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, 1999
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)
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 23, 2000, the Registrant had issued and outstanding
9,627,465 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 23, 2000, was $88,521,510. * Such figures
include 735,460 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 March 23, 2000, 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
Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Business
A. General Description
B. Market Areas
C. Competition
D. Employees
E. Accounting Standards
F. Supervision and Regulation
G. 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
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 five bank subsidiaries in the states of
Iowa, Wisconsin, Illinois and New Mexico and one federal savings
bank subsidiary in Iowa (collectively, the "Bank Subsidiaries").
All six Bank Subsidiaries are members of the Federal Deposit
Insurance Corporation ("FDIC"). Dubuque Bank and Trust Company,
Dubuque, Iowa, ("DB&T") is chartered under the laws of the State
of Iowa and has two wholly-owned subsidiaries: DB&T Insurance,
Inc. ("DB&T Insurance"), a multi-line insurance agency and DB&T
Community Development Corp. ("DB&T Development"), majority owner
of a senior housing project. Galena State Bank and Trust
Company, Galena, Illinois, ("GSB") and Riverside Community Bank,
Rockford, Illinois, ("RCB") are chartered under the laws of the
State of Illinois. First Community Bank, FSB, Keokuk, Iowa,
("FCB") is a federal savings association organized under the laws
of the United States. Wisconsin Community Bank, Cottage Grove,
Wisconsin, ("WCB") is chartered under the laws of the State of
Wisconsin and has one subsidiary, DBT Investment Corporation
("DBT Investment"), an investment management company. New Mexico
Bank & Trust, Albuquerque, New Mexico, ("NMB") is chartered under
the laws of the state of New Mexico. The Bank Subsidiaries
operate 29 banking locations in Iowa, Illinois, Wisconsin and New
Mexico. Heartland has four non-bank subsidiaries. Citizens
Finance Co. ("Citizens") is a consumer finance company. ULTEA,
Inc. ("ULTEA") is a fleet leasing company headquartered in
Madison, Wisconsin. Keokuk Bancshares, Inc. ("Keokuk") is an
investment management company. Heartland Capital Trust I is a
special purpose trust subsidiary of Heartland formed for the
purpose of the offering of cumulative capital securities in
October, 1999.
All of Heartland's subsidiaries are wholly-owned, except for NMB,
of which Heartland was an 80% owner on December 31, 1999. On
January 1, 2000, Heartland completed the acquisition of National
Bancshares, Inc. ("NBI") the one-bank holding company of First
National Bank of Clovis ("FNB") in New Mexico. Heartland merged
FNB into its NMB subsidiary immediately after the closing of the
NBI acquisition. As a result of this affiliate bank merger,
Heartland's ownership in NMB increased to approximately 88%.
The Bank Subsidiaries provide full service retail banking within
Dubuque and Lee Counties in Iowa; within Jo Daviess, Hancock and
Winnebago Counties in Illinois; within Dane, Green, Sheboygan,
Brown, and Eau Claire Counties in Wisconsin; and Bernalillo and
Curry Counties in New Mexico. 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.
Operating Strategy
Heartland's primary operating strategy is to differentiate the
company as a growing consortium of strong community banks through
community involvement, active boards of directors, local
presidents and local decision-making. As part of the operating
strategy, all directors, officers and employees are encouraged to
maintain a strong ownership interest in Heartland. As of
December 31, 1999, these individuals owned approximately 50% of
Heartland's outstanding common stock.
Management believes that the personal and professional service
that is offered to customers provides an appealing alternative to
the "megabanks" that have resulted from the recent mergers and
acquisitions in the financial services industry. While Heartland
employs a community banking philosophy, management believes that
Heartland's size, combined with the full line of financial
products and services, is sufficient to effectively compete in
the respective market areas. At the same time, management
realizes that to remain price competitive Heartland must manage
expense levels by centralizing the back office support functions
to gain economies of scale. Each of the subsidiaries of
Heartland operates under the direction of its own board of
directors, although Heartland has standard operating policies
regarding asset/liability management, liquidity management,
investment management, lending policies and deposit structure
management.
In order to accomplish these strategic objectives, management has
focused on improving the performance of the existing subsidiaries
while simultaneously pursuing an acquisition and expansion
strategy. With respect to the existing subsidiaries, Heartland
has primarily focused on the following strategies:
- Improving the bank subsidiaries' funding costs by reducing
the levels of higher-cost certificates of deposit, increasing the
percentage of lower-cost transaction accounts such as checking,
savings and money market accounts, emphasizing relationship
banking and capitalizing on cross-selling opportunities;
- Emphasizing the expansion of non-traditional sources of
income, including trust and investment services, consumer finance
and vehicle leasing and fleet management;
- Centralizing back office support functions to enable the
Bank Subsidiaries to operate as efficiently as possible; and
- Continually evaluating new technology and acquiring it
when the expected return justifies the cost.
Acquisition and Expansion Strategy
Heartland's strategy is to diversify both its market area and
asset base while increasing profitability through acquisitions
and through expansion of its current subsidiaries. The goal is
to expand through the acquisition of established financial
services organizations, primarily commercial banks or thrifts,
when suitable candidates can be identified and acceptable
business terms negotiated. Heartland has also formed de novo
banking institutions in market areas where management has
identified market potential and management with banking expertise
and philosophy similar to Heartland's. In evaluating expansion
and acquisition opportunities, Heartland has focused on
geographic areas in the Midwest or Southwest with growth
potential.
Heartland continually seeks and evaluates opportunities to
establish branches, loan production offices or other business
facilities as a means of expanding its presence in current or new
market areas. Heartland also looks for opportunities beyond the
Midwest and beyond the categories of community banks and thrifts
when the Heartland board of directors and management believes
that the opportunity will provide a desirable strategic fit
without posing undue risk. 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.
DB&T and WCB have also generated loans that are guaranteed by the
U.S. Small Business Administration, and DB&T 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 real estate loans is
the failure of the business due to economic events or
governmental regulations outside of the control of the borrower
or lender that negatively impact the future cash flow and market
values of the affected properties. In most cases, the Bank
Subsidiaries have collateralized these loans and/or taken
personal guarantees to help assure repayment.
The Bank Subsidiaries' commercial loans and leases are primarily
made based on the identified cash flow of the borrower and
secondarily on the underlying collateral provided by the
borrower. Credit support provided by the borrower for most of
these loans and leases and the probability of repayment is based
on the liquidation of the pledged collateral and enforcement of a
personal guarantee, if any exists. The primary repayment risks
of commercial loans and leases are that the cash flows of the
borrower may be unpredictable, and the collateral securing these
loans may fluctuate in value.
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. 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 and to provide periodic reports to the
respective boards of directors. 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
Agricultural loans are emphasized by DB&T, WCB's Monroe banking
center and NMB's Clovis banking offices due to their
concentration of customers in rural markets. DB&T maintains its
status as one of the largest agricultural lenders in the state of
Iowa. Agricultural loans remain balanced, however, in proportion
to the rest of Heartland's loan portfolio, constituting
approximately 11% of the total loan portfolio at December 31,
1999. 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 ability of the borrower to repay may be affected
by many factors outside of the borrower's control including
adverse weather conditions, loss of livestock due to disease or
other factors, declines in market prices for agricultural
products and the impact of government regulations. Payments on
agricultural loans are ultimately dependent on the profitable
operation or management of the farm property securing the loan.
The agricultural loan departments work closely with all of their
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 the 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.
As interest rates rose during 1999, residential mortgage
outstandings grew as customers elected to take three-, five- and
seven-year adjustable rate mortgage loans, 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 loans typically
have shorter terms and lower balances with higher yields as
compared to one- to four-family residential mortgage loans, but
generally carry higher risks of default. Consumer loan
collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse
personal circumstances.
Consumer loan demand is also serviced through Citizens, which
currently serves the consumer credit needs of over 3,900
customers in the three state area of Iowa, Illinois and Wisconsin
from its Dubuque, Iowa, Madison and Appleton, Wisconsin, and
Loves Park, Illinois offices. Citizens typically lends to
borrowers with past credit problems or limited credit histories.
Heartland expects to incur a higher level of credit losses on
Citizens loans as compared to other consumer loans.
Trust Departments
The trust departments for DB&T, GSB and FCB have been providing
trust services to their respective communities for many years.
Trust personnel from DB&T also work with RCB, WCB and NMB
personnel to provide trust services to all Bank Subsidiaries.
Currently, the Bank Subsidiaries have over $600 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
DB&T contracts with a third-party vendor, Focused Investments
LLC, an affiliate of Wayne Hummer & Co., to operate independent
securities offices at DB&T, GSB and FCB. Focused Investments LLC
offers full-service stock and bond trading, direct investments,
annuities and mutual funds. RCB also contracts with Invest
Financial Corporation to operate an independent securities office
at the main facility.
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 Dubuque County, Iowa, 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 seven 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, offices were opened in
Madison, Wisconsin, during June, 1996, Appleton, Wisconsin,
during August, 1998 and Loves Park, Illinois during February,
1999.
GSB 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. GSB 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.
FCB'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, FCB 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. FCB has one branch office in Keokuk and another
branch in the city of Carthage in Hancock County, Illinois.
Keokuk is an industrial community with a population of
approximately 13,500.
RCB 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.
WCB operates one office from its location in Cottage Grove,
Wisconsin, which is approximately 10 miles east of Madison in
Dane County. A branch office was opened in Middleton, a suburb
of Madison, in February, 1998. According to the 1990 census, the
county had a population of 390,000, and the village of Cottage
Grove had a population of 1,100. Wisconsin Business Bank, a
branch of WCB, opened three offices in Sheboygan, DePere and Eau
Claire, Wisconsin during 1999. These three facilities are
located in the northeastern Wisconsin counties of Sheboygan and
Brown and the west central Wisconsin county of Eau Claire with
populations of 104,000, 195,000 and 85,000, respectively,
according to the 1990 census. WCB also acquired the Bank One
Monroe Wisconsin banking center in July of 1999. The city of
Monroe, which is approximately 50 miles southwest of Madison, is
located in Green County in south central Wisconsin. According to
the 1990 census, Monroe had a population of 13,700, and Green
County had a population of 30,000.
NMB operates four offices within Albuquerque, New Mexico in
Bernalillo County. Based upon the 1990 census, the county had a
population of 480,000 and the city had a population of 385,000.
NMB also operates two locations in the New Mexico communities of
Clovis and Melrose, both located in Curry County. Clovis is
located in east central New Mexico, approximately 220 miles from
Albuquerque, 100 miles northwest of Lubbock, Texas and 105 miles
southwest of Amarillo, Texas. Clovis had a population of
approximately 31,000, and Curry County had a population of 42,000
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 the Bank Subsidiaries 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. Under the Gramm-Leach-Bliley
Act of 1999, effective March 11, 2000, securities firms and
insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions.
The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which Heartland and the Bank
Subsidiaries conduct business. The financial services industry
is also likely to become more competitive as further
technological advances enable more companies to provide financial
services. These technological advances may diminish the
importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
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, 1999, Heartland employed 484 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. Heartland offers a variety of employee
benefits and management considers its employee relations to be
excellent.
E. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No.
133, Accounting for Derivative Instruments and Hedging
Activities. In July 1999, the FASB issued FAS 137, Deferring
Statement 133's Effective Date, which defers the effective date
for implementation of FAS 133 by one year, making FAS 133
effective no later than January 1, 2001 for Heartland's financial
statements. Management does not believe the adoption of FAS 133
will have a material impact on the consolidated financial
statements.
F. SUPERVISION AND REGULATION (dollars in thousands)
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 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 the Iowa Superintendent of
Banking (the "Iowa Superintendent"), the Illinois Commissioner of
Banks and Real Estate (the "Illinois Commissioner"), the Division
of Banking of the Wisconsin Department of Financial Institutions
(the "Wisconsin DFI"), the New Mexico Financial Institutions
Division (the "New Mexico Division"), the Office of Thrift
Supervision (the "OTS"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Federal Deposit
Insurance Corporation (the "FDIC"), the Internal Revenue Service
and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes,
regulations and regulatory 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 its 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 its
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 is a summary of the material elements of the
regulatory framework that applies to Heartland and its
subsidiaries. It does not describe all of the statutes,
regulations and regulatory policies that apply to Heartland and
its subsidiaries, nor does it restate all of the requirements of
the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety
by reference to the applicable statutes, regulations and
regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business
of Heartland and its subsidiaries.
Recent Regulatory Developments
On November 12, 1999, President Clinton signed legislation that
will allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Gramm-Leach-
Bliley Act (the "Act"), a bank holding company that elects to
become a financial holding company may engage in any activity
that the Federal Reserve, in consultation with the Secretary of
the Treasury, determines by regulation or order is (i) financial
in nature, (ii) incidental to any such financial activity, or
(iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The Act
specifies certain activities that are deemed to be financial in
nature, including lending, exchanging, transferring, investing
for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic
advisory services; underwriting, dealing in or making a market
in, securities; and any activity currently permitted for bank
holding companies by the Federal Reserve under section 4(c)(8) of
the Bank Holding Company Act. A bank holding company may elect
to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory
rating under the Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for
a financial holding company (as described above) and any activity
that the Secretary of the Treasury, in consultation with the
Federal Reserve, determines is financial in nature or incidental
to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate
investment activities (unless otherwise permitted by law), (iii)
insurance company portfolio investments and (iv) merchant
banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital
the bank's outstanding investments in financial subsidiaries).
The Act provides that state banks may invest in financial
subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same
conditions that apply to national bank investments in financial
subsidiaries.
At this time, it is not possible to predict the impact the Act
may have on Heartland. Various bank regulatory agencies have
just begun issuing regulations as mandated by the Act. The
Federal Reserve has issued an interim rule that sets forth
procedures by which bank holding companies may become financial
holding companies, the criteria necessary for such a conversion,
and the Federal Reserve's enforcement powers should a holding
company fail to maintain compliance with the criteria. The
Office of the Comptroller of the Currency has issued a final rule
discussing the procedures by which national banks may establish
financial subsidiaries as well as the qualifications and
safeguards that will be required. In addition, in February,
2000, all federal bank regulatory agencies jointly issued a
proposed rule that would implement the financial privacy
provisions of the Act.
Heartland
General
Heartland, as the sole shareholder of DB&T, GSB, RCB and WCB and
the controlling shareholder of NMB, is a bank holding company.
As a bank holding company, Heartland is registered with, and is
subject to regulation by, the Federal Reserve under the Bank
Holding Company Act, as amended (the "BHCA"). In accordance with
Federal Reserve 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 otherwise do so. Under the BHCA, Heartland
is subject to periodic examination by the Federal Reserve.
Heartland is also required to file with the Federal Reserve
periodic reports of Heartland's operations and such additional
information regarding Heartland and its subsidiaries as the
Federal Reserve may require.
Heartland's ownership of FCB makes Heartland a savings and loan
holding company, as defined in the Home Owners' Loan Act (the
"HOLA"). Although savings and loan holding companies generally
are subject to supervision and regulation by the OTS, companies
that, like Heartland, are both bank holding companies and savings
and loan holding companies are generally exempt from OTS
supervision. Federal law, however, requires the Federal Reserve
to consult with the OTS, as appropriate, in establishing the
scope of a Federal Reserve examination of such holding company,
to provide the OTS, upon request, with copies of Federal Reserve
examination reports and other supervisory information concerning
any such holding company, and to cooperate with the OTS in any
enforcement action against any such holding company if the
conduct at issue involves Heartland's savings association
subsidiary.
Investments and Activities
Under the BHCA, a bank holding company must obtain Federal
Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank
holding company if, after the acquisition, it would own or
control more than 5% of the shares of the other bank or bank
holding company (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 Federal Reserve 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 Federal Reserve
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 (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies)
and state laws 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 generally prohibits 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.
This general prohibition is subject to a number of exceptions.
The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses
found by the Federal Reserve to be "so closely related to banking
... as to be a proper incident thereto." Under current
regulations of the Federal Reserve, Heartland and its non-bank
subsidiaries are permitted to engage in a variety of banking-
related businesses, including 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 domestic activities of non-
bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of an FDIC-insured depository institution or its
holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of an institution or
holding company.
Capital Requirements
Bank holding companies are required to maintain minimum levels of
capital in accordance with Federal Reserve 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 Federal Reserve'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%, at least one-half of which 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 a minimum requirement of 4% 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). Total capital consists
primarily of 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. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. For example, the Federal
Reserve's capital guidelines contemplate that additional capital
may be required to take adequate account of, among other things,
interest rate risk, or the risks posed by concentrations of
credit, nontraditional activities or securities trading
activities. 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, 1999, Heartland had regulatory capital in
excess of the Federal Reserve's minimum requirements, with a risk-
based capital ratio of 11.68% and a leverage ratio of 8.85%.
