Average month-end balance 42,025 25,965 26,750
Weighted average interest
rate for the year 5.24% 5.71% 3.92%
Weighted average interest
rate at year-end 5.75 5.56 5.74
TEN
INCOME TAXES
Income taxes for the years ended December 31, 1996, 1995 and
1994, were as follows:
Current Deferred Total
-------------------------
1996:
Federal $2,291 $ (42) $2,249
State 500 (64) 436
------ ------ ------
Total $2,791 $ (106) $2,685
====== ====== ======
1995:
Federal $2,258 $ 243 $2,501
State 347 36 383
------ ------ ------
Total $2,605 $ 279 $2,884
====== ====== ======
1994:
Federal $2,055 $ 457 $2,512
State 412 91 503
------ ------ ------
Total $2,467 $ 548 $3,015
====== ====== ======
Temporary differences between the amounts reported in the
financial statements and the tax basis of assets and liabilities
result in deferred taxes. No valuation allowance was required
for deferred tax assets. Deferred tax liabilities and assets for
the years ended December 31, 1996, and 1995, were as follows:
1996 1995
------ ------
Deferred tax assets:
Allowance for possible loan
and lease losses $ 1,595 $ 1,516
Loan origination fees 52 85
Deferred compensation 246 295
Bonus payable 24 -
Net operating loss 175 85
-------- --------
Gross deferred tax assets $ 2,092 $ 1,981
-------- --------
Deferred tax liabilities:
Unrealized gain on securities
available for sale $ (790) $(1,557)
Fixed assets (1,019) (894)
Leases (1,418) (1,542)
Securities (124) (153)
Loan portfolio - (5)
Prepaid expenses (95) (70)
Discount accretion (13) -
-------- --------
Gross deferred tax liabilities $(3,459) $(4,221)
-------- --------
Net deferred tax (liability) $(1,367) $(2,240)
======== ========
The actual income taxes differ from the expected amounts
(computed by applying the U.S. federal corporate tax rate of 35%
for 1996, 1995 and 1994 to income before income taxes) as
follows:
1996 1995 1994
--------------------------
Computed "expected" amount $3,742 $3,660 $3,554
Increase (decrease) resulting from:
Nontaxable interest income (560) (658) (754)
State income taxes, net of federal
tax benefit 280 249 327
Appreciated property contributed (230) - -
Graduated income tax rates (110) (105) (101)
Tax credits (440) (200) -
Other 3 (62) (11)
------ ------ -------
Income taxes $2,685 $2,884 $3,015
====== ====== =======
Effective tax rates 25.1% 27.6% 29.7%
Heartland has investments in certain low-income housing projects
totaling $5,785 and $2,890 as of December 31, 1996 and 1995,
respectively, which are included in other assets in the
consolidated financial statements. These investments are
expected to generate federal income tax credits of approximately
$440 per year through 2005.
ELEVEN
OTHER BORROWINGS
Other borrowings at December 31, 1996 and 1995, were
as follows:
1996 1995
------- -------
Advances from the FHLB;
weighted average maturity dates at
December 31, 1996 and 1995, were
November, 2000 and September, 1999,
respectively; and weighted average
interest rates were 5.89% and 5.98%,
respectively $41,900 $45,400
Notes payable on leased assets with
interest rates varying from 8.25% to
9.75% 606 -
------ ------
Total $42,506 $45,400
======= =======
The Banks are members of the FHLB of Des Moines or of Chicago.
The advances from the FHLB are collateralized by one-to-four unit
residential mortgages totaling $156,775 at December 31, 1996, and
$135,613 at December 31, 1995.
Future payments at December 31, 1996, for all other borrowings
were as follows:
1998 $ 22,330
1999 10,657
2000 5,109
2001 10
Thereafter 4,400
--------
Total $ 42,506
========
TWELVE
EMPLOYEE BENEFIT PLANS
The Banks sponsor retirement plans covering substantially all
employees. Contributions to the plans are subject to approval by
the Boards of Directors of the Banks, which fund and record as an
expense all approved contributions. Costs charged to operating
expenses were $382 for 1996, $335 for 1995 and $303 for 1994.
In 1994, Heartland adopted a non-contributory, defined
contribution pension plan covering substantially all employees of
the Banks. Annual contributions are based upon 5% of qualified
compensation as defined in the plan. Costs charged to operating
expense were $382 for 1996, $335 for 1995 and $303 for 1994. The
Banks also have employee savings plans covering substantially all
employees of the Banks. Under the employee savings plans, the
Banks make matching contributions of up to 2% of the
participants' wages. Costs charged to operating expenses were
$140 for 1996, $124 for 1995 and $126 for 1994.
As a result of the merger of Keokuk with Heartland, the Keokuk
employee stock ownership plan ("ESOP") was discontinued in 1994.
Shares held by the ESOP were allocated to eligible plan
participants and distributed. ESOP expense was $34 for 1994. The
Keokuk 401(k) plan was also discontinued and participants were
allowed to roll over their plan assets to the Heartland employee
savings plan.
THIRTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
Heartland leases certain land and facilities under operating
leases. Minimum future rental commitments at December 31, 1996,
for all non-cancelable leases were as follows:
1997 83
1998 72
1999 69
2000 65
2001 43
Thereafter 135
---
Total 467
===
Rental expense for premises and equipment leased under operating
leases was $128 for 1996, $59 for 1995 and $118 for 1994.
In the normal course of business, the Banks make various
commitments and incur certain contingent liabilities that are not
presented in the accompanying consolidated financial statements.
The commitments and contingent liabilities include various
guarantees, commitments to extend credit and standby letters of
credit.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Banks upon
extension of credit, is based upon management's credit evaluation
of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties. Standby letters of credit
and financial guarantees written are conditional commitments
issued by the Banks to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. At
December 31, 1996 and 1995, commitments to extend credit
aggregated $103,168 and $94,311 and standby letters of credit
aggregated $7,750 and $3,492, respectively. Heartland does not
anticipate any material loss as a result of the commitments and
contingent liabilities.
FOURTEEN
STOCK PLANS
For purposes of this footnote, all shares have been restated to
reflect the March 29, 1996, two-for-one stock split effected in
the form of a stock dividend. In 1991, Heartland adopted a stock
purchase plan which provides executive officers of Heartland and
the Banks the opportunity to purchase up to a cumulative total of
200,000 common shares of Heartland stock. Under this plan
Heartland may issue treasury shares at a price equal to the price
paid when acquired as treasury shares. Cumulative shares sold
through December 31, 1996, under the plan were 172,366. Total
compensation expense associated with this plan was $215 in 1996.
No compensation expense was recognized for issuances prior to
1996, as the issuance price was equal to market.
1996 1995
------ ------
Granted 69,538 15,350
Exercised 41,904 15,350
Forfeited 27,634 -
Average Offering Price $16.20 $14.59
Heartland's Stock Option Plan ("Plan") is administered by the
Compensation Committee ("Committee") of the Board of Directors
whose members determine to whom options will be granted and the
terms of each option. Under the Plan, 600,000 common shares have
been reserved for issuance. Directors and key policy-making
employees are eligible for participation in the Plan. Options may
be granted that are either intended to be "incentive stock
options" as defined under Section 422 of the Internal Revenue
Code or not intended to be incentive stock options ("non-
qualified stock options"). The exercise price of stock options
granted will be established by the Committee but may not be less
than the fair market value of the shares on the date that the
option is granted. Each option granted is exercisable in full at
any time or from time to time, subject to vesting provisions, as
determined by the Committee and as provided in the option
agreement, but such time may not exceed ten years from the grant
date. At December 31, 1996, there were 380,753 shares available
for issuance under the Plan.
Under the Plan, stock appreciation rights ("SARS") may also be
granted alone or in tandem with or with reference to a related
stock option, in which event the grantee, at the exercise date,
has the option to exercise the option or the SARS, but not both.
SARS entitle the holder to receive in cash or stock, as
determined by the Committee, an amount per share equal to the
excess of the fair market value of the stock on the date of
exercise over the fair value at the date the SARS or related
options were granted. SARS may be exercisable for up to ten years
after the date of grant. No SARS have been granted under the
Plan.
A summary of the status of the Plan as of December 31, 1996 and
1995, and changes during the years ended follows:
<TABLE>
<CAPTION>
1996 1995
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
(000) Price (000) Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 124 $16 - $ -
Granted 111 19 124 16
Exercised (23) 21 - -
Forfeited (16) 22 - -
--- ---
Outstanding at
end of year 196 $17 124 $16
===
Options exercisable
at end of year 3 $24
Weighted-average fair
value of options
granted during
the year $4.13 $6.60
</TABLE>
As of December 31, 1996, options outstanding had exercise prices
ranging from $16.00 and $24.00 per share, respectively, and a
weighted-average remaining contractual life of 8.62 years.
The fair value of stock options granted was determined utilizing
the Black Scholes Valuation model. Significant assumptions
include:
1996 1995
------ ------
Risk-free interest rate 5.68% 6.59%
Expected option life 10 Years 10 Years
Expected volatility 28.62% 28.62%
Expected dividends 2.29% 1.88%
Heartland applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost for its stock options has
been recognized in the financial statements. Had Heartland
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, Heartland's net
income would have been reduced to the pro forma amounts indicated
below:
1996 1995
---- ----
Net income as reported $8,006 $7,574
Pro forma 7,853 7,514
Earnings per share as reported $1.70 $1.58
Pro forma 1.67 1.56
Pro forma net income reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation
is reflected over the options' vesting period and compensation
cost for options granted prior to January 1, 1995, is not
considered.
In 1996, Heartland adopted the Heartland Employee Stock Purchase
Plan ("ESPP"), which permits all eligible employees to purchase
shares of Heartland common stock at a price of not less than 85%
of the fair market value on the determination date (as determined
by the Committee). A maximum of 200,000 shares is available for
sale under the ESPP. For the year ended December 31, 1996,
Heartland approved a price of 100% of fair market value at July
1, 1996. At December 31, 1996, 6,265 shares were purchased under
the ESPP at no charge to Heartland's earnings.
During each of the years ended December 31, 1996 and 1995,
Heartland acquired shares for use in the executive stock purchase
plan, the Plan and the ESPP. Shares acquired totaled 37,309 and
85,138 for 1996 and 1995, respectively.
FIFTEEN
FAIR VALUE OF FINANCIAL INSTRUMENTS
Following are disclosures of the estimated fair value of
Heartland's financial instruments. The estimated fair value
amounts have been determined using available market information
and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
Heartland could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 40,080 $ 40,080 $ 54,805 $ 54,805
Time deposits in other
banks 167 167 145 145
Securities available for
sale 181,815 181,815 145,857 145,857
Securities held to
maturity 2,151 2,245 2,369 2,503
Loans and leases, net of
unearned 484,085 484,828 454,905 455,461
Financial Liabilities:
Demand deposits 55,482 55,482 49,283 49,283
Savings deposits 224,317 224,317 210,853 210,853
Time deposits 278,544 280,353 274,451 276,920
Short-term borrowings 56,358 56,368 23,241 23,310
Other borrowings 42,506 42,420 45,400 45,728
</TABLE>
Cash and Cash Equivalents and Time Deposits in Other Banks - The
carrying amount is a reasonable estimate of fair value.
Securities - For securities either held to maturity or available
for sale, fair value equals quoted market price if available. If
a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans and Leases - The fair value of loans is estimated by
discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The fair
value of loans held for sale is estimated using quoted market
prices.
Deposits - The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Short-term and Other Borrowings - Rates currently available to
the Banks for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby
Letters of Credit - Based upon management's analysis of the off
balance sheet financial instruments, there are no significant
unrealized gains or losses associated with these financial
instruments based upon our review of the fees currently charged
to enter into similar agreements, taking into account the
remaining terms of the agreements and the present
creditworthiness of the counterparties.
SIXTEEN
REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY
DIVIDENDS
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Banks'
financial statements. The regulations prescribe specific capital
adequacy guidelines that involve quantitative measures of a
bank's assets, liabilities, and certain off balance sheet items
as calculated under regulatory accounting practices. Capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996 and 1995,
that the Banks met all capital adequacy requirements to which
they were subject.
As of December 31, 1996, the most recent notification from the
FDIC categorized each of the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Banks must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the following table. There are no conditions or
events since that notification that management believes have
changed the institution's category.
The Banks' actual capital amounts and ratios are also presented
in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1996
Total Capital (to Risk-
Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $73,777 14.28% $41,334 >8.0% N/A
DB&T 43,882 12.67% 27,709 >8.0% $34,637 >10.0%
Galena 9,140 13.74% 5,322 >8.0% 6,652 >10.0%
FCB 13,322 15.17% 7,026 >8.0% 8,783 >10.0%
Riverside 3,171 19.42% 1,306 >8.0% 1,633 >10.0%
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $67,701 13.10% $20,667 >4.0% N/A
DB&T 39,593 11.43% 13,855 >4.0% $20,782 > 6.0%
Galena 8,307 12.49% 2,661 >4.0% 3,991 > 6.0%
FCB 12,603 14.35% 3,513 >4.0% 5,270 > 6.0%
Riverside 3,029 18.55% 653 >4.0% 980 > 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated $67,701 9.81% $27,594 >4.0% N/A
DB&T 39,593 8.58% 18,464 >4.0% $23,080 > 5.0%
Galena 8,307 7.63% 4,356 >4.0% 5,445 > 5.0%
FCB 12,603 11.17% 4,514 >4.0% 5,643 > 5.0%
Riverside 3,029 20.45% 593 >4.0% 741 > 5.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1995
Total Capital (to
Risk Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $66,165 14.46% $36,603 >8.0% N/A
DB&T 40,437 12.55% 25,785 >8.0% $32,232 >10.0%
Galena 8,722 13.70% 5,092 >8.0% 6,366 >10.0%
FCB 13,085 18.41% 5,687 >8.0% 7,109 >10.0%
Riverside 3,684 184.66% 160 >8.0% 200 >10.0%
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $60,780 13.28% $18,302 >4.0% N/A
DB&T 36,512 11.33% 12,893 >4.0% $19,339 > 6.0%
Galena 7,926 12.45% 2,546 >4.0% 3,819 > 6.0%
FCB 12,429 17.48% 2,844 >4.0% 4,265 > 6.0%
Riverside 3,676 184.26% 80 >4.0% 120 > 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated $60,780 9.47% $25,666 >4.0% N/A
DB&T 36,512 8.36% 17,468 >4.0% $21,836 > 5.0%
Galena 7,926 7.54% 4,205 >4.0% 5,256 > 5.0%
FCB 12,429 11.81% 4,210 >4.0% 5,262 > 5.0%
Riverside 3,676 282.55% 52 >4.0% 65 > 5.0%
</TABLE>
The ability of Heartland to pay dividends to its stockholders is
dependent upon dividends paid by its subsidiaries. The Banks are
subject to certain statutory and regulatory restrictions on the
amount they may pay in dividends. To maintain acceptable capital
ratios in the Banks, certain portions of their retained earnings
are not available for the payment of dividends. Retained earnings
which could be available for the payment of dividends to
Heartland totaled approximately $28,150 as of December 31, 1996,
under the most restrictive minimum capital requirements.
SEVENTEEN
PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc.
is as follows:
Balance Sheets
December 31, 1996 1995
--------- ---------
Assets:
Cash and interest bearing deposits $ 3,208 $ 356
Investment in subsidiaries 66,722 64,268
Other assets 204 26
Due from subsidiaries 215 -
--------- ---------
Total $ 70,349 $ 64,650
========= =========
Liabilities
and Stockholders' Equity:
Liabilities:
Accrued expenses and other liabilities $ 90 $ 144
--------- ---------
Total liabilities 90 144
--------- ---------
Stockholders' Equity:
Common stock 4,854 2,427
Capital surplus 13,366 13,090
Retained earnings 52,864 49,171
Net unrealized gain on securities
available for sale 1,327 2,620
Treasury stock (2,152) (2,802)
--------- ---------
Total stockholders' equity $ 70,259 64,506
--------- ---------
Total $ 70,349 $ 64,650
========= =========
Income Statements for the
Years Ended December 31, 1996 1995 1994
------ ------ ------
Operating revenues:
Dividends from subsidiaries $5,611 $6,574 $5,018
Other 4 - 3
------ ------ ------
Total operating revenues 5,615 6,574 5,021
------ ------ ------
Operating expenses:
Outside services 197 154 380
Other operating expenses 443 460 401
Interest - - 4
Amortization of non-compete
agreement - - 162
------ ------ ------
Total operating expenses 640 614 947
------ ------ ------
Equity in undistributed earnings 2,815 1,421 2,834
------ ------ ------
Income before income tax benefit 7,790 7,381 6,908
Income tax benefit 216 193 232
------ ------ ------
Net income $8,006 $7,574 $7,140
====== ====== ======
Statements of Cash Flows For
the Years Ended December 31, 1996 1995 1994
------ ------ ------
Cash flows from operating
activities:
Net income $8,006 $7,574 $7,140
Keokuk Bancshares, Inc.
earnings October 1, 1993,
through December 31, 1993 - - (525)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (2,815) (1,421) (2,834)
Amortization - - 162
(Increase) decrease in due
from subsidiaries (215) 720 (187)
Increase (decrease) in other
liabilities (54) 17 240
(Increase) decrease in other
assets (178) 94 (105)
------- ------- -------
Net cash provided by operating
activities 4,744 6,984 3,891
------- ------- -------
Cash flows from investing
activities:
Initial capital injection for
subsidiaries (543) (4,000) -
Payments for purchase of
subsidiaries - - (3)
Capital expenditures - - (3)
Other - 18 21
------- ------- -------
Net cash provided (used) by
investing activities (543) (3,982) 15
------- ------- -------
Cash flows from financing
activities:
Payments on other borrowings - (162) (1,936)
Cash dividends paid (1,886) (2,360) (785)
Purchase of treasury stock (759) (2,855) (185)
Sale of treasury stock 1,296 236 3
Issuance of common stock - - 166
Redemption of redeemable
preferred stock - - (67)
------- ------- -------
Net cash (used) by
financing activities (1,349) (5,141) (2,804)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 2,852 (2,139) 1,102
Cash and cash equivalents at
beginning of year 356 2,495 1,393
------- ------- -------
Cash and cash equivalents at
end of year $3,208 $ 356 $2,495
======= ======= =======
Representations of Management
Management is responsible for the contents of the consolidated
financial statements and other information contained in other
sections of this annual report. The consolidated financial
statements have been prepared in conformity with generally
accepted accounting principles appropriate to reflect, in all
material respects, the substance of events and transactions that
should be included. The consolidated financial statements
reflect management's judgments and estimates as to the effects of
events and transactions that are accounted for or disclosed.
The company maintains accounting and reporting systems, supported
by an internal accounting control system, which are adequate to
provide reasonable assurance that transactions are authorized,
assets are safeguarded and reliable consolidated financial
statements are prepared, recognizing the cost and expected
benefits of internal accounting controls. A staff of internal
auditors conducts ongoing reviews of accounting practices and
internal accounting controls.
The consolidated financial statements as of December 31, 1996,
1995 and 1994, of Heartland Financial USA, Inc. and its wholly-
owned subsidiaries: Dubuque Bank and Trust Company, DB&T
Insurance, Inc., DB&T Community Development Corp., Galena State
Bank and Trust Company, Riverside Community Bank, Keokuk
Bancshares, Inc., First Community Bank, FSB, Citizens Finance Co.
and ULTEA, Inc. were audited by independent certified public
accountants. Their role is to render independent professional
opinions of the fairness of the consolidated financial statements
based upon performance of procedures they deem appropriate under
generally accepted auditing standards.
The Audit Committees of the Boards of Directors of member banks
meet periodically with the internal auditors to review matters
relating to internal accounting controls and the nature, extent
and results of audit efforts. The internal auditors and
independent certified public accountants have free access to the
Audit Committees.
/s/ Lynn B. Fuller
- -------------------------
Lynn B. Fuller
President, Heartland Financial USA, Inc.
/s/ John K. Schmidt
- ------------------------
John K. Schmidt
Executive Vice President and CFO, Heartland Financial USA, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Heartland Financial USA, Inc.
We have audited the accompanying consolidated balance sheets of
Heartland Financial USA, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Heartland Financial USA, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations
and their cash flows for each the years in the three-year period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, IA
January 30, 1997
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR NOMINEES
Served as Position with Heartland
Name Heartland and the Subsidiaries and
(Age) Director Since Principal Occupation
- ------------- ----------------- -------------------------
CLASS I
(Term Expires 2000)
Lynn B. Fuller 1987 President of Heartland;
(Age 47) Director, President and
Chief Executive Officer of
DB&T; Director of Galena (1992-
present); Director and
President of DB&T Insurance,
Citizens and DB&T Development
(1994-present); Director of
Keokuk (1994-present), First
Community (1994-present) and
DBT Investment (1994-present);
Director and Chairman of
Riverside (1995-present);
Director and Chairman of
ULTEA, Inc. (1996-present);
Director, Cottage Grove State
Bank (1997-present).
Gregory R. Miller 1994 Executive Vice President
(Age 48) of Heartland (1996-present);
Director (1990-1995),
President and Chief Executive
Officer of Keokuk; President
and Chief Executive Officer of
First Community; President of
KFS Services, Inc.
CONTINUING DIRECTORS
Served as Position with Heartland
Name Heartland and the Subsidiaries and
(Age) Director Since Principal Occupation
- --------------- ----------------- -------------------------
CLASS II
(Term Expires 1998)
Mark C. Falb 1995 Director of DB&T; President
(Age 49) and Chief Executive
Officer (1983-1992) and
Chairman of the Board (1992)
of Wm. C. Brown Companies;
Chairman of the Board and
Chief Executive Officer of
Westmark Enterprises, Inc.
(1992-present) and
Kendall/Hunt Publishing
Company.
James A. Schmid 1981 Vice Chairman of the Board of
(Age 73) Heartland (1991-present);
Chairman of the Board and
Director of DB&T; Director of
DB&T Insurance, Citizens and
DB&T Development (1994-
present); Chairman of the
Board (1991-present),
President (1974-1992) and
Chief Executive Officer (1992-
present) of Crescent Electric
Supply Company.
Robert Woodward 1987 Director of DB&T, DB&T
(Age 60) Insurance, Citizens and
DB&T Development Corp. (1994-
present); Chairman of the
Board and Chief Executive
Officer of Woodward
Communications, Inc. (1995-
present).
CLASS III
(Term Expires 1999)
Lynn S. Fuller 1981 Chairman of the Board and
(Age 72) Chief Executive Officer
of Heartland; Director and
Vice Chairman of the Board of
DB&T; Director of DB&T
Insurance, Citizens and DB&T
Development (1994-present).
Evangeline K. Jansen
(Age 80) 1981 Director of DB&T, DB&T
Insurance, Citizens and DB&T
Development Corp. (1994-
present).
All of Heartland's directors will hold office for the terms
indicated, or until their respective successors are duly elected
and qualified. There are no arrangements or understandings
between Heartland and any other person pursuant to which any of
Heartland's directors have been selected for their respective
positions. No member of the Board of Directors is related to any
other member of the Board of Directors, except that Lynn S.
Fuller is the father of Lynn B. Fuller.
