Submitted pursuant to Rule 901(d) of Regulation S-T
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period __________ to __________
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices Zip Code)
(319) 589-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
classes of Registrant's common stock as of the latest practicable
date: As of November 12, 1998 the Registrant had outstanding
9,517,580 shares of common stock, $1.00 par value per share.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Form 10-Q Signature Page
<PAGE>
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
9/30/98 12/31/97
(Unaudited)
------- --------
ASSETS
Cash and due from banks $ 29,552 $ 24,267
Federal funds sold 46,649 32,918
--------- ---------
Cash and cash equivalents 76,201 57,185
Time deposits in other
financial institutions 1,656 194
Securities:
Available for sale-at market (cost
of $221,317 for 1998 and $193,805
for 1997) 224,528 197,869
Held to maturity-at cost (approximate
market value of $3,372 for 1998 and
$3,999 for 1997) 3,224 3,879
Loans and leases:
Held for sale 8,921 10,437
Held to maturity 549,989 545,969
Allowance for possible loan and
lease losses (8,281) (7,362)
--------- ---------
Loans and leases, net 550,629 549,044
Premises, furniture and equipment, net 19,557 17,204
Other real estate, net 1,070 774
Assets under operating leases 32,448 3,750
Other assets 24,469 22,161
--------- ---------
TOTAL ASSETS $933,782 $852,060
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 58,133 $ 60,950
Savings 291,319 252,292
Time 347,378 310,290
--------- ---------
Total deposits 696,830 623,532
Short-term borrowings 72,819 96,239
Accrued expenses and other liabilities 16,496 11,494
Other borrowings 65,131 43,023
--------- ---------
TOTAL LIABILITIES 851,276 774,288
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share;
authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 12,000,000 shares; issued,
9,707,252 shares at September 30, 1998,
and 4,853,626 at December 31, 1997 9,707 4,854
Capital surplus 10,115 13,706
Retained earnings 63,374 58,914
Accumulated other comprehensive income-
net unrealized gain on securities
available for sale 2,017 2,545
Treasury stock at cost (177,202 and
106,251 shares at September 30, 1998,
and December 31, 1997, respectively)(1) (2,707) (2,247)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 82,506 77,772
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $933,782 $852,060
========= =========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 12,503 $ 12,235 $ 37,112 $ 34,661
Interest on securities:
Taxable 3,009 2,561 8,551 7,701
Nontaxable 286 289 862 875
Interest on federal
funds sold 381 229 1,110 378
Interest on interest
bearing deposits in
other financial
institutions 108 12 251 69
-------- -------- -------- --------
TOTAL INTEREST INCOME 16,287 15,326 47,886 43,684
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 7,425 6,649 21,000 19,063
Interest on short-term
borrowings 990 1,023 3,117 2,557
Interest on other
borrowings 1,039 488 2,582 1,690
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 9,454 8,160 26,699 23,310
-------- -------- -------- --------
NET INTEREST INCOME 6,833 7,166 21,187 20,374
Provision for possible
loan and lease losses 304 298 889 993
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 6,529 6,868 20,298 19,381
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 788 702 2,199 2,023
Trust fees 676 472 1,716 1,451
Brokerage commissions 86 91 272 226
Insurance commissions 179 109 581 395
Securities gains, net 535 411 1,620 818
Rental income on
operating leases 2,901 215 3,866 509
Gains on sale of loans 272 124 847 207
Other noninterest income 78 86 263 202
-------- -------- -------- --------
TOTAL OTHER INCOME 5,515 2,210 11,364 5,831
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 4,050 3,504 11,324 9,748
Occupancy 409 333 1,208 1,067
Furniture and equipment 525 438 1,343 1,040
Outside services 392 329 1,026 1,070
FDIC deposit insurance
assessment 28 35 89 87
Advertising 316 185 813 624
Depreciation on equipment
under operating leases 2,069 155 2,763 367
Other noninterest expense 1,309 1,060 3,619 3,069
-------- -------- -------- --------
TOTAL OTHER EXPENSES 9,098 6,039 22,185 17,072
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 2,946 3,039 9,477 8,140
Income taxes 892 780 2,851 2,308
-------- -------- -------- --------
NET INCOME $ 2,054 $ 2,259 $ 6,626 $ 5,832
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC (1) $ .22 .24 $ .70 $ .62
EARNINGS PER COMMON
SHARE-DILUTED (1) $ .22 $ .24 $ .70 $ .61
CASH DIVIDENDS DECLARED
PER COMMON SHARE (1) $ .08 $ .065 $ .23 $ .195
(1) Restated to reflect the two-for-one stock split effected in
the form of a stock dividend payable on July 27, 1998, to
stockholders of record on June 30, 1998.