Dividends
The Delaware General Corporation Law (the "DGCL") allows
Heartland to pay dividends only out of its surplus (as defined
and computed in accordance with the provisions of the DGCL) 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. Additionally, the Federal Reserve has
issued a policy statement with regard to the payment of cash
dividends by bank holding companies. The policy statement
provides that a bank holding company should not pay cash
dividends which exceed its net income or which can only be funded
in ways that weaken the bank holding company's financial health,
such as by borrowing. The Federal Reserve also 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.
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, the
Company 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, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF-
insured, Iowa-chartered bank, DB&T is subject to the examination,
supervision, reporting and enforcement requirements of the Iowa
Superintendent, as the chartering authority for Iowa banks, and
the FDIC, as administrator of the BIF.
GSB and RCB are Illinois-chartered banks, the deposit accounts of
which are insured by the BIF of the FDIC. As BIF-insured,
Illinois-chartered banks, GSB and RCB are subject to the
examination, supervision, reporting and enforcement requirements
of the Illinois Commissioner, as the chartering authority for
Illinois banks, and the FDIC, as administrator of the BIF.
WCB is a Wisconsin-chartered bank, the deposit accounts of which
are insured by the BIF of the FDIC. As a BIF-insured, Wisconsin-
chartered bank, WCB is subject to the examination, supervision,
reporting and enforcement requirements of the Wisconsin DFI, as
the chartering authority for Wisconsin banks, and the FDIC, as
administrator of the BIF.
NMB is a New Mexico-chartered bank, the deposit accounts of which
are insured by the BIF of the FDIC. As a BIF-insured, New Mexico-
chartered bank, NMB is subject to the examination, supervision,
reporting and enforcement requirements of the New Mexico
Division, as the chartering authority for New Mexico banks, and
the FDIC, as administrator of the BIF.
FCB is a federally chartered savings association, the deposits of
which are insured by the FDIC's Savings Association Insurance
Fund ("SAIF"). As a SAIF-insured, federally chartered savings
association, FCB 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.
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 results of 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, 1999, both BIF and SAIF
assessments ranged from 0% of deposits to 0.27% of deposits. For
the semi-annual assessment period beginning January 1, 2000, both
BIF and SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing,
that the institution (i) has engaged or is engaging in unsafe or
unsound practices, (ii) is in an unsafe or unsound condition to
continue operations or (iii) 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 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 Financing Corporation
("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result
of federal legislation enacted in 1996, beginning as of January
1, 1997, both SAIF members and BIF members became subject to
assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Between January 1,
2000 and the final 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. During the year
ended December 31, 1999, the FICO assessment rate for SAIF
members ranged between approximately 0.058% of deposits and
approximately 0.061% of deposits, while the FICO assessment rate
for BIF members ranged between approximately 0.0116% of deposits
and approximately 0.0122% of deposits. During the year ended
December 31, 1999, the Bank Subsidiaries paid FICO assessments
totaling $121.
Supervisory Assessments
All Iowa banks, Illinois banks, Wisconsin banks, New Mexico banks
and federal savings associations are required to pay supervisory
assessments to the Iowa Superintendent, the Illinois
Commissioner, the Wisconsin DFI, the New Mexico Division and the
OTS, respectively, to fund the operations of such agencies. In
general, the amount of such supervisory assessments is based upon
each institution's total assets. During the year ended December
31, 1999, the Bank Subsidiaries paid supervisory assessments
totaling $152.
Capital Requirements
The FDIC has established the following minimum capital standards
for state-chartered insured non-member banks, such as DB&T, GSB,
RCB, WCB and NMB: a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-
rated banks with a minimum requirement of at least 4% 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 Federal Reserve's capital
guidelines for bank holding companies (see "--Heartland--Capital
Requirements").
Pursuant to the HOLA and OTS regulations, savings associations,
such as FCB, are subject to the following minimum capital
requirements: a core capital requirement, consisting of a
minimum ratio of core capital to total assets of 3% for savings
associations assigned a composite rating of 1 as of the
association's most recent OTS examination, with a minimum core
capital requirement of 4% of total assets for all other savings
associations; 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. Core capital
consists primarily of permanent stockholders' equity less (i)
intangible assets other than certain supervisory goodwill,
certain mortgage servicing rights and certain purchased credit
card relationships and (ii) 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. Total capital consists primarily of core
capital plus certain debt and equity instruments that do not
qualify as core capital and a portion of FCB's allowances for
loan and leases 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, among other things, interest rate
risk or the risks posed by concentrations of credit or
nontraditional activities.
During the year ended December 31, 1999, 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 requirement. As of December 31, 1999, each of the
Bank Subsidiaries exceeded its minimum regulatory capital
requirements, as follows:
Risk-Based Leverage Tangible
Capital Capital Capital
Ratio Ratio Ratio
--------- --------- ---------
DB&T 10.75 7.94 N/A
GSB 12.16 7.68 N/A
RCB 11.57 8.23 N/A
WCB 10.99 8.43 N/A
NMB 19.02 18.00 N/A
FCB 12.01 8.08 8.04
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," in each case as defined by regulation.
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring
the institution to submit a capital restoration plan; limiting
the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
restricting transactions between the institution and its
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. As of
December 31, 1999, each of the Bank Subsidiaries was well
capitalized, as defined by applicable regulations.
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. Because Heartland owns more
than 25% of the outstanding stock of each of the Bank
Subsidiaries, the Bank Subsidiaries are deemed to be commonly
controlled.
Dividends
In general, under applicable state law, DB&T, GSB, RCB, WCB and
NMB may not pay dividends in excess of their undivided profits.
OTS regulations require prior OTS approval for any capital
distribution by a savings association that is not eligible for
expedited processing under the OTS's application processing
regulations. In order to qualify for expedited processing, a
savings association must: (i) have a composite examination
rating of 1 or 2; (ii) have a Community Reinvestment Act rating
of satisfactory or better; (iii) have a compliance rating of 1 or
2; (iv) meet all applicable regulatory capital requirements; and
(v) not have been notified by the OTS that it is a problem
association or an association in troubled condition. Savings
associations that qualify for expedited processing are not
required to obtain OTS approval prior to making a capital
distribution unless: (a) the amount of the proposed capital
distribution, when aggregated with all other capital
distributions during the same calendar year, will exceed an
amount equal to the association's year-to-date net income plus
its retained net income for the preceding two years; (b) after
giving effect to the distribution, the association will not be at
least "adequately capitalized" (as defined by OTS regulation); or
(c) the distribution would violate a prohibition contained in an
applicable statute, regulation or agreement with the OTS or the
FDIC or violate a condition imposed in connection with an OTS-
approved application or notice. The OTS must be given prior
notice of certain types of capital distributions, including any
capital distribution by a savings association that, like FCB, is
a subsidiary of a holding company, or by a savings association
that, after giving effect to the distribution, would not be "well-
capitalized" (as defined by OTS regulation).
The payment of dividends by any financial institution or its
holding company 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, 1999.
Further, under applicable regulations of the OTS, the FCB may not
pay dividends in an amount, which would reduce its capital below
the amount required for the liquidation account established in
connection with the FCB's conversion from the mutual to the stock
form of ownership in 1991. As of December 31, 1999,
approximately $35,210 was available to be paid as dividends to
Heartland by the Bank Subsidiaries. Notwithstanding the
availability of funds for dividends, however, the banking
regulators may prohibit the payment of any dividends by the Bank
Subsidiaries if such payment is deemed to constitute an unsafe or
unsound practice.
Insider Transactions
The Bank Subsidiaries are subject to certain restrictions imposed
by federal law 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,
federal law 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 one of the Bank Subsidiaries
maintains a correspondent relationship.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines, which
establish operational and managerial standards to promote the
safety and soundness of federally insured depository
institutions. 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. Since the fourth quarter of 1998, and through the
first quarter of 2000, the federal banking regulators have issued
safety and soundness standards for achieving Year 2000
compliance, including standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for
contingencies.
In general, the safety and soundness 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 institution's primary
federal regulator may require the institution to submit a plan
for achieving and maintaining 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. 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. Noncompliance with the standards
established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal
banking regulators, including cease and desist orders and civil
money penalty assessments.
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 de novo branch is to be located.
Illinois banks, such as GSB and RCB, have authority under
Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory
approvals. Likewise, under the laws of Wisconsin and New Mexico,
Wisconsin banks and New Mexico banks, respectively, have
statewide branching authority, subject to regulatory approval.
Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act"), both state and national
banks are allowed 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 new
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
allowed individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997. The laws of Iowa, Illinois, Wisconsin and New
Mexico permit interstate bank mergers, subject to certain
conditions, including a prohibition against interstate mergers
involving an Iowa, Illinois, Wisconsin or New Mexico bank,
respectively, that have been in existence and continuous
operation for fewer than five years.
Federally chartered savings associations 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 or acquire branch offices anywhere in the United
States. If a federal savings association fails to qualify as a
"domestic building and loan association," as defined in the
Internal Revenue Code, and fails to meet the qualified thrift
lender test, the association may branch only to the extent
permitted for national banks located in the savings association's
home state. As of December 31, 1999, FCB 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.
These restrictions have not had, and are not currently expected
to have, a material impact on the operations of DB&T, GSB, RCB,
WCB or NMB.
Qualified Thrift Lender Test
The HOLA requires every savings association to satisfy a
"qualified thrift lender" ("QTL") test. Under the HOLA, a
savings association will be deemed to meet the QTL test if it
either (i) maintains at least 65% of its "portfolio assets" in
"qualified thrift investments" on a monthly basis in nine out of
every 12 months or (ii) qualifies as a "domestic building and
loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist
of mortgage loans, mortgage-backed securities, education loans,
small business loans, credit card loans and certain other housing
and consumer-related loans and investments. "Portfolio assets"
consist of a savings association's total assets less goodwill and
other intangible assets, the association's business properties
and a limited amount of the liquid assets maintained by the
association pursuant to the liquidity requirements of the HOLA
and OTS regulations (see "--The Bank Subsidiaries--Liquidity
Requirements"). A savings association that fails to meet the QTL
test must either convert to a bank charter or operate under
certain restrictions on its operations and activities.
Additionally, within one year following the loss of QTL status,
the holding company for the savings association will be required
to register as, and will be deemed to be, a bank holding company.
A savings association that fails the QTL test may requalify as a
QTL but it may do so only once. As of December 31, 1999, FCB
satisfied the QTL test, with a ratio of qualified thrift
investments to portfolio assets of 79.03%, 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 quarter, 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 4% of either (i)
its liquidity base (i.e., its net withdrawable accounts plus
borrowings repayable in 12 months or less) as of the end of the
preceding calendar quarter or (ii) the average daily balance of
its liquidity base during the preceding calendar quarter. This
liquidity requirement may be changed from time to time by the OTS
to an amount within a range of 4% to 10% of the liquidity base,
depending upon economic conditions and the deposit flows of
savings associations. The OTS may also require a savings
association to maintain a higher level of liquidity than the
minimum 4% requirement if the OTS deems necessary to ensure the
safe and sound operation of the association. Penalties may be
imposed for failure to meet liquidity ratio requirements. At
December 31, 1999, FCB was in compliance with OTS liquidity
requirements, with a liquidity ratio of 8.73%.
Federal Reserve System
Federal Reserve 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 $44,300 or less, the reserve requirement is 3% of
total transaction accounts; and for transaction accounts
aggregating in excess of $44,300, the reserve requirement is
$1,329 plus 10% of the aggregate amount of total transaction
accounts in excess of $44,300. The first $5,000 of otherwise
reservable balances is exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by
the Federal Reserve. The Bank Subsidiaries are in compliance
with the foregoing requirements. The balances used to meet the
reserve requirements imposed by the Federal Reserve may be used
to satisfy liquidity requirements to which FCB is subject under
the HOLA and OTS regulations.
G. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of Heartland are affected by the policies of
regulatory authorities, including the Federal Reserve 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 following table is a listing of the principal operating
facilities of Heartland:
Main Main
Facility Facility Number
Name and Main Square Owned or of
Facility Address Footage Leased Locations
- ---------------- -------- -------- ---------
Banking Subsidiary
DB&T
1398 Central Avenue 59,500 Owned 8
Dubuque, IA 52001
GSB
971 Gear Street 18,000 Owned 3
Galena, IL 61036
RCB
6855 E. Riverside Blvd. 8,000 Owned 3
Rockford, IL 60114
FCB
320 Concert Street 6,000 Owned 3
Keokuk, IA 52632
WCB
580 North Main Street
Cottage Grove, WI 53527 6,000 Owned 6
NMB
320 Gold NW
Albuquerque, NM 87102 11,400 Lease term 6
through 2006
Main
Facility Number
Name and Main Owned or of
Facility Address Leased Locations
- ---------------- -------- ---------
Nonbanking Subsidiaries
Citizens
1275 Main Street Leased
Dubuque, IA 52001 from DB&T 4
ULTEA
2976 Triverton Pike
Madison, WI 53711 Leased 2
The principal offices of Heartland are located in DB&T's main
office.
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 1999 to a
vote of security holders.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Heartland's common stock was held by approximately 870
shareholders of record as of March 23, 2000, 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
Calendar Quarter High Low
---- ---
1998:
First $14 5/16 $16
Second 14 16 7/8
Third 15 3/4 19
Fourth 16 3/4 19
1999:
First $19 1/2 $17 7/8
Second 19 3/4 18 1/4
Third 20 1/2 18 7/8
Fourth 19 3/8 16
Cash dividends have been declared by Heartland quarterly during
the past two years ending December 31, 1999. The following table
sets forth the cash dividends per share paid on Heartland's
common stock for the past two years:
Calendar Quarter
1999 1998
---- ----
First $.08 $.075
Second .08 .075
Third .09 .08
Fourth .09 .08
<PAGE>
ITEM 6.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended December 31,
1999 1998 1997
--------------------------------
STATEMENT OF INCOME DATA
Interest income $ 74,154 $ 64,517 $ 59,261
Interest expense 40,849 36,304 31,767
-------- -------- --------
Net interest income 33,305 28,213 27,494
Provision for loan and
lease losses 2,626 951 1,279
-------- -------- --------
Net interest income after
provision for loan and
lease losses 30,679 27,262 26,215
Noninterest income 25,424 17,297 8,565
Noninterest expense 44,722 31,781 22,927
Provision for income taxes 3,156 3,757 3,338
-------- -------- --------
Net income $ 8,225 $ 9,021 $ 8,515
======== ======== ========
PER COMMON SHARE DATA
Net income-basic $ 0.86 $ 0.95 $ 0.90
Net income-diluted 0.84 0.94 0.89
Cash dividends 0.34 .31 .26
Dividend payout ratio 39.47% 32.48% 28.96%
Book value $ 9.03 $ 8.84 $ 8.19
Weighted average shares
outstanding 9,555,194 9,463,313 9,476,342
BALANCE SHEET DATA
Investments and federal
funds sold $213,452 $259,964 $234,666
Total loans and leases,
net of unearned 835,146 590,133 556,406
Allowance for loan and lease
losses 10,844 7,945 7,362
Total assets 1,184,147 953,785 852,060
Total deposits 869,659 717,877 623,532
Long-term obligations 76,657 57,623 43,023
Stockholders' equity 86,573 84,270 77,772
EARNINGS PERFORMANCE DATA
Return on average total assets 0.78% 1.01% 1.09%
Return on average stockholders'
equity 9.61 11.26 11.59
Net interest margin ratio (1) 3.64 3.58 3.89
Earnings to fixed charges:
Excluding interest on deposits 2.15x 2.65x 2.97x
Including interest on deposits 1.28 1.35 1.37
ASSET QUALITY RATIOS
Nonperforming assets to total
assets 0.19% 0.28% 0.34%
Nonperforming loans and leases
to total loans and leases 0.20 0.30 0.37
Net loan and lease charge-offs
to average loans and leases 0.06 0.07 0.08
Allowance for loan and lease
losses to total loans and
leases 1.30 1.35 1.32
Allowance for loan and lease
losses to nonperforming
loans and leases 657.49 453.74 362.30
CAPITAL RATIOS
Average equity to average
assets 8.12% 9.01% 9.39%
Total capital to risk-adjusted
assets 11.68 12.13 12.71
Tier 1 leverage 8.85 8.58 8.76
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
1996 1995
-------------------
STATEMENT OF INCOME DATA
Interest income $51,886 $ 49,149
Interest expense 27,644 25,529
-------- --------
Net interest income 24,242 23,620
Provision for loan and lease losses 1,408 820
-------- --------
Net interest income after provision
for loan and lease losses 22,834 22,800
Noninterest income 7,364 4,981
Noninterest expense 19,507 17,323
Provision for income taxes 2,685 2,884
-------- ---------
Net income $ 8,006 $ 7,574
======== ========
PER COMMON SHARE DATA
Net income-basic $ 0.85 $ 0.79
Net income-diluted 0.84 0.78
Cash dividends .20 .15
Dividend payout ratio 23.53% 19.03%
Book value $ 7.42 $ 6.88
Weighted average shares
outstanding 9,430,018 9,610,368
BALANCE SHEET DATA
Investments and federal funds sold $183,966 $171,726
Total loans and leases, net of unearned 484,085 454,905
Allowance for loan and lease losses 6,191 5,580
Total assets 736,552 677,313
Total deposits 558,343 534,587
Long-term obligations 42,506 45,400
Stockholders' equity 70,259 64,506
EARNINGS PERFORMANCE DATA
Return on average total assets 1.16% 1.18%
Return on average stockholders' equity 12.00 12.28
Net interest margin ratio (1) 3.98 4.13
Earnings to fixed charges:
Excluding interest on deposits 3.38x 3.97x
Including interest on deposits 1.39 1.41
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.34% 0.28%
Nonperforming loans and leases
to total loans and leases 0.41 0.26
Net loan and lease charge-offs
to average loans and leases 0.17 0.08
Allowance for loan and lease losses
to total loans and leases 1.28 1.23
Allowance for loan and lease losses
to nonperforming loans and leases 313.63 463.84
CAPITAL RATIOS
Average equity to average assets 9.66% 9.59%
Total capital to risk-adjusted assets 14.28 14.46
Tier 1 leverage 9.54 9.47
(1) Tax equivalent using a 34% tax rate.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollars in thousands)
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 subsidiaries: Dubuque Bank and Trust Company
("DB&T"); Galena State Bank and Trust Company ("GSB"); Riverside
Community Bank ("RCB"); Wisconsin Community Bank ("WCB"); New
Mexico Bank & Trust ("NMB"); First Community Bank, FSB ("FCB");
Citizens Finance Co. ("Citizens"); ULTEA, Inc. ("ULTEA"); DB&T
Insurance, Inc.; DB&T Community Development Corp.; DBT Investment
Corporation; Keokuk Bancshares, Inc. (dba KBS Investment Corp.),
and Heartland Capital Trust I ("Trust I"). All of Heartland's
subsidiaries are wholly-owned except for NMB, of which Heartland
was an 80% owner on December 31, 1999.