EXECUTIVE OFFICERS
The term of office for the executive officers of Heartland is
from the date of election until the next annual organizational
meeting of the Board of Directors. The names and ages of the
executive officers of Heartland as of December 31, 1996, offices
held by these officers on that date and other positions held with
Heartland and its subsidiaries are set forth below.
Position with Heartland
and Subsidiaries
Name Age and Principal Occupation
Lynn B. Fuller 47 Director and President
of Heartland; Director,
President and Chief Executive
Officer of DB&T; Director of
Keokuk, Galena, First
Community, Cottage Grove
State Bank, DB&T Insurance,
Citizens, DBT Investment and
DB&T Development; President
of DB&T Insurance, DB&T
Development and Citizens;
Chairman and Director of
Riverside; Chairman and
Director of ULTEA.
Lynn S. Fuller 72 Chairman of the Board
and Chief Executive Officer
of Heartland; Director and
Vice Chairman of the Board of
DB&T; Director of DB&T
Insurance, Citizens and DB&T
Development
James A. Schmid 73 Vice Chairman of the
Board of Heartland; Chairman
of the Board of DB&T;
Director of DB&T Insurance,
Citizens and DB&T
Development; Chairman of the
Board and Chief Executive
Officer of Crescent Electric
Supply Company
John K. Schmidt 37 Executive Vice President
and Chief Financial Officer
of Heartland; Senior Vice
President and Chief Financial
Officer of DB&T; Treasurer of
DB&T Insurance and Citizens;
Director of DBT Investment;
Vice President and Assistant
Secretary of Ultea
Greg R. Miller 48 Executive Vice President
of Heartland; Director,
President and Chief Executive
Officer of Keokuk and First
Community; President of KFS
Services, Inc.
Kenneth J. Erickson 45 Senior Vice President of
Heartland; Senior Vice
President, Lending of DB&T;
Senior Vice President of Cit-
izens; Director of ULTEA
Edward H. Everts 45 Senior Vice President,
Heartland; Senior Vice
President of Operations and
Retail Banking of DB&T
Douglas J. Horstmann 43 Senior Vice President,
Lending of DB&T; Executive
Vice President of DB&T
Development
Paul J. Peckosh 51 Senior Vice President,
Trust of DB&T
Mr. Lynn B. Fuller is the son of Mr. Lynn S. Fuller. There are no
other family relationships among any of the directors or
executive officers of Heartland.
Lynn B. Fuller has been a director of Heartland and of DB&T since
1984 and has been President of Heartland and DB&T since 1987. He
has been a director of the Galena Bank since its acquisition by
Heartland in 1992 and of Keokuk Bancshares and First Community
since the merger in 1994. Mr. Fuller joined DB&T in 1971 as a
consumer loan officer and was named DB&T's Executive Vice
President and Chief Executive Officer in 1985. He was named
Chairman and Director of Riverside in conjunction with the
opening of the de novo operation in 1995.
Lynn S. Fuller has been a director of Heartland since its
formation in 1981 and of DB&T since 1964. Mr. Fuller began his
banking career in 1946 in Minnesota, and he returned to Iowa in
1949 to serve as Executive Vice President and Cashier of Jackson
State Savings Bank in Maquoketa. Mr. Fuller joined DB&T in 1964.
He was later named President of DB&T and held this position until
1987. Mr. Fuller remains as the Chairman of the Board and Chief
Executive Officer of Heartland.
James A. Schmid has been a director of Heartland since its
formation in 1981 and of DB&T since 1966. Mr. Schmid also
currently serves as the Vice Chairman of Heartland and as the
Chairman of the Board of DB&T. He is the Chairman of the Board
and Chief Executive Officer of Crescent Electric Supply Company,
in East Dubuque, Illinois.
John K. Schmidt has been Heartland's Executive Vice President and
Chief Financial Officer since 1991. He has been employed by DB&T
since September, 1984 and became DB&T's Vice President, Finance
in 1986, and Senior Vice President and Chief Financial Officer in
January, 1991. Mr. Schmidt is a certified public accountant and
worked at KPMG Peat Marwick in Des Moines, Iowa, from 1982 until
joining DB&T.
Greg R. Miller was appointed Executive Vice President of
Heartland in 1996. Mr. Miller joined First Community in 1987 as
Executive Vice President and was appointed President and Chief
Executive Officer of Keokuk and First Community in 1988. He
became a Heartland director in 1994 in conjunction with the
merger of Heartland with Keokuk. Mr. Miller is a certified
public accountant and was the Chief Executive Officer of Keokuk
Area Hospital immediately prior to joining First Community.
Kenneth J. Erickson has been Senior Vice President of Heartland
since 1992 and Senior Vice President, Lending of DB&T since 1989.
Mr. Erickson joined DB&T in 1975 and was appointed Vice
President, Commercial Loans in 1985.
Edward H. Everts was appointed as Senior Vice President of
Heartland in 1996. Mr. Everts joined DB&T as Senior Vice
President, Operations and Retail Banking in 1992. Prior to his
service with DB&T, Mr. Everts was Vice President and Lead Retail
Banking Manager of First Bank, Duluth, Minnesota.
Douglas J. Horstmann has been Senior Vice President, Lending, of
DB&T since 1989. Mr. Horstmann joined DB&T in 1980 and was
appointed Vice President, Commercial Loans in 1985. Prior to
joining DB&T, Mr. Horstmann was an examiner for the Iowa Division
of Banking.
Paul J. Peckosh has been Senior Vice President, Trust, of DB&T
since 1991. Mr. Peckosh joined DB&T in 1975 as Assistant Vice
President, Trust and was appointed Vice President, Trust in 1980.
Mr. Peckosh is an attorney and graduated from the Marquette
University of Law School in 1970.
ITEM 11.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation paid or granted to Heartland's Chief Executive
Officer and to each of the other five most highly compensated
executive officers of Heartland or the Subsidiaries for the
fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
(a) (b) (c) (d)
Fiscal
Year
Ended
Name and December Bonus
Principal Position 31st Salary($)(1) ($)(2)
- ---------------------------- -------- ------------ --------
<S> <C> <C> <C>
Lynn B. Fuller 1996 $157,000 $72,523
President of Heartland 1995 155,000 83,031
1994 150,000 92,807
Lynn S. Fuller, Chairman 1996 $105,000 $ ---
and Chief Executive Officer 1995 105,000 ---
of Heartland 1994 105,000 ---
Gregory R. Miller 1996 $103,591 $14,304
Executive Vice President 1995 99,607 14,304
of Heartland(4) 1994 92,407 36,000
John K. Schmidt 1996 $ 99,000 $26,257
Executive Vice President 1995 95,000 25,575
and Chief Financial Officer 1994 90,000 29,277
of Heartland
Kenneth J. Erickson 1996 $ 96,000 $22,946
Senior Vice President 1995 90,000 15,940
of Heartland 1994 84,000 20,371
Douglas J. Horstmann 1996 $ 96,000 $17,946
Senior Vice President 1995 90,000 15,940
of DB&T 1994 84,000 20,371
</TABLE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
(a) (b) (f) (g) (h)
FY Securities All
Ended Restricted Underlying Other
Name and Dec. Stock Options/ Compensa-
Principal Position 31st Awards($) SARs(#) tion($)(3)
- ------------------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Lynn B. Fuller 1996 $ --- $12,000 $28,168
President 1995 --- 24,000 20,473
of Heartland 1994 --- --- 19,014
Lynn S. Fuller 1996 $ --- $ --- $25,036
Chairman and Chief 1995 --- --- 19,964
Executive Officer 1994 --- --- 16,062
of Heartland
Gregory R. Miller 1996 $ --- $ 6,000 $19,143
Executive Vice 1995 --- 12,000 16,930
President 1994 --- --- 15,409
of Heartland(4)
John K. Schmidt 1996 $ --- $ 8,000 $18,602
Executive Vice 1995 --- 16,000 15,650
President and 1994 --- --- 13,920
Chief Financial
Officer of Heartland
Kenneth J. Erickson 1996 $ --- $ 8,000 $19,117
Senior Vice President 1995 --- 16,000 13,899
of Heartland 1994 --- --- 12,211
Douglas J. Horstmann 1996 $ --- $ 8,000 $18,358
Senior Vice President 1995 --- 16,000 13,898
of DB&T 1994 --- --- 12,211
</TABLE>
(1) Includes amounts deferred under Heartland's Retirement
Plan for 1994 and 1995. The amount shown for 1996 is subject to
adjustment and payment in April, 1997.
(2) The amounts shown represent amounts received under
Heartland's Management Incentive Compensation Plan for 1994 and
1995. The amount shown for 1996 is subject to adjustment prior
to payment.
(3) The amounts shown represent amounts contributed on
behalf of the respective officer to Heartland's Retirement Plan,
and, for 1995 and 1996, also represents the allocable portion of
the premium paid for life insurance under Heartland's split-
dollar life insurance plan for certain of the named executive
officers. For 1996, such amounts also include the aggregate
value of the discount to market price of shares purchased under
Heartland's Employee Stock Purchase Plan and/or Heartland's
Executive Restricted Stock Purchase Plan. For Messrs. Lynn S.
Fuller and Lynn B. Fuller, the amount shown includes
transportation-related expenses. For 1996, the amount contributed
for each officer under the Retirement Plan, and the aggregate
below market discount realized by each named individual, is as
follows; $18,622 and $7,171 for Mr. Lynn B. Fuller, $14,361 and
$4,244 for Mr. Lynn S. Fuller, $15,117 and $4,026 for Mr. Miller,
$15,759 and $2,705 for Mr. Schmidt and $14,349 and $4,587 for Mr.
Erickson and $14,349 and $3,858 for Mr. Horstmann.
(4) Mr. Miller became an executive officer of a subsidiary
of Heartland following the July 1, 1994, acquisition by the
Company of Keokuk Bancshares. The figures include salary, bonus
and other compensation received by Mr. Miller as an officer of
Keokuk Bancshares and First Community prior to the acquisition
and as an officer of First Community and Heartland following the
acquisition.
Stock Option Information
The following table sets forth certain information concerning the
number and value of stock options granted in the last fiscal year
to the individuals named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d)
% of
Total
Options
Granted
to Exercise
Options Employees or Base
Granted in Fiscal Price
Name (#)(1) Year (S/Sh)
- ---- ------- --------- --------
<S> <C> <C> <C>
Lynn B. Fuller 12,000 17% $17.25
Lynn S. Fuller --- -- ---
Gregory R. Miller 6,000 9% 17.25
John K. Schmidt 8,000 12% 17.25
Kenneth J. Erickson 8,000 12% 17.25
Douglas J. Horstmann 8,000 12% 17.25
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (e) (f)
Grant Date
Expiration Present Value
Name Date ($) (2)(3)
- ---- ---------- -------------
<S> <C> <C>
Lynn B. Fuller 02/06/06 $74,280
Lynn S. Fuller ---- ---
Gregory R. Miller 02/06/06 37,140
John K. Schmidt 02/06/06 49,520
Kenneth J. Erickson 02/06/06 49,520
Douglas J. Horstmann 02/06/06 49,520
</TABLE>
(1) Options become exercisable in three equal portions on the
day after the third, fourth and fifth anniversaries of the
February 6, 1996 date of grant.
(2) The Black Scholes valuation model was used to determine the
grant date present values. Significant assumptions include: risk-
free interest rate, 5.68%; expected option life, 10 years;
expected volatiliity, 28.62%; expected dividends, 2.29%.
(3) The ultimate value of the options will depend on the future
market price of Heartland's Common Stock, which cannot be
forecast with reasonable accuracy. The actual value, if any, an
executive may realize upon the exercise of an option will depend
on the excess of the market value of Heartland's Common Stock, on
the date the option is exercised, over the exercise price of the
option.
The following table sets forth certain information
concerning the number and value of stock options at December 31,
1996 held by the named executive officers. No stock options were
exercised during 1996 by such persons.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Shares Options/SARs In-the-Money
Acquired at FY End Options/SARs
On Value (#)(d)(1) at FY-End($)(e)
Exercise Realized Exer- Unexer- Exer- Unexer-
(#)(b) ($)(c) cisable cisable cisable cisable
-------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Lynn B. Fuller - $- - 36,000 $- $273,000
Lynn S. Fuller - - - --- - ---
Gregory R. Miller - - - 18,000 - 136,500
John K. Schmidt - - - 24,000 - 182,000
Kenneth J. Erickson - - - 24,000 - 182,000
Douglas J. Horstman - - - 24,000 - 182,000
</TABLE>
(1) In addition to options granted in 1996, such amounts include
options granted in 1995 at an exercise price of $16.00 per share and
vesting one-third each on May 18, 1998, 1999 and 2000.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect
to the beneficial ownership of Heartland's Common Stock at March
2410, 1997, by each person known by Heartland to be the
beneficial owner of more than 5% of the outstanding Common Stock,
by each director or nominee, by each executive officer named in
the Summary Compensation Table and by all directors and executive
officers of Heartland as a group.
<TABLE>
<CAPTION>
Name of Individual and Amount and Nature of Percent
Number of Persons in Group Beneficial Ownership(1) of Class
- -------------------------- ----------------------- --------
<S> <C> <C>
5% Stockholders
Dubuque Bank and Trust Company
1398 Central Avenue
Dubuque, Iowa 52001 459,540 (2) 9.7%
Heartland Partnership, L.P.
1145 S. Grandview
Dubuque, Iowa 52003 278,000 (3) 5.9%
Directors
Mark C. Falb 98,096 (4) 2.1%
Lynn B. Fuller 63,264 (5) 1.3%
Lynn S. Fuller 461,238 (6) 9.7%
Evangeline K. Fuller 564,656 (7) 11.9%
Gregory R. Miller 104,674 (8) 2.2%
James A. Schmid 191,440 (9) 4.0%
Robert Woodward 215,710 (10) 4.6%
Other Executive Officers
John K. Schmidt 12,796 *
Kenneth J. Erickson 16,315 (11) *
Douglas J. Horstmann 16,149 (12) *
All directors and executive
officers as a group
(12 persons) 1,769,259 37.4%
</TABLE>
* Less than one percent
(1) The information contained in this column is based upon
information furnished to Heartland by the persons named above and
the members of the designated group. Amounts reported include
shares held directly as well as shares which are held in
retirement accounts and shares held by certain members of the
named individuals' families or held by trusts of which the named
individual is a trustee or substantial beneficiary, with respect
to which shares the respective director may be deemed to have
sole or shared voting and/or investment power. The nature of
beneficial ownership for shares shown in this column is sole
voting and investment power, except as set forth in the footnotes
below. Inclusion of shares shall not constitute an admission of
beneficial ownership or voting and investment power over included
shares.
(2) Includes 253,884 shares over which DB&T has sole voting
and investment power and 205,656 shares over which DB&T has
shared voting or investment power.
(3) Mr. Lynn S. Fuller, Chairman of the Board and Chief
Executive Officer of Heartland, is the General Partner of
Heartland Partnership, L.P., and in such capacity exercises sole
voting and investment power over such shares.
(4) Includes 53,488 shares over which Mr. Falb has shared
voting and investment power and 22,352 shares held by Mr. Falb's
spouse, as trustee, over which Mr. Falb has no voting or
investment power.
(5) Includes an aggregate of 2,020 shares held by Mr.
Fuller's spouse and minor child, over which shares Mr. Fuller has
shared voting and investment power. Excludes 7,000 shares held
by the Heartland Partnership, L.P. over which Mr. Fuller has no
voting or investment power but in which Mr. Fuller does have a
beneficial interest.
(6) Includes shares held by the Heartland Partnership,
L.P., as well as 35,182 shares held by a trust for which Mr.
Fuller's spouse is a trustee and over which shares Mr. Fuller has
shared voting and investment power.
(7) Represents shares held in certain trusts for which Ms.
Jansen serves as trustee or co-trustee. Voting and investment
power is shared with respect to 144,256 of such shares.
(8) Includes an aggregate of 37,304 shares held by Mr.
Miller's spouse and minor child, over which shares Mr. Miller has
no voting or investment power.
(9) Includes 5,392 shares held by Mr. Schmid's wife, over
which Mr. Schmid has shared voting and investment power, 73,336
shares held in trust over which Mr. Schmid has sole voting and
investment power, and 42,192 shares held by Crescent Realty
Corp., of which Mr. Schmid is a controlling person.
(10) Includes an aggregate of 130,600 shares held by various
trusts of which Mr. Woodward is a trustee and over which shares
Mr. Woodward has shared voting and investment power over 124,200
shares and sole voting and invest power over 6,400 shares.
(11) Includes 2,400 shares held by Mr. Erickson jointly with
his spouse, over which shares Mr. Erickson has shared voting and
investment power.
(12) Includes 9,000 shares held by Mr. Horstmann's spouse,
over which shares Mr. Horstmann has shared voting and investment
power.
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires that Heartland's directors, executive
officers and 10% stockholders file reports of ownership and
changes in ownership with the Securities and Exchange Commission.
Such persons are also required to furnish Heartland with copies
of all Section 16(a) forms they file. Based solely upon
Heartland's review of such forms, Heartland is not aware that any
of its directors, executive officers or 10% stockholders failed
to comply with the filing requirements of Section 16(a) during
the period commencing January 1, 1996 through December 31, 1996.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of Heartland and the Subsidiaries, and
their associates, were customers of and had transactions with
Heartland and one or more of the Subsidiaries during 1996.
Additional transactions may be expected to take place in the
future. All outstanding loans, commitments to loan, transactions
in repurchase agreements and certificates of deposit and
depository relationships, in the opinion of management, were made
in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other
persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents filed as a part of this report are listed
below:
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are
included along with this Form 10-K and are listed on the "Index
of Exhibits" immediately following the signature page.
(b) Reports of Form 8-K:
There were no reports on Form 8-K filed during the last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized on March 18, 1997.
Heartland Financial USA, Inc.
By:/s/ Lynn S. Fuller By: /s/ John K. Schmidt
------------------------ ------------------------
Lynn S. Fuller John K. Schmidt
Chairman and Executive Vice President
Principal Executive Officer and Principal Financial
and Accounting Officer
Date: March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 18, 1997.
/s/ Lynn B. Fuller /s/ Lynn S. Fuller
- ----------------------------- -----------------------------
Lynn B. Fuller Lynn S. Fuller
President and Director Chairman, CEO and Director
/s/ James A. Schmidt /s/ Mark C. Falb
- ----------------------------- -----------------------------
James A. Schmid Mark C. Falb
Vice Chairman and Director Director
/s/ Gregory R. Miller /s/ Evangeline K. Jansen
- ----------------------------- -----------------------------
Gregory R. Miller Evangeline K. Jansen
Director and Director
Executive Vice President
/s/ Robert Woodward
- -----------------------------
Robert Woodward
Director
3. Exhibits
3.1 Certificate of Incorporation of Heartland Financial
USA, Inc. (Filed as Exhibit 3.1 to Registrant's
Form S-4 for the fiscal year ended December 31, 1993,
and incorporated by reference herein.)
3.2 Bylaws of Heartland Financial USA, Inc.
(Filed as Exhibit 3.2 to Registrant's Form S-4
for the fiscal year ended December 31, 1993, and
incorporated by reference herein.)
4.1 Specimen Stock Certificate of Heartland Financial
USA, Inc. (Exhibit 4.1 to the Registration Statement
on Form S-4 filed with the Commission May 4, 1994,
as amended (SEC File No. 33-76228)
10.1 Heartland Financial USA, Inc. 1993 Stock Option
Plan (Filed as Exhibit 10.1 to Registrant's Form S-4
for the fiscal year ended December 31, 1993,
and incorporated by reference herein.)
10.2 Heartland Financial USA, Inc. Executive Restricted
Stock Purchase Plan (Filed as Exhibit 10.2 to
Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by
reference herein.)
10.3 Dubuque Bank and Trust Management Incentive
Compensation Plan (Filed as Exhibit 10.3 to
Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by
reference herein.)
10.4 Dubuque Bank and Trust Executive Death Benefit
Plan (Filed as Exhibit 10.4 to
Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by reference
herein.)
10.5 Change of Control Agreement
between Heartland Financial USA, Inc. and Lynn B.
Fuller dated February 11, 1993, (Filed as Exhibit 10.5
to Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by reference
herein.)
10.6 Change of Control Agreement between Heartland Financial
USA, Inc. and John K. Schmidt dated February 11, 1993,
(Filed as Exhibit 10.6 to Registrant's Form S-4 for the
fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.7 Employment Agreement between
Heartland Financial USA, Inc. and Greg R. Miller dated
June 30, 1994. (Filed as Exhibit 10.4 to Registrant's
Form 10-K for the fiscal year ended December 31, 1994,
and incorporated by reference herein.)
10.8 Change of Control Agreement
between Heartland Financial USA, Inc. and Greg R.
Miller dated June 30, 1994. (Filed as Exhibit 10.3 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1994, and incorporated by reference
herein.)
10.9 ATM License Agreement between
Dubuque Bank and Trust Company and Plus Systems, Inc.,
dated January 2, 1992, (Filed as Exhibit 10.9 to
Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by reference
herein.)
10.10 Service Mark License Agreement between Dubuque Bank
and Trust Company and Cirrus System, Inc., dated
September 1, 1988, (Filed as Exhibit 10.10 to
Registrant's Form S-4 for the fiscal year ended
December 31, 1993, and incorporated by reference
herein.)
10.11 CSMA/FI Debit Processing
Agreement between Dubuque Bank and Trust Company and
Card Services--Members Associated dated May 4, 1993,
(Filed as Exhibit 10.11 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and
incorporated by reference herein.)
10.12 Bank Marketing Agreement
between ADP, Inc. and Heartland Bancorp dated August
26, 1993, (Filed as Exhibit 10.12 to Registrant's Form
S-4 for the fiscal year ended December 31, 1993, and
incorporated by reference herein.)
10.13 Planning and Conceptual Design
agreement between Galena State Bank and Trust Company
and HBE Financial Facilities dated October 7, 1994.
(Filed as Exhibit 10.5 to Registrant's Form 10-K for
the fiscal year ended December 31, 1994, and
incorporated by reference herein.)
10.14 Lease Agreement dated May 28,
1970, for Unit 710, Kennedy Mall, Dubuque, Iowa, and as
amended July 22, 1976, between Dubuque Bank and Trust
Company and The Kennedy Mall, Inc. (Filed as Exhibit
10.14 to Registrant's Form S-4 for the fiscal year
ended December 31, 1993, and incorporated by reference
herein.)
10.15 Lease Agreement for 1275 Main
Street, Dubuque, Iowa, between Fischer & Co. and
Dubuque Bank and Trust Company (as successor to Epworth
Savings Bank) dated February 1, 1968 (Filed as Exhibit
10.15 to Registrant's Form S-4 for the fiscal year
ended December 31, 1993, and incorporated by reference
herein.)
10.16 Processing Agreement between
ITS, Inc., and Dubuque Bank and Trust Company (Filed as
Exhibit 10.16 to Registrant's Form S-4 for the fiscal
year ended December 31, 1993, and incorporated by
reference herein.)
10.18 Change of Control Agreement
between Heartland Financial USA, Inc. and Kenneth J.
Erickson dated January 1, 1995. (Filed as Exhibit 10.1
to Registrant's Form 10-K for the fiscal year ended
December 31, 1994, and incorporated by reference
herein.)
10.19 Change of Control Agreement
between Heartland Financial USA, Inc. and Douglas J.