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
NET INCOME $2,054 $2,259 $6,626 $5,832
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities available
for sale:
Unrealized holding gains
(losses) arising during
the period 679 1,119 541 1,701
Less: reclassification
adjustment for gains
included in net income (353) (271) (1,069) (540)
------- ------- ------- -------
Other comprehensive income 326 848 (528) 1,161
------- ------- ------- -------
COMPREHENSIVE INCOME $2,380 $3,107 $6,098 $6,993
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
9/30/98 9/30/97
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 13,412 $ 10,436
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (1,462) (33)
Proceeds on maturities of time deposits - 202
Proceeds from the sale of securities
available for sale 23,697 18,135
Proceeds from the sale of mortgage-
backed securities available for sale 2,276 4,032
Proceeds from the maturity of and
principal paydowns on securities held
to maturity 637 1,845
Proceeds from the maturity of and
principal paydowns on securities
available for sale 31,787 8,585
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities held to maturity 343 -
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 38,472 9,381
Purchase of securities available for
sale (63,768) (15,857)
Purchase of mortgage-backed securities
available for sale (56,739) (16,411)
Net increase in loans and leases (6,218) (50,845)
Net increase in assets under operating
leases (7,454) (1,982)
Capital expenditures (3,524) (2,202)
Net cash and cash equivalents received
in acquisition of subsidiaries 2,730 670
Proceeds on sale of other real estate
owned 497 -
Proceeds on sale of fixed assets 8 1
Proceeds on sale of repossessed assets 85 7
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (38,633) (44,472)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts 36,210 (6)
Net increase in time deposit accounts 37,088 11,747
Net increase in other borrowings 19,758 7,791
Net increase (decrease) in short-term
borrowings (43,080) 8,347
Purchase of treasury stock (4,163) (668)
Proceeds from sale of treasury stock 593 998
Dividends (2,169) (1,848)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 44,237 26,361
--------- ---------
Net increase (decrease) in cash
and cash equivalents 19,016 (7,675)
Cash and cash equivalents at
beginning of year 57,185 40,080
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 76,201 $ 32,405
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 2,619 $ 2,554
========= =========
Cash paid for interest $ 26,178 $ 22,782
========= =========
Other borrowings transferred to
short-term borrowings $ 12,323 $ 24,500
========= =========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained
herein should be read in conjunction with the audited
consolidated financial statements and accompanying notes to the
financial statements for the fiscal year ended December 31, 1997,
included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1998. The December 31, 1997,
balance sheet has been derived from the audited financial
statements as of that date. Accordingly, footnote disclosure
which would substantially duplicate the disclosure contained in
the audited consolidated financial statements has been omitted.
The financial information of Heartland Financial USA, Inc. (the
"Company") included herein is prepared pursuant to the rules and
regulations for reporting on Form 10-Q. Such information
reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary
for a fair presentation of results for the interim periods. The
results of the interim periods ended September 30, 1998, are not
necessarily indicative of the results expected for the year
ending December 31, 1998.
On June 16, 1998, the Company's Board of Directors declared a two-
for-one stock split in the form of a 100% stock dividend to
stockholders of record on June 30, 1998, payable on July 27,
1998. Accordingly, all per share data have been restated to
reflect the stock split.
Basic earnings per share is determined using net income and
weighted average common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average
common shares and assumed incremental common shares issued.
Amounts used in the determination of basic and diluted earnings
per share for the three and nine month periods ended September
30, 1998 and 1997, are shown in the tables below:
Three Months Ended
9/30/98 9/30/97
--------- ---------
Net Income $ 2,054 $ 2,259
========= =========
Weighted average common shares
outstanding 9,334,328 9,479,566
Assumed incremental common shares
issued upon exercise of stock options 157,400 149,432
--------- ---------
Weighted average common shares for
diluted earnings per share 9,491,728 9,628,998
========= =========
Nine Months Ended
9/30/98 9/30/97
--------- ---------
Net Income $ 6,626 $ 5,832
========= =========
Weighted average common shares
outstanding 9,443,365 9,473,804
Assumed incremental common shares issued
upon exercise of stock options 144,388 140,131
--------- ---------
Weighted average common shares for
diluted earnings per share 9,587,753 9,613,935
========= =========
NOTE 2: ACQUISITIONS
On July 17, 1998, the Company acquired all of the assets and
assumed certain liabilities of Arrow Motors Inc., a Wisconsin
corporation doing business as Lease Associates Group ("LAG") in
Milwaukee. With $28,000 in total assets, LAG was merged into
ULTEA, the Company's wholly-owned fleet leasing subsidiary. The
stockholders of LAG, at the acquisition date, received 287,644
shares of Heartland common stock and the remaining balance of
$1,929 in a promissory note payable over three years bearing a
rate of 7.50%. The excess of the purchase price over the fair
value of net assets acquired was $632. The transaction was
accounted for as a purchase transaction and, accordingly, the
results of operations are included in the Consolidated Financial
Statements from the acquisition date. The pro forma effect of
the acquisition was not material to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements
to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of
1995, and is including this statement for the purposes of these
safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on the operations and
future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial
services in the Company's market area and accounting principles,
policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further
information concerning the Company and its business, including
additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the
Securities and Exchange Commission.