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. 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'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, rental income on operating
leases and trust income, also affects Heartland's results of
operations. Heartland's principal operating expenses, aside from
interest expense, consist of compensation and employee benefits,
occupancy and equipment costs, depreciation on equipment under
operating leases and provision for loan and lease losses.
Heartland crossed the one billion dollar mark during 1999, as
total assets reached $1,184,147 at year-end, an increase of
$230,362 or 24.15% since year-end 1998 and the largest percentage
increase since 1992. Particularly gratifying was the significant
growth experienced in the loan portfolio, which grew to $835,146
at December 31, 1999, an increase of $245,013 or 41.52% since
December 31, 1998.
Net income recorded during 1999 totaled $8,225 or $.86 on a basic
per common share basis. During 1998, annual earnings were $9,021
or $.95 on a basic per common share basis. Return on common
equity was 9.61% and return on assets was .78% for 1999, compared
to 11.26% and 1.01% for 1998, respectively. Earnings declined
during the year, as compared to 1998, primarily as a result of an
increased loan loss provision associated with the strong loan
growth experienced. Additionally, earnings were affected by
expenses incurred to pursue growth initiatives in new and
existing markets, combined with a reduction in the amount of
securities gains realized.
During 1998, Heartland was able to sustain an increase in
earnings even though additional overhead was expended on growth
initiatives. Earnings increased $506 or 5.94% during 1998 when
compared to the $8,515 or $.90 per basic common share recorded
during 1997. Return on common equity was 11.59% and return on
assets was 1.09% for 1997. Heartland's total assets grew
$101,725 or 11.94% from year-end 1997. Loans and leases were up
$33,727 or 6.06% at December 31, 1998.
The initiatives undertaken in these years to position Heartland
for future increased earnings included:
NMB was established in Albuquerque, New Mexico in May of
1998 and subsequently opened three additional branches
during the second and third quarters of 1999. Total assets
at NMB reached $101,164 at December 31, 1999. The
acquisition and subsequent merger of First National Bank of
Clovis into NMB was completed on January 1, 2000, nearly
doubling NMB's asset size.
WCB was acquired in March of 1997 and subsequently opened a
branch office in Middleton, Wisconsin in early 1998.
Additional offices were opened during 1999 in Sheboygan,
Green Bay and Eau Claire, Wisconsin and the acquisition of
Bank One Wisconsin's Monroe branch was completed in July of
1999. Total assets at this entity went from $54,031 at year-
end 1998 to $185,837 on December 31, 1999.
RCB, Heartland's 1995 de novo bank in Rockford, Illinois,
opened an additional branch location in July of 1999.
ULTEA acquired Arrow Motors Inc., a Wisconsin corporation
doing business as Lease Associates Group ("LAG"), in July of
1998 and, as a result, became the largest fleet management
company based in Wisconsin.
Citizens, a consumer finance company, opened offices in
Appleton, Wisconsin and Rockford, Illinois during 1998.
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 $34,125,
$28,999 and $28,280 for 1999, 1998 and 1997, respectively, an
increase of $5,126 or 17.68% for 1999 and $719 or 2.54% for 1998.
These increases were primarily attributable to the significant
growth in loans and the ability to keep the increase in interest
expense below the growth in interest income.
Expressed as a percentage of average earning assets, Heartland's
net interest margin was 3.64% in 1999, 3.58% in 1998 and 3.89% in
1997. The 1999 increase was primarily the result of a shift in
the asset mix on the balance sheet as gross loans went from
61.87% of total assets at December 31, 1998, to 70.53% at
December 31, 1999. The decrease in net interest margin during
1998 occurred for several reasons:
The operations of ULTEA resulted in additional interest
expense associated with debt utilized to fund the vehicles
under operating leases while the income derived from these
leases is recorded as noninterest income.
A decline and flattening of the yield curve resulted in an
acceleration of paydowns in the mortgage-backed securities and
loan portfolio and pressure from loan customers to lower rates
charged on their balances.
The return on Heartland's securities portfolio declined as
several higher-yielding securities matured or were called and
the average life of the portfolio was reduced as prepayments
accelerated on the mortgage-backed securities portfolio.
Heartland continues to manage its balance sheet on a proactive
basis. 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)
For the Year Ended
December 31, 1999
Average
Balance Interest Rate
---------- -------- ------
EARNING ASSETS
Securities:
Taxable $ 200,559 $11,113 5.54%
Nontaxable (1) 21,010 1,842 8.77
---------- ------- ------
Total securities 221,569 12,955 5.85
----- ---- ------- ------
Interest bearing deposits 8,176 468 5.72
Federal funds sold 7,741 410 5.30
---------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 365,199 29,790 8.16
Residential mortgage 162,878 12,773 7.84
Agricultural and agricultural
real estate (1) 86,505 7,382 8.53
Consumer 86,132 8,683 10.08
Direct financing leases, net 9,401 659 7.01
Fees on loans - 1,854 -
Less: allowance for loan
and lease losses (9,336) - -
---------- ------- ------
Net loans and leases 700,779 61,141 8.72
---------- ------- ------
Total earning assets 938,265 74,974 7.99
---------- ------- ------
NONEARNING ASSETS
Total nonearning assets 115,757 - -
---------- ------- ------
TOTAL ASSETS $1,054,022 $74,974 7.11%
========== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $ 324,476 $10,789 3.33%
Time, $100,000 and over 59,822 3,222 5.39
Other time deposits 312,051 17,169 5.50
Short-term borrowings 111,853 5,630 5.03
Other borrowings 60,490 4,039 6.68
---------- ------- ------
Total interest bearing
liabilities 868,692 40,849 4.70
---------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 81,511 - -
Accrued interest and other
liabilities 18,254 - -
---------- ------- ------
Total noninterest bearing
liabilities 99,765 - -
---------- ------- ------
Stockholders' Equity 85,565 - -
---------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,054,022 $40,849 3.88%
========== ======= ======
Net interest income (1) $34,125
=======
Net interest income
to total earning assets (1) 3.64%
======
Interest bearing liabilities
to earning assets 92.58%
==========
(1) Tax equivalent basis is calculated using an effective tax
rate of 34%.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
For the Year Ended
December 31, 1998
Average
Balance Interest Rate
-------- -------- ------
EARNING ASSETS
Securities:
Taxable $196,206 $11,515 5.87%
Nontaxable (1) 20,507 1,716 8.37
-------- ------- ------
Total securities 216,713 13,231 6.11
-------- ------- ------
Interest bearing deposits 8,313 386 4.64
Federal funds sold 29,830 1,582 5.30
-------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 249,326 21,523 8.63
Residential mortgage 162,545 12,854 7.91
Agricultural and agricultural
real estate (1) 75,685 6,751 8.92
Consumer 66,138 6,702 10.13
Direct financing leases, net 8,367 625 7.47
Fees on loans - 1,649 -
Less: allowance for loan
and lease losses (7,944) - -
-------- ------- ------
Net loans and leases 554,117 50,104 9.04
-------- ------- ------
Total earning assets 808,973 65,303 8.07
-------- ------- ------
NONEARNING ASSETS
Total nonearning assets 80,317 - -
-------- ------- ------
TOTAL ASSETS $889,290 $65,303 7.34%
======== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $266,282 $ 9,512 3.57%
Time, $100,000 and over 51,283 2,905 5.66
Other time deposits 282,142 16,228 5.75
Short-term borrowings 78,484 4,076 5.19
Other borrowings 56,137 3,583 6.38
-------- ------- ------
Total interest bearing
liabilities 734,328 36,304 4.94
-------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 60,514 - -
Accrued interest and other
liabilities 14,343 - -
-------- ------- ------
Total noninterest bearing
liabilities 74,857 - -
-------- ------- ------
Stockholders' Equity 80,105 - -
-------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $889,290 $36,304 4.08%
======== ======= ======
Net interest income (1) $28,999
=======
Net interest income
to total earning assets (1) 3.58%
======
Interest bearing liabilities
to earning assets 90.77%
========
(1) Tax equivalent basis is calculated using an effective tax
rate of 34%.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
For the Year Ended
December 31, 1997
Average
Balance Interest Rate
-------- -------- ------
EARNING ASSETS
Securities:
Taxable $169,086 $10,393 6.15%
Nontaxable (1) 19,700 1,773 9.00
-------- ------- ------
Total securities 188,786 12,166 6.44
-------- ------- ------
Interest bearing deposits 2,972 98 3.30
Federal funds sold 12,570 681 5.42
-------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 222,157 19,683 8.86
Residential mortgage 178,362 14,083 7.90
Agricultural and agricultural
real estate (1) 66,294 6,037 9.11
Consumer 55,218 5,672 10.27
Direct financing leases, net 6,739 501 7.43
Fees on loans - 1,126 -
Less: allowance for loan
and lease losses (6,998) - -
-------- ------- ------
Net loans and leases 521,772 47,102 9.03
-------- ------- ------
Total earning assets 726,100 60,047 8.27
-------- ------- ------
NONEARNING ASSETS
Total nonearning assets 56,596 - -
-------- ------- ------
TOTAL ASSETS $782,696 $60,047 7.67%
======== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $237,730 $ 8,317 3.50%
Time, $100,000 and over 34,913 1,961 5.62
Other time deposits 268,201 15,487 5.77
Short-term borrowings 70,313 3,740 5.32
Other borrowings 36,406 2,262 6.21
-------- ------- ------
Total interest bearing
liabilities 647,563 31,767 4.91
-------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 51,770 - -
Accrued interest and other
liabilities 9,906 - -
-------- ------- ------
Total noninterest bearing
liabilities 61,676 - -
-------- ------- ------
Stockholders' Equity 73,457 - -
-------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $782,696 $31,767 4.06%
======== ======= ======
Net interest income (1) $28,280
=======
Net interest income
to total earning assets (1) 3.89%
======
Interest bearing liabilities
to earning assets 89.18%
========
(1) Tax equivalent basis is 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
For the Year Ended
December 31,
1999 Compared to 1998
Change Due to
Volume Rate Net
--------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $ 255 $ (657) $ (402)
Nontaxable 42 84 126
Interest bearing deposits (6) 88 82
Federal funds sold (1,171) (1) (1,172)
Loans and leases 13,261 (2,224) 11,037
------- ------ -------
TOTAL EARNING ASSETS 12,381 (2,710) 9,671
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 2,079 (802) 1,277
Time, $100,000 and over 484 (167) 317
Other time deposits 1,720 (779) 941
Short-term borrowings 1,733 (179) 1,554
Other borrowings 278 178 456
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 6,294 (1,749) 4,545
------- ------- -------
NET INTEREST INCOME $ 6,087 $ (961) $ 5,126
======= ======= =======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Year Ended
December 31,
1998 Compared to 1997
Change Due to
Volume Rate Net
-------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $1,668 $(546) $1,122
Nontaxable 72 (129) (57)
Interest bearing deposits 176 112 288
Federal funds sold 935 (34) 901
Loans and leases 2,920 82 3,002
------ ----- ------
TOTAL EARNING ASSETS 5,771 (515) 5,256
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 999 196 1,195
Time, $100,000 and over 919 25 944
Other time deposits 805 (64) 741
Short-term borrowings 435 (99) 336
Other borrowings 1,226 95 1,321
------ ----- ------
TOTAL INTEREST BEARING
LIABILITIES 4,384 153 4,537
------ ----- ------
NET INTEREST INCOME $1,387 $(668) $ 719
====== ===== ======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Year Ended
December 31,
1997 Compared to 1996
Change Due to
Volume Rate Net
-------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $2,033 $ (32) $2,001
Nontaxable (1,133) (202) (1,335)
Interest bearing deposits (51) (14) (65)
Federal funds sold 55 16 71
Loans and leases 5,725 530 6,255
------ ----- ------
TOTAL EARNING ASSETS 6,629 298 6,927
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 813 30 843
Time, $100,000 and over (163) (7) (170)
Other time deposits 1,641 261 1,902
Short-term borrowings 1,739 58 1,797
Other borrowings (331) 82 (249)
------ ----- ------
TOTAL INTEREST BEARING
LIABILITIES 3,699 424 4,123
------ ----- ------
NET INTEREST INCOME $2,930 $(126) $2,804
====== ===== ======
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses increased $1,675 or
176.13% during 1999 when compared to 1998. This increase was
primarily in response to the significant loan growth experienced
and was made to provide, in management's opinion, an adequate
allowance for loan and lease losses. During 1998, the provision
for loan and lease losses decreased $328 or 25.65% when compared
to 1997. This reduction was primarily the result of a $357
recovery on a pool of leases written down during 1996.
NONINTEREST INCOME
For the Years Ended
December 31,
1999 1998 1997
--------------------------
Service charges and fees $ 3,906 $ 3,013 $2,723
Trust fees 2,662 2,284 2,009
Brokerage commissions 655 413 324
Insurance commissions 803 751 563
Securities gains, net 713 1,897 1,446
Rental income on operating leases 14,718 7,428 811
Gains on sale of loans 1,028 1,212 373
Other noninterest income 939 299 316
------- ------- ------
Total noninterest income $25,424 $17,297 $8,565
======= ======= ======
The above table shows Heartland's noninterest income for the
years indicated. Total noninterest income increased $8,127 or
46.99% during 1999, as compared to an increase of $8,732 or
101.95% during 1998.
Expansion into vehicle leasing and fleet management was
responsible for the significant growth in noninterest income
during both years. Rental income on operating leases accounted
for 89.70% and 75.78% of the change in 1999 and 1998,
respectively. ULTEA's first full year of operation as a
Heartland subsidiary occurred in 1997. During the third quarter
of 1998, ULTEA acquired LAG and, as a result, more than doubled
in asset size going from $15 million to $35 million.
Gains on sale of loans decreased $184 or 15.18% during 1999. The
volume of mortgage loans sold into the secondary market declined
during 1999 as rates moved upward and customers elected to take
three- and five-year adjustable rate mortgage loans, which
Heartland elected to retain in its loan portfolio. Conversely,
during 1998, gains on sale of loans increased $839 or 224.93% as
Heartland experienced refinancing activity in its real estate
mortgage loan portfolio as a result of decreasing interest rates.