Horstmann dated January 1, 1995. (Filed as Exhibit 10.2
to Registrant's Form 10-K for the fiscal year ended
December 31, 1994, and incorporated by reference
herein.)
10.20 Contract for Purchase and Sale
between Heartland Financial USA, Inc. and Clyde and
Marjorie Anderson, as Co-trustees of Anderson Trust No.
70, dated February 28, 1995. (Filed as Exhibit 10.20 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.21 Heartland Financial Money
Purchase Pension Plan and Defined Contribution Master
Plan and Trust Agreement dated January 1, 1995. (Filed
as Exhibit 10.21 to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and incorporated
by reference herein.)
10.22 Heartland Financial USA, Inc.
Self-Funded Employee Health Benefit Plan dated January
1, 1996. (Filed as Exhibit 10.22 to Registrant's Form
10-K for the fiscal year ended December 31, 1995, and
incorporated by reference herein.)
10.23 Heartland Financial USA, Inc.
Self-Funded Employee Dental Benefit Plan dated January
1, 1996. (Filed as Exhibit 10.23 to Registrant's Form
10-K for the fiscal year ended December 31, 1995, and
incorporated by reference herein.)
10.24 Claim Processing Agreement
between Seabury & Smith, Inc. and Heartland Financial
USA, Inc. dated January 1, 1996. (Filed as Exhibit
10.24 to Registrant's Form 10-K for the fiscal year
ended December 31, 1995, and incorporated by reference
herein.)
10.25 Dubuque Bank and Trust Company
Executive Death Benefit Program Plan Revisions,
Enrollment Booklet, and Universal Life Split-Dollar
Agreement effective December 1, 1995, and similar
agreement are in place at Galena State Bank and Trust
Company, First Community Bank, FSB, and Riverside
Community Bank. (Filed as Exhibit 10.25 to Registrant's
Form 10-K for the fiscal year ended December 31, 1995,
and incorporated by reference herein.)
10.26 Employment Agreement between
Heartland Financial USA, Inc. and Scott A. Hendee dated
October 25, 1994. (Filed as Exhibit 10.26 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.27 Employment Agreement between
Heartland Financial USA, Inc. and Jerry L. Murdock
dated February 11, 1995. (Filed as Exhibit 10.27 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.28 Employment Agreement between
Heartland Financial USA, Inc. and Willard C. Brenner
dated August 1, 1995. (Filed as Exhibit 10.28 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.29 Employment Agreement between
Heartland Financial USA, Inc. and Thomas E. Belmont
dated August 11, 1995. (Filed as Exhibit 10.29 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.30 Investment Center Agreement
Focused Investment LLC and Heartland Financial USA,
Inc. dated August 1, 1995. (Filed as Exhibit 10.30 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.31 Principal Member for Credit
Card Issuance between Dubuque Bank & Trust Company and
VISA USA, Inc. dated June 26, 1995. (Filed as Exhibit
10.31 to Registrant's Form 10-K for the fiscal year
ended December 31, 1995, and incorporated by reference
herein.)
10.32 Standard Form of Agreement
between Owner and Design/Builder between Riverside
Community Bank and a Joint Venture of Pedriano
Gustafson Inc. and Reitzel Construction Co. dated
October 25, 1995. (Filed as Exhibit 10.32 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.33 Construction Agreement between
HBE Financial Facilities and Galena State Bank and
Trust Company dated October 20, 1995. (Filed as Exhibit
10.33 to Registrant's Form 10-K for the fiscal year
ended December 31, 1995, and incorporated by reference
herein.)
10.34 Standard Form of Design-Build
Agreement and General Conditions between Owner and
Contractor between First Community Bank, FSB, and
Altman-Charter Company dated November 13, 1995. (Filed
as Exhibit 10.34 to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and incorporated
by reference herein.)
10.35 Assignment between Galena
State Bank and Trust Company and Hoskins Lumber Company
dated February 7, 1996. (Filed as Exhibit 10.35 to
Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.36 Heartland Financial USA, Inc.
Employee Stock Purchase Plan effective January 1, 1996,
(Filed in conjunction with Form S-8 on June 18, 1996,
and incorporated by reference herein.)
10.37 The Stock Purchase Agreement
between Heartland Financial USA, Inc. and the
stockholders of Cottage Grove State Bank dated November
8, 1996.
10.38 Asset Purchase Agreement
between ULTEA, LLC and Heartland Financial USA, Inc.
dated December 4, 1996.
11. Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23. Consent of KPMG Peat Marwick LLP
EXHIBIT 11
EARNINGS PER SHARE:
Net income for the year ended December 31, 1996 $8,006,000
Weighted average common shares 4,715,009
------
Earnings per share $1.70
======
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Galena State Bank & Trust Company, an Illinois state bank
with its main office located in Galena, Illinois
2. Dubuque Bank and Trust Company, an Iowa state bank with
its main office located in Dubuque, Iowa
2.a. DB&T Insurance, Inc.
2.b. DBT Investment Corporation
2.c. DB&T Community Development Corp.
3. Keokuk Bancshares, Inc., a savings and loan holding
company with its main office located in Keokuk, Iowa
3.a. First Community Bank, FSB
3.a.1. KFS Services, Inc.
4. Riverside Community Bank, an Illinois state bank with its
main office located in Rockford, Illinois
5. Citizens Finance Co.
6. ULTEA
7. Cottage Grove (acquired March 1, 1997)
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Heartland Financial USA, Inc.:
We consent to incorporation by reference in the Registration
Statement on Form S-8 for the 1993 Stock Option Plan of Heartland
Financial USA, Inc. of our report dated on January 30, 1997,
relating to the consolidated balance sheets of Heartland
Financial USA, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 which report appears in
the December 31, 1996 annual report on Form 10-K of Heartland
Financial USA, Inc. and subsidiaries.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 26, 1997
EXHIBIT 10.37
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is dated as
of the 8th day of November, 1996, by and between HEARTLAND
FINANCIAL USA, INC., a Delaware corporation ("Buyer"), and the
stockholders of the Cottage Grove State Bank, a Wisconsin state
bank with its main office located in Cottage Grove, Wisconsin
(the "Bank"), executing this Agreement (individually, "Seller,"
and collectively, "Sellers").
RECITALS
A. Each of Sellers owns the number of shares of the issued
and outstanding capital stock of the Bank, par value $2.50 per
share (the "Stock"), set forth opposite such Seller's name on the
signature page of this Agreement.
B. Sellers, together with the other individuals who within
30 days of the date of this Agreement execute the Additional
Stock Purchase Agreement referred to in Section 2.3 (the
"Additional Sellers"), are the owners of not less than 66 2/3% of
all of the issued and outstanding Stock.
C. On the terms and conditions set forth in this Agreement
and the form of Acquisition Agreement, Sellers and the Additional
Sellers wish to sell to Buyer, and Buyer wishes to purchase from
Sellers and the Additional Sellers, all of the issued and
outstanding shares of the Stock that are owned by such Sellers
and Additional Sellers.
In consideration of the foregoing premises and the mutual
promises, covenants and agreements hereinafter set forth, the
parties to this Agreement hereby agree as follows:
AGREEMENTS
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions. In addition to those terms
defined throughout this Agreement, the following terms, when used
herein, shall have the following meanings.
(a) "Acquisition" shall mean the purchase by Buyer of all
of the issued and outstanding shares of Stock owned by Sellers.
(b) "Business Day" shall mean any day except Saturday,
Sunday and any day on which the Bank is authorized or required by
law or other government action to close.
(c) "Person" shall mean an individual, corporation,
partnership (including a business trust), joint stock company,
trust, unincorporated association, joint venture or other entity
or a government or any political subdivision or agency thereof.
(d) "Regulatory Authorities" shall mean any state or
federal governmental body or agency which under applicable
statutes and regulations: (i) has supervisory authority over
Buyer or the Bank; (ii) is required to approve, or give its
consent to the transactions contemplated by this Agreement; or
(iii) with which a filing must be made in connection therewith,
including in any case, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation and the
Division of Banking of the Department of Financial Institutions
of the State of Wisconsin.
(e) "Subsidiary" shall mean, as to any Person: (i) any
corporation more than 50% of whose stock of any class or classes
having by the terms thereof ordinary voting power to elect a
majority of the directors of such corporation (irrespective of
whether or not, at the time, stock of any class or classes of
such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time owned by such
Person and/or one or more Subsidiaries of such Person; and (ii)
any partnership, association, joint venture or other entity in
which such Person and/or one or more Subsidiaries of such Person
has more than a 50% equity interest at the time.
Section 1.2 Principles of Construction. (a) In this
Agreement, unless otherwise stated or the context otherwise
requires, the following usages apply: (i) unless otherwise
provided herein, actions permitted, but not required, under this
Agreement may be taken at any time and from time to time in the
actor's sole discretion; (ii) in computing periods from a
specified date to a later specified date, the words "from" and
"commencing on" (and the like) mean "from and including," and the
words "to," "until" and "ending on" (and the like) mean "to, but
excluding"; (iii) headings are inserted for convenience of
reference only and are not part of, nor shall they affect any
construction or interpretation of this Agreement; (iv) unless
otherwise specified, indications of time of day mean Dubuque,
Iowa, time; (v) all references to articles, sections, schedules
and exhibits are to articles, sections, schedules and exhibits in
or to this Agreement unless otherwise specified; (vi) references
to a statute shall refer to the statute and any successor
statute, and to all regulations promulgated under or implementing
the statute or successor, as in effect at the relevant time;
(vii) references to a governmental or quasi-governmental agency,
authority or instrumentality shall also refer to a regulatory
body that succeeds to the functions of the agency, authority or
instrumentality; (viii) "including" means "including, but not
limited to"; (ix) unless the context requires otherwise, all
words used in this Agreement in the singular number shall extend
to and include the plural, all words in the plural number shall
extend to and include the singular and all words in any gender
shall extend to and include all genders; and (x) any reference to
a document or set of documents in this Agreement, and the rights
and obligations of the parties under any such documents, shall
mean such document or documents as amended from time to time, and
any and all modifications, extensions, renewals, substitutions or
replacements thereof (b) All accounting terms not
specifically defined herein shall be construed in accordance with
generally accepted accounting principles and other regulatory or
statutory requirements followed in the preparation of the Bank's
most recent Report of Condition and Report of Income filed with
the Federal Deposit Insurance Corporation (a "Bank Call Report").
Section 1.3 Cottage Grove Book of Schedules. The Cottage
Grove Book of Schedules referred to in this Agreement shall
consist of the agreements and other documentation described and
referred to in this Agreement with respect to the Bank. The
Cottage Grove Book of Schedules has been delivered by the Bank to
Buyer and its counsel not less than five Business Days prior to
the date of this Agreement.
ARTICLE 2
BASIC TERMS OF TRANSACTION
Section 2.1 Appointment of Sellers' Representative. (a)
Each of Sellers, by executing this Agreement, hereby appoints Mr.
Vernon Molbreak, the President of the Bank, as Sellers'
Representative, to act for each Seller as his or her agent and
attorney-in-fact for purposes of all actions to be taken as
provided in this Agreement, and Sellers' Representative, by
executing this Agreement, hereby accepts such appointment.
(b) Buyer shall be entitled to rely on any statement
(which may be given orally, unless a written notice is expressly
required) or action of Sellers' Representative which purports to
be a decision or action of Sellers' Representative on behalf of
Sellers. Buyer shall recognize and give effect to any
designation of a successor Sellers' Representative if and only if
such Sellers' Representative is named in a notice received by
Buyer, which notice appoints such successor Sellers'
Representative and is executed by Sellers holding a majority of
the Stock held by all Sellers. Each Seller agrees that any
successor Sellers' Representative so appointed shall be vested
with the same power and authority as the Sellers' Representative
named in this Agreement.
Section 2.2 Sale and Purchase of Stock. (a) On the terms
and subject to the conditions hereinafter set forth and on the
assumption that Buyer will purchase on the Closing Date (as
defined below) all of the issued and outstanding shares of Stock
owned by Sellers, each of Sellers agrees to sell the Stock owned
by such Seller to Buyer, and Buyer agrees to purchase then and
there and accept delivery of the shares of Stock owned by each of
Sellers, in exchange for the payment to Seller of a cash amount
per share equal to: (i) $7,875,200 (the "Purchase Price"),
divided by (ii) the number of issued and outstanding shares of
Stock immediately prior to the Closing, excepting that any
increase over the minimum capital at Closing (as defined below)
shall increase the per share value at a rate of $1.00 for each
$40,000 increase.
(b) Notwithstanding anything contained herein to the
contrary, Buyer agrees that any Seller entitled to receive such
Seller's pro rata share of the Purchase Price (the "Seller Pro
Rata Portion") at the closing of the Acquisition (the "Closing")
pursuant to the terms of this Agreement may make an irrevocable
election by written notice delivered to Buyer not later than 30
days prior to the Closing Date (the "Installment Election"), to
receive the Seller Pro Rata Portion which shall be payable, at
such Seller's election, in three, four or five equal annual
installments. The first such installment shall be payable on the
Closing Date and the remaining installments shall be payable on
each of the following succeeding anniversaries of the Closing
Date until the full amount of the Seller Pro Rata Portion has
been paid to such Seller. Buyer agrees to pay to any Seller
electing such installment option interest on any outstanding
balance due to such Seller after the Closing Date at an annual
rate equal to 7.50%, payable with and in addition to each
installment payment. Buyer further agrees if requested by any
stockholder to provide a letter of credit collateralizing the
installment election of such stockholder, provided, however, that
any installment election secured by a letter of credit shall bear
interest at an annual rate of 7.00%.
Section 2.3 Additional Sellers. After the execution of
this Agreement by Buyer and Sellers, Buyer agrees to offer to buy
all of the common stock of the Bank owned by stockholders other
than Sellers (the "Additional Sellers") on the terms and
conditions set forth in the form of the Additional Stock Purchase
Agreement attached as Exhibit A, which contains the same
financial terms as set forth in this Agreement. Closing of the
purchase of the Stock from the Additional Sellers shall occur on
the Closing Date simultaneously with the closing of the
Acquisition.
Section 2.4 Merger Option. Sellers agree that Buyer may,
at its option and if permitted by applicable law, elect to
structure the Acquisition as a cash merger of the Bank with a
wholly-owned subsidiary of Buyer (the "Bank Merger") to be
organized for the sole purpose of effectuating the Bank Merger,
on financial terms the same as those set forth in the Agreement
for the purchase by Buyer of the Stock. If Buyer elects to
accomplish the Acquisition through the Bank Merger, Sellers
agree:
(a) to cause the Board of Directors of the Bank to
approve the Bank Merger and to submit it to the stockholders
of the Bank for their approval;
(b) to vote the shares of Stock owned by them in favor
of the Bank Merger; and
(c) to take, or cause the Bank and its Board of
Directors to take, all steps necessary to consummate the
Bank Merger.
Any such Bank Merger shall be accomplished pursuant to a merger
agreement containing the same financial terms and substantially
the same other terms and conditions as set forth in this
Agreement.
Section 2.5 Closing. (a) Pursuant to the terms of this
Agreement, the Closing shall occur at the offices of Buyer at
1398 Central Avenue, Dubuque, Iowa, as soon as practicable after
Buyer has obtained all necessary regulatory approvals and all
applicable waiting periods have expired, but in no event later
than March 1, 1997, unless mutually extended by Buyer and
Sellers' Representative. Notwithstanding anything contained
herein to the contrary, if on the date that is otherwise
prescribed by this Section to be the Closing Date the
stockholders' equity of the Bank is less than $4,875,000, then
the Closing Date shall be extended to the end of the next
succeeding calendar month when the stockholders' equity of the
Bank is greater than or equal to $4,875,000, but in no event
shall the Closing Date be extended pursuant to the provisions of
this sentence any later than June 30, 1997. Time is of the
essence.
(b) For purposes of this Section, the stockholders' equity
of the Bank shall be calculated in accordance with generally
accepted accounting principles, consistently applied, but not
including the adjustment prescribed by Financial Accounting
Standards Board Statement No. 115. As part of the calculation of
such stockholder's equity, Sellers shall cause the Bank to permit
Buyer to conduct a review of the Bank's loans and allowance for
loan and lease losses (the "Loss Reserve"). Sellers agree that
the calculation of the Bank's stockholders' equity shall take
into account any increase in the Loss Reserve determined by Buyer
to be reasonably necessary as a result of such review, subject,
however, to Sellers' right to challenge loan characterization of
Buyer.
Section 2.6 Buyer's Deliveries at Closing. At the
Closing, Buyer shall deliver, or cause to be delivered, to the
Sellers' Representative the following items:
(a) a certified or cashier's check in, or evidence of the
credit to any bank account of Seller at the Bank of, an amount
equal to the applicable Seller Pro Rata Portion receivable by
each Seller, or the first installment of such Seller Pro Rata
Portion, with respect to any Seller who has made an effective
Installment Election;
(b) a good standing certificate for Buyer issued by the
Secretary of State of the State of Delaware, and dated not more
than 15 Business Days prior to the Closing Date;
(c) a copy of the certificate of incorporation of Buyer
certified as of the Closing Date by the Secretary or any
Assistant Secretary of Buyer;
(d) a copy of the bylaws of Buyer certified as of the
Closing Date by the Secretary or any Assistant Secretary of
Buyer;
(e) copies of resolutions of the board of directors of
Buyer authorizing and approving this Agreement and the
consummation of the transactions contemplated hereby, certified
as of the Closing Date by the Secretary or any Assistant
Secretary of Buyer;
(f) a certificate of the President or any Vice President
and the Secretary or any Assistant Secretary of Buyer dated the
Closing Date certifying that: (i) all of the representations and
warranties of Buyer set forth in this Agreement are true and
correct with the same force and effect as if all of such
representations and warranties were made at the Closing Date; and
(ii) Buyer has performed or complied with all of the covenants
and obligations to be performed or complied with by Buyer under
the terms of this Agreement on or prior to the Closing Date;
(g) copies of each of the regulatory approvals necessary to
consummate the transactions contemplated herein; and
(h) such other documents as the Sellers' Representative
shall reasonably request.
Section 2.7 Sellers' Deliveries at Closing. At the
Closing, the Sellers' Representative shall deliver, or cause to
be delivered to Buyer the following items:
(a) a good standing certificate for the Bank issued by the
Division of Banking of the Department of Financial Institutions
of the State of Wisconsin (the "Banking Division") dated not more
than 15 Business Days prior to the Closing Date;
(b) a copy of the articles of incorporation of the Bank
certified by the Banking Division and dated not more than 15
Business Days prior to the Closing Date;
(c) a certificate of the Cashier or any Assistant Cashier
of the Bank dated the Closing Date certifying a copy of the
bylaws of the Bank;
(d) a certificate executed by the Sellers' Representative
dated the Closing Date certifying that: (i) there have been no
further amendments to the articles of incorporation delivered
pursuant to subsection (b) of this Section; (ii) all of the
representations and warranties of Sellers set forth in this
Agreement are true and correct with the same force and effect as
if all of such representations and warranties were made at the
Closing Date; and (iii) Sellers have performed or complied with
all of the covenants and obligations to be performed or complied
with by Sellers under the terms of this Agreement on or prior to
the Closing Date;
(e) a list of the Bank's stockholders as of the Closing
Date certified by the Cashier or any Assistant Cashier of the
Bank;
(f) a legal opinion of Sellers' counsel dated the Closing
Date to the effect set forth in Exhibit B attached hereto; and
(g) such other documents as Buyer or its counsel shall
reasonably request.
Section 2.8 Default by Seller. If any of Sellers shall
fail or refuse on the Closing Date to sell and deliver to Buyer
all of the shares of Stock of the Bank to be sold and delivered
by such Seller pursuant to this Agreement, Buyer shall have the
right on the Closing Date exercisable in its sole discretion to:
(a) terminate this Agreement without liability on the part of
Buyer to any Seller and without liability on the part of any
non-defaulting Seller to Buyer; or (b) purchase all the shares of
such Bank Stock owned by the non-defaulting Sellers. Any action
taken by Buyer pursuant to this Section shall not relieve any
defaulting Seller from liability to Buyer in respect to any
default of such Seller under this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Each of Sellers hereby represents and warrants to Buyer as
follows:
Section 3.1 Ownership of Stock. Seller owns the number
of shares of Stock set forth opposite his or her name on the
signature page of this Agreement. Such shares of Stock are free
of any lien or encumbrance, are freely transferable and are
subject to no claim of right except pursuant to this Agreement.
Section 3.2 Authorization; Enforceability. Seller has
full power and authority to enter into, execute, deliver and
perform this Agreement and all other agreements and instruments
to be executed by Seller in connection herewith. All of such
actions and consummation by Seller of the transactions
contemplated hereby have been duly authorized and approved by all
required action. This Agreement constitutes a legal, valid and
binding obligation of Seller enforceable in accordance with its
terms.
Section 3.3 Bank Organization. The Bank is a Wisconsin
state bank with its main office located in Cottage Grove,
Wisconsin, and is duly organized, validly existing and in good
standing under the laws of the State of Wisconsin. The Bank has
full power and authority, corporate or otherwise, to carry on its
business as it is now being conducted and to own or hold under
lease the properties and assets it owns or holds under lease.
Except as set forth on Schedule 3.3 of the Cottage Grove Book of
Schedules, the Bank owns no voting stock or equity securities of
any corporation, association, partnership or other entity. All
of the deposit liabilities of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund to the fullest extent permitted by applicable law
and the Bank pays the premium assessed by the FDIC for such
deposit insurance.
Section 3.4 Bank Capitalization. The authorized capital
stock of the Bank consists, and immediately prior to the Closing
will consist, of 40,000 shares of common stock, $2.50 par value
per share, all of which shares are issued and outstanding. All
of the outstanding shares of capital stock of the Bank have been
duly and validly authorized and issued and are fully paid and
nonassessable. There are no options, warrants, rights, calls or
commitments of any character relating to any additional shares of
the capital stock of the Bank. No capital stock or other
security issued by the Bank has been issued in violation of, or
without compliance with, the rights of stockholders.
Section 3.5 Litigation and Regulatory Matters. Schedule
3.5 of the Cottage Grove Book of Schedules sets forth a list of
all actions, suits, agreements with Regulatory Authorities or
legal or administrative proceedings pending or existing as of the
date hereof in or to which the Bank is a named party or is
subject. Except as set forth on Schedule 3.5 of the Cottage
Grove Book of Schedules, there is no action, suit, proceeding,
claim or formal written protest by any Person or agency, or any
investigation, report or agreement by or with any regulatory
authority having jurisdiction over Seller or the Bank or any of
their respective assets or businesses which exists or is pending
or, to Seller's knowledge, threatened against Seller or the Bank,
or any of the Bank's officers or directors in their capacities as
such, or its assets, business or goodwill which would reasonably
be expected to have a material adverse effect on the financial
condition, assets or business of the Bank or which would impair
Seller's ability to consummate the Acquisition. Seller further
represents and warrants that except as set forth on Schedule 3.5
of the Cottage Grove Book of Schedules, Seller does not know or
have any reason to believe that there is any basis for assertion
against the Bank of any material claims based upon the wrongful
action or inaction of any of its officers, directors or employees
which would reasonably be expected to have a material adverse
effect on the financial condition, assets or business of the Bank
or which would impair Seller's ability to consummate the
Acquisition. The Bank is not subject to, or in default with
respect to, nor are any of its assets subject to, any outstanding
judgment, regulatory agreement, injunction, writ, order or decree
or any other requirement of any governmental body or court or of
any governmental agency or instrumentality which would reasonably
be expected to have a material adverse effect on the financial
condition, assets or business of the Bank.