GENERAL
The Company's results of operations depend primarily on net
interest income, which is the difference between interest income
from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income, which includes service
charges, fees and gains on loans and trust income, also affects
the Company's results of operations. The Company's principal
operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy and equipment costs
and provision for loan and lease losses.
Net income of $2,054,000 for the third quarter of 1998 was down
$205,000 (9.07%) from the $2,259,000 recorded during the third
quarter of 1997. On a basic per common share basis, the third
quarter earnings decreased from $.24 in 1997 to $.22 in 1998.
Heartland's return on common equity for the third quarter of 1998
was 10.08% as compared to 12.08% for the same quarter in 1997.
Return on assets decreased to .90% from 1.13% for the same
periods.
Total earnings for the first nine months of 1998 increased
$794,000 (13.61%) to $6,626,000 from the $5,832,000 recorded
during the same period in 1997. Basic per common share earnings
for the first nine months of 1998 were $.70, an increase of
13.95% from the same period in 1997. Heartland's return on common
equity was 11.21% for the first nine months of 1998 as compared
to 10.75% for the same period in 1997. Return on assets remained
stable at 1.02% for the nine month period in 1998 compared to
1.01% for the same period in 1997.
A reduction in the net interest margin during the third quarter
of 1998 compared to the same period in 1997 was the major
contributor to the decline in net income for the quarters under
comparison. The Company incurred additional interest expense in
1998 as a result of the third-quarter acquisition of Lease
Associates Group. On a year-to-date basis, net interest margin
expanded due primarily to growth in the Company's asset base.
Total assets grew $124,280,000 (15.35%) from $809,502,000 at
September 30, 1997, to $933,782,000 at September 30, 1998,
particularly as a result of the Lease Associates Group
acquisition and expansion efforts in Rockford, Illinois; Madison,
Wisconsin; and Albuquerque, New Mexico.
Noninterest income increased significantly during the third
quarter and first nine months of 1998 compared to the same
periods in 1997 due primarily to additional rental income on
operating leases. Gains on sale of loans and securities gains
were the other major contributors in the noninterest income area.
Strong growth in noninterest income was partially offset by
increases in noninterest expense for the third quarter and nine-
month periods under comparison. Most of these increases resulted
from depreciation on equipment under operating leases and the
establishment of a de novo operation in Albuquerque, New Mexico
in May of 1998.
NET INTEREST INCOME
The net interest margin expressed as a percentage of total assets
decreased to 3.43% for the third quarter of 1998 compared to
3.95% for the same period in 1997 and 3.74% for the second
quarter of 1998.
For the third quarter of 1998, net interest income decreased
$333,000 (4.65%) when compared to the same period in 1997.
This decline was primarily the result of the acquisition of Lease
Associates Group, which subsequently merged with ULTEA, Inc., the
Company's fleet management company. As a result of the merger,
the Company incurred additional interest expense on the assumed
debt of Lease Associates Group utilized to fund vehicles under
operating lease. Additionally, the net interest margin was
adversely affected by the rate compression resulting from the
flat yield curve and the ensuing acceleration of paydowns in the
loan portfolio.
Net interest income increased $813,000 (3.99%) for the first nine
months of 1998 compared to the same period in 1997. The 15.35%
growth in total assets contributed to this change.
NONINTEREST INCOME
Noninterest income increased $3,305,000 (149.55%) for the third
quarter of 1998 compared to the same period in 1997. On a year-
to-date basis, noninterest income grew $5,533,000 (94.89%).
Rental income on operating leases accounted for 81.27% or
$2,686,000 of the increase for the quarter and 60.67% or
$3,357,000 of the increase for the year-to-date period. This
growth was directly attributable to the acquisition of Lease
Associates Group.