The majority of these new fixed rate 15- and 30-year real estate
loans were sold into the secondary market.
Securities gains decreased $1,184 or 62.41% during 1999 compared
to 1998. During 1998, securities gains increased $451 or 31.19%
compared to 1997 and were attributable to the strong performance
of Heartland's equity portfolio.
Emphasis during the past several years on enhancing revenues from
services provided to customers has contributed to the growth of
fee income. Service charges, trust fees and brokerage
commissions all increased by more than 10% during each of the
past two years.
Other noninterest income increased $640 or 214.05% during 1999
primarily due to gains on the disposal of leased assets at ULTEA.
NONINTEREST EXPENSE
For the Years Ended
December 31,
1999 1998 1997
---------------------------
Salaries and employee
benefits $18,945 $15,218 $13,070
Occupancy, net 2,076 1,695 1,354
Furniture and equipment 2,416 1,998 1,537
Outside services 2,239 1,416 1,439
FDIC deposit insurance
assessment 121 118 116
Advertising 1,376 1,150 826
Depreciation on equipment under
operating leases 10,844 5,296 584
Other noninterest expense 6,705 4,890 4,001
------- ------- -------
Total noninterest expense $44,722 $31,781 $22,927
======= ======= =======
Efficiency ratio (1) 76.01% 71.58% 64.77%
======= ======= =======
(1) Noninterest expense divided by the sum of net interest
income and noninterest income less securities gains.
The above table shows Heartland's noninterest expense for the
years indicated. Noninterest expense increased $12,941 or 40.72%
in 1999 when compared to 1998. Total 1998 noninterest expense
represented an increase of $8,854 or 38.62% from the 1997 total.
The largest component of the increase in noninterest expense
during both 1999 and 1998 was related to the operations of ULTEA,
as depreciation on equipment under operating leases increased
$5,548 or 104.76% in 1999 and $4,712 or 806.85% in 1998.
Salaries and employee benefits expense continued to experience
increases during both 1999 and 1998, growing $3,727 or 24.49% and
$2,148 or 16.43%, respectively. In addition to the normal merit
and cost of living raises, these increases were attributable to
Heartland's continued expansion efforts, particularly the
additions at NMB and WCB. The number of full-time equivalent
employees increased from 396 at December 31, 1998, to 484 at
December 31, 1999.
In addition to the increases experienced in salaries and employee
benefits, the expansion efforts underway during the past two
years have resulted in additional occupancy, furniture and
equipment and advertising/public relations costs. These expenses
increased $1,025 or 21.16% during 1999 and $1,126 or 30.29%
during 1998.
Fees for outside services increased $823 or 58.12% during 1999
when compared to 1998. In addition to fees relating to expansion
efforts, this increase resulted from consulting fees paid for a
net interest margin and earnings improvement study. This
engagement was focused on identifying specific strategies to
increase earnings with an emphasis on reaching and expanding the
bank subsidiaries' core customers more effectively and
efficiently. The study was completed during the third quarter of
1999 and implementation of the recommendations is scheduled to be
completed by the second quarter of 2000.
Other noninterest expenses increased $1,815 or 37.12% during 1999
due primarily to the growth initiatives underway. Some of the
expenses included within this category that experienced
significant growth during 1999 as a result of the expansion
efforts were goodwill and core deposit intangibles amortization,
office supplies, telephone charges and fees relating to the
processing of credit cards for merchants. During 1998, other
noninterest expenses grew $889 or 22.22%. Amortization and
maintenance expense on software 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 TAXES
Income tax expense decreased $601 or 16.00% for 1999 primarily as
a result of a reduction in pre-tax earnings. During 1998, income
tax expense increased $419 or 12.55% as a result of additional
pre-tax earnings. The effective tax rate was 27.73% in 1999,
29.40% in 1998 and 28.16% in 1997.
FINANCIAL CONDITION
LENDING ACTIVITIES
Heartland's major source of income is interest on loans and
leases. The table below presents the composition of Heartland's
loan portfolio at the end of the years indicated.
LOAN PORTFOLIO
December 31,
1999 1998
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and commercial
real estate $448,991 53.53% $277,765 46.88%
Residential mortgage 180,347 21.50 156,415 26.40
Agricultural and
agricultural real estate 92,936 11.08 77,211 13.03
Consumer 103,608 12.35 72,642 12.26
Lease financing, net 12,886 1.54 8,508 1.43
-------- ------- -------- -------
Gross loans and leases 838,768 100.00% 592,541 100.00%
======= =======
Unearned discount (3,169) (2,136)
Deferred loan fees (453) (272)
-------- --------
Total loans and leases 835,146 590,133
Allowance for loan and
lease losses (10,844) (7,945)
-------- --------
Loans and leases, net $824,302 $582,188
======== ========
LOAN PORTFOLIO
December 31,
1997 1996
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and commercial
real estate $242,868 43.46% $206,523 42.46%
Residential mortgage 175,268 31.37 166,999 34.33
Agricultural and
agricultural real estate 69,302 12.40 57,526 11.83
Consumer 64,223 11.49 48,361 9.94
Lease financing, net 7,171 1.28 7,042 1.44
-------- ------- -------- -------
Gross loans and leases 558,832 100.00% 486,451 100.00%
======= =======
Unearned discount (2,077) (1,962)
Deferred loan fees (349) (404)
-------- --------
Total loans and leases 556,406 484,085
Allowance for loan and
lease losses (7,362) (6,191)
-------- --------
Loans and leases, net $549,044 $477,894
======== ========
LOAN PORTFOLIO
December 31,
1995
Amount Percent
-------- -------
Commercial and commercial
real estate $191,866 42.00%
Residential mortgage 158,324 34.66
Agricultural and
agricultural real estate 59,089 12.94
Consumer 38,988 8.54
Lease financing, net 8,530 1.86
-------- -------
Gross loans and leases 456,797 100.00%
=======
Unearned discount (1,510)
Deferred loan fees (382)
--------
Total loans and leases 454,905
Allowance for loan and
lease losses (5,580)
--------
Loans and leases, net $449,325
========
The table below sets forth the remaining maturities by loan and
lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1)
December 31, 1999
Over 1 Year
Through 5 Years
One Year Fixed Floating
or less Rate Rate
------------------------------
Commercial and commercial
real estate $149,798 $201,105 $ 41,020
Residential mortgage 35,437 37,483 12,432
Agricultural and
agricultural real estate 35,699 40,240 5,657
Consumer 26,835 51,142 10,557
Lease financing, net 3,108 8,988 -
-------- -------- --------
Total $250,877 $338,958 $ 69,666
======== ======== ========
Over 5 Years
Fixed Floating
Rate Rate Total
-------------------------------
Commercial and commercial
real estate $ 25,816 $ 31,252 $448,991
Residential mortgage 11,828 83,167 180,347
Agricultural and
agricultural real estate 5,268 6,072 92,936
Consumer 6,223 8,851 103,608
Lease financing, net 790 - 12,886
-------- -------- --------
Total $ 49,925 $129,342 $838,768
======== ======== ========
(1) Maturities based upon contractual dates.
Net loans and leases grew $242,114 or 41.59% from December 31,
1998, to December 31, 1999, compared to $33,144 or 6.04% from
December 31, 1997, to December 31, 1998. Expansion at WCB
accounted for $106,951 or 44.17% of the growth during 1999, with
the acquisition of the Monroe banking office making up $37,916 of
this increase. Also contributing to the 1999 growth was the
$54,499 increase in the loan portfolio at DB&T, Heartland's lead
bank, which comprised 22.51% of the growth. NMB accounted for
$28,829 or 86.98% of the growth during 1998 and $36,328 or 15.00%
during 1999.
During both years, the largest dollar growth occurred in
commercial and commercial real estate loans, which increased
$171,226 or 61.64% during 1999 and $34,897 or 14.37% during 1998.
This growth was the result of aggressive calling efforts combined
with the expansion into new markets. During 1999, the majority
of the growth occurred at three of the subsidiary banks. WCB was
responsible for $72,617 or 42.41% of this increase with the
Monroe acquisition contributing $26,420. DB&T accounted for
$42,025 or 24.54% of the growth and NMB contributed $30,129 or
17.60%. During 1998, NMB made up $22,860 or 65.51% of the
increase in this loan category.
The other loan category to experience significant growth during
1999, consumer loans, grew $29,960 or 41.24%, exclusive of the
Monroe acquisition. Indirect paper, primarily on new
automobiles, at DB&T and Citizens, Heartland's consumer finance
subsidiary, were responsible for the majority of this growth.
During 1998, consumer loan outstandings grew $8,419 or 13.11%
with loans at NMB comprising $2,721 or 32.32% of this change.
Exclusive of the Monroe acquisition, agricultural and
agricultural real estate loans experienced a $4,570 or 5.92%
growth during 1999. This same loan category grew $7,909 or
11.41% during 1998. These increases reflected the solid
reputation and expertise DB&T has developed in agricultural
lending, combined with continued calling efforts.
Residential mortgage loan outstandings grew $23,932 or 15.30%
during 1999. Nearly all the growth was recorded at WCB as
Heartland's full real estate loan product line was introduced to
this market. This same loan category was the only one to
experience a decrease during 1998, declining $18,853 or 10.76%.
This decrease occurred as customers chose fixed rate 15- and 30-
year mortgages which the subsidiary banks elected to sell into
the secondary market.
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.
Additionally, risks associated with commercial and agricultural
real estate loans include fluctuating property values and
concentrations of loans in a specific type of real estate.
Repayment on consumer loans, including those on residential real
estate, are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse
personal circumstances and deteriorating economic conditions.
Heartland monitors its loan concentrations and does not believe
it has concentrations in any specific industry.
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) ensuring that
primary and secondary sources of repayment are adequate in
relation to the amount of the loan; (iii) administering loan
policies through a Board of Directors and an officers' loan
committee; (iv) developing and maintaining adequate
diversification of the loan portfolio as a whole and of the loans
within each loan category; and (v) ensuring that each loan is
properly documented and, if appropriate, guaranteed by government
agencies and that insurance coverage is adequate.
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.
NONPERFORMING ASSETS
December 31,
1999 1998 1997 1996 1995
------------------------------------
Nonaccrual loans and
leases $1,414 $1,324 $1,819 $1,697 $ 977
Loan and leases
contractually past
due 90 days or more 236 426 187 247 226
Restructured loans
and leases - - 26 30 -
------ ------ ------ ------ ------
Total nonperforming
loans and leases 1,650 1,750 2,032 1,974 1,203
Other real estate 585 857 774 532 640
Other repossessed assets 67 77 124 21 51
------ ------ ------ ------ ------
Total nonperforming assets $2,302 $2,684 $2,930 $2,527 $1,894
====== ====== ====== ====== ======
Nonperforming loans and
leases to total loans
and leases 0.20% 0.30% 0.37% 0.41% 0.26%
Nonperforming assets
to total loans and
leases plus repossessed
property 0.28% 0.45% 0.53% 0.52% 0.42%
Nonperforming assets to
total assets 0.19% 0.28% 0.34% 0.34% 0.28%
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 loan and lease losses at 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 financial position,
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
Bank Holding Company Performance Reports published by the Federal
Reserve Board for bank holding companies with total assets of $1
to $3 billion. In this report, the peer group reported
nonperforming assets to total assets of .53% and .58% for
September 30, 1999, and December 31, 1998, respectively.
Heartland's ratios at December 31, 1999 and 1998, were .19% and
.28%, respectively.
ALLOWANCE FOR LOAN AND LEASE LOSSES
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, general economic conditions,
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 Heartland's loan review
committee included the following: i) a continued increase in
higher-risk consumer and more-complex commercial loans as
compared to relatively lower-risk residential real estate loans;
ii) the entrance into new markets in which Heartland had little
or no previous lending experience; iii) uncertainties within the
agricultural markets; and iv) the economies of Heartland's
primary market areas have been stable for some time and the
allowance is intended to anticipate the cyclical nature of most
economies.
The allowance for loan and lease losses increased by $2,899 or
36.49% during 1999, primarily as a result of the significant
growth experienced in the loan portfolio. Additionally, the
Monroe branch acquisition accounted for $665 or 22.94% of the
increase in the allowance for loan and lease losses during 1999.
As a percentage of total loans and leases, the allowance for loan
and lease losses was 1.30% at December 31, 1999, 1.35% at
December 31, 1998 and 1.32% at December 31, 1997.
There can be no assurances that the allowance for loan and lease
losses will be adequate to cover all probable losses, but
management believes that the allowance for loan and lease losses
was adequate at December 31, 1999. 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
December 31,
1999 1998 1997 1996 1995
-----------------------------------------
Allowance at
beginning of year $ 7,945 $7,362 $6,191 $5,580 $5,124
Charge-offs:
Commercial and
commercial real
estate 81 289 93 578 108
Residential mortgage - 20 21 23 6
Agricultural and
agricultural real
estate 8 41 21 2 -
Consumer 546 473 449 323 381
Lease financing - - - -
------- ------ ------ ------ ------
Total charge-offs 635 823 584 926 495
------- ------ ------ ------ ------
Recoveries:
Commercial and
commercial
real estate 74 372 36 16 22
Residential mortgage 12 - 8 1 15
Agricultural and
agricultural
real estate 6 1 2 45 8
Consumer 151 82 99 67 86
Lease financing - - - - -
------- ------ ------ ------ ------
Total recoveries 243 455 145 129 131
------- ------ ------ ------ ------
Net charge-offs (1) 392 368 439 797 364
Provision for loan
and lease losses 2,626 951 1,279 1,408 820
Additions related
to acquisitions 665 - 331 - -
------- ------ ------ ------ ------
Allowance at end
of period $10,844 $7,945 $7,362 $6,191 $5,580
======= ====== ====== ====== ======
Net charge-offs to
average loans and
leases 0.06% 0.07% 0.08% 0.17% 0.08%
======= ====== ====== ====== ======
(1) Includes net charge-offs at Citizens, Heartland's consumer
finance company, of $256 for 1999, $278 for 1998, $256 for 1997,
$173 for 1996 and $153 for 1995.
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
As of December 31,
1999 1998
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------- -------- ------ --------
Commercial and
commercial real
estate $ 6,108 53.53% $2,180 46.88%
Residential
mortgage 756 21.50 397 26.40
Agricultural and
agricultural real
estate 1,016 11.08 583 13.03
Consumer 1,917 12.35 1,096 12.26
Lease financing(1) 91 1.54 44 1.43
Unallocated 956 - 3,345 -
------- ------- ------ -------
$10,844 100.00% $7,362 100.00%
======= ======= ====== =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
As of December 31,
1997 1996
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------ -------- ------ --------
Commercial and
commercial real
estate $1,889 43.46% $1,568 42.46%
Residential
mortgage 725 31.37 590 34.33
Agricultural and
agricultural real
estate 577 12.40 480 11.83
Consumer 1,044 11.49 818 9.94
Lease financing(1) 30 1.28 28 1.44
Unallocated 3,097 - 2,707 -
------ ------- ------ -------
$7,362 100.00% $6,191 100.00%
====== ======= ====== =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
As of December 31, 1995
--------------------------
Loan/
Lease
Category
to Gross
Loans &
Amount Leases
------ --------
Commercial and commercial
real estate $1,430 42.00%
Residential mortgage 500 34.66
Agricultural and agricultural
real estate 518 12.94
Consumer 618 8.54
Lease financing(1) 34 1.86
Unallocated 2,480 -
------ -------
$5,580 100.00%
====== =======
SECURITIES
The primary objective of the securities portfolio continues to be
to provide the Heartland bank subsidiaries with a source of
liquidity given their high loan-to-deposit ratios. Securities
represented 17.87% of total assets at December 31, 1999, as
compared to 25.42% at December 31, 1998 and 23.68% at December
31, 1997. The reduction in 1999 was representative of a shift in
the asset mix of Heartland, as growth in the loan portfolio
outpaced deposit growth.
The composition of the portfolio is managed to maximize the
return on the portfolio while considering the impact it has on
the Heartland's asset/liability position and liquidity needs.
During 1999, management elected to replace paydowns received on
mortgage-backed securities with less volatile U.S. government
agency securities, as the spreads on mortgage-backed securities
compared to comparable U.S. treasury securities with the same
maturities narrowed. The state tax-exempt nature of selected
U.S. government agency securities also made them attractive
purchases for Heartland's Illinois bank subsidiaries. During
1998, purchases were made in U.S. government agencies and fixed-
rate collateralized mortgage obligations ("CMO's"). Management
purchased tightly structured tranches in well-seasoned CMO's to
reduce its exposure to prepayments. 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.