Section 3.6 Insurance. Schedule 3.6 of the Cottage Grove
Book of Schedules lists and briefly describes the policies of
insurance (including fidelity bonds and all policies of, and
binders evidencing, life, fire, workers' compensation, banker's
blanket bond, directors and officers, title, general liability
and insurance providing benefits for employees) owned or held by
the Bank on the date hereof. Such policies cover risks and are
in such amounts as are customary for banks similarly situated to
the Bank. Each such policy is now, and at the Closing will be in
full force and effect (except for any expiring policy which is
replaced by coverage at least as extensive). All premiums due on
such policies have been paid.
Section 3.7 Defaults Under Agreements. The Bank is not
in default or, to the best of Seller's knowledge, alleged to be
in default, under any loan or credit agreement, conditional sales
contract or other title retention agreement or security agreement
relating to money borrowed by the Bank, agreements pursuant to
which it leases real or personal property or any other instrument
or obligation, which would reasonably be expected to have a
material adverse effect on the financial condition, assets or
business of the Bank. The Bank is not in default in any material
respect and Seller has no knowledge of any material default under
such instruments by any other party thereto and has no knowledge
of any event which with notice or lapse of time or both would
constitute a material default.
Section 3.8 Bank Financial Statements. Copies of the
Bank Call Reports for the Bank at the close of business on March
31 and June 30, 1996, and December 31, 1991, 1992, 1993, 1994 and
1995 (collectively, the "Bank Financial Statements") are set
forth on Schedule 3.8 of the Cottage Grove Book of Schedules.
The Bank Financial Statements are complete and correct in all
material respects and fairly present the financial position of
the Bank at the dates shown and the results of operations for the
periods covered. The Bank Financial Statements are unaudited
statements and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis and
as required by applicable rules or regulations. The Bank
Financial Statements do not include any material assets or omit
to state any material liabilities, absolute or contingent, or
other facts, which inclusion or omission would render the Bank
Financial Statements misleading in any material respect.
Section 3.9 Loans; Loan Loss Reserve. (a) All loans and
loan commitments extended by the Bank and any extensions,
renewals or continuations of such loans and loan commitments (the
"Loans") were made in accordance with customary lending standards
of the Bank in the ordinary course of business. The Loans are
evidenced by appropriate and sufficient documentation and
constitute valid and binding obligations to the Bank enforceable
in accordance with their terms. All such Loans are, and at the
Closing will be, free and clear of any security interest, lien,
encumbrance or other charge and the Bank has complied, and at the
Closing will have complied, in all respects with all laws and
regulations relating to such Loans. To the best knowledge of
Sellers after due inquiry, none of such Loans is subject to any
material offset or claim of offset.
(b) The reserve for possible loan and lease losses shown on
the June 30, 1996 Call Report for the Bank is adequate in all
material respects under the requirements of generally accepted
accounting principles to provide for possible losses, net of
recoveries relating to loans previously charged off, on loans
outstanding (including accrued interest receivable) as of June
30, 1996, and contains and will contain an additional amount of
unallocated reserves for unanticipated future losses at an
adequate level. The aggregate loan balances at such date in
excess of such reserves are, based on past loan loss experience,
collectible in accordance with their terms, and all uncollectible
loans have been charged off.
Section 3.10 Investments. None of the investments
reflected under the heading "Securities" in the most recent Bank
Call Report which are owned by the Bank or any investment
securities owned by the Bank and none of the investments made by
the Bank or the Bank since the date of such report is subject to
any investment or other restriction, whether contractual or
statutory, which materially impairs the ability of the Bank or
the Bank freely to dispose of such investment at any time.
Section 3.11 Regulatory Filings. The Bank has filed in a
timely manner all required filings with all proper regulatory
authorities, including the FDIC and the Banking Division. All
such filings were accurate and complete in all material respects
as of the dates of the filings, and no such filing has made any
untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading.
Section 3.12 Properties, Contracts, Employee Benefit Plans
and Other Agreements. Schedule 3.12 of the Cottage Grove Book of
Schedules lists or describes the following:
(a) Each parcel of real property owned by the Bank and the
principal buildings and structures located thereon, together with
a legal description of such real estate, and each lease of real
property to which the Bank is a party, identifying the parties
thereto, the annual rental payable, the expiration date thereof
and a brief description of the property covered, and in each case
of either owned or leased real property, a description of the
property's current use, including, if applicable, identification
of each such property as a branch or main office of the Bank;
(b) Each loan and credit agreement, conditional sales
contract or other title retention agreement or security agreement
relating to money borrowed by the Bank, exclusive of any deposit
agreement with customers of the Bank entered into in the ordinary
course of business, agreement for the purchase of federal funds
and repurchase agreement;
(c) Each agreement, loan, contract, lease, guarantee,
letter of credit, line of credit or commitment of the Bank not
referred to elsewhere in this Section which:
(i) involves payment by the Bank (other than as
disbursement of loan proceeds to customers) of more than
$10,000 in any calendar year, or of more than $20,000 when
aggregated with any of the foregoing that involved payments
of less than $10,000 in any calendar year;
(ii) involves payments based on profits of the Bank;
(iii) relates to the future purchase of goods or
services in excess of the requirements of its business at
current levels or for normal operating purposes;
(iv) was not made in the ordinary course of business; or
(v) materially affects the business or financial condition
of the Bank;
(d) Each profit sharing, group insurance, hospitalization,
stock option, pension, retirement, bonus, deferred compensation,
stock bonus, stock purchase or other employee welfare or benefit
agreement, plan, contract or arrangement under which pensions,
deferred compensation and any other retirement or employee
benefits are being paid, may become payable, provided or made
available by the Bank, which was established, maintained,
sponsored or undertaken by the Bank for the benefit of its
officers, directors or employees, including each trust or other
agreement with any custodian or any trustee for funds held under
any such agreement, plan or arrangement, and all other
agreements, contracts or arrangements under which pensions,
deferred compensation or other retirement benefits are being paid
or may become payable by the Bank (collectively, the "Employee
Benefit Plans"), and, in respect to any of them, the latest
reports or forms, if any, filed with the Department of Labor and
Pension Benefit Guaranty Corporation under ERISA, any current
financial or actuarial reports and any currently effective United
States Internal Revenue Service ("IRS") private rulings or
determination letters obtained by or for the benefit of the Bank;
(e) Each lease or license to which the Bank is a party with
respect to personal property, whether as lessee or licensee, with
rental or other payments due thereunder in excess of $12,000 in
any calendar year, or of more than $20,000 in any calendar year
when aggregated with any of the foregoing that involved payments
of less than $10,000 in any calendar year;
(f) Any collective bargaining agreement and each employment
and consulting contract or similar arrangement between any Person
and the Bank (except for any ordinary oral employment contract
with an employee of the Bank creating an at will employment
relationship); and
(g) The name and annual salary of each director, officer or
employee of the Bank, and the profit sharing, bonus or other form
of compensation (other than salary) paid or payable by the Bank
to or for the benefit of each such person in question for the
current year and for the year ended December 31, 1995.
Copies of each document, plan or contract listed and
described on Schedule 3.12 of the Cottage Grove Book of Schedules
are appended to such Schedule and included in the Cottage Grove
Book of Schedules.
Section 3.13 Disclosures. No representation or warranty
made herein by Seller contains any untrue statement of a material
fact, or omits to state a material fact necessary to make the
statements contained herein under the circumstances under which
they were made not misleading, and Seller has made full
disclosure of all material facts with respect to the Bank.
Except as and to the extent reflected or reserved against in the
Bank Financial Statements or the Subsequent Bank Financial
Statements (as defined below), the Bank does not have, and with
respect to the Subsequent Bank Financial Statements will not
have, any liabilities or obligations, of any nature, secured or
unsecured, (whether accrued, absolute, contingent or otherwise)
including any tax liabilities due or to become due, which would
reasonably be expected to have a material adverse effect on the
financial condition, assets or business of the Bank.
Section 3.14 Effect of Agreement. The execution, delivery
and performance of this Agreement by Seller and the consummation
by Seller of the transactions contemplated hereby do not: (a)
require the consent, waiver, order, registration, qualification,
approval, license or authorization of any Person, court,
regulatory authority or other governmental body, other than as
may be required in connection or in compliance with the
provisions of applicable law; (b) violate, with or without the
giving of notice or the passage of time or both, in any material
respect any provision of law applicable to Seller; (c) conflict
with or result in a breach of any terms of its articles of
incorporation or bylaws, if applicable, or any material mortgage,
deed of trust, license, indenture or other agreement or
instrument, or any order, judgment, decree, statute, regulation
or other restriction of any kind or character, to which Seller or
the Bank is a party or by which Seller or the Bank or any of
their respective assets may be bound; (d) give to others any
right to accelerate or terminate, or result in acceleration or
termination of, any such agreement or instrument; (e) result in
termination of any provision of any such agreement or instrument;
or (f) result in the creation of any lien, charge or encumbrance
upon any of the property or assets of the Bank.
Section 3.15 Articles of Incorporation and Bylaws. The
copies of: (a) the articles of incorporation and all amendments
thereto of the Bank; and (b) the bylaws of the Bank, as amended
to date, are all complete and correct and set forth on Schedule
3.15 of the Cottage Grove Book of Schedules.
Section 3.16 Books and Records. The books and records of
the Bank are in all material respects complete and correct and
accurately reflect the basis for the financial condition and
results of operations of the Bank set forth in the Bank Financial
Statements.
Section 3.17 Interim Events. Except as set forth in
Schedule 3.17 of the Cottage Grove Book of Schedules, since June
30, 1996, the Bank has not:
(a) Suffered any changes having a material adverse effect
on the financial condition, assets or business of the Bank, or in
the operation or conduct of its business;
(b) Suffered any material damage, destruction or loss to
any of its properties whether covered by insurance or not;
(c) Declared any dividend or other distribution with
respect to its stock, repurchased or redeemed shares of its
stock, issued any shares of its stock or sold or agreed to issue
or sell any of its stock or any right to purchase or acquire any
such stock or any security convertible into such stock or taken
any action to reclassify, recapitalize or split up its stock or
issued any stock appreciation rights;
(d) Granted or agreed to grant any increase in benefits
payable or to become payable under any Employee Benefit Plan;
(e) Cancelled or compromised any debt or claim other than
in the ordinary course of business;
(f) Entered into any transaction, contract or commitment
other than in the ordinary course of business;
(g) Incurred any obligation or liability (fixed or
contingent) other than obligations and liabilities incurred in
the ordinary course of its business;
(h) Mortgaged, pledged or subjected to a lien, security
interest or other encumbrance any of its assets except to tax and
other liens which arise by operation of law and with respect to
which payment is not past due and except for pledges or liens:
(i) required to be granted in connection with the acceptance by
the Bank of government deposits; (ii) granted in connection with
repurchase or reverse repurchase agreements; or (iii) otherwise
incurred in the ordinary course of the conduct of its business;
(i) Conducted its business in any manner other than
substantially as it was being conducted prior to such time;
(j) Leased, sold or otherwise disposed of any of its assets
except in the ordinary course of business or leased, purchased or
otherwise acquired from third parties any assets except in the
ordinary course of business;
(k) Except for the transactions contemplated by this
Agreement, merged, consolidated or agreed to merge or consolidate
with or into any other Person, or acquired or agreed to acquire
any stock, equity interest or business of any other Person;
(l) Agreed to enter into any transaction for the borrowing
or loaning of monies, other than in the ordinary course of
business;
(m) Made any principal or interest payment on any
outstanding indebtedness of the Bank; or
(n) Increased the salary of any officer or the compensation
or fees payable to any director, or entered into any employment
contract with any officer or salaried employee or implemented or
made any material amendment to any employee welfare, stock
option, profit sharing or other similar plan or arrangement.
Section 3.18 Taxes. The Bank has filed with the
appropriate governmental agencies all federal, state and local
income, franchise, excise, sales, use, real and personal property
and other tax returns and reports required to be filed by it.
Except as set forth on Schedule 3.18 of the Cottage Grove Book of
Schedules, the Bank is not: (a) delinquent in the payment of any
taxes shown on such returns or reports or on any assessments
received by it for such taxes; (b) aware of any pending or
threatened examination for income taxes for any year by the IRS
or any state tax agency; (c) subject to any agreement extending
the period for assessment or collection of any federal or state
tax; or (d) a party to any action or proceeding nor has any claim
been asserted against it by any governmental authority for
assessment or collection of taxes. None of the tax liabilities
of the Bank has ever been audited by the IRS or any state tax
agency for any period since January 1, 1993. The Bank is not a
party to any threatened action or proceeding by any governmental
authority for assessment or collection of taxes. The reserve for
taxes in the financial statements of the Bank for the year ended
December 31, 1995, is adequate to cover all of the tax
liabilities of the Bank (including income taxes and franchise
fees) that may become payable in future years in respect to any
transactions consummated prior to December 31, 1995. The Bank
does not nor will it have any liability for taxes of any nature
for or in respect of the operation of its business or ownership
of its assets from December 31, 1995, up to and including the
Closing, except to the extent reflected on the Subsequent Bank
Financial Statements or otherwise reflected in the books and
records of the Bank for the period following its then most recent
of the Subsequent Bank Financial Statements.
Section 3.19 Title to Properties. The Bank has good and
marketable title to all assets and properties shown in the most
recent Bank Financial Statements, whether real or personal,
tangible or intangible, which it purports to own subject to no
liens, mortgages, security interests, encumbrances or charges of
any kind except: (a) as noted in the Bank Financial Statements or
on Schedule 3.19 of the Cottage Grove Book of Schedules; (b)
statutory liens for taxes not yet delinquent or being contested
in good faith by appropriate proceedings and for which
appropriate reserves have been established and reflected on the
Bank Financial Statements or will be reflected on the Subsequent
Bank Financial Statements; (c) pledges or liens required to be
granted in connection with the acceptance of government deposits,
granted in connection with repurchase or reverse repurchase
agreements or otherwise incurred in the ordinary course of
business; and (d) minor defects and irregularities in title and
encumbrances which do not materially impair the use thereof for
the purposes for which they are held and which would not
reasonably be expected to have a material adverse effect on the
financial condition, assets or business of the Bank. The Bank as
lessee has the right under valid and existing leases to occupy,
use, possess and control any and all of the real property leased
by it.
Section 3.20 Compliance with Applicable Law. The Bank
holds all licenses, certificates, permits, franchises and rights
from all appropriate federal, state or other public authorities
necessary for the conduct of its business and where failure to do
so would reasonably be expected to have a material adverse effect
on the financial condition, assets or business of the Bank. The
Bank has complied in all material respects with all applicable
federal, state and local statutes, ordinances, regulations, rules
or requirements, and the Bank is not presently charged with, or
to its knowledge, under governmental investigation with respect
to, any actual or alleged material violations of any statute,
ordinance, regulation or rule.
Section 3.21 Compliance With ERISA. Except as set forth
on Schedule 3.21 of the Cottage Grove Book of Schedules, all
employee benefit plans (as defined in Section 3(3) of ERISA)
established or maintained by the Bank, or to which the Bank
contributes, are in compliance in all material respects with all
applicable requirements of ERISA, and are in compliance in all
material respects with all applicable requirements (including
qualification and non-discrimination requirements in effect as of
the Closing) of the Code for obtaining the tax benefits the Code
thereupon permits with respect to such employee benefit plans.
For purposes of this Section, non-compliance with the Code and
ERISA is material if such non-compliance would reasonably be
expected to have a material adverse effect on the financial
condition, assets or business of the Bank. No such employee
benefit plan has, or as of the Closing will have, any amount of
unfunded benefit liabilities (as defined in Section 4001(a)(18)
of ERISA) for which the Bank would be liable to any Person under
Title IV of ERISA if any such employee benefit plan were
terminated as of the Closing, which amounts would be material to
the Bank. Such employee benefit plans are funded in accordance
with Section 412 of the Code (if applicable). There would be no
obligations which would be material to the Bank under Title IV of
ERISA relating to any such employee benefit plan that is a
multi-employer plan if any such plan were terminated or if the
Bank withdrew from any such plan as of the Closing.
Section 3.22 Compliance With Environmental Laws. To the
best of the Bank's knowledge, the Bank has conducted its business
in material compliance with all federal, state, county and
municipal environmental laws, including statutes, regulations,
rules, ordinances, orders, restrictions and requirements relating
to underground storage tanks, petroleum products, air pollutants,
water pollutants or process waste water or otherwise relating to
the environment or toxic or hazardous substances or to the
manufacture, processing, distribution, use, recycling,
generation, treatment, handling, storage, disposal or transport
of any hazardous or toxic substances or petroleum products
(including polychlorinated biphenyls, whether contained or
uncontained, and asbestos-containing materials, whether friable
or not), including the Federal Solid Waste Disposal Act, the
Hazardous and Solid Waste Amendments, the Federal Clean Air Act,
the Federal Clean Water Act, the Occupational Health and Safety
Act, the Federal Resource Conservation and Recovery Act, the
Toxic Substances Control Act, the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980
and the Superfund Amendments and Reauthorization Act of 1986, all
as amended, and regulations of the Environmental Protection
Agency, the Nuclear Regulatory Agency and any state department of
natural resources or state environmental protection agency now or
at any time hereafter in effect (collectively, the "Environmental
Laws"). There are no pending or, to Seller's knowledge,
threatened actions or proceedings by any local municipality,
sewerage district or other governmental entity against the Bank
with respect to the Environmental Laws and, to Seller's
knowledge, there is no basis or grounds for any such action or
proceeding. Except as set forth on Schedule 3.22 of the Cottage
Grove Book of Schedules, no environmental clearances or other
governmental approvals are required for the conduct of the
business of the Bank or the consummation of the transactions
contemplated hereby. Except as set forth on Schedule 3.22 of the
Cottage Grove Book of Schedules, the Bank is not the owner of any
interest in real estate on which any substances have been used,
stored, deposited, treated, recycled or disposed of, which
substances if known to be present on, at or under such property,
would require clean-up, removal or some other remedial action
under any Environmental Laws.
Section 3.23 Trust Administration. The Bank has properly
administered, in all material respects, all accounts for which it
acts as fiduciary, including but not limited to accounts for
which it serves as a trustee, agent, custodian, personal
representative, guardian or investment advisor, in accordance
with the terms of the governing documents and applicable state
and federal law and regulations and common law. No director,
officer or employee of the Bank has committed any material breach
of trust with respect to any such fiduciary account, and the
accounting for each such fiduciary account is true and correct in
all material respects and accurately reflects the assets of such
fiduciary account.
Section 3.24 Brokerage Commissions. All negotiations
relating to this Agreement and the transactions contemplated
herein have been and will be carried on by Sellers directly with
Buyer, its counsel, accountants and other representatives in such
a manner that no actions taken by Seller, the Bank or the Bank's
officers, agents or representatives shall give rise to any claim
against Buyer for any brokerage commission, finder's fee,
investment advisor's fee or other like payment in connection with
the transactions contemplated hereby.
Section 3.25 Approval Delays. To the best of Seller's
knowledge after due inquiry, Seller knows of no reason why the
granting of any of the regulatory approvals referred to in
Section 11.2 would be denied or unduly delayed.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Sellers as follows:
Section 4.1 Organization. Buyer: (a) is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Delaware and is a registered bank holding
company under the Bank Holding Bank Act of 1956, as amended (the
"BHCA"); (b) is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the business
conducted or the properties or assets owned or leased by it makes
such qualification necessary and where failure to be so qualified
would reasonably be expected to have a material adverse effect on
the consolidated financial condition, assets or business of Buyer
and its Subsidiaries; and (c) has full power and authority,
corporate and otherwise, to own, operate and lease its properties
as presently owned, operated and leased, and to carry on its
business as it is now being conducted.
Section 4.2 Authorization. Buyer has the requisite
corporate power and authority to enter into and perform its
obligations under this Agreement and the execution, delivery and
performance of this Agreement by Buyer and the consummation of
the transactions contemplated hereby have been duly authorized by
all necessary corporate action. This Agreement constitutes a
legal, valid and binding obligation of Buyer enforceable in
accordance with its terms.
Section 4.3 Litigation and Regulatory Matters. As of the
date of this Agreement, there is no action, suit, proceeding,
claim or formal written protest by any Person or agency, or any
investigation or report by a governmental agency or authority
pending, or to Buyer's knowledge, threatened against Buyer or any
of its Subsidiaries that challenges the validity or propriety of
the transactions contemplated by this Agreement, or with respect
to any actual or alleged violations of any statute, ordinance,
regulation, rule or the rights of any Person, entity or
organization that would reasonably be expected to have a material
adverse effect on the consolidated financial condition, assets or
business of Buyer and its Subsidiaries. Neither Buyer nor any of
its Subsidiaries is subject to, or in default with respect to,
nor are any of its or their assets subject to, any outstanding
judgment, injunction, order or decree or any other requirement of
any governmental body or court or of any governmental agency or
instrumentality which would reasonably be expected to have a
material adverse effect on the consolidated financial condition,
assets or business of Buyer and its Subsidiaries.
Section 4.4 Effect of Agreement. The execution, delivery
and performance of this Agreement by Buyer and the consummation
by it of the transactions contemplated hereby do not: (a) require
the consent, waiver, order, registration, qualification,
approval, license or authorization of any Person, court,
regulatory authority or other governmental body, other than as
specifically contemplated by this Agreement and as may be
required in connection or in compliance with the provisions of
applicable law, including consents, authorizations, approvals or
exemptions required under the BHCA, the Wisconsin Banking Act or
the Federal Deposit Insurance Act; (b) violate, with or without
the giving of notice or the passage of time or both, in any
material respect any provision of law applicable to Buyer; (c)
conflict with or result in a breach of any terms of Buyer's
certificate of incorporation or bylaws, or any material mortgage,
deed of trust, license, indenture or other agreement or
instrument, or any order, judgment, decree, statute, regulation
or other restriction of any kind or character, to which Buyer or
any of its Subsidiaries is a party or by which its or any of
their assets may be bound; (d) give to others any right to
accelerate or terminate, or result in acceleration or termination
of, any such agreement or instrument; (e) result in termination
of any provision of any such agreement or instrument; or (f)
result in the creation of any lien, charge or encumbrance upon
any of the property or assets of Buyer or its Subsidiaries.
Section 4.5 Brokerage Commissions. All negotiations
relating to this Agreement and the transactions contemplated
herein have been and will be carried on by Buyer directly with
Sellers or the Sellers' Representative, their respective counsel,
accountants and other representatives in such a manner that no
actions taken by Buyer or its officers, agents or representatives
shall give rise to any claim against Sellers or the Sellers'
Representative for any brokerage commission, finder's fee,
investment advisor's fee or other like payment in connection with
the transactions contemplated hereby.
Section 4.6 Financial Capability; Approval Delays. Buyer
has or has available to it the requisite funds necessary to
perform its obligations under this Agreement and to satisfy any
financial requirements necessary to obtain all necessary
regulatory approvals of the transactions contemplated by this
Agreement. To the best of its knowledge, Buyer knows of no
reason why the granting of any of the regulatory approvals
referred to in Section 11.2 would be denied or unduly delayed.