Securities gains increased by $124,000 (30.17%) during the three
month period and $802,000 (98.04%) during the nine month period
ended September 30, 1998, compared to the same periods in 1997.
The strong performance of the Company's equity portfolio was
responsible for these gains.
Gains on sale of loans increased $148,000 (119.35%) and $640,000
(309.18%) during the third quarter and first nine months of 1998,
respectively, as compared to the same periods in 1997. The
Company continued to experience refinancing activity in its real
estate mortgage loan portfolio as a result of decreasing interest
rates. The majority of these new fixed rate fifteen- and thirty-
year real estate loans were sold into the secondary market, while
the servicing of these loans was retained by the Company.
Trust fees grew $204,000 (43.22%) for the quarter ended September
30, 1998, compared to the same period in 1997. For the nine
month period ended September 30, 1998, trust fees increased
$265,000 (18.26%). These increases were attributable to growth
in assets under management, which increased from $366,158,000 at
December 31, 1996, to $434,003,000 at December 31, 1997, and
$469,559,000 at September 30, 1998. Strong equity and debt
markets, combined with the development of new trust
relationships, was responsible for this growth.
Insurance commissions increased $186,000 (47.09%) during the
first nine months of 1998 over the same period in 1997 primarily
due to additional sales of annuity products as a result of
enhancements in this product line.
NONINTEREST EXPENSE
Noninterest expense increased $3,059,000 (50.65%) for the third
quarter of 1998 and $5,113,000 (29.95%) for the first nine months
of 1998 compared to the same periods in 1997. The largest
component of this increase was also related to the operations of
Lease Associates Group, as depreciation on equipment under
operating leases increased $1,914,000 and $2,396,000 for the
three and nine month periods ended September 30, 1998,
respectively, as compared to the prior year.
Salaries and employee benefits, the largest component of
noninterest expense, increased $546,000 (15.58%) for the third
quarter of 1998 when compared to the same period in 1997. For
the first nine months of 1998, salaries and employee benefits
expense increased $1,576,000 (16.17%). Personnel additions
related to the opening in May of the Company's most recent de
novo community bank, New Mexico Bank and Trust located in
Albuquerque, New Mexico, was a major contributor to this
increase. The acquisition of Wisconsin Community Bank on March 1,
1997, and its subsequent opening of a branch facility in
Middleton, Wisconsin in February of this year, was also partially
responsible for the increase.
For the nine month period ended September 30, 1998, furniture and
equipment expenses increased $303,000 (29.13%) compared to the
same period in 1997. The establishment of the de novo operation
in Albuquerque, New Mexico was primarily responsible for this
growth.
Other noninterest expenses grew $249,000 (23.49%) during the
third quarter of 1998 compared to the same period in 1997. On a
year-to-date comparable basis, other noninterest expenses
increased $550,000 (17.92%). Amortization and maintenance
expense on software have contributed to this increase primarily
due to the conversion of the bank subsidiaries to Fiserv's
Comprehensive Banking Systems during the spring of 1997.
INCOME TAX EXPENSE
Income tax expense for the third quarter of 1998 increased
$112,000 (14.36%) over the same period in 1997. For the first
nine months of 1998, income tax expense increased $543,000
(23.53%) when compared to the same period in 1997. These
increases were primarily the result of corresponding growth in
pre-tax earnings. The Company's effective tax rate increased to
30.08% for the first nine months of 1998 compared to 28.35% for
the same period in 1997. A reduction in tax-exempt income during
1998 contributed to the higher effective tax rate.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Net loans and leases remained stable during the first nine months
of 1998, increasing $2,504,000 (.45%). Agricultural loan
outstandings experienced the most significant growth, increasing
$10,787,000 (15.57%) from December 31, 1997, to September 30,
1998 due to aggressive calling efforts. Growth in consumer loan
outstandings was $7,363,000 (11.46%) during the same time period,
primarily in consumer lines of credit and dealer paper. The only
category to experience a decrease during the first nine months of
1998 was residential mortgage loan outstandings, which declined
$18,966,000 (10.82%) as customers elected to take fixed rate
fifteen- and thirty-year mortgages which the bank subsidiaries
sold into the secondary market.