The tables below present the composition and maturities of the
securities portfolio by major category.
SECURITIES PORTFOLIO COMPOSITION
Held to Maturity Available for Sale
% of % of
December 31, 1999 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. Treasury
securities $ - -% $ - -%
U.S. government
agencies - - 90,536 42.79
Mortgage-backed
securities - - 75,637 35.75
States and political
subdivisions 2,196 1.04 23,708 11.20
Other securities - - 19,500 9.22
------ ------- -------- -------
Total $2,196 1.04% $209,381 98.96%
====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION
Total
% of
December 31, 1999 Amount Portfolio
-------------------
U.S. Treasury securities $ - -%
U.S. government agencies 90,536 42.79
Mortgage-backed securities 75,637 35.75
States and political
subdivisions 25,904 12.24
Other securities 19,500 9.22
-------- -------
Total $211,577 100.00%
======== =======
SECURITIES PORTFOLIO COMPOSITION
Held to Maturity Available for Sale
% of % of
December 31, 1998 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. Treasury
securities $ - -% $ 1,709 0.71%
U.S. government
agencies - - 77,361 31.90
Mortgage-backed
securities - - 128,317 52.92
States and political
subdivisions 2,718 1.12 18,818 7.76
Other securities - - 13,565 5.59
------ ------ -------- -------
Total $2,718 1.12% $239,770 98.88%
====== ====== ======== =======
SECURITIES PORTFOLIO COMPOSITION
Total
% of
December 31, 1998 Amount Portfolio
-------------------
U.S. Treasury securities $ 1,709 0.71%
U.S. government agencies 77,361 31.90
Mortgage-backed securities 128,317 52.92
States and political
subdivisions 21,536 8.88
Other securities 13,565 5.59
-------- -------
Total $242,488 100.00%
======== =======
SECURITIES PORTFOLIO COMPOSITION
Held to Maturity Available for Sale
% of % of
December 31, 1997 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. Treasury
securities $ - -% $ 13,342 6.62%
U.S. government
agencies 598 .30 63,762 31.60
Mortgage-backed
securities 325 .16 86,690 42.97
States and political
subdivisions 2,956 1.46 17,746 8.80
Other securities - - 16,329 8.09
------ ------- -------- -------
Total $3,879 1.92% $197,869 98.08%
====== ====== ======== =======
SECURITIES PORTFOLIO COMPOSITION
Total
% of
December 31, 1997 Amount Portfolio
-------------------
U.S. Treasury securities $ 13,342 6.62%
U.S. government agencies 64,360 31.90
Mortgage-backed securities 87,015 43.13
States and political
subdivisions 20,702 10.26
Other securities 16,329 8.09
-------- -------
Total $201,748 100.00%
======== =======
SECURITIES PORTFOLIO MATURITIES
After One But
Within One Year Within Five Years
--------------- -----------------
December 31, 1999 Amount Yield Amount Yield
------------------------------------
U.S. Treasury
securities $ - -% $ - -%
U.S. government
agencies 15,280 5.59 75,248 5.96
Mortgage-backed
securities 30,872 5.76 27,700 6.13
States and political
subdivisions (1) 1,138 10.99 4,678 8.80
Other securities 8,504 5.61 1,755 5.83
------- ------ ------- -------
Total $55,794 5.80% $109,381 6.10%
======= ====== ======== =======
SECURITIES PORTFOLIO MATURITIES
After Five But
Within Ten Years After Ten Years
---------------- -----------------
Amount Yield Amount Yield
------------------------------------
U.S. Treasury
securities $ - -% $ - -%
U.S. government
agencies 8 10.25 - -
Mortgage-backed
securities 4,835 5.43 12,230 6.40
States and political
subdivisions (1) 6,090 8.23 13,998 8.05
Other securities - - 1,040 5.62
------- ------- ------- ------
Total $10,933 7.00% $27,268 7.22%
======= ======= ======= ======
SECURITIES PORTFOLIO MATURITIES
Total
Amount Yield
--------------------
U.S. Treasury securities $ - -%
U.S. government agencies 90,536 5.89
Mortgage-backed securities 75,637 5.98
States and political
subdivisions (1) 25,904 8.36
Other securities 11,299 5.64
-------- ------
Total $203,376 6.22%
======== ======
(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
Total average deposits experienced an increase of $117,639 or
17.82% during 1999 compared to an increase of $67,607 or 11.41%
during 1998. The Monroe acquisition accounted for $40,121 or
34.11% of the growth in average deposits during 1999. Without
the acquisition, growth during 1999 was $77,518 or 11.74%. All
of the subsidiary banks, with the exception of FCB, were able to
grow average deposits by more than seven percent during both
years. The de novo community banks of RCB and NMB made up
$36,568 or 47.17% of the 1999 growth and $22,335 or 33.04% of the
1998 growth.
The mix of individual account balances to total deposits has been
shifting from the time deposit category to the demand and savings
deposit categories over the past two years. Consumer interest in
traditional time deposits has diminished over time as they are
drawn to alternative investment products. In order to attract
additional deposit customers, the subsidiary banks have continued
to enhance their checking and money market deposit product lines.
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
For the year ended December 31, 1999 Percent
Average of
Balance Deposits Rate
------------------------
Demand deposits $ 81,511 10.48% 0.00%
Savings accounts 324,476 41.71 3.33
Time deposits less than $100,000 312,051 40.12 5.50
Time deposits of $100,000 or more 59,822 7.69 5.39
-------- -------
Total deposits $777,860 100.00%
======== =======
AVERAGE DEPOSITS
For the year ended December 31, 1998
Percent
Average of
Balance Deposits Rate
------------------------
Demand deposits $ 60,514 9.17% 0.00%
Savings accounts 266,282 40.33 3.57
Time deposits less than $100,000 282,142 42.73 5.75
Time deposits of $100,000 or more 51,283 7.77 5.66
-------- -------
Total deposits $660,221 100.00%
======== =======
AVERAGE DEPOSITS
For the year ended December 31, 1997
Percent
Average of
Balance Deposits Rate
------------------------
Demand deposits $ 51,770 8.74% 0.00%
Savings accounts 237,730 40.12 3.50
Time deposits less than $100,000 268,201 45.25 5.77
Time deposits of $100,000 or more 34,913 5.89 5.62
-------- -------
Total deposits $592,614 100.00%
======== =======
The following table sets forth the amount and maturities of time
deposits of $100,000 or more at December 31, 1999.
Time Deposits $100,000 and Over
December 31,
1999
------------
3 months or less $21,255
Over 3 months through 6 months 7,412
Over 6 months through 12 months 19,264
Over 12 months 9,521
-------
$57,452
=======
All of the Heartland banks, except for NMB, own stock in the
Federal Home Loan Bank ("FHLB") of Des Moines or of Chicago,
enabling them to borrow funds from their respective FHLB for
short- or long-term purposes under a variety of programs. Total
FHLB borrowings at December 31, 1999 and 1998, were $33,613 and
$40,618, respectively.
Heartland also utilizes securities sold under agreements to
repurchase as a source of funds. All of the bank subsidiaries
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 the bank'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. With the entry into new markets,
these balances have grown from $36,716 at December 31, 1998, to
$66,839 at December 31, 1999.
On July 23, 1999, Heartland amended its credit agreement with an
unaffiliated bank increasing Heartland's unsecured credit line
from $20,000 to $40,000. The additional credit line provided the
$18,000 capital investment required at WCB to complete the Monroe
acquisition. Under the terms of this agreement, Heartland has a
term loan of $25,000 and a revolving credit loan of up to $15,000
with a reduction to $5,000 at December 31, 1999. Heartland had
no balance outstanding on the revolving credit loan at December
31, 1999. The term loan is payable quarterly in $1,000
installments beginning March 31, 2000, with the final payment of
$10,000 payable on December 31, 2003. This credit line was
established to provide working capital to the nonbanking
subsidiaries and to meet general corporate commitments.
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
At or for the
Year Ended December 31,
1999 1998 1997
---------------------------
Balance at end of period $132,300 $ 75,920 $96,239
Maximum month-end amount
Outstanding 140,992 102,313 96,239
Average month-end amount
Outstanding 116,252 80,277 73,170
Weighted average interest
rate at year-end 4.80% 5.00% 5.49%
Weighted average interest
rate for the year ended 5.03% 5.19% 5.32%
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 10.56% and 11.68%, respectively, on December
31, 1999, compared with 11.05% and 12.13% at December 31, 1998,
and 11.54% and 12.71% for December 31, 1997. At December 31,
1999, Heartland's leverage ratio, the ratio of Tier 1 capital to
total average assets, was 8.85% compared to 8.58% and 8.76% at
December 31, 1998 and 1997, respectively.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. As a result of the acquisition of
WCB in March of 1997, remaining cash payments to previous
stockholders total $594 in 2000 and $584 in 2001, plus interest
at rates of 7.00% to 7.50%. The acquisition and merger of LAG
into ULTEA in July of 1998 included an agreement to make three
equal remaining cash payments to the previous principal
stockholder of $643 in 2000 and 2001, plus interest at 7.50%.
In July of 1999, WCB completed its acquisition of Bank One
Wisconsin's Monroe banking center. As part of this transaction,
Heartland infused an additional capital investment at WCB of
$18,000.
On January 1, 2000, Heartland completed its acquisition of
National Bancshares, Inc. ("NBI"), the one-bank holding company
of First National Bank of Clovis ("FNB") in New Mexico. FNB has
four locations in the New Mexico communities of Clovis and
Melrose, with $120,113 in assets and $97,533 in deposits at
December 31, 1999. The total purchase price for NBI was $23,103,
of which $5,774 was paid in common stock of Heartland to NBI's
Employee Stock Ownership Plan (the "ESOP") and $3,820 in notes
payable over three or five years, at the stockholders'
discretion, bearing interest at 7.00%. The requisite cash
payments under these notes payable, including interest, total
$855 in 2000, $1,062 in 2001, $1003 in 2002, $731 in 2003 and
$687 in 2004. As provided in the merger agreement, participants
in the ESOP elected to receive a cash payment totaling $4,619 for
255,180 of the 319,009 shares of Heartland common stock
originally issued to them. Immediately following the closing of
the NBI acquisition, FNB was merged into NMB. As a result of this
affiliate bank merger, Heartland's ownership in NMB increased to
approximately 88%.
In October of 1999, Heartland completed an offering of $25,000 of
9.60% cumulative capital securities representing undivided
beneficial interests in Trust I, a special purpose trust
subsidiary formed for the sole purpose of this offering. The
proceeds from the offering were used by Trust I to purchase
junior subordinated debentures from Heartland. The proceeds are
being used for general corporate purposes, including the
repayment of $15,000 of indebtedness on the revolving credit loan
and the financing of acquisitions. All of the securities
qualified as Tier 1 capital for regulatory purposes as of
December 31, 1999. Subsequent to the acquisition of NBI,
approximately $22,970 of the securities qualified as Tier 1
capital, as regulations do not allow the amount of these
securities included in Tier 1 capital to exceed 25% of total Tier
1 capital. When including the acquisition of NBI, total capital
would have been approximately $105,861 or 10.27% of total risk-
adjusted assets on December 31, 1999. Tier 1 capital, adjusted
for the NBI acquisition, would have been approximately $99,880 or
8.91% of total risk-adjusted assets on December 31, 1999.
Heartland continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities. As
evidenced by the recent expansion into New Mexico, Heartland is
seeking to operate in high growth areas, even if they are outside
of its traditional Midwest market areas. Future expenditures
relating to these efforts are not estimable at this time.
Heartland's capital ratios are detailed in the table below.
RISK-BASED CAPITAL RATIOS(1)
December 31,
1999 1998 1997
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------
Capital Ratios:
Tier 1 capital $101,665 10.56% $ 81,149 11.05% $ 71,713 11.54%
Tier 1 capital
minimum
requirement 38,517 4.00 29,379 4.00 24,854 4.00
-------- ------ -------- ------ -------- ------
Excess $ 63,148 6.56% $ 51,770 7.05% $ 46,859 7.54%
======== ====== ======== ====== ======== ======
Total capital $112,508 11.68% $ 89,093 12.13% $ 78,995 12.71%
Total capital
minimum
requirement 77,035 8.00 58,757 8.00 49,707 8.00
-------- ------ -------- ------ -------- ------
Excess $ 35,473 3.68% $ 30,336 4.13% $ 29,288 4.71%
======== ====== ======== ====== ======== ======
Total risk-
adjusted
assets $962,933 $734,463 $621,338
======== ======== ========
(1) Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 to risk-adjusted assets ratio of 4.00% and total to
risk-adjusted assets ratio of 8.00%.
LEVERAGE RATIOS(1)
December 31,
1999 1998 1997
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------
Capital Ratios:
Tier 1 capital $ 101,665 8.85% $ 81,149 8.58% $ 71,713 8.76%
Tier 1 capital
minimum
requirement(2) 45,965 4.00 37,810 4.00 32,729 4.00
---------- ----- -------- ------ -------- ------
Excess $ 55,700 4.85% $ 43,339 4.58% $ 38,984 4.76%
========== ===== ======== ====== ======== ======
Average
adjusted
assets $1,149,125 $945,242 $818,232
========== ======== ========
(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 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 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.
Heartland's revolving credit agreement, as of December 31, 1999,
provided an additional borrowing capacity of $5,000. This
agreement contains specific covenants which, among other things,
limit dividend payments and restrict the sale of assets by the
Heartland under certain circumstances. Also contained within the
agreement are certain financial covenants, including the
maintenance by Heartland 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. At
December 31, 1999, Heartland was in compliance with all the
covenants contained in this credit agreement.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in
market prices and rates. Heartland's market risk is comprised
primarily of interest rate risk resulting from its core banking
activities of lending and deposit gathering. Interest rate risk
measures the impact on earnings from changes in interest rates
and the effect on current fair market values of Heartland's
assets, liabilities and off-balance sheet contracts. The
objective is to measure this risk and manage the balance sheet to
avoid unacceptable potential for economic loss.
Heartland management continually develops and applies strategies
to mitigate market risk. Exposure to market risk is reviewed on a
regular basis by the asset/liability committees at the banks and,
on a consolidated basis, by the Heartland board of directors.
Monthly, management utilizes both the standard balance sheet GAP
report and an independently developed income statement GAP report
to analyze the effect of changes in interest rates on net
interest income and to manage interest rate risk. Also utilized
periodically during the year is an interest rate sensitivity
analysis, which simulates 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 these tools, 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. Management does not
believe that Heartland's primary market risk exposures and how
those exposures were managed in 1999 have materially changed when
compared to 1998.
Derivative financial instruments include futures, forwards,
interest rate swaps, option contracts and other financial
instruments with similar characteristics. Heartland was not a
party to these types of derivatives at December 31, 1999.
However, Heartland does enter into financial instruments with off
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. 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 and
may require collateral from the borrower. Standby letters of
credit are conditional commitments issued by Heartland to
guarantee the performance of a customer to a third party up to a
stated amount and with specified terms and conditions. These
commitments to extend credit and standby letters of credit are
not recorded on the balance sheet until the instrument is
exercised.