ARTICLE 5
COVENANTS OF SELLERS
From and after the date hereof and through the Closing, each
Seller covenants and agrees with Buyer as follows, and where
applicable as set forth below, that he or she will cause the Bank
to comply with the following covenants:
Section 5.1 Information, Access Thereto, Confidentiality.
(a) Buyer, its representatives and agents shall, at all times
during normal business hours prior to the Closing Date, have full
and continuing access to the facilities, operations, records and
properties of the Bank. Buyer, its representatives and agents
may, prior to the Closing Date, make or cause to be made such
reasonable investigation of the operations, records and
properties of the Bank and of its financial and legal condition
as Buyer shall deem necessary or advisable to familiarize itself
with such records, properties and other matters; provided, that
such access or investigation shall not interfere unnecessarily
with the normal operations of the Bank. Upon request, the Bank
will furnish Buyer or its representatives or agents, its
attorneys' responses to auditors' reasonable requests for
information, and such financial and operating data and other
information reasonably requested by Buyer developed by the Bank,
its auditors, accountants or attorneys (provided with respect to
attorneys, such disclosure would not result in the waiver by the
Bank of any claim of attorney-client privilege), and will permit
Buyer, its representatives or agents to discuss such information
directly with any individual or firm performing auditing or
accounting functions for the Bank, and such auditors and
accountants shall be directed to furnish copies of any reports or
financial information as developed to Buyer or its
representatives or agents. This Section shall not require the
disclosure of any information the disclosure of which to Buyer
would be prohibited by law.
(b) Any confidential information or trade secrets
concerning Buyer or any of its Subsidiaries received by Sellers,
the Bank, or any of their respective employees, representatives
or agents in connection with this Agreement and the transactions
contemplated hereunder shall be treated confidentially, and any
correspondence, memoranda, records, copies, documents and
electronic or other media of any kind containing either such
confidential information, or trade secrets or both shall be
destroyed by Sellers or the Bank, as applicable or, at Buyer's
request, returned to Buyer in the event this Agreement is
terminated as provided in Section 12.1. Such information shall
not be used by Sellers, the Bank or any of their respective
employees, representatives or agents to the detriment of Buyer or
its Subsidiaries.
Section 5.2 Carry on in Regular Course. The Bank shall
carry on its business diligently and substantially in the same
manner as is presently being conducted and shall not make or
institute any unusual or material change in its methods of doing
business without the prior written consent of Buyer. The Bank
shall, unless otherwise consented to in writing in advance by
Buyer:
(a) Provide Buyer with prior notice of any loan, extension
of credit or loan renewal in a principal amount greater than
$200,000;
(b) Take no deliberate action or deliberately omit to take
any action with the effect of reducing the Bank's stockholders'
equity below $4,875,000;
(c) Maintain all of its assets necessary for the conduct of
its business in good operating condition and repair, reasonable
wear and tear and damage by fire or unavoidable casualty
excepted, and maintain policies of insurance upon its assets and
with respect to the conduct of its business in amounts and kinds
comparable to that in effect on the date hereof and pay all
premiums on such policies when due;
(d) Use its reasonable best efforts to preserve its present
business organization intact, keep available the services of its
present officers and employees and preserve its present
relationships with Persons having business dealings with it, and
in connection therewith, permit representatives of Buyer:
(i) to participate in meetings or discussions
with such officers and employees of the Bank in
connection with employment opportunities with
Buyer and the Bank after the Closing; and
(ii) to contact Persons having dealings with the
Bank for the purpose of informing such Persons of
the progress of the Acquisition and the services
to be offered by Buyer and the Bank after the
Closing;
(e) Maintain its books, accounts and records in the usual,
regular and ordinary manner, on a basis consistent with prior
years and comply in all material respects with all laws and
regulations applicable to it and to the conduct of its business;
(f) Make no amendment to its articles of incorporation or
bylaws and enter into no merger or consolidation with, or sale of
a significant portion of its assets to, any other Person;
(g) Make no change in the number of shares of its capital
stock issued and outstanding, grant or make no option, warrant,
call, right, commitment or any other security or agreement of any
character obligating it to issue any shares of its capital stock
and issue no other securities or evidences of indebtedness;
(h) Make no increase in the compensation payable or to
become payable by it to any employee except as may be required
under the terms of any existing Employee Benefit Plan;
(i) Make no increase in the compensation in excess of 3% to
any employee;
(j) Except for modifications necessary to comply with any
applicable law, rule or regulation, make no change in any
Employee Benefit Plan;
(k) Hire no additional employees or appoint any additional
directors;
(l) Provide prior notice to Buyer before the Bank makes any
purchase or sale of securities for the Bank's investment
portfolio which individually or in the aggregate exceeds
$250,000;
(m) Provide prior notice to Buyer before the Bank accepts
the deposit or renewal of the deposit of any public funds with a
principal amount in excess of $80,000, except temporary deposits
of the Town and Village of Cottage Grove tax deposits;
(n) Maintain a reserve for possible loan and lease losses
which is adequate in all material respects under the requirements
of generally accepted accounting principles to provide for
possible losses, net of recoveries relating to loans previously
charged off, on loans outstanding (including accrued interest
receivable);
(o) Not enter into any new material lease, contract or
agreement (including any such lease, contract or agreement
requiring annual payments in excess of $1,000 or such leases,
contracts or agreements which in the aggregate have annual rental
payments exceeding $5,000), nor make any material change in any
such existing material lease, contract or agreement, including
extending the current term of any such lease, contract or
agreement through action or inaction; and
(p) File in a timely manner all required filings with all
proper regulatory authorities and cause such filings to be true
and correct in all material respects.
Section 5.3 Subsequent Call Reports. As soon as
available after the date hereof, Sellers shall deliver to Buyer
the monthly unaudited consolidated balance sheets and profit and
loss statements of the Bank prepared for its internal use, the
Bank's Call Report for each quarterly period completed prior to
the Closing, and all other financial reports or statements
submitted to regulatory authorities after the date hereof, to the
extent permitted by law (collectively, the "Subsequent Call
Reports"). The Subsequent Call Reports shall be prepared on a
basis consistent with past accounting practices and shall fairly
present the financial condition and results of operations for the
dates and periods presented. The Subsequent Call Reports will
not include any material assets or omit to state any material
liabilities, absolute or contingent, or other facts, which
inclusion or omission would render such financial statements
misleading in any material respect.
Section 5.4 Advice of Changes. Between the date hereof
and the Closing Date, Sellers shall promptly advise Buyer in
writing of any fact which, if existing or known at the date
hereof, would have been required to be set forth or disclosed in
or pursuant to this Agreement or of any fact which, if existing
or known at the date hereof, would have made any of the
representations contained herein materially untrue.
Section 5.5 Title to Real Estate. Within 45 days of the
date of this Agreement, Sellers shall obtain and deliver to
Buyer, with respect to all real estate owned by the Bank, an
owner's preliminary report of title covering a date subsequent to
the date hereof, issued by Chicago Title Insurance Company or
such other title insurance company as is acceptable to Buyer,
which preliminary report shall contain a commitment of such title
insurance company to issue an ALTA owner's title insurance policy
insuring the fee simple title of Buyer or the Bank in such real
estate in an amount to be determined, subject only to: (a)
public utility easements; (b) private easements, covenants and
restrictions which do not,in the reasonable judgment of Buyer,
adversely impair the Bank's ability to use, or the value of, the
property; and (c) liens of current state and local property taxes
which are not delinquent or subject to penalty.
Section 5.6 Environmental Matters. Buyer may in its
discretion, prior to the Closing, retain at its own expense an
independent professional consultant to perform an environmental
site assessment and render to Buyer a report (an "Environmental
Report") to determine if any real property in which the Bank
holds any interest contains or gives evidence that any violations
of Environmental Laws have occurred on any such property.
Neither Buyer nor its independent professional consultant shall
enter upon any such real property in which the Bank holds only a
mortgagee's interest without the prior permission of the Bank and
the Person in possession thereof. Sellers shall cause the Bank
not to withhold such permission unreasonably, and shall cause the
Bank to use all reasonable efforts to obtain such permission for
Buyer from the Person in possession of any such mortgaged real
property for which Buyer desires its independent professional
consultant to conduct a site assessment. Buyer shall not act
upon any information produced by such reviews or investigations
with or for the Bank or any other Persons or Agency without prior
consent of the Seller. Buyer shall be responsible for and cause
the repair of any property that is damaged by the environmental
testing described in this Section.
Section 5.7 Materials Provided to Buyer. Any materials
or information provided by Sellers or the Bank to Buyer for use
in any filing made by Buyer with any of the Regulatory
Authorities or with any other regulatory agency will not contain
any statement that, at the time and in light of the circumstances
under which it is made, will be false or misleading with respect
to any material fact or will omit to state any material fact
necessary in order to make the statements therein not false or
misleading.
Section 5.8 Accounting and Other Adjustments. Sellers
agree that they will cause the Bank to: (a) make any accounting
adjustments or entries to its books of account and other
financial records; (b) make additional contributions to any
allowance for loan and lease losses; (c) sell or transfer any
investment securities held by it; (d) charge-off any loan or
lease; (e) create any new reserve account or make additional
contributions to any other existing reserve account; (f) make
changes in any accounting method; (g) accelerate, defer or accrue
any anticipated obligation, expense or income item; and (h) make
any other adjustments which would affect the financial reporting
of Buyer, on a consolidated basis after the Closing, in any case
as Buyer shall request, provided, however, that Sellers shall not
be obligated to take any such requested action until immediately
prior to the Closing and at such time as Sellers shall have
received reasonable assurances that all conditions precedent to
Sellers' obligations under this Agreement (except for the
completion of actions to be taken at the Closing) have been
satisfied, and provided, further, that any of the actions taken
by the Bank solely as a result of the provisions of this Section
shall be totally disregarded for purposes of the Purchase Price.
Section 5.9 Other Offers. Sellers shall cause the Bank
and any of its officers, directors, employees, representatives or
agents not to, directly or indirectly, make, encourage,
facilitate, solicit, assist or initiate any inquiry or proposal,
or participate in any negotiations with, or provide any
information to, any corporation, partnership, agent, attorney,
financial advisor, Person or other entity or group (other
than Buyer and its Subsidiaries or an officer, employee or other
authorized representative of Buyer or its Subsidiaries) relating
to any liquidation, dissolution, recapitalization, merger or
consolidation of the Bank; sale of a significant amount of assets
of the Bank; purchase or sale of shares of capital stock of the
Bank; or any similar transactions involving Sellers or the Bank,
other than the transactions contemplated by this Agreement. Upon
execution of this Agreement, each Seller shall immediately, and
shall likewise cause the Bank to, cease and cause to be
terminated any and all such current contacts and negotiations
with respect to any such transaction.
ARTICLE 6
COVENANTS OF BUYER
Buyer hereby covenants and agrees with Sellers as follows:
Section 6.1 Confidentiality. Any confidential
information or trade secrets received by Buyer, its employees or
agents in the course of the examination described in Section 5.1
shall be treated confidentially, and any correspondence,
memoranda, records, copies, documents and electronic or other
media of any kind containing either such confidential
information, or trade secrets or both shall be destroyed by Buyer
or, at the request of the Sellers' Representative, returned to
the Bank in the event this Agreement is terminated as provided in
Section 12.1, provided, however, that the restrictions of this
sentence shall not apply: (a) as may otherwise be required by
law; (b) to the extent such information shall have otherwise
become publicly available; or (c) to disclosure by or on behalf
of Buyer to Regulatory Authorities whose consent or approval may
be required to consummate the transactions contemplated by this
Agreement and to its lenders or other investors for the purpose
of obtaining financing of such transactions. Such information
shall not be used by Buyer or its agents to the detriment of
Sellers or the Bank.
Section 6.2 Materials Provided by Buyer. No certificate
or other instrument or document to be furnished to Sellers or the
Bank by or on behalf of Buyer pursuant to this Agreement will
contain any untrue statement of material fact or will omit to
state any material fact required to be stated herein or therein
which is necessary to make the statements contained herein or
therein, in light of the circumstances in which they are or were
made, not misleading in any material respect.
ARTICLE 7
ADDITIONAL COVENANTS OF ALL PARTIES
Section 7.1 Cooperation. Each of the parties to this
Agreement will fully and promptly cooperate with each other and
their respective counsel and accountants in connection with any
steps to be taken as part of their obligations under this
Agreement.
Section 7.2 Expenses. Except as otherwise provided
herein, all costs and expenses incurred by a party hereto shall
be borne by such party, including the fees of their respective
accountants and attorneys.
Section 7.3 Publicity. Prior to the Closing, the parties
to this Agreement will consult with each other before issuing any
press releases or otherwise making any public statements with
respect to this Agreement or the transactions contemplated hereby
and shall not issue any such press release or make any such
public statement without the prior consent of the other parties,
except as may be required by law.
ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer under this Agreement are subject,
unless waived by Buyer, to the satisfaction of the following
conditions on or prior to the Closing:
Section 8.1 Representations and Warranties True at
Closing. The representations and warranties made by Sellers in
this Agreement shall be true and correct as of the Closing with
the same effect as though such representations and warranties had
been made or given as of the Closing, except for changes
contemplated by this Agreement, and except also for
representations and warranties as of a specified time other than
the Closing, which shall be true and correct in all material
respects at such specified time.
Section 8.2 Compliance With Agreement. Sellers shall have
made all the deliveries set forth in Section 2.7 and performed
and complied with all of their other obligations under this
Agreement which are to be performed or complied with prior to or
at the Closing.
Section 8.3 Proceedings and Documents Satisfactory. All
proceedings, corporate or other, to be taken by Sellers in
connection with the transactions contemplated by this Agreement,
and all documents incident thereto, shall be reasonably
satisfactory in form and substance to counsel for Buyer, and the
Bank shall have made available to Buyer for examination the
originals or true and correct copies of all records and documents
relating to the business and affairs of the Bank which Buyer may
reasonably request in connection with said transactions.
Section 8.4 Accuracy of Financial Statements. The Bank
Financial Statements and the Subsequent Bank Financial
Statements, previously or subsequently furnished to Buyer by
Sellers or the Bank shall not be inaccurate in any material
respect, and the stockholders' equity of the Bank on the Closing
Date shall be greater than or equal to $4,875,000.
Section 8.5 Absence of Certain Changes or Events. From
the date hereof to the Closing, there shall be and have been no
material adverse change in the financial condition, assets or
business of the Bank.
Section 8.6 Selling Stockholders. Within 30 days of the
date of this Agreement, stockholders of the Bank holding not less
than 66 2/3% of the Bank's issued and outstanding voting stock
shall have executed this Agreement or the Additional Stock
Purchase Agreement attached as Exhibit A.
ARTICLE 9
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
The obligations of each Seller under this Agreement are
subject, unless waived by the Sellers' Representative, to the
satisfaction on or prior to the Closing of the following
conditions:
Section 9.1 Representations and Warranties True at
Closing. The representations and warranties made by Buyer in this
Agreement shall be true and correct on and as of the Closing with
the same effect as though such representations and warranties had
been made or given on and as of the Closing, except for changes
contemplated by this Agreement, and except also for
representations and warranties as of a specified time other than
the Closing, which shall be true and correct in all material
respects at such specified time.
Section 9.2 Compliance With Agreement. Buyer shall have
made all the deliveries set forth in Section 2.6 and shall have
performed and complied with all of its other obligations under
this Agreement which are to be performed or complied with by it
prior to or at the Closing.
Section 9.3 Proceedings and Documents Satisfactory. All
proceedings, corporate or other, to be taken by Buyer in
connection with the transactions contemplated by this Agreement,
and all documents incident thereto, shall be reasonably
satisfactory in form and substance to counsel for the Sellers'
Representative, and Buyer shall have made available to the
Sellers' Representative for examination the originals or true and
correct copies of all records and documents relating to the
business and affairs of Buyer which the Sellers' Representative
or its counsel may reasonably request in connection with said
transactions.
Section 9.4 Litigation. No action, suit, proceeding or
claim shall have been instituted, made or threatened by any
Person relating to the Acquisition or the validity or propriety
of the transactions contemplated by this Agreement which in the
reasonable opinion of the Sellers' Representative would have a
material adverse affect on the ability of Buyer to consummate the
transactions contemplated hereby.
ARTICLE 10
CONDITIONS PRECEDENT TO OBLIGATIONS
OF ALL PARTIES
Section 10.1 Regulatory Approvals. Buyer shall have
received any and all required approvals from the Federal Reserve,
the FDIC and the Banking Division and any other necessary
Regulatory Authority for the consummation of the transactions
contemplated hereby.
Section 10.2 Approval Conditions In addition to the
regulatory approvals described in Section 11.2, all actions,
consents or approvals, governmental or otherwise, which are, or
in the opinion of counsel for Buyer or the Sellers'
Representative may be, necessary to permit or enable the Bank
upon and after the Acquisition, to conduct all or any part of the
business of the Bank, in the manner in which such activities and
businesses are conducted up to the Closing, shall have been
obtained without any conditions which in the reasonable opinion
of Buyer and the Sellers' Representative are materially adverse,
and shall not have been withdrawn or stayed.
Section 10.3 Orders, Decrees and Judgments. Consummation
of the transactions contemplated by this Agreement shall not
violate any order, decree or judgment of any court or
governmental body having competent jurisdiction.
ARTICLE 11
REGULATORY APPROVALS
Section 11.1 Initial Filings. Buyer shall use all
reasonable efforts to make as soon as practicable prior to the
Closing Date all appropriate initial filings necessary to obtain
the regulatory approvals referred to in Section 11.2 at such time
as it reasonably believes that such filings would be accepted and
approved by the appropriate regulatory agencies. Buyer shall in
good faith pursue the regulatory approvals necessary to
consummate the transactions contemplated in this Agreement.
Buyer shall provide the Sellers' Representative and its counsel
with copies of each application or material document to be filed
by Buyer with Regulatory Authorities to obtain such approvals.
Section 11.2 Necessary Regulatory Approvals. Buyer shall
have primary responsibility for preparation of all applications
for regulatory approval of all the transactions contemplated in
this Agreement, including, but not limited to, the preparation of
an application or any amendment thereto or any other required
statements or documents filed or to be filed by any party with:
(a) the Board of Governors of the Federal Reserve System; (b) the
FDIC; (c) the Banking Division; and (d) any other party or
Regulatory Authority pursuant to any applicable law or
regulation, for authority to consummate the transactions
contemplated by this Agreement. Each Seller and the Sellers'
Representative agree to cooperate with Buyer and use all
reasonable efforts to assist Buyer in preparing such applications
and in pursuit of such approvals.
ARTICLE 12
TERMINATION AND ABANDONMENT
Section 12.1 Reasons for Termination and Abandonment This
Agreement may be terminated and abandoned upon prompt written
notice to the other party or parties before the Closing Date:
(a) This Agreement may be terminated and the other
transactions may be abandoned at any time, for any reason, upon
prompt written notice by Buyer to Sellers' Representative before
the Closing Date, notwithstanding any requisite approval and
adoption of this Agreement, and the transactions contemplated
hereby and this Agreement shall become void and there shall be no
liability or restrictions on the future activities on the part of
any party hereto, or its directors, officers or stockholders,
except for obligations of Sellers and Buyer concerning
confidentiality referred to in Sections 5.1 and 6.1,
respectively.
(b) Except for any Sellers who default in the sale of their
shares of Stock to Buyer, in which case Buyer shall have only the
remedies of specific performance conferred to Buyer under Section
13.11, this Agreement may be terminated and the other
transactions may be abandoned at any time, for any reason, upon
prompt written notice from any Seller to Buyer before the Closing
Date, notwithstanding any requisite approval and adoption of this
Agreement, and the transactions contemplated hereby and this
Agreement shall otherwise become void and there shall be no
monetary liability or restrictions on the future activities on
the part of any party hereto, or its directors, officers or
stockholders, except for obligations of Sellers and Buyer
concerning confidentiality referred to in Sections 5.1 and 6.1,
respectively.
ARTICLE 13
MISCELLANEOUS
Section 13.1 Governing Law. All questions concerning the
construction, validity and interpretation of this Agreement, and
the performance of the obligations imposed by this Agreement
shall be governed by the internal laws of the State of Wisconsin
applicable to contracts made and wholly to be performed in such
state without regard to conflicts of laws.
Section 13.2 Assignment. Neither this Agreement nor any
of the rights or obligations hereunder may be assigned, in whole
or in part, by any of the parties to this Agreement without the
prior written consent of Buyer and the Sellers' Representative
and any purported assignment in violation hereof shall be void
and of no effect.
Section 13.3 Amendment and Modification. The parties may
by written agreement signed by Buyer and the Sellers'
Representative: (a) extend the time for the performance of any
of the obligations or other acts of the parties to this
Agreement; (b) waive any inaccuracies in the representations or
warranties contained in this Agreement or in any document
delivered pursuant to this Agreement; and (c) waive compliance
with or modify, amend or supplement any of the conditions,
covenants, agreements, representations or warranties contained in
this Agreement or waive or modify performance of any of the
obligations of any of the parties to this Agreement, which are
for the benefit of the waiving party. The failure of any party
hereto to enforce at any time any provision of this Agreement
shall not be construed to be a waiver of such provision, nor in
any way affect the validity of this Agreement or any part hereof
or the right of any party thereafter to enforce each and every
such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
Section 13.4 Notices. All notices, requests and other
communications hereunder shall be in writing (which shall include
telecopier communication) and shall be deemed to have been duly
given if delivered by hand or by overnight express delivery
service, mailed with first class postage prepaid or telecopied if
confirmed immediately thereafter by also mailing a copy of any
notice, request or other communication by mail with first class
postage prepaid:
(a) If to Sellers or the Sellers' Representative, to:
Mr. Vernon Molbreak
1215 Shorewood
Madison, Wisconsin 53705
Telephone: (608) 233-8156
Telecopier: (608) 231-3519
with copies to:
Cottage Grove State Bank
501 N. Main Street
Cottage Grove, Wisconsin 53527
Attention: Mr. Kenneth Krantz
Telephone: (608) 257-7313
Telecopier: (608) 257-2075
(b) If to Buyer, to:
Heartland Financial USA, Inc.
1398 Central Avenue
P.O. Box 778
Dubuque, Iowa 52004-0778
Attention: Mr. John K. Schmidt
Executive Vice President and Chief
Financial Officer
Telephone: (319) 589-2100
Telecopier: (319) 589-2011
with copies to:
Barack, Ferrazzano, Kirschbaum & Perlman
333 West Wacker, Suite 2800
Chicago, Illinois 60606
Attention: John E. Freechack, Esq.
Telephone: (312) 984-3223
Telecopier: (312) 984-3193
or to such other Person or place as Buyer shall furnish to the
Sellers' Representative or the Sellers' Representative shall
furnish to Buyer in writing. Except as otherwise provided
herein, all such notices, requests or other communications shall
be effective: (i) if delivered by hand, when delivered; (ii) if
mailed in the manner provided in this Section, five Business Days
after deposit with the United States Postal Service; (iii) if
delivered by overnight express delivery service, on the next
Business Day after deposit with such service; (iv) if by
telecopier, on the next Business Day if also confirmed by mail in
the manner provided in this Section.