The adequacy of the allowance for loan and lease losses is
determined by management using factors that include the overall
composition of the loan portfolio, types of loans, past loss
experience, loan delinquencies, and potential substandard and
doubtful credits. The adequacy of the allowance for loan and
lease losses is monitored on an ongoing basis by the loan review
staff, senior management and the Board of Directors. Factors
considered by the Heartland Loan Review Committee included the
following: i) a continued increase in higher-risk consumer and
more-complex commercial and agricultural loans from relatively
lower-risk real estate loans; and ii) the economies of the
Company's primary market areas have been stable for some time and
the growth of the allowance is intended to anticipate the
cyclical nature of most economies. There can be no assurances
that the allowance for loan and lease losses will be adequate to
cover all losses, but management believes that the allowance for
loan and lease losses was adequate at September 30, 1998. The
allowance for loan and lease losses was increased $919,000
(12.48%) during the first nine months of 1998, of which $313,000
resulted from a recovery on a previously charged off loan at
First Community Bank. As a percentage of total loans and leases,
the allowance for loan and lease losses was 1.48% on September
30, 1998, and 1.32% on both December 31, 1997, and September 30,
1997.
The Company's provision for possible loan and lease losses
increased $6,000 (2.01%) for the three month period and decreased
$104,000 (10.47%) for the nine month period ended September 30,
1998, compared to the same periods in 1997. During the first
nine months of 1998, the Company recorded net recoveries of
$30,000 compared to net charge offs of $211,000 recorded during
the first nine months of 1997.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, decreased from
$2,032,000 at December 31, 1997, to $1,525,000 at September 30,
1998, a $507,000 (24.95%) reduction. As a percentage of total
loans and leases, nonperforming loans were .27% at September 30,
1998, .31% at June 30, 1998 and .37% on December 31, 1997.
SECURITIES
The dual objectives of the securities portfolio are to provide
the Company with sources of both liquidity and earnings.
Securities represented 24.39% of total assets at September 30,
1998, as compared to 23.68% at December 31, 1997. During the
first nine months of 1998, the portion of the securities
portfolio held in U.S. treasuries was decreased to .84% from
6.69%. To maximize the return on the portfolio, management
decided to increase its investment in U.S. government agencies
and fixed-rate collateralized mortgage obligations ("CMO's").
DEPOSITS AND BORROWED FUNDS
Total deposits grew $73,298,000 (11.76%) during the first nine
months of 1998. Demand deposits experienced a decrease of
$2,817,000 (4.62%). Savings deposits increased $39,027,000
(15.47%) and certificates of deposit increased $37,088,000
(11.95%). These increases were primarily attributable to strong
growth at the Company's lead bank, Dubuque Bank and Trust, and
the de novo community banks of Riverside Community Bank and New
Mexico Bank and Trust.
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability.
Over the nine month period ended September 30, 1998, the amount
of short-term borrowings decreased $23,420,000 (24.34%). This
change was primarily the result of the maturity of $26,500,000 in
FHLB advances, which was partially offset by the transfer of
$11,500,000 in FHLB borrowings from other borrowings due to
approaching maturities. As a result of the Lease Associates
Group acquisition, the Company assumed additional debt of
$22,000,000 of which $7,000,000 was short-term. A reduction in
the amount of repurchase agreements requested by the corporate
cash management customers at Dubuque Bank and Trust also
contributed to the change in short-term borrowings.
Other borrowings increased $22,108,000 (51.39%) during the first
nine months of 1998. Borrowings under Heartland's unsecured
revolving credit line were increased from $3,500,000 at December
31, 1997, to $20,000,000 at September 30, 1998. These borrowings
were used to provide working capital to the nonbanking
subsidiaries and to meet general corporate commitments, including
the $12,000,000 capital investment in New Mexico Bank and Trust.
The remaining $15,000,000 of the Lease Associates Group debt was
also responsible for the change in other borrowings. Partially
offsetting this increase was the $8,000,000 decrease in long-term
FHLB borrowings during the first nine months of 1998 as a result
of the transfer of $11,500,000 to short-term borrowings and
additional advances of $3,500,000. The Company's long-term FHLB
advances totaled $28,900,000 on September 30, 1998, at a weighted
average remaining term of 4.31 years and a weighted average rate
of 6.10%.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but the
composition of assets and capital and the amount of off-balance
sheet commitments. The Company's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
9/30/98 12/31/97
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 79,418 11.62% $ 71,713 11.54%
Tier 1 capital minimum
requirement 27,349 4.00% 24,854 4.00%
-------- ------ -------- ------
Excess $ 52,069 7.62% $ 46,859 7.54%
======== ====== ======== ======
Total capital $ 87,698 12.83% $ 78,995 12.71%
Total capital minimum
requirement 54,698 8.00% 49,707 8.00%
-------- ------ -------- ------
Excess $ 33,000 4.83% $ 29,288 4.71%
======== ====== ======== ======
Total risk adjusted assets $683,720 $621,338
======== ========
Leverage Capital Ratios:(2)
Tier 1 capital $ 79,418 8.75% $ 71,713 8.76%
Tier 1 capital minimum
requirement(3) 36,320 4.00% 32,729 4.00%
-------- ------ -------- ------
Excess $ 43,098 4.75% $ 38,984 4.76%
======== ====== ======== ======
Average adjusted assets
(less goodwill) $908,008 $818,232
======== ========
(1)Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 capital to risk-adjusted assets ratio of 4.00% and
total capital to risk-adjusted assets ratio of 8.00%
(2)The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(3)Management of the Company has established a minimum target
leverage ratio of 4.00%. Based on Federal Reserve
guidelines, a bank holding company generally is required to
maintain a leverage ratio of 3.00% plus additional capital of
at least 100 basis points.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. As a result of the acquisition of
Wisconsin Community Bank, the Company has cash payments remaining
under the purchase agreement of $823,000 in 1999, $594,000 in
2000 and $584,000 in 2001, plus interest at rates of 7.00% to
7.50%.