The table below summarizes the scheduled maturities of market
risk sensitive assets and liabilities as of December 31, 1999.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
TABLE OF MARKET RISK-SENSITIVE INSTRUMENTS
December 31, 1999
MATURING IN: 2000 2001 2002 2003
------------------------------------
ASSETS
Federal funds sold $ 1,875 $ - $ - $ -
Time deposits in other
financial institutions 5,093 913 2 -
Securities 55,794 39,263 22,967 42,073
Loans and leases:
Fixed rate loans 158,024 114,065 120,417 52,692
Variable rate loans 101,937 47,957 31,978 16,804
-------- -------- -------- --------
Loans and leases, net 259,961 162,022 152,395 69,496
-------- -------- -------- --------
Total Market Risk-
Sensitive Assets $322,723 $202,198 $175,364 $111,569
======== ======== ======== ========
LIABILITIES
Savings $367,413 $ - $ - $ -
Time deposits:
Fixed rate time
certificates less
than $100,000 201,119 83,135 29,792 18,991
Variable rate time
certificates less
than $100,000 5,072 2,822 - -
-------- -------- -------- --------
Time deposits less
than $100,000 206,191 85,957 29,792 18,991
Time deposits of
$100,000 or more 47,931 7,109 1,455 857
Federal funds purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings 132,300 - - -
Other borrowings:
Fixed rate borrowings - 10,570 11,987 1,505
Variable rate borrowings - 4,000 4,000 13,000
-------- -------- -------- --------
Other borrowings - 14,570 15,987 14,505
-------- -------- -------- --------
Total Market Risk-
Sensitive Liabilities $753,835 $107,636 $ 47,234 $ 34,353
======== ======== ======== ========
Average Estimated
Interest Fair
MATURING IN: 2004 Thereafter Total Rate Value
-------------------------------------------------
ASSETS
Federal funds sold $ - $ - $ 1,875 2.88% $ 1,875
Time deposits in
other financial
institutions - 76 6,084 5.44 6,084
Securities 5,078 46,402 211,577 6.19 211,645
Loans and leases:
Fixed rate loans 51,784 49,925 546,907 8.40 542,077
Variable rate
loans 11,565 77,998 288,239 8.32 287,854
-------- -------- ---------- ----------
Loans and leases,
net 63,349 127,923 835,146 829,931
-------- -------- ---------- ----------
Total Market Risk-
Sensitive Assets $ 68,427 $174,401 $1,054,682 $1,049,536
======== ======== ========== ==========
LIABILITIES
Savings $ - $ - $ 367,413 3.48% $ 367,413
Time deposits
Fixed rate time
certificates less
than $100,000 10,167 2,305 345,509 5.51 343,043
Variable rate time
certificates less
than $100,000 - - 7,894 5.32 7,893
-------- -------- ---------- ----------
Time deposits less
than $100,000 10,167 2,305 353,403 350,936
Time deposits of
$100,000 or more 100 - 57,452 5.62 57,377
Federal funds purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings - - 132,300 4.80 132,300
Other borrowings:
Fixed rate
borrowings 5 31,590 55,657 8.03 63,796
Variable rate
borrowings - - 21,000 5.76 21,000
-------- -------- ---------- ----------
Other borrowings 5 31,590 76,657 84,796
-------- -------- ---------- ----------
Total Market Risk
Sensitive
Liabilities $ 10,272 $ 33,895 $ 987,225 $ 992,822
======== ======== ========== ==========
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.
YEAR 2000
The Year 2000 posed a unique set of challenges to those
industries, such as financial institutions, that are reliant on
information technology. Heartland began to identify and react to
issues related to the Year 2000 in 1996. A project team,
comprised of individuals from key areas throughout Heartland,
identified issues and took steps necessary to eliminate any
adverse effects on Heartland's operations.
The total out-of-pocket expenditures required to bring
Heartland's systems into compliance for the Year 2000 were
approximately $330. These required expenditures did not have a
material impact on operations, cash flow or financial condition.
This amount included costs for upgrading equipment specifically
for the purpose of Year 2000 compliance and staff expense for
testing and contingency development. Although management feels
confident that all necessary upgrades have been identified, no
assurance can be made that Year 2000 compliance has been achieved
without additional unanticipated expenditures.
As a result of the efforts of Heartland's Year 2000 project team,
Heartland and its subsidiaries experienced an uneventful
transition from 1999 to 2000. There was no disruption of
services to customers or with internal operations. Among the
benefits derived from the time, effort and costs related to Year
2000 was a complete review and update of Heartland's disaster
recovery and contingency plans. As a result, Heartland is now
better prepared to deal with technical or natural disasters that
could threaten its operations. As it is too soon to conclude
that there will not be any problems arising from the century date
change, management continues to monitor its information systems,
vendors and customers to assure that Year 2000 problems, should
they arise, are resolved promptly.
<PAGE>
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except per share data)
Notes 1999 1998
----- -------- --------
ASSETS
Cash and due from banks 3 $ 34,078 $ 25,355
Federal funds sold 1,875 17,476
-------- --------
Cash and cash equivalents 35,953 42,831
Time deposits in other
financial institutions 6,084 6,127
Securities: 4
Available for sale-at market
(cost of $211,782 for 1999
and $236,417 for 1998) 209,381 239,770
Held to maturity-at cost
(approximate market value
of $2,264 for 1999 and
$2,871 for 1998) 2,196 2,718
Loans and leases: 5
Held for sale 16,636 10,985
Held to maturity 818,510 579,148
Allowance for loan and
lease losses 6 (10,844) (7,945)
-------- --------
Loans and leases, net 824,302 582,188
Assets under operating leases 35,495 34,622
Premises, furniture and
equipment, net 7 26,995 19,780
Other real estate, net 585 857
Goodwill and core deposit
premium, net 13,997 3,841
Other assets 29,159 21,051
-------- --------
TOTAL ASSETS $1,184,147 $953,785
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: 8
Demand $ 91,391 $ 70,871
Savings 367,413 292,852
Time 410,855 354,154
-------- --------
Total deposits 869,659 717,877
Short-term borrowings 9 132,300 75,920
Accrued expenses and other
liabilities 18,958 18,095
Other borrowings 11 76,657 57,623
-------- --------
TOTAL LIABILITIES 1,097,574 869,515
--------- --------
STOCKHOLDERS' EQUITY: 13,14,16
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 December 31,
1999, and 1998) 9,707 9,707
Capital surplus 15,339 14,984
Retained earnings 65,132 60,154
Accumulated other
comprehensive income (1,511) 2,107
Treasury stock at cost
(120,478 and 172,173 shares
at December 31, 1999, and
December 31, 1998, respectively) (2,094) (2,682)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 86,573 84,270
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,184,147 $953,785
========== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
Notes 1999 1998 1997
----- -------- -------- --------
INTEREST INCOME:
Interest and fees on
loans and leases 5 $60,947 $49,901 $46,919
Interest on securities:
Taxable 11,113 11,515 10,393
Nontaxable 1,216 1,133 1,170
Interest on federal funds sold 410 1,582
681
Interest on interest bearing
deposits in other financial
institutions 468 386 98
-------- -------- --------
TOTAL INTEREST INCOME 74,154 64,517 59,261
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits 8 31,180 28,645 25,765
Interest on short-term
borrowings 5,630 4,076 3,740
Interest on other borrowings 4,039 3,583 2,262
-------- -------- --------
TOTAL INTEREST EXPENSE 40,849 36,304 31,767
-------- -------- --------
NET INTEREST INCOME 33,305 28,213 27,494
Provision for loan and
lease losses 6 2,626 951 1,279
-------- -------- --------
Net interest income after
provision for loan and
lease losses 30,679 27,262 26,215
-------- -------- --------
OTHER INCOME:
Service charges and fees 3,906 3,013 2,723
Trust fees 2,662 2,284 2,009
Brokerage commissions 655 413 324
Insurance commissions 803 751 563
Securities gains, net 713 1,897 1,446
Rental income on operating leases 14,718 7,428 811
Gains on sale of loans 1,028 1,212 373
Other noninterest income 939 299 316
-------- -------- --------
TOTAL OTHER INCOME 25,424 17,297 8,565
-------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 12 18,945 15,218 13,070
Occupancy 13 2,076 1,695 1,354
Furniture and equipment 2,416 1,998 1,537
Depreciation on equipment
under operating leases 10,844 5,296 584
Outside services 2,239 1,416 1,439
FDIC deposit insurance
assessment 121 118 116
Advertising 1,376 1,150 826
Other operating expenses 6,705 4,890 4,001
-------- -------- --------
TOTAL OTHER EXPENSES 44,722 31,781 22,927
-------- -------- --------
Income before income taxes 11,381 12,778 11,853
Income taxes 10 3,156 3,757 3,338
-------- -------- --------
NET INCOME $ 8,225 $ 9,021 $ 8,515
======== ======== ========
EARNINGS PER COMMON SHARE-BASIC $ 0.86 $ 0.95 $ 0.90
======== ======== ========
EARNINGS PER COMMON SHARE-
DILUTED 1 $ 0.84 $ 0.94 $ 0.89
======== ======== ========
CASH DIVIDENDS DECLARED PER
COMMON SHARE $ 0.34 $ 0.31 $ 0.26
======== ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 1997 $ 4,854 $13,366 $52,864
Net Income - 1997 8,515
Unrealized gain on securities
available for sale
Reclassification adjustment for
gains realized in income
Income taxes
Comprehensive income
Cash dividends declared:
Common, $.26 per share (2,465)
Purchase of 32,835 shares of
common stock
Sale of 44,650 shares of
common stock 340
------- ------- -------
Balance at December 31, 1997 $ 4,854 $13,706 $58,914
Net Income - 1998 9,021
Unrealized gain on securities
available for sale
Reclassification adjustment for
gains realized in income
Income taxes
Comprehensive income
Cash dividends declared:
Common, $.31 per share (2,928)
Two-for-one stock split 4,853 (4,853)
Purchase of 166,970 shares
of common stock
Sale of 328,857 shares
of common stock 1,278
------- ------- -------
Balance at December 31, 1998 $ 9,707 $14,984 $60,154
Net Income - 1999 8,225
Unrealized loss on securities
available for sale
Reclassification adjustment for
gains realized in income
Income taxes
Comprehensive income
Cash dividends declared:
Common, $.34 per share (3,247)
Purchase of 44,907 shares
of common stock
Sale of 96,602 shares
of common stock 355
------- ------- -------
BALANCE AT DECEMBER 31, 1999 $ 9,707 $15,339 $65,132
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- -------- -----
Balance at January 1, 1997 $ 1,327 $(2,152) $70,259
Net Income - 1997 8,515
Unrealized gain on securities
available for sale 3,291 3,291
Reclassification adjustment for
gains realized in income (1,446) (1,446)
Income taxes (627) (627)
-------
Comprehensive income 9,733
Cash dividends declared:
Common, $.26 per share (2,465)
Purchase of 32,835 shares
of common stock (865) (865)
Sale of 44,650 shares
of common stock 770 1,110
------- ------- -------
Balance at December 31, 1997 $ 2,545 $(2,247) $77,772
Net Income - 1998 9,021
Unrealized gain on securities
available for sale 1,233 1,233
Reclassification adjustment for
gains realized in income (1,897) (1,897)
Income taxes 226 226
-------
Comprehensive income 8,583
Cash dividends declared:
Common, $.31 per share (2,928)
Two-for-one stock split
Purchase of 166,970 shares
of common stock (4,431) (4,431)
Sale of 328,857 shares
of common stock 3,996 5,274
------- ------- -------
Balance at December 31, 1998 $ 2,107 $(2,682) $84,270
Net Income - 1999 8,225
Unrealized loss on securities
available for sale (4,769) (4,769)
Reclassification adjustment for
gains realized in income (713) (713)
Income taxes 1,864 1,864
-------
Comprehensive income 4,607
Cash dividends declared:
Common, $.34 per share (3,247)
Purchase of 44,907 shares
of common stock (837) (837)
Sale of 96,602 shares of
common stock 1,425 1,780
------- ------- -------
BALANCE AT DECEMBER 31, 1999 $(1,511) $(2,094) $86,573
======= ======= =======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
1999 1998 1997
------- ------- -------
Cash Flows from Operating
Activities:
Net income $ 8,225 $ 9,021 $ 8,515
Adjustments to reconcile net
income to net cash provided
by operating activities
net of acquisitions:
Depreciation and amortization 14,294 7,856 2,635
Provision for loan and
lease losses 2,626 951 1,279
Provision for income taxes (348) (488) 114
Net amortization/(accretion)
of premium/(discount)
on securities 1,417 875 (292)
Securities gains, net (713) (1,897) (1,446)
Loans originated for sale (80,804) (139,554) (44,035)
Proceeds on sales of loans 75,351 142,328 49,563
Net gain on sales of loans (1,028) (1,212) (373)
Increase in accrued
interest receivable (826) (620) (354)
Increase in accrued interest
payable 353 623 449
Other, net (5,613) 468 (2,265)
------- ------- -------
Net cash provided by operating
activities 12,934 18,351 13,790
------- ------- -------
Cash Flows from Investing
Activities:
Purchase of time deposits - (5,934) (33)
Proceeds on maturities of time
deposits 43 - 201
Proceeds from the sale of
securities available for sale 22,454 27,928 20,053
Proceeds from the sale of
mortgage-backed securities
available for sale - 2,276 3,980
Proceeds from the maturity of
and principal paydowns on
securities held to maturity 520 837 2,732
Proceeds from the maturity of
and principal paydowns on
securities available for sale 26,139 41,902 13,647
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 68,931 53,040 13,175
Purchase of securities
available for sale (71,354) (70,211) (24,485)
Purchase of mortgage-backed
securities available for sale (21,257) (96,543) (30,612)
Net increase in loans and
leases (201,186) (36,262) (55,546)
Increase in assets under
operating leases (11,716) (12,161) (3,259)
Capital expenditures (7,802) (4,365) (2,522)
Net cash and cash equivalents
received in acquisition
of subsidiaries 43,682 2,730 670
Net cash received from minority
interest stockholders 58 2,950 -
Net cash and cash equivalents
paid in acquisition of trust
assets (528) - -
Proceeds on sale of OREO and
other repossessed assets 1,086 831 7
Proceeds on sale of fixed assets 4 8 1
------- ------- -------
Net cash used by investing
activities (150,926) (92,631) (61,991)
Cash Flows from Financing
Activities:
Net increase in demand deposits
and savings accounts 42,217 50,481 17,137
Net increase in time deposit
accounts 18,165 43,864 15,182
Net increase in other
borrowings 34,633 15,250 23,886
Net increase (decrease) in
short-term borrowings 38,403 (42,979) 11,483
Purchase of treasury stock (837) (4,431) (865)
Proceeds from sale of
treasury stock 1,780 669 948
Dividends (3,247) (2,928) (2,465)
------- ------- -------
Net cash provided by
financing activities 131,114 59,926 65,306
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (6,878) (14,354) 17,105
Cash and cash equivalents at
beginning of year 42,831 57,185 40,080
------- ------- -------
Cash and cash equivalents at
end of period $35,953 $42,831 $57,185
======= ======= =======
Supplemental disclosures:
Cash paid for income/franchise
taxes $ 3,596 $ 3,303 $ 3,090
Cash paid for interest $40,496 $35,681 $31,318
Other borrowings transferred
to short-term borrowings $15,599 $15,323 $25,500
See accompanying notes to consolidated 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; Jo
Daviess, Hancock and Winnebago Counties in Illinois; Dane, Green,
Sheboygan, Brown and Eau Claire Counties in Wisconsin; and
Bernalillo and Curry Counties in New Mexico, 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 subsidiaries: Dubuque
Bank and Trust Company ("DB&T"); Galena State Bank and Trust
Company ("GSB"); Riverside Community Bank ("RCB"); Wisconsin
Community Bank ("WCB"); New Mexico Bank & Trust ("NMB"); First
Community Bank, FSB ("FCB"); Citizens Finance Co.("Citizens");
ULTEA, Inc. ("ULTEA"); DB&T Insurance, Inc.; DB&T Community
Development Corp.; DBT Investment Corporation; and Keokuk
Bancshares, Inc. (dba KBS Investment Corp.); and Heartland
Capital Trust I ("Trust I"). All of Heartland's subsidiaries are
wholly-owned except for NMB, of which Heartland was an 80% owner
on December 31, 1999. 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.
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 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.
Under Heartland's credit policies, all nonaccrual and
restructured loans are defined as impaired loans. 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.
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. Loans are sold on a nonrecourse basis with
either servicing released or retained, and gains and losses are
recognized based on the difference between sales proceeds and the
carrying value of the loan.
Mortgage servicing rights associated with loans originated and
sold, where servicing is retained, are capitalized and included
in other assets in the balance sheet. The value of these
capitalized servicing rights are amortized in relation to the
servicing revenue expected to be earned. The carrying values of
these rights are periodically reviewed for impairment. For
purposes of measuring impairment, the rights are stratified into
certain risk characteristics including loan type, note rate,
prepayment trends, and external market factors. There was no
valuation allowance required as of December 31, 1999.
Mortgage loans serviced for others were $188,258 and $154,089 as
of December 31, 1999 and 1998, respectively. Custodial escrow
balances maintained in connection with the loan servicing
portfolio were approximately $1,112 and $894 as of December 31,
1999 and 1998, respectively.
Allowance for Loan and Lease Losses - The allowance for 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. Provisions for 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 disposal
costs. The excess, if any, of such costs at the time acquired
over the fair value is charged against the allowance for loan and
lease losses. Subsequent write downs estimated on the basis of
later evaluations, gains or losses on sales and net expenses
incurred in maintaining such properties are charged to
operations.
Intangible Assets - Intangible assets consist of goodwill and
core deposit premiums. Goodwill represents the excess of the
purchase price of acquired subsidiaries' net assets over their
fair value. Goodwill is amortized over periods of 15 to 25 years
on the straight-line basis. Core deposit premiums are amortized
over ten years on an accelerated basis. Periodically, Heartland
reviews the intangible assets 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, GSB,
RCB, FCB, WCB and NMB ("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.