Section 13.5 Entire Agreement. This Agreement and any
documents executed by the parties pursuant to this Agreement and
referred to herein constitute the entire understanding and
agreement of the parties to this Agreement and supersede all
other prior agreements and understandings, written or oral,
relating to such subject matter between the parties. This
Agreement and every representation, warranty, covenant, agreement
and provision hereof shall be binding upon and inure to the
benefit of the parties to this Agreement and their respective
successors and permitted assigns.
Section 13.6 Severability. Whenever possible, each
provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective
only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining
provisions of this Agreement unless the consummation of the
transactions contemplated hereby is adversely affected thereby.
Section 13.7 Counterparts. This Agreement and any
amendments thereto may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 13.8 All Reasonable Efforts. Each party
represents and warrants that it will use all reasonable efforts
to bring about the transactions contemplated by this Agreement as
soon as practicable provided that this Section shall not obligate
the Sellers' Representative or Buyer to remedy any breach of any
of its representations, warranties and covenants herein. In the
event that any party becomes aware of the occurrence or impending
occurrence of any event which would constitute or cause a breach
by it of any of the representations or warranties herein, or
would have constituted or caused a breach by it of any of the
representations or warranties herein, had such an event occurred
or been known prior to the date hereof, said party shall
immediately give detailed and written notice thereof to the other
party or parties.
Section 13.9 Survival of Representations and Warranties.
The covenants, representations and warranties contained in this
Agreement shall survive only until the Closing.
Section 13.10 No Third Party Beneficiaries. This Agreement
is not intended to and shall not create any rights in or confer
any benefits upon any Person or entity other than the parties to
this Agreement.
Section 13.11 Remedies. Each of Sellers acknowledges that
the shares of the Stock to be sold to Buyer hereunder are unique
and that monetary damages would not be an adequate remedy for
Buyer if any Seller should breach his or her agreement to sell
any of such shares to Buyer hereunder. Accordingly, it is
understood and agreed that Buyer shall, in addition to all other
available remedies, be entitled to a judgment or decree of
specific performance against any Seller who breaches his or her
agreement to sell any of such shares to Buyer hereunder subject
to the provisions of Article 12.
Section 13.12 Facsimile Signatures. This Agreement may be
executed and accepted by facsimile signature and any such
signature shall be of the same force and effect as an original
signature.
IN WITNESS WHEREOF, Buyer, Sellers and the Sellers'
Representative have executed this Agreement as of the date first
set forth above.
BUYER:
ATTEST: HEARTLAND FINANCIAL USA, INC.
By: /s/ John K. Schmidt By: /s/ Lynn B. Fuller
------------------------ ------------------------
John K. Schmidt Lynn B. Fuller
Executive Vice President President
SELLERS:
<TABLE>
<CAPTION>
Number of
Signature Printed Name Shares
<S> <C> <C>
/s/ Galen Hartung Galen Hartung 1,081
/s/ Chester G. Hoel Chester G. Hoel 1,400
/s/ Molbreak Trustee Vernon Molbreak 2,591
/s/ James Bradley James Bradley 100
/s/ Robert O. Witte Robert O. Witte 1,080
/s/ Kenneth J. Krantz Kenneth J. Krantz 60
/s/ Kenneth J. Krantz Kenneth J. Krantz IRA 325
Total 6,637
</TABLE>
SELLERS' REPRESENTATIVE:
/s/ VERNON MOLBREAK
- ------------------------
VERNON MOLBREAK
LIST OF EXHIBITS
Exhibit A Form of Additional Stock Purchase Agreement
Exhibit B Form of Opinion of Counsel to Sellers
LIST OF SCHEDULES
Schedule 3.3 Bank Organization
Schedule 3.5 Litigation and Regulatory Matters
Schedule 3.6 Insurance
Schedule 3.8 Bank Financial Statements
Schedule 3.12 Properties, Contracts,Employee
Benefit Plans and Other Agreements
Schedule 3.15 Articles of Incorporation and Bylaws
Schedule 3.17 Interim Events
Schedule 3.18 Taxes
Schedule 3.19 Title to Properties
Schedule 3.21 Compliance With ERISA
Schedule 3.22 Compliance With Environmental Laws
EXHIBIT 10.38
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of the 4th day of December, 1996, between ULTEA,
LLC, a Wisconsin limited liability company ("Seller"), and
HEARTLAND FINANCIAL USA, INC., a Delaware corporation ("Buyer").
RECITALS
A. Seller owns various assets related to the purchase and
leasing of vehicles and equipment, and Seller wishes to transfer,
convey and assign substantially all of its properties, assets,
rights and business to Buyer, upon the terms and conditions set
forth in this Agreement.
B. Buyer wishes to purchase substantially all of the
properties, assets, rights and business of Seller and assume
certain obligations with respect thereto, upon the terms and
conditions set forth in this Agreement (the "Acquisition").
In consideration of the mutual covenants, representations
and warranties contained herein, the parties agree as follows:
AGREEMENTS
ARTICLE 1
DEFINITIONS
Section 1.1 Definitions. In addition to those terms
defined throughout this Agreement, the following terms, when used
herein, shall have the following meanings.
(a) "Affiliate" shall mean and include: (i) any
corporation, partnership, trust, person or other entity directly
or indirectly controlling, controlled by, or under common control
with, an individual or entity; or (ii) any officer, director or
holder or owner of any of the outstanding voting securities, of
an entity.
(b) "Business Day" shall mean any day except Saturday,
Sunday and any day on which Dubuque Bank and Trust Company,
Dubuque, Iowa, is authorized or required by law or other
government action to close.
(c) "Person" shall mean an individual, corporation,
partnership (including a business trust), joint stock company,
trust, unincorporated association, joint venture or other entity
or a government or any political subdivision or agency thereof.
(d) "Regulatory Authorities" shall mean any state or
federal governmental body or agency which under applicable
statutes and regulations: (i) has supervisory authority over
Buyer or Seller or its respective business or businesses; (ii) is
required to approve, or give its consent to the transactions
contemplated by this Agreement; or (iii) with which a filing must
be made in connection therewith, including in any case, the Board
of Governors of the Federal Reserve System.
Section 1.2 Principles of Construction. (a) In this
Agreement, unless otherwise stated or the context otherwise
requires, the following usages apply: (i) unless otherwise
provided herein, actions permitted, but not required, under this
Agreement may be taken at any time and from time to time in the
actor's sole discretion; (ii) in computing periods from a
specified date to a later specified date, the words "from" and
"commencing on" (and the like) mean "from and including," and the
words "to," "until" and "ending on" (and the like) mean "to, but
excluding"; (iii) headings are inserted for convenience of
reference only and are not a part of, nor shall they affect any
construction or interpretation of this Agreement; (iv) unless
otherwise specified, indications of time of day mean Dubuque,
Iowa, time; (v) all references to articles, sections, schedules
and exhibits are to articles, sections, schedules and exhibits in
or to this Agreement unless otherwise specified; (vi) references
to a statute shall refer to the statute and any successor
statute, and to all regulations promulgated under or implementing
the statute or successor, as in effect at the relevant time;
(vii) references to a governmental or quasi-governmental agency,
authority or instrumentality shall also refer to a regulatory
body that succeeds to the functions of the agency, authority or
instrumentality; (viii) "including" means "including, but not
limited to"; (ix) unless the context requires otherwise, all
words used in this Agreement in the singular number shall extend
to and include the plural, all words in the plural number shall
extend to and include the singular and all words in any gender
shall extend to and include all genders; and (x) any reference to
a document or set of documents in this Agreement, and the rights
and obligations of the parties under any such documents, shall
mean such document or documents as amended from time to time, and
any and all modifications, extensions, renewals, substitutions or
replacements thereof.
(b) All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted
accounting principles followed in the preparation of Seller's
financial statements.
Section 1.3 Seller Book of Schedules. The Seller Book of
Schedules referred to in this Agreement shall consist of the
agreements and other documentation described and referred to in
this Agreement with respect to Seller. The Seller Book of
Schedules has been delivered by Seller to Buyer and its counsel
not less than five Business Days prior to the date of this
Agreement.
ARTICLE 2
SALE AND PURCHASE OF ASSETS
Section 2.1 Purchased Assets. Subject to the terms and
conditions of this Agreement, Seller shall sell, transfer, assign
and deliver to Buyer at the time of the consummation of the
transactions contemplated by this Agreement (the "Closing"), free
and clear of all liens, claims or encumbrances whatsoever (other
than those liens and encumbrances securing the repayment of
obligations under the Credit Lines, as defined below), by such
bills of sale, assignments and other documents as may reasonably
be requested by counsel for Buyer, and Buyer agrees to purchase
and accept delivery from Seller, the Purchased Assets. Subject
to and except as specifically set forth in Section 2.2, the term
"Purchased Assets" shall mean all the assets, properties and
rights, tangible and intangible, of Seller, including the
following:
(a) all cash, cash equivalents, investments and securities
of Seller;
(b) all current and charged-off accounts receivable of
Seller;
(c) all inventories of Seller, whether in the possession of
Seller or to be delivered to Seller (collectively referred to as
"Inventory"), including raw materials, work in progress and
finished goods, set forth on Schedule 2.1(c) of the Seller Book
of Schedules, as adjusted for fluctuations between the date of
such schedule and the Closing based upon the increase and
decrease of Inventory in the ordinary course of business and
consistent with past practice during such period;
(d) all furniture, machinery, vehicles, equipment, fixtures
and all items of personal property owned by Seller (collectively
referred to as "Equipment"), including those shown on Schedule
2.1(d) of the Seller Book of Schedules;
(e) all real property, interest in real property (including
Seller's rights as lessee in Seller's offices located at 2976
Triverton Pike, Madison, Wisconsin, pursuant to a lease between
Seller and Joe Tisserand (the "Office Lease")) and structures and
improvements located on such real property used in connection
with the business of Seller and all the easements and uses which
benefit such property;
(f) all contract rights of Seller, including all rights of
Seller under the Office Lease, insurance policies, contracts for
the lease of vehicles or equipment by Seller to its customers
(collectively, the "Lease Contracts"), the Credit Lines (as
defined below) and any other contracts listed on Schedule 2.1(f)
of the Seller Book of Schedules;
(g) all patents, trademarks, service marks, trade names and
copyrights, inventions, know-how, trade secrets, packaging, trade
dress, proprietary processes and formulae and other industrial
and intellectual property rights used in the operation of its
business as presently conducted, and all registrations and
applications for, and all goodwill associated with, any of the
foregoing (collectively referred to as "Intellectual Property"),
including those listed on Schedule 2.1(g) of the Seller Book of
Schedules;
(h) all books, files and records of Seller relating to its
business and operations, including property, production,
engineering, inventory, customer, vendor, purchasing and sales
records; computer programs; and such other records as Buyer may
require subsequent to the Closing in its conduct of the business
previously conducted by Seller;
(i) interest in and to each of the telephone numbers
assigned to Seller as of the Closing Date;
(j) all stationery; purchase orders; labels; shipping
material; catalogs, brochures, manuals and all other sales
materials or information; contract, proposal and other forms; art
work, photographs, graphic designs, signage and all other
advertising materials of Seller;
(k) the right, title and interest of Seller in and to the
corporate name "ULTEA" and all variants thereof, and any logos,
graphics or other associated symbols, and all goodwill associated
with any of the foregoing;
(l) all assignable licenses, permits, consents, approvals
and other governmental, quasi-governmental and private
authorizations, pertaining to the use of the Purchased Assets;
(m) all assignable manufacturer's and other guaranties,
warranties and associated rights, pertaining to the Purchased
Assets;
(n) all claims of Seller against others, whether or not
asserted and whether or not now existing or hereafter arising
(other than claims by Seller against Buyer under this Agreement
or arising out of either rights not assigned hereunder or
liabilities of Seller other than Assumed Liabilities); and
(o) all goodwill and going-concern value incident or
related to or connected with the business of Seller.
Section 2.2 Excluded Assets. The following (the
"Excluded Assets") shall be excluded from the Purchased Assets
being sold, transferred, assigned and delivered to Buyer pursuant
to the terms of this Agreement:
(a) all assets held by any employee benefit plan maintained
by Seller for the benefit of its employees;
(b) the corporate minute books and stock record books of
Seller and personnel, payroll and accounting records of Seller
(provided, however, that in the case of payroll, personnel and
accounting records, Buyer shall have access to such records if
such access is reasonably necessary);
(c) all proceeds of this Agreement;
(d) the tax returns and tax records of Seller and rights to
tax refunds if any; and
(e) all contract rights under contracts not shown on
Schedule 2.1(f).
Section 2.3 Assumed Liabilities. As of the Closing,
subject to the terms and conditions of this Agreement and in
reliance upon the representations and warranties of Seller, Buyer
shall assume:
(a) only those trade payables of Seller set forth on
Schedule 2.3 of the Seller Book of Schedules;
(b) any outstanding commercial loans and lines of credit,
provided that the proceeds thereof were used to purchase vehicles
and equipment for lease to Seller's customers and two vehicles
used by Seller's officers in the ordinary course of business (as
limited, the "Credit Lines");
(c) only to the extent that the same are incurred in
accordance with Article 8 of this Agreement, those trade payables
incurred by Seller after the date of Schedule 2.3 and created in
the ordinary course of Seller's business and consistent with past
practice; and
(d) the rights and obligations under those contracts listed
on Schedule 2.1.(f).
The liabilities and obligations of Seller to be assumed by Buyer
under this Section 2.3 are collectively referred to as the
"Assumed Liabilities." Nothing in this Agreement shall be
construed as creating any implication, covenant or commitment on
the part of Buyer that Buyer is assuming any of Seller's
liabilities or obligations except as specifically set forth in
this Section.
Section 2.4 Retained Liabilities. Nothing contained in
this Agreement is intended to, nor shall it, constitute or cause
Buyer to be a successor to Seller. Other than the Assumed
Liabilities, Buyer will not assume, undertake, accept or be bound
by or responsible for, and the Purchased Assets shall not be
subject to, and Seller will remain liable for, any liabilities,
payables, contracts, agreements, commitments or obligations of
Seller or its directors, officers or members, or the Affiliates
of any of the foregoing, whether due or to become due, absolute
or contingent, direct or indirect, asserted or unasserted, known
or unknown, choate or inchoate, including any of the following:
(a) any obligations or liabilities of Seller arising or
incurred after the date of this Agreement, including any
obligations of Seller to perform under any of the contracts of
Seller other than those specific obligations which arise under
the contracts listed on Schedule 2.1(f), which first arise and
accrue following the Closing;
(b) subject to the provisions of Section 5.1(b), any
obligations of Seller to perform under this Agreement and any
obligations incurred by Seller for legal and accounting fees
relating to this Agreement;
(c) any obligations or liabilities under any collective
bargaining agreements, any employment agreements (oral or
written) or any employee benefit plans or trusts;
(d) any obligations or liabilities of Seller to creditors
listed in Schedule 2.3 in amounts greater than those shown on
Schedule 2.3, except trade payables incurred by Seller after the
date of Schedule 2.3 and created in the ordinary course of
business, consistent with past practice and in accordance with
this Agreement;
(e) all liabilities for federal, state, local and foreign
taxes (including franchise, income, real property, sales, use,
excise, employment and other taxes) for any period ending prior
to the Closing Date (as defined below);
(f) any obligations owing to any employees or members of
Seller including accrued vacations and accrued sick time, monies
loaned by such employees or members to Seller, accrued salary
owed to any such employees and reimbursement of expenses advanced
by such employees; or
(g) any obligations or liabilities relating to or arising
from products sold or distributed prior to Closing (including
claims for breach of warranty or product liability, whether made
before or after Closing).
ARTICLE 3
BULK SALES AND SALES TAX
Section 3.1 Bulk Sales. It is the opinion of the parties
that the provisions of Chap. 406, Wis. Stats. relating to bulk
transfers is inapplicable to the transactions contemplated by
this Agreement. Notwithstanding the foregoing, Seller shall
indemnify and hold Buyer harmless of and from any and all
liability, claim or loss which Buyer may incur by reason of a
final determination that Chap. 406, Wis. Stats. was applicable to
the transactions contemplated by this Agreement.
Section 3.2 Sales Tax. Immediately prior to the Closing,
Seller shall surrender its sales tax permit so as to qualify for
the "occasional sales" tax exemption, and Seller shall be solely
responsible for any sales tax due upon the Closing.
ARTICLE 4
PURCHASE PRICE
Section 4.1 Purchase Price. (a) The purchase price for
the Purchased Assets shall be $388,332 (the "Purchase Price").
Buyer's obligation to pay the Purchase Price shall be satisfied
by the delivery to Seller at Closing certificates representing
the number of shares of Buyer's common stock (the "Common Stock")
that is equal to the quotient of $388,332 divided by the Average
Price (as defined below) as of the third business day prior to
the Closing Date. The parties have agreed that Schedule 4.1 of
the Seller Book of Schedules correctly sets forth the allocation
of the Purchase Price among the Purchased Assets.
(b) For purposes of this Agreement, the Average Price as of
any date (the "Determination Date") shall be equal to the
weighted average of the publicly reported per share selling
prices at which the last 3,000 shares of Common Stock were traded
in the open market immediately prior to the Determination Date.
(c) Seller represents and acknowledges that it:
(i) has received from Buyer a copy of its most recent
annual report on Form 10-K, quarterly report on Form 10-Q, proxy
statement and annual report to stockholders;
(ii) is acquiring the Common Stock pursuant to this
Agreement for its own account, except that Buyer acknowledges
that Seller may dissolve and liquidate its assets after the
Closing and accordingly distribute the Common Stock only to its
members listed on Schedule 6.2;
(iii) is aware, and will inform its members, that
Buyer's common stock to be issued pursuant to this Agreement will
not be registered with the Securities and Exchange Commission or
the securities regulatory authority of any state, and is being
offered pursuant to exemptions from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"),
and applicable state securities laws; and
(iv) knows, and has informed its members, that shares
of the Common Stock may not be sold or otherwise transferred
unless: (A) they are registered under the Securities Act and any
applicable state law; or (B) such sale or transfer is exempt from
such registration and Buyer has received an opinion of counsel
acceptable to it to the effect that such sale or transfer is so
exempt.
Section 4.2 Right to Sell. For a period of 30 days after
the Closing and upon receipt by Buyer of an irrevocable written
request, Buyer agrees to purchase from Seller or any of Seller's
members at the Average Price as of the date of Buyer's receipt of
such written request any shares of Common Stock originally issued
to Seller in connection with the transactions contemplated by
this Agreement. After such 30 day period and until the 180th day
after the Closing, and upon receipt by Buyer of an irrevocable
written request, Buyer agrees to purchase from Seller or any of
Seller's members at a price equal to the Average Price as of the
date of Buyer's receipt of such written request, less $0.50 per
share, any shares of Common Stock originally issued to Seller in
connection with the transactions contemplated by this Agreement.
Section 4.3 Payment of Unsatisfied Claims. On or after
the Closing Date, Seller shall pay all its liabilities and claims
against it as the same are made, or if disputed, after such
claims are settled or otherwise adjudicated excepting only the
Assumed Liabilities. Except with respect to Assumed Liabilities,
Buyer shall have absolutely no obligation to pay any claims
against Seller identified on the Creditor List or any other
claims.
ARTICLE 5
DELIVERIES AND DATE AND PLACE OF CLOSING
Section 5.1 Buyer's Deliveries at Closing. At the
Closing, Buyer shall deliver, or cause to be delivered, to Seller
the following items:
(a) certificates for the Common Stock to be delivered in
satisfaction of the Purchase Price;
(b) cash payments, subject to the following limits, to
reimburse Seller for professional fees actually incurred by
Seller in connection with the Acquisition of: (i) up to $6,500
for legal costs incurred for the negotiation and review of this
Agreement and related to the dissolution of Seller after the
Closing; and (ii) up to $1,500 for professional tax advice and
fees associated with the Acquisition, the preparation of Seller's
final tax return and the dissolution of Seller, provided,
however, that such reimbursable expenses shall be subject to
Buyer's final review and approval and shall be itemized and
accompanied by such further documentation as Buyer may reasonably
request;
(c) a copy of the articles of incorporation of Buyer
certified as of the Closing Date by the President or Secretary of
Buyer;
(d) a copy of the bylaws of Buyer certified as of the
Closing Date by the President or Secretary of Buyer;
(e) copies of resolutions of the board of directors of
Buyer authorizing and approving this Agreement and the
consummation of the Acquisition, certified as of the Closing Date
by the President or Secretary of Buyer;
(f) a certificate of the President of Buyer dated the
Closing Date certifying that: (i) all of the representations and
warranties of Buyer set forth in this Agreement are true and
correct with the same force and effect as if all of such
representations and warranties were made at the Closing Date; and
(ii) Buyer has performed or complied with all of the covenants
and obligations to be performed or complied with by Buyer under
the terms of this Agreement on or prior to the Closing Date; and
(g) such other documents as Seller or its counsel shall
reasonably request.
Section 5.2 Buyer's Additional Deliveries at Closing. At
the Closing and in consideration of the additional assistance
rendered and to be rendered to Buyer and Seller in connection
with the negotiation and consummation of the Acquisition, Buyer
shall deliver, or cause to be delivered, to the individuals named
below the following additional items:
(a) an Employment Agreement between Buyer and Keith J.
Kreps, executed by Buyer and in the form attached hereto as
Exhibit A;
(b) an Employment Agreement between Buyer and Kim W. Smith,
executed by Buyer and in the form attached hereto as Exhibit B;
(c) a Buy-Sell Agreement among Buyer and Keith J. Kreps and
Kim W. Smith, executed by Buyer and in the form attached hereto
as Exhibit C;
(d) cash payments to Keith J. Kreps and Kim W. Smith in the
amounts of $30,231 and $12,526, respectively, representing
consulting fees; and
(e) a promissory note dated the Closing Date and executed
by Buyer made payable to Keith J. Kreps, in the principal amount
of $52,000 and bearing interest at the annual rate of 8.25%, with
payments thereon to be made as follows: (i) up to $35,000 of
principal plus accrued interest on the first anniversary of the
Closing Date; and (ii) the remainder plus principal accrued
interest on the second anniversary of the Closing Date, provided,
however, that the payments of principal and interest on each of
the first and second anniversaries of the Closing Date shall be
subject to the satisfaction by Mr. Kreps of certain performance
standards to be mutually agreed upon between Buyer and Mr. Kreps
prior to the Closing Date, and provided further, that Buyer shall
be released from any further payments due under such promissory
note if Mr. Kreps terminates his employment with Buyer without
cause and any of Buyer's subsidiaries at any time before the
final maturity of such note.
Section 5.3 Seller's Deliveries at Closing. At the
Closing, Seller shall deliver, or cause to be delivered to Buyer
the following items:
(a) a copy of the certificate of limited liability company
of Seller certified as of the Closing Date by the President or
any Vice President of Seller;
(b) a certificate of the President or any Vice President of
Seller dated the Closing Date certifying a copy of the operating
agreement of Seller;
(c) copies of resolutions of the members of Seller
authorizing and approving this Agreement and the consummation of
the Acquisition and changing the name of Seller to another name
that is different from "ULTEA" or any name which is similar
thereto, certified as of the Closing Date by the President or any
Vice President of Seller;
(d) a certificate executed by the President and any Vice
President of Seller dated the Closing Date certifying that: (i)
all of the representations and warranties of Seller set forth in
this Agreement are true and correct with the same force and
effect as if all of such representations and warranties were made
at the Closing Date; and (ii) Seller has performed or complied
with all of the covenants and obligations to be performed or
complied with by Seller under the terms of this Agreement on or
prior to the Closing Date;
(e) an Employment Agreement between Buyer and Keith J.