On July 17, 1998, the Company completed the acquisition and
merger into ULTEA of Arrow Motors Inc., a Wisconsin corporation
doing business as Lease Associates Group. In conjunction with
this merger, the Company agreed to three equal cash payments of
$643,000 in 1999, 2000 and 2001, plus interest at 7.50%.
The Company continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities.
Future expenditures relating to these efforts are not estimable
at this time.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing
obligations and its existing commitments, to withstand
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. The liquidity of the
Company principally depends on cash flows from operating
activities, investment in and maturity of assets, changes in
balances of deposits and borrowings and its ability to borrow
funds in the money or capital markets.
Net cash outflows from investing activities decreased $5,839,000
during the first nine months of 1998 compared to the same period
in 1997. Net principal disbursed on loans decreased $44,627,000
for the periods under comparison while net purchases of
securities increased $33,005,000 and net expenditures for assets
under operating leases increased $5,472,000.
Net cash inflows from financing activities increased $17,876,000
for the nine month period ended September 30, 1998, compared to the
same period in 1997. Cash provided by a net change in deposits
increased $61,557,000 while cash used by a net change in borrowings
increased $39,460,000 during the periods under comparison.
Total cash inflows from operating activities increased $2,976,000
for the first nine months of 1998 compared to the same period of
1997. Management of investing and financing activities, and
market conditions, determine the level and the stability of net
interest cash flows. Management attempts to mitigate the impact
of changes in market interest rates to the extent possible, so
that balance sheet growth is the principal determinant of growth
in net interest cash flows.
In the event of short term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks. The bank subsidiaries may also borrow funds from the
Federal Reserve Bank, but have not done so during the periods
covered in this report. Also, the subsidiary banks' FHLB
memberships give them the ability to borrow funds for short- and
long-term purposes under a variety of programs.
The Company's revolving credit agreement provides for total
borrowings of up to $20,000,000 at any one time. The agreement
contains specific covenants which, among other things, limit
dividend payments and restrict the sale of assets by the Company
under certain circumstances. Also contained within the agreement
are certain financial covenants, including the maintenance by the
Company of a maximum nonperforming assets to total loans ratio,
minimum return on average assets ratio, maximum funded debt to
total equity capital ratio, and requires that each of the bank
subsidiaries remain well capitalized, as defined from time to
time by the federal banking regulators.
YEAR 2000
The federal banking regulators have issued guidelines
establishing minimum safety and soundness standards for achieving
Year 2000 compliance. The guidelines, which took effect October
15, 1998, and apply to all FDIC-insured depository institutions,
establish standards for developing and managing Year 2000 project
plans, testing remediation efforts and planning for
contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal
Financial Institutions Examination Council ("FFIEC"), but are not
intended to replace or supplant the FFIEC guidance which will
continue to apply to all federally-insured depository
institutions.
The guidelines were issued under section 39 of the Federal
Deposit Insurance Act, as amended ("FDIA"), which requires the
federal banking regulators to establish standards for the safe
and sound operation of federally-insured depository institutions.
Under section 39 of the FDIA, if an institution fails to meet any
of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a
plan for achieving compliance. If an institution fails to submit
an acceptable compliance plan, or fails in any material respect
to implement a compliance plan that has been accepted by its
primary federal regulator, the regulator is required to issue an
order directing the institution to cure the deficiency. Such an
order is enforceable in court in the same manner as a cease and
desist order. Until the deficiency cited in the regulator's
order is cured, the regulator may restrict the institution's rate
of growth, require the institution to increase its capital,
restrict the rates the institution pays on deposits or require
the institution to take any action the regulator deems
appropriate under the circumstances. In addition to the
enforcement procedures established in section 39 of the FDIA,
noncompliance with the standards established by the guidelines
may also be grounds for other enforcement action by the federal
baking regulators, including cease and desist orders and civil
money penalty assessments.