Earnings Per Share - Amounts used in the determination of basic
and diluted earnings per share for the years ended December 31,
1999, 1998 and 1997 are shown in the table below.
1999 1998 1997
------ ------ ------
Net income $8,225 $9,021 $8,515
====== ====== ======
Weighted average common shares
outstanding for basic earnings
per share 9,555 9,463 9,476
Assumed incremental common shares
issued upon exercise of stock
options 196 148 143
------ ------ ------
Weighted average common shares
for diluted earnings per share 9,751 9,611 9,619
====== ====== ======
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 - In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. In July 1999, the
FASB issued FAS 137, Deferring Statement 133's Effective Date,
which defers the effective date for implementation of FAS 133 by
one year, making FAS 133 effective no later than January 1, 2001
for Heartland's financial statements. Management does not
believe the adoption of FAS 133 will have a material impact on
the consolidated financial statements.
TWO
ACQUISITIONS
Heartland regularly explores opportunities for acquisitions of
financial institutions and related businesses. Generally,
management does not make a public announcement about an
acquisition opportunity until a definitive agreement has been
signed.
On January 1, 2000, Heartland completed its acquisition of
National Bancshares, Inc. ("NBI"), the one-bank holding company
of First National Bank of Clovis ("FNB") in New Mexico. FNB has
four locations in the New Mexico communities of Clovis and
Melrose, with $120,113 in assets and $97,533 in deposits at
December 31, 1999. The total purchase price for NBI was $23,103,
of which $5,774 was paid in common stock of Heartland to NBI's
Employee Stock Ownership Plan (the "ESOP") and $3,820 in notes
payable over three or five years, at the stockholders'
discretion, bearing interest at 7.00%. As provided in the merger
agreement, participants in the ESOP elected to receive a cash
payment totaling $4,619 for 255,180 of the 319,009 shares of
Heartland common stock originally issued to them. Heartland
merged FNB into its NMB subsidiary immediately after the closing
of the NBI acquisition. As a result of this affiliate bank
merger, Heartland's ownership in NMB increased to approximately
88%. The acquisition of NBI will be accounted for as a purchase;
accordingly, the results of operations of FNB will be included in
the financial statements from the acquisition date. The resultant
acquired deposit base intangible and goodwill of approximately
$8,911 will be amortized over a period of 10 to 15 years. The pro
forma effect of the acquisition was not material to the financial
statements.
On July 23, 1999, WCB completed its acquisition of Bank One
Wisconsin's branch in Monroe, Wisconsin. Included in the
acquisition were deposits of $93,780 and loans of $38,581. Trust
assets of the Monroe branch were also acquired by WCB. The
acquisition was accounted for as a purchase; accordingly, the
results of operations of the Monroe banking center have been
included in the financial statements from the acquisition date.
The resultant acquired deposit base intangible of $2,505 is being
amortized over a period of 10 years and the remaining excess
purchase price over the fair value of assets acquired of $8,327
is being amortized over a period of 15 years. The pro forma
effect of the acquisition was not material to the financial
statements.
On July 17, 1998, Heartland 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, Heartland's 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 and is being amortized over 25 years
using the straight-line method. 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.
During 1997, Heartland entered into an agreement with a group of
New Mexico business leaders to establish a new bank in
Albuquerque. NMB opened on May 4, 1998, and Heartland's portion
of the $15,000 investment was $12,000.
On March 1, 1997, Heartland acquired Cottage Grove State Bank
(subsequently named WCB), a $39,287 Wisconsin state bank located
in Cottage Grove, Wisconsin, at a cost of $7,890. The
stockholders of Cottage Grove State Bank, at the date of
acquisition, received cash of $4,892 and the remaining balance in
contracts payable over two, three or four years, at their
discretion, bearing rates of 7.00% and 7.50%. The purchase price
paid in excess of the fair value of net assets acquired was
$2,465 and is being amortized over 25 years using the straight-
line method. This transaction was accounted for as a purchase;
accordingly, WCB's results of operations were included in the
consolidated financial statements from the acquisition date.
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, 1999 and 1998 were $1,443
and $1,257 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, 1999 and 1998, are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
1999
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,196 $ 69 $ (1) $ 2,264
-------- -------- -------- --------
Total $ 2,196 $ 69 $ (1) $ 2,264
======== ======== ======== ========
Securities available
for sale:
U.S. government
corporations and
agencies $ 92,234 $ 3 $ (1,701) $ 90,536
Mortgage-backed
securities 75,959 212 (534) 75,637
Obligations of states
and political
subdivisions 23,583 683 (558) 23,708
Corporate debt
securities 11,415 - (116) 11,299
-------- -------- -------- --------
Total debt
securities 203,191 898 (2,909) 201,180
Equity securities 8,591 128 (518) 8,201
-------- -------- -------- --------
Total $211,782 $ 1,026 $ (3,427) $209,381
======== ======== ======== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
1998
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,718 $ 153 $ - $ 2,871
-------- -------- -------- --------
Total $ 2,718 $ 153 $ - $ 2,871
======== ======== ======== ========
Securities available
for sale:
U.S. Treasury securities $ 1,701 $ 8 $ - $ 1,709
U.S. government
corporations and
agencies 76,471 1,005 (115) 77,361
Mortgage-backed
securities 127,732 817 (232) 128,317
Obligations of states
and political
subdivisions 17,281 1,542 (5) 18,818
Corporate debt
securities 2,454 40 (1) 2,493
-------- -------- -------- --------
Total debt
securities 225,639 3,412 (353) 228,698
Equity securities 10,778 647 (353) 11,072
-------- -------- -------- --------
Total $236,417 $ 4,059 $ (706) $239,770
======== ======== ======== ========
The amortized cost and estimated fair value of debt securities
held to maturity and available for sale at December 31, 1999, by
estimated 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 $ 203 $ 204
Due in 1 to 5 years 981 996
Due in 5 to 10 years 1,012 1,064
Due after 10 years - -
-------- --------
Total $ 2,196 $ 2,264
======== ========
Securities available for sale:
Due in 1 year or less $ 55,704 $ 55,591
Due in 1 to 5 years 110,294 108,400
Due in 5 to 10 years 9,989 9,921
Due after 10 years 27,204 27,268
-------- --------
Total $203,191 $201,180
======== ========
As of December 31, 1999, securities with a market value of
$141,836 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, 1999, 1998 and 1997, are summarized as
follows:
1999 1998 1997
------- ------- -------
Securities sold:
Proceeds from sales $22,454 $30,204 $24,033
Gross security gains 1,007 1,945 1,526
Gross security losses 294 48 80
FIVE
LOANS AND LEASES
Loans and leases as of December 31, 1999 and 1998, were as
follows:
1999 1998
-------- --------
Loans:
Commercial and commercial
real estate $448,991 $277,765
Residential mortgage 180,347 156,415
Agricultural and agricultural
real estate 92,936 77,211
Consumer 103,608 72,642
-------- --------
Loans, gross 825,882 584,033
Unearned discount (3,169) (2,136)
Deferred loan fees (453) (272)
-------- --------
Loans, net 822,260 581,625
-------- --------
Direct financing leases:
Gross rents receivable 11,929 7,281
Estimated residual value 3,100 2,514
Unearned income (2,143) (1,287)
-------- --------
Direct financing leases, net 12,886 8,508
-------- --------
Allowance for loan and
lease losses (10,844) (7,945)
-------- --------
Loans and leases, net $824,302 $582,188
======== ========
Direct financing leases receivable are generally short-term
equipment leases. Future minimum lease payments as of December
31, 1999, were as follows: $3,723 for 2000, $3,443 for 2001,
$2,941 for 2002, $2,143 for 2003, $1,922 for 2004 and $857
thereafter.
As DB&T is the largest subsidiary of Heartland, the majority of
the loan portfolio is concentrated in northeast Iowa, northwest
Illinois and southwest Wisconsin.
Loans and leases on a nonaccrual status amounted to $1,414 and
$1,324 at December 31, 1999 and 1998, respectively. The allowance
for loan and lease losses related to these nonaccrual loans was
$104 and $176, respectively. Nonaccrual loans of $953 and $314
were not subject to a related allowance for loan and lease losses
at December 31, 1999 and 1998, 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, 1999, 1998 and 1997 were $1,367, $1,437 and
$1,585, respectively. For the years ended December 31, 1999,
1998 and 1997, interest income which would have been recorded
under the original terms of these loans and leases amounted to
approximately $63, $59, and $87, respectively, and interest
income actually recorded amounted to approximately $16, $10, and
$9, 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, 1999, were as follows:
1999
--------
Balance at beginning of year $ 12,477
New loans 14,196
Repayments (3,955)
--------
Balance at end of year $ 22,718
========
SIX
ALLOWANCE FOR
LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the years
ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997
------- ------- -------
Balance at beginning of year $ 7,945 $ 7,362 $ 6,191
Provision for loan and
lease losses 2,626 951 1,279
Recoveries on loans and leases
previously charged off 243 455 145
Loans and leases charged off (635) (823) (584)
Additions related to acquisitions 665 - 331
------- ------- -------
Balance at end of year $10,844 $ 7,945 $ 7,362
======= ======= =======
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of December 31, 1999 and
1998, were as follows:
1999 1998
------- -------
Land and land improvements $ 4,204 $ 3,366
Buildings and building improvements 21,630 15,787
Furniture and equipment 14,632 12,349
------- -------
Total 40,466 31,502
Less accumulated depreciation (13,471) (11,722)
------- -------
Premises, furniture and equipment, net $26,995 $19,780
======= =======
Depreciation expense on premises, furniture and equipment was
$2,095 for 1999, $1,730 for 1998, and $1,443 for 1997.
EIGHT
DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of one hundred thousand dollars or more as of
December 31, 1999 and 1998, were $57,452 and $62,293,
respectively. At December 31, 1999, the scheduled maturities of
time certificates of deposit were as follows:
1999
---------
2000 $ 254,122
2001 93,067
2002 31,246
2003 19,848
2004 thereafter 12,572
---------
Total $ 410,855
=========
Interest expense on deposits for the years ended December 31,
1999, 1998 and 1997, was as follows:
1999 1998 1997
------- ------- -------
Savings and insured money
market accounts $10,789 $ 9,512 $ 8,317
Time certificates of deposit in
denominations of $100 or more 3,222 2,905 1,961
Other time deposits 17,169 16,228 15,487
------- ------- -------
Interest expense on deposits $31,180 $28,645 $25,765
======= ======= =======
NINE
SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 1999 and 1998, were as
follows:
1999 1998
-------- --------
Securities sold under
agreements to repurchase $ 66,839 $ 36,716
Federal funds purchased 28,600 13,175
Federal Home Loan Bank ("FHLB")
advances 17,504 14,504
U.S. Treasury demand note 7,781 3,636
Notes payable on leased assets 6,339 6,423
Contracts payable to previous
owners of LAG for acquisition 643 643
Contracts payable to previous
stockholders of WCB for
acquisition 594 823
Note payable to unaffiliated bank 4,000 -
-------- --------
Total $132,300 $ 75,920
======== ========
See Note 11 related to the note payable to an unaffiliated bank
and collateral pledged for FHLB advances.
All repurchase agreements as of December 31, 1999 and 1998, were
due within six months.
Average and maximum balances and rates on aggregate short-term
borrowings outstanding during the years ended December 31, 1999,
1998 and 1997, were as follows:
1999 1998 1997
-------- -------- -------
Maximum month-end balance $140,992 $102,313 $96,239
Average month-end balance 116,252 80,277 73,170
Weighted average interest
rate for the year 5.03% 5.19% 5.32%
Weighted average interest
rate at year-end 4.80 5.00 5.49
TEN
INCOME TAXES
Income taxes for the years ended December 31, 1999, 1998 and
1997, were as follows:
Current Deferred Total
--------------------------
1999:
Federal $2,790 $ 14 $2,804
State 504 (152) 352
------ ------ ------
Total $3,294 $ (138) $3,156
====== ====== ======
1998:
Federal $2,900 $ 300 $3,200
State 577 (20) 557
------ ------ ------
Total $3,477 $ 280 $3,757
====== ====== ======
1997:
Federal $2,977 $ (47) $2,930
State 428 (20) 408
------ ------ ------
Total $3,405 $ (67) $3,338
====== ====== ======
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. Based upon Heartland's level of
historical taxable income and anticipated future taxable income
over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that Heartland
will realize the benefits of these deductible differences.
Deferred tax liabilities and assets for the years ended December
31, 1999 and 1998, were as follows:
1999 1998
------- -------
Deferred tax assets:
Unrealized loss on
Securities available for sale $ 889 $ -
Allowance for loan
and lease losses 4,020 2,997
Deferred compensation 280 244
Securities 30 136
Net operating loss 600 468
------- -------
Gross deferred tax assets $ 5,819 $ 3,845
------- -------
Deferred tax liabilities:
Unrealized gain on securities
available for sale $ - $(1,246)
Fixed assets (4,580) (4,470)
Leases (1,800) (1,360)
Tax bad debt reserves (670) (697)
Discount on loans (220) -
Prepaid expenses (165) (165)
Other (49) (30)
Mortgage servicing rights (185) -
------- -------
Gross deferred tax liabilities $(7,669) $(7,968)
------- -------
Net deferred tax (liability) $(1,850) $(4,123)
======= =======
The actual income taxes differ from the expected amounts
(computed by applying the U.S. federal corporate tax rate of 35%
for 1999, 1998 and 1997, to income before income taxes) as
follows:
1999 1998 1997
--------------------------
Computed "expected" amount $3,983 $4,472 $4,149
Increase (decrease) resulting from:
Nontaxable interest income (515) (511) (510)
State income taxes, net of federal
tax benefit 230 360 260
Graduated income tax rates (100) (100) (100)
Tax credits (440) (440) (440)
Other (2) (24) (21)
------ ------ ------
Income taxes $3,156 $3,757 $3,338
====== ====== ======
Effective tax rates 27.7% 29.4% 28.2%
====== ====== ======
Heartland has investments in certain low-income housing projects
totaling $5,100 and $5,400 as of December 31, 1999 and 1998,
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, 1999 and 1998, were
as follows:
1999 1998
------- -------
Advances from the FHLB;
weighted average maturity dates at
December 31, 1999 and 1998, were
July, 2005 and July, 2002,
respectively; and weighted average
interest rates were 6.03% and 6.12%,
respectively $16,109 $26,114
Notes payable on leased assets with
interest rates varying from 5.39% to
9.75% 13,322 12,845
Note payable with unaffiliated bank 21,000 16,200
Trust preferred securities 25,000 -
Contracts payable to previous stock-
holders of LAG for acquisition due
over a three-year schedule at 7.50%
through July, 2001 643 1,286
Contracts payable to previous stock-
holders of WCB for acquisition due
in annual payments over two-, three- or
four-year schedules at interest rates
of 7.00% to 7.50% through March, 2001 583 1,178
------- ------
Total $76,657 $57,623
======= =======
DB&T, GSB, FCB, RCB and WCB are members of the FHLB of Des Moines
or of Chicago. The advances from the FHLB are collateralized by
the Banks' investment in FHLB stock of $3,756 and $3,659 at
December 31, 1999 and 1998, respectively. Additional collateral
is provided by the Banks' one-to-four unit residential mortgages
totaling $113,133 at December 31, 1999, and $116,520 at December
31, 1998.
On July 23, 1999, Heartland entered into an Amended and Restated
Loan Agreement with an unaffiliated bank to establish a term
credit line as well as to increase the availability under an
existing revolving credit line. The unsecured credit line was
increased from $20,000 to $40,000. Under the terms of this
agreement at December 31,1999, Heartland has a term loan of
$25,000 and a revolving credit loan of up to $5,000. The term
loan is payable quarterly in $1,000 installments beginning March
31, 2000, with the final payment of $10,000 payable on December
31, 2003. At December 31, 1999, $25,000 was outstanding on the
term loan with $21,000 classified as other borrowings and the
subsequent year's payments of $4,000 classified as short-term
borrowings. The additional credit line was established primarily
to provide the $18,000 capital investment required at WCB upon
its acquisition of the Monroe branch. Under the terms of this
agreement, Heartland must maintain a minimum return on average
assets, maximum non-performing assets to total loans ratio,
maximum funded debt to total equity capital ratio and each of
Heartland's banking subsidiaries must remain well capitalized.