Kreps, originally executed by Mr. Kreps and in the form attached
hereto as Exhibit A;
(f) an Employment Agreement between Buyer and Kim W. Smith,
originally executed by Mr. Smith and in the form attached hereto
as Exhibit B;
(g) a Buy-Sell Agreement among Buyer and Keith J. Kreps and
Kim W. Smith, originally executed by Messrs. Kreps and Smith and
in the form attached hereto as Exhibit C;
(h) an assignment of the Office Lease from Seller to Buyer
and the consent of the owner of such leased office space to the
assignment, in each case in a form reasonably acceptable to
Buyer;
(i) an assignment of each of the Credit Lines from Seller
to Buyer and the consent of the lender under such Credit Line to
the assignment, in each case in a form reasonably acceptable to
Buyer;
(j) an assignment of the Lease Contracts from Seller to
Buyer and, if necessary, the consent of the lessees under such
Lease Contracts to the assignment, in each case in a form
reasonably acceptable to Buyer;
(k) such other bills of sale, endorsements, consents,
assignments and other instruments of transfer and conveyance as
shall be necessary or appropriate in the judgment of Buyer
effectively to transfer, convey and assign the Purchased Assets
to Buyer; and
(l) such other documents as Buyer or its counsel shall
reasonably request.
Section 5.4 Post-Closing Deliveries and Actions. (a)
Immediately after Seller has taken the actions required to be
taken by Section 5.4(b) below, Buyer shall take all such actions
as may be necessary to qualify to do business in the State of
Wisconsin under the name "ULTEA."
(b) Within 15 Business Days after the Closing Date, Seller
shall take such actions as may be necessary to dissolve Seller.
Seller agrees to coordinate the timing of such filing with Buyer
so that Buyer's application for a certificate of qualification to
do business in the State of Wisconsin is filed immediately after
such certificate of amendment.
Section 5.5 Closing Date. Pursuant to the terms of this
Agreement, the Closing shall occur at the offices of Buyer at
1398 Central Avenue, Dubuque, Iowa, at 10:00 a.m. on the later of
January 31, 1997, or the fifth Business Day after the date on
which all necessary approvals are received from the Regulatory
Authorities and all required waiting periods have expired, or at
such other time or place as may be agreed to by Buyer and Seller.
The Acquisition shall be effective at 12:01 a.m. on the Closing
Date.
Section 5.6 Further Assurances. Seller shall, at any time
and from time to time after the Closing, upon the request of
Buyer, do, execute, acknowledge, deliver and file, or cause to be
done, executed, acknowledged, delivered or filed, all such
further acts, deeds, transfers, conveyances, assignments or
assurances as may be reasonably required for the better
transferring, conveying, assigning and assuring to Buyer, or for
the aiding and assisting in the collection of or reducing to
possession by Buyer, any of the Purchased Assets or for the
purpose of completing or effecting any of the other transactions
contemplated by this Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Buyer's execution of this Agreement and
consummation of the transactions contemplated herein, Seller
represents and warrants to Buyer as set forth in this Article,
with the express understanding that said representations and
warranties are material to and are being relied upon by Buyer,
notwithstanding any investigations conducted by Buyer.
Section 6.1 Organization. Seller: (a) is a limited
liability company duly organized, validly existing and in good
standing under the laws of the State of Wisconsin; (b) is duly
qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted or the
properties or assets owned or leased by it makes such
qualification necessary; and (c) has full power and authority,
corporate and otherwise, to own, operate and lease its properties
as presently owned, operated and leased, and to carry on its
business as it is now being conducted. Seller owns no voting
stock or equity securities of any corporation, association,
partnership or other entity.
Section 6.2 Capitalization; Stock Ownership. All of the
issued and outstanding member units of Seller are owned by its
members listed on Schedule 6.2 of the Seller Book of Schedules.
There are no options, warrants, rights, calls or commitments of
any character relating to any additional member units of Seller.
Section 6.3 Authority. Seller has the requisite power
and authority to enter into and perform its obligations under
this Agreement and the execution, delivery and performance of
this Agreement by Seller, and consummation by it of the
transactions contemplated hereby have been authorized by all
necessary action, corporate or otherwise, including the requisite
approval of Seller's board of directors and its members, and this
Agreement constitutes a legal, valid and binding obligation of
Seller enforceable in accordance with its terms except as such
enforcement may be limited by bankruptcy, insolvency,
reorganization or other laws and subject to general principles of
equity.
Section 6.4 Effect of Agreement. Except as set forth on
Schedule 6.4, the execution, delivery and performance of this
Agreement by Seller and the consummation by it of the Acquisition
do not: (a) require the consent, waiver, order, registration,
qualification, approval, license or authorization of any Person
or Regulatory Authority; (b) violate, with or without the giving
of notice or the passage of time or both, in any material respect
any provision of law applicable to Seller; (c) conflict with or
result in a breach of any terms of its certificate of limited
liability company or bylaws or any mortgage, deed of trust,
license, indenture or other agreement or instrument, or any
order, judgment, decree, statute, regulation or other restriction
of any kind or character, to which Seller is a party or by which
any of Seller's assets may be bound; (d) give to others any right
to accelerate or terminate, or result in acceleration or
termination of, any such agreement or instrument; (e) result in
termination of any provision of any such agreement or instrument;
or (f) result in the creation of any lien, charge or encumbrance
upon any of the property or assets of Seller.
Section 6.5 Title and Properties. On the Closing Date,
Seller will have good and marketable title to all of the
Purchased Assets, free and clear of any and all mortgages, liens
(including mechanic's liens and similar liens for labor furnished
or materials supplied), pledges, security interests, title
retention arrangements, conditional sales arrangements, claims,
charges, set-offs, restrictions, options or rights to purchase,
lease or sublease, or other encumbrances ("Marketable Title").
Immediately after the Closing, the instruments of conveyance,
transfer and assignment to be delivered to Buyer pursuant hereto,
will vest in Buyer Marketable Title to the Purchased Assets. The
Purchased Assets are: (a) in good operating order and condition
and are not in need of repair or replacement; (b) performing
satisfactorily and are available for immediate use in the conduct
of the business and operations of Seller; and (c) all of the
properties, interests and assets held for use or used in
connection with the business or operations of Seller have been
and are sufficient to conduct such business and operations in the
manner heretofore conducted in the ordinary course of business.
Section 6.6 Litigation and Regulatory Matters. There are
no actions, suits or proceedings pending as of the date hereof in
which Seller is a named party. There is no action, suit,
proceeding, claim or formal written protest by any person or
agency, or any investigation or report by any Regulatory
Authority having jurisdiction over Seller or its business which
is pending or, to the best of the knowledge of Seller, threatened
against Seller or any of its officers or directors in their
capacities as such, or the assets, business or goodwill of
Seller. Seller further represents and warrants that it does not
know or have any reason to believe that there is any basis for
assertion against any of them of any material claims based upon
the wrongful action or inaction of Seller or any of its officers,
directors or employees. Seller is not subject to any outstanding
judgment, order, writ, injunction or decree of any court,
arbitration panel or other governmental authority.
Section 6.7 Insurance. Schedule 6.7 of the Seller Book
of Schedules lists and briefly describes the policies of
insurance owned or held by Seller. Each such policy is, and
Seller will use its best efforts to keep each such policy, in
full force and effect (except for any expiring policy which is
replaced by coverage at least as extensive) through the Closing
Date. All premiums due thereon on or prior to the Closing Date
have been paid when due.
Section 6.8 Defaults Under Agreements. Seller is not in
default or alleged to be in default under any loan or credit
agreement, conditional sales contract or other title retention
agreement or security agreement relating to money borrowed by
Seller or pursuant to which it leases to or from any Person real
or personal property or under any other instrument or obligation.
To the best of the knowledge of Seller, there is no material
default under such instruments by any other party thereto, nor is
there any event which with notice or lapse of time or both would
constitute a material default.
Section 6.9 Financial Statements and Reports. Seller has
delivered to Buyer copies of the Balance Sheets and the related
Statements of Income, Statements of Cash Flows and Statements of
Changes in Shareholders' Equity of Seller for the years since its
date of incorporation (collectively, the "Seller Financial
Statements"). The Seller Financial Statements are complete and
correct in all material respects and fairly present the financial
positions of Seller at the dates shown and the results of
operations for the periods covered. The Seller Financial
Statements are unaudited statements and have been prepared in
conformity with generally accepted accounting principles applied
on a consistent basis. The Seller Financial Statements do not
include any material assets or omit to state any material
liabilities, absolute or contingent, or other facts, which
inclusion or omission would render the Seller Financial
Statements misleading in any material respect.
Section 6.10 Regulatory Filings. Seller has filed in a
timely manner all required filings with all proper Regulatory
Authorities as necessary. All such filings with such Regulatory
Authorities were accurate and complete in all material respects
as of the dates of the filings, and no such filing made any
untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not
misleading.
Section 6.11 Employees. Schedule 6.11 of the Seller Book
of Schedules lists or describes the following:
(a) All profit sharing, group insurance, hospitalization,
stock option, pension, retirement, bonus, deferred compensation,
stock bonus, stock purchase or other employee welfare or benefit
agreements, plans or arrangements established, maintained,
sponsored or undertaken by Seller for the benefit of its
officers, directors or employees, including each trust or other
agreement with any custodian or any trustee for funds held under
any such agreement, plan or arrangement (collectively, "Employee
Benefit Plans"), and, in respect to any of them, the latest
reports or forms, if any, filed with the Department of Labor and
Pension Benefit Guaranty Corporation under applicable law, any
current financial or actuarial reports and any currently
effective United States Internal Revenue Service private rulings
or determination letters obtained by or for the benefit of
Seller;
(b) All employment, consulting and agency contracts (except
for ordinary oral employment contracts with employees of Seller
creating at will employment relationships); and
(c) The name and annual salary of each officer, employee,
agent or representative of Seller, and the profit sharing, bonus
or other form of compensation (other than salary) paid or payable
by Seller, if any, or a combination of both to or for the benefit
of each such person in question for 1995 and 1996 and any
employment agreement or arrangement with respect to each such
person.
Seller has delivered to Buyer a copy of each document, plan
or contract listed and described in Schedule 6.11.
Section 6.12 Compliance with Applicable Law. Seller holds
all licenses, certificates, permits, franchises and rights from
all appropriate federal, state or other public authorities
necessary for the conduct of its business. Seller is not in
violation, nor has it violated, in any material respect any
applicable federal, state and local statutes, ordinances,
regulations or rules, and Seller is not presently charged with,
or under governmental investigation with respect to, any actual
or alleged material violations of any statute, ordinance,
regulation or rule. Seller is not the subject of any pending or
threatened material proceeding by any Regulatory Authority having
jurisdiction over its business, properties or operations.
Section 6.13 Interim Events. Except as otherwise
permitted hereunder or as set forth on Schedule 6.13 of the
Seller Book of Schedules, since February 20, 1996, Seller has
not:
(a) Suffered any material adverse change in its financial
condition or prospects, the operation or conduct of its business
and relations with customers, suppliers, employees or
representatives;
(b) Suffered any material damage, destruction or loss, to
any of its respective properties, including the Purchased Assets,
whether covered by insurance or not, or failed to maintain such
assets in good operating condition and repair;
(c) Granted or agreed to grant any increase in compensation
to its directors, officers or employees or increased the benefits
payable or to become payable under, or established or otherwise
made any changes in, any Employee Benefit Plan;
(d) Cancelled or compromised any debt or claim other than
in the ordinary course of business and consistent with past
practice;
(e) Entered into any transaction, contract or commitment
other than in the ordinary course of business and consistent with
past practice;
(f) Made any material change in any contract listed on
Schedule 2.1(f);
(g) Incurred any obligation or liability (fixed or
contingent) other than accounts payable, payroll liabilities, tax
obligations and other similar current obligations and
liabilities, in each case incurred in the ordinary course of
business and consistent with past practice;
(h) Conducted its business in any manner other than
substantially as it was being conducted;
(i) Leased, sold or otherwise disposed of any of its
assets, or leased, purchased or otherwise acquired from third
parties any assets, except in each case in the ordinary course of
business and consistent with past practice;
(j) Merged, consolidated or agreed to merge or consolidate
with or into any other entity, or acquired or agreed to acquire
any stock, equity interest or business of any other entity;
(k) Entered into any transaction for the borrowing or
loaning of monies, other than in the ordinary course of business
and consistent with past practice;
(l) Made any change in the accounting methods or accounting
practices followed by Seller which are outside the ordinary
course of business or inconsistent with past practice;
(m) Paid any dividends or made any other distributions to
its members;
(n) Made any amendment to its certificate of limited
liability company or bylaws; or
(o) Entered into any agreement, whether in writing or
otherwise, to take any of the actions described in the foregoing
items (a) through (p).
Section 6.14 Taxes. Seller has filed with the
appropriate governmental agencies all federal, state and local
income, franchise, excise, sales, use, real and personal property
and other tax returns and reports required to be filed by it.
Seller is not: (a) delinquent in the payment of any taxes shown
on such returns or reports or on any assessments received by it
for such taxes; (b) aware of any pending or threatened
examination for income taxes for any year by the Internal Revenue
Service or any state tax agency; (c) subject to any agreement
extending the period for assessment or collection of any federal
or state tax; or (d) a party to any action or proceeding nor has
any claim been asserted against it by any governmental authority
for assessment or collection of taxes. The federal income tax
liabilities of Seller have never been audited by the Internal
Revenue Service. Seller is not a party to any action or
proceeding by any governmental authority for assessment or
collection of taxes, nor, to the best of the knowledge of Seller,
is any such action or proceeding threatened against Seller.
Section 6.15 Compliance With Environmental Laws. There
are no actions, suits, investigations, liabilities, inquiries,
proceedings or orders involving Seller or any of its assets that
are pending or, to the knowledge of Seller, threatened, nor is
there any factual basis for any of the foregoing, as a result of
any asserted failure of Seller, or any predecessor thereof, to
comply (or the assertion of liability even if in compliance) with
any requirement of federal, state or local law, civil or common,
or regulation relating to hazardous, toxic or polluting
substances, or the protection of health or the environment. None
of the property in which Seller has an ownership interest is
contaminated with any such wastes or hazardous substances.
Section 6.16 Relationships. The relationship of Seller
with its employees, suppliers and customers is good, and Seller
has no reason to believe that any such employee, supplier or
customer intends to terminate or materially modify, or would
refuse to transfer to Buyer after the Closing Date, any such
relationship.
Section 6.17 Brokerage Commissions. All negotiations
relating to this Agreement and the transactions contemplated
herein have been and will be carried on by Seller directly with
Buyer, its counsel, accountants and other representatives in such
a manner so as not to give rise to any claim against Buyer for
any brokerage commission, finder's fee, investment advisor's fee
or other like payment in connection with the transactions
contemplated hereby. None of Seller or its members or anyone
acting on behalf of any of them has any liability to any broker,
finder or agent or has agreed to pay any brokerage commission or
financial advisory fees with respect to the transactions
contemplated by this Agreement.
Section 6.18 Disclosures. No representation or warranty
made herein by Seller and no written statement or certificate
given or to be given to Buyer by Seller pursuant to this
Agreement, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein
under the circumstances under which they were made not
misleading, and Seller has made, and will make in good faith
through the Closing, full disclosure of all material facts with
respect to Seller. Except as and to the extent reflected or
reserved against in the Seller Financial Statements for the year
ended December 31, 1995, Seller has no liabilities or
obligations, of any nature, secured or unsecured, (whether
accrued, absolute, contingent or otherwise) including any tax
liabilities due or to become due other than such liabilities as
have been incurred in the ordinary course and consistent with
past practice of Seller's business.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF BUYER
As an inducement to Seller's execution of this Agreement and
consummation of the transactions contemplated herein, Buyer
represents and warrants to Seller as set forth in this Article,
with the express understanding that said representations and
warranties are material to and are being relied upon by Seller,
notwithstanding any investigations conducted by Seller.
Section 7.1 Organization. Buyer: (a) is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Delaware; (b) is duly qualified to do
business and is in good standing in each jurisdiction in which
the nature of the business conducted or the properties or assets
owned or leased by it makes such qualification necessary; and (c)
has full power and authority, corporate and otherwise, to own,
operate and lease its properties as presently owned, operated and
leased, and to carry on its business as it is now being
conducted.
Section 7.2 Authority. Buyer has the requisite power and
authority to enter into and perform its obligations under this
Agreement and the execution, delivery and performance of this
Agreement by Buyer and consummation by Buyer of the transactions
contemplated hereby have been authorized by all necessary action,
corporate or otherwise, and this Agreement constitutes a legal,
valid and binding obligation of Buyer enforceable in accordance
with its terms except as such enforcement may be limited by
bankruptcy, insolvency, reorganization or other laws and subject
to general principles of equity.
Section 7.3 Effect of Agreement. Other than as
contemplated by this Agreement, the execution, delivery and
performance of this Agreement by Buyer and consummation by it of
the Acquisition do not: (a) require the consent, waiver, order,
registration, qualification, approval, license or authorization
of any person, court, regulatory authority or other governmental
body; (b) violate, with or without the giving of notice or the
passage of time or both, in any material respect any provision of
law applicable to Buyer; (c) conflict with or result in a breach
of any terms of its certificate of incorporation or bylaws or any
mortgage, deed of trust, license, indenture or other agreement or
instrument, or any order, judgment, decree, statute, regulation
or other restriction of any kind or character, to which Buyer is
a party or by which any of Buyer's assets may be bound; (d) give
to others any right to accelerate or terminate, or result in
acceleration or termination of, any such agreement or instrument;
(e) result in termination of any provision of any such agreement
or instrument; or (f) result in the creation of any lien, charge
or encumbrance upon any of the property or assets of Buyer.
Section 7.4 Litigation and Regulatory Matters. There is
no action, suit, proceeding, claim or formal written protest by
any person or agency, or any investigation or report by any
regulatory authority having jurisdiction over Buyer or any of its
assets or businesses which is pending or, to the best of Buyer's
knowledge, threatened against Buyer or any of its officers or
directors in their capacities as such, or the assets, business or
goodwill of Buyer which would reasonably be expected to have a
material adverse effect on the consolidated financial condition,
assets or business of Buyer. Buyer further represents and
warrants that its does not know or have any reason to believe
that there is any basis for assertion against it of any material
claims based upon the wrongful action or inaction of Buyer or any
of its officers, directors or employees. Buyer is not subject to
any outstanding judgment, order, writ, injunction or decree of
any court, arbitration panel or other Regulatory Authority which
would reasonably be expected to have a material adverse effect on
the consolidated financial condition, assets or business of
Buyer.
Section 7.5 Brokerage Commissions. All negotiations
relating to this Agreement and the transactions contemplated
herein have been and will be carried on by Buyer directly with
Seller and its directors, officers and members in such a manner
so as not to give rise to any claim against any of them for any
brokerage commission, finder's fee, investment advisor's fee or
other like payment in connection with the transactions
contemplated hereby. Neither Buyer nor anyone acting on its
behalf has any liability to any broker, finder or agent or has
agreed to pay any brokerage commission or financial advisory fees
with respect to the transactions contemplated by this Agreement.
Section 7.6 Disclosures. No representation or warranty
made herein by Buyer and no written statement or certificate
given or to be given to Seller by Buyer pursuant to this
Agreement, contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein
under the circumstances under which they were made not
misleading, and Seller has made, and will make in good faith
through the Closing, full disclosure of all material facts with
respect to Seller. Except as and to the extent reflected or
reserved against in the Buyer's audited financial statements for
the year ended December 31, 1995, as set forth in its 1995 annual
report to stockholders, Buyer has no material liabilities or
obligations, of any nature, secured or unsecured, (whether
accrued, absolute, contingent or otherwise) including any tax
liabilities due or to become due other than such liabilities as
have been incurred in the ordinary course and consistent with
past practice of Buyer's business.
ARTICLE 8
COVENANTS
Section 8.1 Allocation of Purchase Price. Seller and
Buyer each agree that the allocation of the Purchase Price set
forth on Schedule 4.1 is accurate and correct and further agrees
to submit Internal Revenue Service Form 8594, and any other
reports which may be required by the Internal Revenue Code of
1986, as amended, with respect to the Acquisition which shall
incorporate such allocation of the Purchase Price.
Section 8.2 Taxes. Each of Buyer and Seller agrees to
pay all such sales, transfer, use, gross receipts, registration
and similar taxes arising out of or in connection with the
transactions contemplated by this Agreement, as are payable by
such party under applicable law.
Section 8.3 Consents; Satisfaction of Conditions. Each
of the parties hereto will use all commercially reasonable
efforts: (a) to obtain the consents of all Persons and
Regulatory Authorities necessary to consummate the transactions
contemplated by this Agreement; (b) to ensure that the conditions
set forth in Article 9 are satisfied, insofar as such matters are
within the control of any of them; and (c) subject to the terms
and conditions herein provided, otherwise to use its reasonable
efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by
this Agreement.
Section 8.4 Supplemental Information. From time to time
prior to the Closing, Seller will promptly supply written
information to Buyer with respect to any matter hereafter arising
which, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in the
Seller Book of Schedules.
Section 8.5 Information and Access. Buyer, its
representatives and agents shall, at all times during normal
business hours prior to the Closing Date, have full and
continuing access to the facilities, operations, records and
properties of Seller. Buyer, its representatives and agents may,
prior to the Closing Date, make or cause to be made such
reasonable investigation of the operations, records and
properties of Seller and of its financial and legal condition as
Buyer shall deem necessary or advisable to familiarize itself
with such records, properties and other matters; provided, that
such access or investigation shall not interfere unnecessarily
with the normal operations of Seller. Upon request, Seller will
furnish Buyer or its representatives or agents such financial and
operating data and other information reasonably requested by
Buyer and will permit Buyer, its representatives or agents to
discuss such information directly with any individual or firm
performing auditing or accounting functions for Seller, and such
auditors and accountants shall be directed to furnish copies of
any reports or financial information as developed to Buyer or its
representatives or agents. Seller shall give Buyer prior notice
of each meeting of its board of directors and any committees
thereof and a representative of Buyer shall be invited to attend
each such meeting as an observer. No investigation by Buyer
shall affect the representations and warranties made by Seller in
this Agreement.
Section 8.6 Conduct of Business. From the date of this
Agreement until the Closing, Seller shall carry on its business
diligently, in the ordinary course and consistent with past
practice and shall not make or institute any unusual or material
change in its methods of doing business without the prior written
consent of Buyer. Seller shall permit representatives of Buyer:
(a) to participate in meetings or discussions with officers and
employees of Seller in connection with employment opportunities
with Buyer after the Closing; and (b) to contact Persons having
dealings with Seller for the purpose of informing such Persons of
the progress of the Acquisition and the services to be offered by
Buyer after the Closing; Without limiting the generality of the
foregoing, Seller shall not cause or permit from the date of this
Agreement through the Closing any state of affairs, action or
omission described in Section 6.13 (a) through (p).