The Company began to identify issues related to the Year 2000 in
1996. A Year 2000 project team, comprised of individuals from
key areas throughout the Company, was formed. The mission of the
Year 2000 project team was, and is, to identify issues related to
the Year 2000, to initiate remedial measures necessary to
eliminate any adverse effects on the Company's operations, and to
continue to monitor Year 2000 related concerns. Following the
guidelines established by the FFIEC, a Year 2000 Plan was
developed for the Company and its subsidiaries. The project team
developed a comprehensive, prioritized inventory of all hardware,
software, and material third-party providers that may be
adversely affected by the Year 2000 date change, and has
contacted these vendors requesting their status as it relates to
the Year 2000. This inventory includes both information
technology ("IT") and non-IT systems, such as heating and cooling
systems, alarms, building access systems and elevators, which
typically contain embedded technology such as microcontrollers.
This inventory is periodically reevaluated to ensure that
previously assigned priorities remain accurate and to monitor the
progress each vendor is making in resolving its Year 2000
problems. The Company relies on software purchased from third-
party vendors rather than internally-generated software. The
Company has received Year 2000 compliant versions of all mission-
critical software and is currently testing these systems. To
date, testing is 80% complete. Testing is being done on a test
computer rented specifically for this purpose, which is connected
to the Company's existing equipment in a like manner as the
production computer. The Company expects to have all mission-
critical systems tested prior to December 31, 1998.
The Year 2000 project team has also developed a communication
plan that updates the Board of Directors, management, and
employees on the Company's Year 2000 status, and has begun to
develop a customer awareness program. In addition, the Company
has developed a separate plan to manage the Year 2000 risks posed
by commercial borrowing customers. This plan has identified
material loan customers, assessed their preparedness, evaluated
their credit risk to the Company, and implemented appropriate
controls to mitigate the risk. Surveys of customer preparedness
have been used to identify the customer risk and will be used on
all new credits going forward.
In accordance with regulatory guidelines, the project team is
preparing a comprehensive contingency plan in the event that Year
2000 related failures are experienced. The plan will list the
various strategies and resources available to restore core
business processes. Because of discussions that have taken place
regarding contingencies, the Company has determined that a backup
generator is required for Year 2000 concerns, as well as, basic
business recovery issues. Currently, the Company is determining
the size and configuration necessary for the purchase of a
generator in 1999. In the case of utility providers, the Company
has not identified any practical, long-term alternatives to
relying on these companies for basic utility service. The
generator will provide an alternative for the mission-critical
systems for a limited time period.
Management anticipates that the total out-of-pocket expenditures
required for bringing the systems into compliance for the Year
2000 will be approximately $360,000. Management believes that
these required expenditures will not have a material adverse
impact on operations, cash flow, or financial condition. This
amount, including costs for upgrading equipment specifically for
the purpose of Year 2000 compliance, staff expense for testing
and contingency development, and certain administrative
expenditures, have been provided for in the Company's Year 2000
budget. Although management feels confident that the Company has
identified all necessary upgrades, and budgeted accordingly, no
assurance can be made that Year 2000 compliance can be achieved
without additional unanticipated expenditures. It is not
possible at this time to quantify the estimated future costs due
to possible business disruption caused by vendors, suppliers,
customers or even the possible loss of electric power or phone
service; however, such costs could be substantial. As a result
of the Year 2000 project, the Company has not had any material
delay regarding its information systems projects.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
By: /s/ Lynn B. Fuller
-----------------------
Lynn B. Fuller
President
By: /s/ John K. Schmidt
-----------------------
John K. Schmidt
Executive Vice President
Chief Financial Officer
Dated: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000920112
<NAME> HEARTLAND FINANCIAL USA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 24,234 24,234
<INT-BEARING-DEPOSITS> 6,974 6,974
<FED-FUNDS-SOLD> 46,649 46,649
<TRADING-ASSETS> 000 000
<INVESTMENTS-HELD-FOR-SALE> 224,528 224,528
<INVESTMENTS-CARRYING> 3,224 3,224
<INVESTMENTS-MARKET> 3,372 3,372
<LOANS> 558,910 558,910
<ALLOWANCE> (8,281) (8,281)
<TOTAL-ASSETS> 933,782 933,782
<DEPOSITS> 696,830 696,830
<SHORT-TERM> 72,819 72,819
<LIABILITIES-OTHER> 16,496 16,496
<LONG-TERM> 65,131 65,131
000 000
000 000
<COMMON> 9,707 9,707
<OTHER-SE> 72,799 72,799
<TOTAL-LIABILITIES-AND-EQUITY> 933,782 933,782
<INTEREST-LOAN> 12,503 37,112
<INTEREST-INVEST> 3,295 9,413
<INTEREST-OTHER> 489 1,361
<INTEREST-TOTAL> 16,287 47,886
<INTEREST-DEPOSIT> 7,425 21,000
<INTEREST-EXPENSE> 9,454 26,699
<INTEREST-INCOME-NET> 6,833 21,187
<LOAN-LOSSES> 304 889
<SECURITIES-GAINS> 535 1,620
<EXPENSE-OTHER> 9,098 22,185
<INCOME-PRETAX> 2,946 9,477
<INCOME-PRE-EXTRAORDINARY> 2,054 6,626
<EXTRAORDINARY> 000 000
<CHANGES> 000 000
<NET-INCOME> 2,054 6,626
<EPS-PRIMARY> .22 .70
<EPS-DILUTED> .22 .70
<YIELD-ACTUAL> 3.43 3.66
<LOANS-NON> 1,251 1,251
<LOANS-PAST> 256 256
<LOANS-TROUBLED> 18 18
<LOANS-PROBLEM> 000 000
<ALLOWANCE-OPEN> 8,100 7,362
<CHARGE-OFFS> (180) (390)
<RECOVERIES> 57 420
<ALLOWANCE-CLOSE> 8,281 8,281
<ALLOWANCE-DOMESTIC> 4,326 4,326
<ALLOWANCE-FOREIGN> 000 000
<ALLOWANCE-UNALLOCATED> 3,955 3,955
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000920112
<NAME> HEARTLAND FINANCIAL USA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 19,338 19,338
<INT-BEARING-DEPOSITS> 5,215 5,215
<FED-FUNDS-SOLD> 8,046 8,046
<TRADING-ASSETS> 000 000
<INVESTMENTS-HELD-FOR-SALE> 183,080 183,080
<INVESTMENTS-CARRYING> 5,875 5,875
<INVESTMENTS-MARKET> 5,990 5,990
<LOANS> 553,535 553,535
<ALLOWANCE> (7,304) (7,304)
<TOTAL-ASSETS> 809,502 809,502
<DEPOSITS> 602,954 602,954
<SHORT-TERM> 92,103 92,103
<LIABILITIES-OTHER> 10,912 10,912
<LONG-TERM> 27,928 27,928
000 000
000 000
<COMMON> 4,854 4,854
<OTHER-SE> 70,751 70,751
<TOTAL-LIABILITIES-AND-EQUITY> 809,502 809,502
<INTEREST-LOAN> 12,235 34,661
<INTEREST-INVEST> 2,850 8,576
<INTEREST-OTHER> 241 447
<INTEREST-TOTAL> 15,326 43,684
<INTEREST-DEPOSIT> 6,649 19,063
<INTEREST-EXPENSE> 8,160 23,310
<INTEREST-INCOME-NET> 7,166 20,374
<LOAN-LOSSES> 298 993
<SECURITIES-GAINS> 411 818
<EXPENSE-OTHER> 6,039 17,072
<INCOME-PRETAX> 3,039 8,140
<INCOME-PRE-EXTRAORDINARY> 2,259<F1> 5,832<F1>
<EXTRAORDINARY> 000 000
<CHANGES> 000 000
<NET-INCOME> 2,259 5,832
<EPS-PRIMARY> .24<F2> .70<F2>
<EPS-DILUTED> .24<F2> .70<F2>
<YIELD-ACTUAL> 3.95 3.93
<LOANS-NON> 1,525 1,525
<LOANS-PAST> 709 709
<LOANS-TROUBLED> 000 000
<LOANS-PROBLEM> 000 000
<ALLOWANCE-OPEN> 7,151 6,191
<CHARGE-OFFS> (161) (335)
<RECOVERIES> 16 124
<ALLOWANCE-CLOSE> 7,304 7,304
<ALLOWANCE-DOMESTIC> 4,111 4,111
<ALLOWANCE-FOREIGN> 000 000
<ALLOWANCE-UNALLOCATED> 3,193 3,193
<FN>
<F1>RESTATED TO CORRECT ERROR
<F2>RESTATED TO REFLECT IMPLEMENTATION OF FAS 128, EARNINGS PER SHARE AND
TWO-FOR-ONE STOCK SPLIT
</FN>
</TABLE>