Section 8.7 Use of Proceeds. Except as otherwise
provided in this Agreement, Seller agrees that it will use the
proceeds from the sale of the Purchased Assets first to satisfy
all creditors and claimants of Seller known as of the Closing
Date (other than with respect to Assumed Liabilities) before any
other use or distribution thereof.
ARTICLE 9
CONDITIONS TO CLOSING
Section 9.1 Conditions Precedent to Obligations of Buyer.
The obligations of Buyer under this Agreement to consummate the
transactions contemplated hereby will be subject to the
satisfaction, at or prior to the Closing, of all of the following
conditions, any one or more of which may be waived at the option
of Buyer:
(a) The representations and warranties made by Seller in
this Agreement shall be true and correct in all material respects
on and as of Closing Date with the same effect as though such
representations and warranties had been made or given on and as
of the Closing Date, except for changes contemplated by this
Agreement, and except also for representations and warranties as
of a specified time other than the Closing Date, which shall be
true and correct in all material respects at such specified time.
(b) Seller shall have performed and complied with all of
its obligations under this Agreement which are to be performed or
complied with prior to or at the Closing.
(c) As of the Closing Date, Seller shall not have disposed
of any of the Purchased Assets subject to this Agreement, other
than as expressly permitted in writing by Buyer.
(d) All proceedings, corporate or other, to be taken by
Seller in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be
reasonably satisfactory in form and substance to counsel for
Buyer, and Seller shall have made available to Buyer for
examination the originals or true and correct copies of all
records and documents relating to the business and affairs of
Seller which Buyer may reasonably request in connection with said
transactions.
(e) This Agreement shall have been duly and validly
authorized by all necessary corporate action of Seller.
(f) Seller shall not be a party to, or to the best of the
knowledge of Seller, threatened by, any actions, suits,
proceedings, litigation or legal proceedings which, in the
reasonable opinion of Buyer, have or are likely to have a
material adverse effect on the financial condition, prospects,
assets or business of Seller and no action, suit, proceeding or
claim shall have been instituted, made or threatened by any
person relating to the validity or propriety of any of the
transactions contemplated by this Agreement.
(g) From the date hereof through the Closing, there shall
be and have been no material adverse change in the financial
condition, prospects, assets or business of Seller, and as of
October 31, 1996, Seller's membership equity shall have been no
less than $225,000. For purposes of this provision,
stockholders' equity shall be computed in accordance with
generally accepted accounting principles, consistently applied,
but excluding goodwill.
(h) Any consents or approvals required to be secured by
either party by the terms of this Agreement or otherwise
reasonably necessary in the opinion of Buyer to consummate the
transactions contemplated by this Agreement shall have been
obtained and shall be satisfactory to Buyer.
Section 9.2 Conditions Precedent to Obligations of
Seller. The obligations of Seller under this Agreement to
consummate the transactions contemplated hereby will be subject
to the satisfaction, at or prior to the Closing, of all the
following conditions, any one or more of which may be waived at
the option of Seller:
(a) The representations and warranties made by Buyer in
this Agreement shall be true and correct in all material respects
on and as of Closing Date with the same effect as though such
representations and warranties had been made or given on and as
of the Closing Date, except for changes contemplated by this
Agreement, and except also for representations and warranties as
of a specified time other than the Closing Date, which shall be
true and correct in all material respects at such specified time.
(b) Buyer shall have performed and complied with all of its
obligations under this Agreement which are to be performed or
complied with prior to or at the Closing.
(c) This Agreement shall have been duly and validly
authorized by the Board of Directors of Buyer.
ARTICLE 10
INDEMNITY
Section 10.1 Indemnification. (a) Seller hereby agrees
to indemnify and hold harmless Buyer and its directors, officers,
employees and other agents and representatives from and against
any and all liabilities, judgments, claims, settlements, losses,
damages, fees, liens, taxes, penalties, obligations and expenses,
including reasonable fees of counsel and other professional fees,
in excess, in the aggregate, of $10,000, actually incurred or
suffered by any such person arising from, by reason of or in
connection with: (i) any misrepresentation or breach of the
representations, warranties or agreements of Seller contained in
this Agreement; and (ii) any and all liabilities or obligations
of Seller other than the Assumed Liabilities.
(b) Buyer indemnifies and holds harmless Seller from and
against any and all liabilities, judgments, claims, settlements,
losses, damages, fees, liens, taxes, penalties, obligations and
expenses, including reasonable fees of counsel and other
professional fees, in excess, in the aggregate, of $10,000,,
actually incurred or suffered by any such person arising from, by
reason of or in connection with: (i) any misrepresentation or
breach of the representations, warranties or agreements of Buyer
contained in this Agreement; and (ii) the Assumed Liabilities.
Section 10.2 Procedure for Indemnification. (a) Any party
entitled to indemnification pursuant to this Article
("Indemnified Party") shall promptly give notice to the party
required by the Article to provide indemnification ("Indemnifying
Party") after obtaining knowledge of any claims against it
covered by the indemnification provided by this Article
("Claims") and, if such indemnity shall arise from the claim of a
third party, shall permit Indemnifying Party to assume the
defense, at Indemnifying Party's sole expense, of any such Claims
or any litigation resulting from such Claims, provided, however,
Indemnified Party shall not be required to permit Indemnifying
Party to assume the defense of any third party claim if time is
of the essence and which if not immediately paid, discharged or
otherwise complied with would, in the reasonable opinion of
Indemnified Party, have a material adverse affect Indemnified
Party, unless Indemnifying Party provides Indemnified Party with
reasonable assurance that Indemnified Party will not suffer such
material adverse effect by allowing Indemnifying Party to assume
such defense. The right of indemnification hereunder shall not
be affected by any failure of Indemnified Party to give such
notice or any delay by Indemnified Party in giving such notice
unless, and then only to the extent that, the rights and remedies
of Indemnifying Party shall have been prejudiced as a result of
the failure to give, or delay in giving, such notice. Failure by
Indemnifying Party to notify Indemnified Party of Indemnifying
Party's election to defend any such claim or action by a third
party within 30 days after notice thereof shall have been given
to Indemnifying Party shall be deemed a waiver by Indemnifying
Party of its right to defend such claim or action.
(b) If Indemnifying Party assumes the defense of such claim
by a third party or litigation resulting therefrom, as set forth
above, the obligation of Indemnifying Party hereunder as to such
claim shall include taking all steps necessary in the defense or
settlement of such claim or litigation resulting therefrom,
including, the retention of counsel satisfactory to Indemnified
Party, and holding Indemnified Party harmless from and against
any and all Claims caused by or arising out of any settlement
approved by Indemnifying Party, or any judgment in connection
with such claim or litigation resulting therefrom. Without the
prior written consent of Indemnified Party, Indemnifying Party
shall not, in the defense of such claim or any litigation,
consent to the entry of any judgment or enter into any settlement
or other compromise which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to
Indemnified Party of a release, in form reasonably satisfactory
to Indemnified Party, from all liability in respect of such claim
or litigation. Notwithstanding the foregoing, Indemnified Party
will be entitled: (i) to participate in the defense of such
claim or litigation; and (ii) subject to the limitations of any
contract of insurance, upon 30 days' prior written notice to
Indemnifying Party, to control and manage any defense, provided,
however, that if Indemnified Party has already approved of
counsel selected by Indemnifying Party, and unless such
participation or assumption of control and management of any
defense is as a result of the existence of legal defenses
available to Indemnified Party as described in the next
succeeding sentence, then any such participation or assumption of
control or management shall, unless approved by Indemnifying
Party, be at Indemnified Party's sole cost and expense, and if
Indemnified Party has assumed such control or management,
Indemnified Party shall thereafter be responsible for such claim
or litigation. If in any such action Indemnified Party shall
have reasonably concluded that there may be legal defenses
available to it which are different from or additional to those
available to Indemnifying Party, Indemnified Party shall have the
right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on its
behalf.
(c) If Indemnifying Party does not elect to assume the
defense of any such claim by a third party or litigation
resulting therefrom, or if Indemnified Party assumes the defense
of such claim or litigation pursuant to its right described in
the proviso to the first sentence of paragraph (a) of this
Section, Indemnified Party may defend against such claim or
litigation in such manner as it deems appropriate, and, unless
Indemnifying Party shall deposit with Indemnified Party a sum
equivalent to the total amount demanded in such claim or
litigation plus Indemnified Party's estimate of the cost of
defending the same, Indemnified Party may settle such claim or
litigation on such terms as it reasonably deems appropriate and
Indemnifying Party shall, in accordance with the provisions
hereof, promptly reimburse Indemnified Party for the amount of
such settlement and for all losses and expenses incurred by
Indemnified Party in connection with the defense against or
settlement of such claim or litigation. Stockholders agree to
cooperate fully with Indemnified Party in the conduct of any
defense against any such claim.
(d) Indemnified Party shall be entitled to rely upon any
notice, certificate, affidavit, letter, document or other
communication which is believed by Indemnified Party to be
genuine and to have been signed and sent by Indemnifying Party
without further inquiry or investigation and to rely on
statements contained therein without further inquiry or
investigation.
Section 10.3 Election of Remedies. Nothing contained in
this Article shall be deemed an election of remedies under this
Agreement or limit in any way the liability of any Person under
any other agreement to which such Person is a party relating to
this Agreement or the transactions contemplated hereby.
Section 10.4 Expiration of Representations and Warranties
and Indemnification Rights. Notwithstanding anything contained
in this Agreement to the contrary, all representations and
warranties of either party shall expire on the third anniversary
of Closing and from and after the date of the third anniversary
of Closing neither party shall have any indemnification right or
claim against the other party by reason of or in any way
connected with the representations and warranties made in this
Agreement.
ARTICLE 11
TERMINATION
Section 11.1 Termination. This Agreement and the
transactions contemplated hereby may be terminated prior to the
Closing as follows:
(a) by Buyer, if the Closing shall not take place on or
before March 31, 1997, unless the Closing shall have failed to
occur as a result of the breach by Buyer of any of its
representations, warranties or covenants contained in this
Agreement;
(b) by Seller, if the Closing shall not take place on or
before March 31, 1997, unless the Closing shall have failed to
occur as a result of the breach by Seller of any of its
representations, warranties or covenants contained in this
Agreement; or
(c) by Buyer or Seller with the express written consent of
the other.
Section 11.2 Effect of Termination. In the event of the
termination of this Agreement pursuant to the preceding Section,
this Agreement shall forthwith become void and have no effect,
without any liability on the part of any party or its directors,
officers or members, except for any liability arising from such
party's breach or default under any covenant, agreement,
representation or warranty contained herein.
ARTICLE 12
MISCELLANEOUS
Section 12.1 Entire Agreement. This Agreement constitutes
the entire agreement among the parties hereto with respect to the
subject matter hereof and supersedes all other prior agreements
and understandings, both written and oral, among the parties or
any of them with respect to the subject matter hereof. This
Agreement may not be amended except by an instrument in writing
signed by each of the parties hereto. There are no
representations, warranties, understandings or agreements between
the parties other than as set forth herein. The parties may at
any time by mutual agreement: (a) extend the time for the
performance of any of the obligations or other acts of the
parties hereto; (b) waive any inaccuracies in the representations
and warranties contained herein or in any documents, certificate
or writing delivered pursuant hereto; or (c) waive compliance
with any of the agreements, covenants or conditions contained
herein. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed by such party.
Section 12.2 Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but this Agreement
shall not be assignable or delegable by any party hereto without
the prior written consent of the other party, provided, however,
that this Agreement may be assigned by Buyer to any wholly-owned
subsidiary corporation.
Section 12.3 Severability. Whenever possible, each
provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective
only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining
provisions of this Agreement unless the consummation of the
transactions contemplated hereby is adversely affected thereby.
Section 12.4 Survival of Representations, Covenants and
Agreements. All representations, warranties and covenants
contained herein shall survive the Closing, but shall expire on
the third anniversary of the Closing Date.
Section 12.5 Notices. All notices, requests and other
communications hereunder shall be in writing (which shall include
telecopier communication) and may be delivered by hand or
overnight express delivery service, mailed with first class
postage prepaid or telecopied if confirmed immediately thereafter
by also mailing a copy of any notice, request or other
communication by mail with first class postage prepaid:
(a) If to Seller, to:
ULTEA, LLC
2976 Triverton Pike
Madison, Wisconsin 53711
Telephone: (888) 868-5832
Telecopier: (608) 288-8913
with copies to:
Niebler & Muren, S.C.
450 N. Sunnyslope Road, Ste. 270
Brookfield, Wisconsin 53005
Attention: Joseph C. Niebler, Sr., Esq.
Telephone: (414) 784-6630
Telecopier: (414) 784-7630
(b) If to Buyer, to:
Heartland Financial USA, Inc.
1398 Central Avenue
P. O. Box 778
Dubuque, Iowa 52004-0778
Attention: Mr. John K. Schmidt
Executive Vice President and Chief
Financial Officer
Telephone: (319) 589-2100
Telecopier: (319) 589-2011
with copies to:
Barack, Ferrazzano, Kirschbaum & Perlman
333 West Wacker, Suite 2800
Chicago, Illinois 60606
Attention: John E. Freechack, Esq.
Telephone: (312) 984-3223
Telecopier: (312) 984-3193
or to such other Person or place as Buyer shall furnish to Seller
or Seller shall furnish to Buyer in writing. Except as otherwise
provided herein, all such notices, requests or other
communications shall be effective: (i) if delivered by hand, when
delivered; (ii) if mailed in the manner provided in this Section,
five Business Days after deposit with the United States Postal
Service; (iii) if delivered by overnight express delivery
service, on the next Business Day after deposit with such
service; (iv) if by telecopier, on the next Business Day if also
confirmed by mail in the manner provided in this Section.
Section 12.6 Governing Law. All questions concerning the
construction, validity and interpretation of this Agreement, and
the performance of the obligations imposed by this Agreement
shall be governed by the internal laws of the State of Wisconsin
regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws.
Section 12.7 Interpretation. This Agreement shall be
construed as a whole in accordance with the fair meaning of its
language and, regardless of who is responsible for its original
drafting, shall not be construed for or against either party.
Section 12.8 Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be
an original, but all of which shall constitute one and the same
agreement.
Section 12.9 No Rights of Third Parties. Nothing
expressed or implied in this Agreement is intended or shall be
construed to confer upon or give any person or other Buyer or
Seller any rights or remedies under or by reason of this
Agreement or any transaction that this Agreement contemplates.
Section 12.10 Fees and Expenses. Each of the parties
hereto will pay its own fees and expenses, including those of
attorneys, accountants and other advisors.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed on its behalf by its officers thereunto
duly authorized, all as of the date and year first above written.
ATTEST HEARTLAND FINANCIAL USA, INC.
By: /s/John K. Schmidt By: /s/ Lynn B. Fuller
------------------------- ------------------------
John K. Schmidt Lynn B. Fuller
Executive Vice President President
ATTEST ULTEA, LLC
By: /s/ Kim W. Smith By: /s/ Keith J. Kreps
------------------------ ------------------------
Kim W. Smith Keith J. Kreps
Secretary President
LIST OF EXHIBITS
Exhibit A Form of Employment Agreement with Keith J.
Kreps
Exhibit B Form of Employment Agreement with Kim W.
Smith
Exhibit C Form of Buy-Sell Agreement
LIST OF SCHEDULES
Schedule 2.1(c) Inventory
Schedule 2.1(d)
Furniture, Machinery,
Vehicles, Equipment and Other
Personal Property
Schedule 2.1(f) Contract Rights
Schedule 2.1(g) Intellectual Property
Schedule 2.3 Trade Payables
Schedule 4.1 Allocation of Purchase Price
Schedule 6.2 Members of Seller
Schedule 6.4 Effect of Agreement
Schedule 6.7 Insurance
Schedule 6.11 Employment
Agreements and Employee
Benefit Plans
Schedule 6.13 Interim Events
Exhibit A Form of Employment Agreement
with Keith J. Kreps
Exhibit B Form of Employment Agreement
with Kim W. Smith
EXHIBIT C
BUY-SELL AGREEMENT
THIS BUY-SELL AGREEMENT (this "Agreement"), is made and
entered into as of the 24th day of December, 1996 (the "Effective
Date"), among HEARTLAND FINANCIAL USA, INC., a Delaware
corporation ("Heartland"), and KIM W. SMITH and KEITH J. KREPS
(collectively, "Executives").
RECITALS
A. Effective as of the date of this Agreement, Heartland
has consummated the purchase of substantially all of the assets
of ULTEA, LLC, a Wisconsin limited liability company, related to
its business of purchasing and leasing of vehicles and equipment
(the "Business").
A. Heartland intends to operate the Business through a
wholly-owned subsidiary and Executives have entered into
employment agreements with such subsidiary and Heartland to
assist in such operations.
C. In connection with its acquisition of the Business and
the employment of Executives, Heartland has agreed to grant
Executives certain rights to purchase the Business if Heartland
decides in the future to sell the Business.
NOW, THEREFORE, in consideration of the premises, it is
agreed by and among the parties hereto as follows:
AGREEMENTS
Section 1. Right of First Refusal. If at any time
within five years after the date of this Agreement, Heartland
desires to sell the Business (the "Sale Decision"), Heartland
agrees that it shall first offer to sell the Business to
Executives.
Section 2. Sale Notice; Acceptable Sale Terms. If
Heartland has made the Sale Decision, and prior to the sale of
the Business to any person or entity other than Executives,
Heartland shall provide written notice to Executives of the Sale
Decision and of the cash price and other terms and conditions
that Heartland would find acceptable in connection with a sale of
the Business to Executives (the "Sale Notice"). Executives shall
have 45 days after the effective date of the Sale Notice within
which either to accept the terms and conditions of Heartland's
offer as set forth in the Sale Notice or to reach an agreement
with Heartland on other mutually acceptable terms and conditions
of a sale to Executives of the Business (in either case,
"Acceptable Sale Terms"). If Executives and Heartland shall not
have agreed upon Acceptable Sale Terms within such 45-day period,
this Agreement shall terminate and Heartland shall have no
further obligations to Executives hereunder.
Section 3. Sole Discretion. Each of Executives
acknowledges and agrees that any decision by Heartland with
respect to the Sale Decision or with respect to the acceptance of
any proposed terms and conditions of a sale of the Business to
Executives may be made by Heartland in its sole discretion and
shall not be subject to challenge by Executives pursuant to the
terms of this Agreement.
Section 4. General Provisions.
(a) Successors; Assignment. This Agreement shall be
binding upon and inure to the benefit of: (i) Executives only in
their individual and personal capacities and their rights
hereunder shall not be assignable by Executives nor shall their
personal representatives succeed to any of their rights
hereunder; and (ii) Heartland and its successors and assigns.
(b) Entire Agreement; Modifications. This Agreement
constitutes the entire agreement between the parties respecting
the subject matter hereof, and supersedes all prior negotiations,
undertakings, agreements and arrangements with respect thereto,
whether written or oral. Except as otherwise explicitly provided
herein, this Agreement may not be amended or modified except by
written agreement signed by each of Executives and Heartland.
(c) Governing Law. This Agreement shall be construed
and the legal relations of the parties hereto shall be determined
in accordance with the laws of the State of Iowa without
reference to the law regarding conflicts of law.
(d) Notices. Notices pursuant to this Agreement shall
be in writing and shall be deemed given when received; and, if
mailed, shall be mailed by United States first class mail,
postage prepaid; and if to Heartland, addressed to the principal
headquarters of Heartland, attention: President; or, if to
Executives, to the addresses set forth below Executives'
signatures on this Agreement, or to such other address as the
party to be notified shall have given to the other. If mailed,
any notice shall be deemed given five business days after deposit
with the United States Postal Service.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
/s/ Keith J. Kreps /s/ Kim W. Smith
- ---------------------------- ----------------------------
KEITH J. KREPS KIM W. SMITH
2976 Triverton Pike 2976 Triverton Pike
Madison, WI 53711 Madison, WI 53711
- ---------------------------- ----------------------------
(Address) (Address)
HEARTLAND FINANCIAL USA, INC.
By: /s/ Lynn B. Fuller
----------------------------
Lynn B. Fuller
President
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995
<CASH> 38,088 26,156 38,088 26,156
<INT-BEARING-DEPOSITS> 2,159 5,294 2,159 5,294
<FED-FUNDS-SOLD> 000 23,500 000 23,500
<TRADING-ASSETS> 000 000 000 000
<INVESTMENTS-HELD-FOR-SALE> 181,815 145,857 181,815 145,857
<INVESTMENTS-CARRYING> 2,151 2,369 2,151 2,369
<INVESTMENTS-MARKET> 2,245 2,503 2,245 2,503
<LOANS> 484,085 454,905 484,085 454,905
<ALLOWANCE> (6,191) (5,580) (6,191) (5,580)
<TOTAL-ASSETS> 736,552 677,313 736,552 677,313
<DEPOSITS> 558,343 534,587 558,343 534,587
<SHORT-TERM> 56,358 23,241 56,358 23,241
<LIABILITIES-OTHER> 9,086 9,579 9,086 9,579
<LONG-TERM> 42,506 45,400 42,506 45,400
000 000 000 000
000 000 000 000
<COMMON> 4,854 2,427 4,854 2,427
<OTHER-SE> 65,405 62,079 65,405 62,079
<TOTAL-LIABILITIES-AND-EQUITY> 736,552 677,313 736,552 677,313
<INTEREST-LOAN> 10,510 10,135 40,670 38,968
<INTEREST-INVEST> 2,729 2,155 10,443 9,325
<INTEREST-OTHER> 138 514 773 856
<INTEREST-TOTAL> 13,377 12,804 51,886 49,149
<INTEREST-DEPOSIT> 5,948 5,822 23,190 22,029
<INTEREST-EXPENSE> 7,089 6,830 27,644 25,529
<INTEREST-INCOME-NET> 6,288 5,974 24,242 23,620
<LOAN-LOSSES> 221 146 1,408 820
<SECURITIES-GAINS> 309 124 1,889 413
<EXPENSE-OTHER> 4,649 4,065 19,507 17,323
<INCOME-PRETAX> 3,043 2,808 10,691 10,458
<INCOME-PRE-EXTRAORDINARY> 3,043 2,808 10,691 10,458
<EXTRAORDINARY> 000 000 000 000
<CHANGES> 000 000 000 000
<NET-INCOME> 2,336 2,090 8,006 7,574
<EPS-PRIMARY> .49 .44 1.70 1.58
<EPS-DILUTED> .49 .44 1.70 1.58
<YIELD-ACTUAL> 4.17 3.96 3.98 4.13
<LOANS-NON> 1,697 977 1,697 977
<LOANS-PAST> 247 226 247 226
<LOANS-TROUBLED> 000 000 000 000
<LOANS-PROBLEM> 000 000 000 000
<ALLOWANCE-OPEN> 6,240 5,617 5,580 5,124
<CHARGE-OFFS> (296) (219) (926) (495)
<RECOVERIES> 26 36 129 131
<ALLOWANCE-CLOSE> 6,191 5,580 6,191 5,580
<ALLOWANCE-DOMESTIC> 3,431 3,100 3,431 3,100
<ALLOWANCE-FOREIGN> 000 000 000 000
<ALLOWANCE-UNALLOCATED> 2,760 2,480 2,760 2,480
</TABLE>