On October 21, 1999, Heartland completed an offering of $25,000
of 9.60% cumulative capital securities representing undivided
beneficial interests in Trust I, a special purpose trust
subsidiary of Heartland formed for the sole purpose of this
offering. The proceeds from the offering were used by Trust I to
purchase junior subordinated debentures from Heartland. The
proceeds are being used for general corporate purposes, including
the repayment of $15,000 of indebtedness on the revolving credit
loan and the financing of acquisitions. All of the securities
qualified as Tier 1 capital for regulatory purposes as of
December 31, 1999. Subsequent to the acquisition of NBI on
January 1, 2000, approximately $22,970 of the securities
qualified as Tier 1 capital, as the amount of securities may not
exceed more than 25% of Heartland's total Tier 1 capital.
Interest is payable quarterly on March 31, June 30, September 30
and December 31 of each year. The debentures will mature and the
capital securities must be redeemed on September 30, 2029.
Heartland has the option to shorten the maturity date to a date
not earlier than September 30, 2004. Heartland will not shorten
the maturity date without prior approval of the Board of
Governors of the Federal Reserve System, if required. Prior
redemption is permitted under certain circumstances such as
changes in tax or regulatory capital rules. In connection with
this offering, $1,137 of deferred issuance costs was recorded in
other assets.
Future payments at December 31, 1999, for all other borrowings
were as follows:
2001 $ 14,570
2002 15,987
2003 14,505
2004 6
Thereafter 31,589
--------
Total $ 76,657
========
TWELVE
EMPLOYEE BENEFIT PLANS
Heartland sponsors a retirement plan covering substantially all
employees. Contributions to this plan are subject to approval by
the Heartland Board of Directors. The Heartland subsidiaries fund
and record as an expense all approved contributions. Costs
charged to operating expenses were $530 for 1999, $435 for 1998
and $418 for 1997. This plan includes an employee savings
program, under which the Heartland subsidiaries make matching
contributions of up to 2% of the participants' wages. Costs
charged to operating expenses were $183 for 1999, $161 for 1998
and $150 for 1997.
Heartland also has a non-contributory, defined contribution
pension plan covering substantially all employees. Annual
contributions are based upon 5% of qualified compensation as
defined in the plan. Costs charged to operating expense were $530
for 1999, $435 for 1998 and $418 for 1997.
THIRTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
Heartland leases certain land and facilities under operating
leases. Minimum future rental commitments at December 31, 1999,
for all non-cancelable leases were as follows:
2000 $ 476
2001 484
2002 433
2003 393
2004 413
Thereafter 691
------
Total $2,890
======
Rental expense for premises and equipment leased under operating
leases was $521 for 1999, $268 for 1998 and $78 for 1997.
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, 1999 and 1998, commitments to extend credit
aggregated $274,406 and $229,332 and standby letters of credit
aggregated $9,564 and $6,230, respectively. Heartland does not
anticipate any material loss as a result of the commitments and
contingent liabilities.
FOURTEEN
STOCK PLANS
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, 1,200,000 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 the exercise
price for the incentive stock options 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, 1999 and 1998 respectively, there were
283,467 and 468,519 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 market 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, 1999, 1998
and 1997, and changes during the years ended follows:
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------ --------- ------ --------- ------ ---------
Outstanding
at beginning
of year 654 $10 522 $ 9 392 $ 8
Granted 274 18 196 15 146 12
Exercised (79) 19 (28) 15 (4) 13
Forfeited (89) 19 (36) 16 (12) 13
--- --- ---
Outstanding at
end of year 760 $11 654 $10 522 $ 9
=== === ===
Options
exercisable
at end of year 6 $12 6 $12 6 $12
Weighted-average
fair value of
options
granted during
the year $1.96 $3.65 $3.83
As of December 31, 1999 and 1998, options outstanding had
exercise prices ranging from $8 to $18 per share and a weighted-
average remaining contractual life of 6.77 and 7.40 years,
respectively.
The fair value of stock options granted was determined utilizing
the Black Scholes Valuation model. Significant assumptions
include:
1999 1998 1997
-------- -------- ---------
Risk-free interest rate 6.28% 5.75% 6.30%
Expected option life 10 Years 10 Years 10 Years
Expected volatility 13.04% 24.27% 24.27%
Expected dividends 1.94% 1.76% 2.17%
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 FAS No. 123 "Accounting for
Stock-Based Compensation", Heartland's net income would have been
reduced to the pro forma amounts indicated below:
1999 1998 1997
------ ------ ------
Net income as reported $8,225 $9,021 $8,515
Pro forma 7,890 8,745 8,317
Earnings per share-basic
as reported $ .86 $ .95 $ .90
Pro forma .83 .92 .88
Earnings per share-diluted
as reported $ .84 $ .94 $ .89
Pro forma .81 .91 .86
Pro forma net income reflects only options granted in 1999, 1998,
1997, 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under FAS 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 400,000 shares is available for
sale under the ESPP. For the years ended December 31, 1999 and
1998, Heartland approved a price of 100% of fair market value at
December 31, 1998 and December 31, 1997, respectively. At
December 31, 1999 and 1998, respectively, 16,481 and 15,333
shares were purchased under the ESPP at no charge to Heartland's
earnings.
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 400,000 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, 1997
under the plan were 399,800. Total compensation expense
associated with this plan was $267 for 1997. No additional shares
are anticipated to be issued under this plan. A summary of the
activity in the executive restricted stock purchase plan for the
year ended December 31, 1997 follows:
1997
-------
Granted 55,268
Exercised 55,068
Forfeited 200
Average Offering Price $ 8.10
During each of the years ended December 31, 1999, 1998 and 1997,
Heartland acquired shares for use in the executive stock purchase
plan, the Plan and the ESPP. Shares acquired totaled 44,907,
290,924 and 65,670 for 1999, 1998 and 1997, 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.
December 31, December 31,
1999 1998
------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------
Financial Assets:
Cash and cash equivalents $ 35,953 $ 35,953 $ 42,831 $ 42,831
Time deposits in other
banks 6,084 6,084 6,127 6,127
Securities available for
sale 209,381 209,381 239,770 239,770
Securities held to
maturity 2,196 2,264 2,718 2,871
Loans and leases, net of
unearned 835,146 829,931 590,133 594,185
Financial Liabilities:
Demand deposits $ 91,391 $ 91,391 $ 70,871 $ 70,871
Savings deposits 367,413 367,413 292,852 292,852
Time deposits 410,855 408,313 354,154 358,044
Short-term borrowings 132,300 132,300 75,920 75,920
Other borrowings 76,657 84,796 57,623 58,872
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 1 capital (as
defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1999 and 1998,
that the Banks met all capital adequacy requirements to which
they were subject.
As of December 31, 1999, 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 1 risk-based and Tier 1 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.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1999
Total Capital (to Risk-
Weighted Assets)
Consolidated $112,508 11.68% $ 77,035 >8.0% $ N/A -
DB&T 51,041 10.75 37,980 >8.0 47,475
>10.0%
GSB 11,604 12.16 7,635 >8.0 9,544 >10.0
FCB 9,033 12.01 6,016 >8.0 7,520 >10.0
RCB 6,555 11.57 4,534 >8.0 5,667 >10.0
WCB 15,704 10.99 11,430 >8.0 14,287 >10.0
NMB 15,306 19.02 6,438 >8.0 8,048 >10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $101,665 10.56% $ 38,517 >4.0% $ N/A -
DB&T 46,049 9.70 18,990 >4.0 28,485 >6.0
GSB 10,411 10.91 3,818 >4.0 5,726 >6.0
FCB 8,092 10.76 3,008 >4.0 4,512 >6.0
RCB 5,969 10.53 2,267 >4.0 3,400 >6.0
WCB 14,012 9.81 5,715 >4.0 8,572 >6.0
NMB 14,556 18.09 3,219 >4.0 4,829 >6.0
Tier 1 Capital
(to Average Assets)
Consolidated $101,665 8.85% $ 45,965 >4.0% $ N/A -
DB&T 46,049 7.94 23,212 >4.0 29,015 >5.0
GSB 10,411 7.68 5,424 >4.0 6,780 >5.0
FCB 8,092 8.08 4,007 >4.0 5,009 >5.0
RCB 5,969 8.23 2,900 >4.0 3,625 >5.0
WCB 14,012 8.43 6,648 >4.0 8,310 >5.0
NMB 14,556 18.00 3,235 >4.0 4,044 >5.0
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- -------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1998
Total Capital (to Risk-
Weighted Assets)
Consolidated $89,093 12.13% $58,757 >8.0% N/A
DB&T 44,380 10.10 35,144 >8.0 $43,930 >10.0%
GSB 10,850 13.66 6,353 >8.0 7,941 >10.0
FCB 9,385 13.53 5,551 >8.0 6,939 >10.0
RCB 4,818 11.23 3,431 >8.0 4,288 >10.0
WCB 4,774 13.60 2,809 >8.0 3,511 >10.0
NMB 14,901 45.85 2,600 >8.0 3,250 >10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $81,149 11.05% $29,379 >4.0% N/A
DB&T 39,960 9.10 17,572 >4.0 $26,358 >6.0%
GSB 9,857 12.41 3,177 >4.0 4,765 >6.0
FCB 8,516 12.27 2,776 >4.0 4,163 >6.0
RCB 4,398 10.26 1,715 >4.0 2,573 >6.0
WCB 4,358 12.41 1,405 >4.0 2,107 >6.0
NMB 14,535 44.72 1,300 >4.0 1,950 >6.0
Tier 1 Capital
(to Average Assets)
Consolidated $81,149 8.58% $37,810 >4.0% N/A
DB&T 39,960 7.38 21,670 >4.0 $27,088 >5.0%
GSB 9,857 7.76 5,082 >4.0 6,353 >5.0
FCB 8,516 8.36 4,073 >4.0 5,092 >5.0
RCB 4,398 7.03 2,502 >4.0 3,127 >5.0
WCB 4,358 9.14 1,908 >4.0 2,385 >5.0
NMB 14,535 40.62 1,431 >4.0 1,789 >5.0
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 $35,210 as of December 31, 1999,
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, 1999 1998
-------- --------
Assets:
Cash and interest bearing deposits $ 3,744 $ 695
Investment in subsidiaries 124,924 100,585
Other assets 2,434 1,442
Due from subsidiaries 7,550 -
-------- --------
Total $138,652 $102,722
======== ========
Liabilities
and stockholders' equity:
Liabilities:
Short-term borrowings $ 4,594 $ 823
Other borrowings 47,364 17,378
Accrued expenses and other liabilities 121 251
-------- --------
Total liabilities 52,079 18,452
-------- --------
Stockholders' equity:
Common stock 9,707 9,707
Capital surplus 15,339 14,984
Retained earnings 65,132 60,154
Accumulated other comprehensive
income (1,511) 2,107
Treasury stock (2,094) (2,682)
-------- --------
Total stockholders' equity 86,573 84,270
-------- --------
Total $138,652 $102,722
======== ========
Income Statements for the
Years Ended December 31, 1999 1998 1997
------ ------ ------
Operating revenues:
Dividends from subsidiaries $8,515 $7,413 $2,621
Other 201 173 10
------ ------ ------
Total operating revenues 8,716 7,586 2,631
------ ------ ------
Operating expenses:
Interest 2,087 1,115 208
Outside services 172 151 219
Other operating expenses 450 442 350
------ ------ ------
Total operating expenses 2,709 1,708 777
------ ------ ------
Equity in undistributed earnings 1,430 2,684 6,398
------ ------ ------
Income before income tax benefit 7,437 8,562 8,252
Income tax benefit 788 459 263
------ ------ ------
Net income $8,225 $9,021 $8,515
====== ====== ======
Statements of Cash Flows For
the Years Ended December 31, 1999 1998 1997
------- ------- -------
Cash flows from operating
activities:
Net income $ 8,225 $ 9,021 $ 8,515
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (1,430) (2,684) (6,398)
(Increase) decrease in due
from subsidiaries (7,550) 1,350 (1,135)
Increase (decrease) in other
liabilities (130) (6) 167
(Increase) decrease in other
assets (992) 261 (1,499)
------- ------- -------
Net cash provided (used)
by operating activities (1,877) 7,942 (350)
------- ------- -------
Cash flows from investing
activities:
Capital injections for
subsidiaries (26,580) (13,152) (2,855)
Receipts for sale of
minority interest 58 - -
Payments for purchase of
subsidiaries - - (7,890)
Retirement of subsidiary stock - - 4,500
Other (5) 2 -
------- ------- -------
Net cash used by
investing activities (26,527) (13,150) (6,245)
------- ------- -------
Cash flows from financing
activities:
Payments on other borrowings (15,823) (7,018) (1,042)
Proceeds from other borrowings 49,580 18,895 7,365
Cash dividends paid (3,247) (2,928) (2,465)
Purchase of treasury stock (837) (4,431) (865)
Sale of treasury stock 1,780 669 1,110
------- ------- -------
Net cash provided by
financing activities 31,453 5,187 4,103
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 3,049 (21) (2,492)
Cash and cash equivalents at
beginning of year 695 716 3,208
------- ------- -------
Cash and cash equivalents at
end of year $ 3,744 $ 695 $ 716
======= ======= =======
<PAGE>
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,
1999 and 1998, and the related consolidated statements of income,
changes in stockholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended
December 31, 1999. 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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, 1999 and 1998, and the results of their operations
and their cash flows for each the years in the three-year period
ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Des Moines, Iowa
January 20, 2000
<PAGE>
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, 1999,
1998 and 1997, of Heartland Financial USA, Inc. and its
subsidiaries: Dubuque Bank and Trust Company; Galena State Bank
and Trust Company; Riverside Community Bank; Wisconsin Community
Bank; New Mexico Bank & Trust; First Community Bank, FSB; DB&T
Insurance, Inc.; DB&T Community Development Corp.; Citizens
Finance Co.; ULTEA, Inc.; Keokuk Bancshares, Inc. (dba KBS
Investment Corp); DBT Investment Corporation; and Heartland
Capital Trust I 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 and CEO, Heartland Financial USA, Inc.
/s/ John K. Schmidt
- ------------------------------
John K. Schmidt
Executive Vice President and CFO, Heartland Financial USA, Inc.
<PAGE>
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The information in the Heartland Proxy Statement for the 2000
annual meeting of stockholders dated April 5, 2000 (the "2000
Proxy Statement") under the caption "Election of Directors" and
under the caption, "Security Ownership of Directors and Executive
Officers and Certain Beneficial Owners" is incorporated by
reference. The information regarding executive officers is
included pursuant to Instruction 3 to Item 401 (b) and (c) of
Regulation S-K and is noted below.
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, 1999, 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 50 Director, President and
Chief Executive Officer of
Heartland; Director of DBT,
GSB, FCB, WCB, NMB, Keokuk,
DB&T Insurance, Citizens, DBT
Investment and DB&T
Development; President of
DB&T Insurance, DB&T
Development and Citizens;
Chairman and Director of RCB;
Chairman and Director of
ULTEA.
Lynn S. Fuller 75 Chairman of the Board 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 76 Vice Chairman of the
Board of Heartland; Chairman
of the Board of DB&T;
Director of DB&T Insurance,
Citizens and DB&T Development
John K. Schmidt 40 Executive Vice President
and Chief Financial Officer
of Heartland; President and
Chief Executive Officer of
DB&T; Treasurer of DB&T
Insurance and Citizens;
Director of DBT Investment;
Vice President and Assistant
Secretary of ULTEA
Kenneth J. Erickson 48 Executive Vice President
of Heartland; Senior Vice
President, Lending of DB&T;
Senior Vice President of Cit-
izens; Director of ULTEA
Edward H. Everts 48 Senior Vice President,
Heartland; Senior Vice
President of Operations and
Retail Banking of DB&T
Douglas J. Horstmann 46 Senior Vice President,
Lending of Heartland; Senior
Vice President, Lending of
DB&T; Executive Vice
President of DB&T Development
Paul J. Peckosh 54 Senior Vice President,
Trust of Heartland; Senior
Vice President 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 since 1987. He has been
a director of GSB since its acquisition by Heartland in 1992 and
of Keokuk and FCB 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 RCB in conjunction with the
opening of the de novo operation in 1995, Director of WCB in
conjunction with the purchase of Cottage Grove State Bank in 1997
and Director of NMB in conjunction with the opening of the de
novo bank in 1998. Mr. Fuller was President of DB&T from 1987
until 1999 at which time he was named Chief Executive Officer of
Heartland.
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 and was Chief Executive Officer until 1999. Mr. Fuller
remains as the Chairman of the Board 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.
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, Senior Vice President and Chief Financial Officer in
January, 1991 and President and Chief Executive Officer in 1999.
Mr. Schmidt is a certified public accountant and worked at KPMG
LLP in Des Moines, Iowa, from 1982 until joining DB&T.
Kenneth J. Erickson was named Executive Vice President of
Heartland in 1999 and has served as Senior Vice President 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 was named as Senior Vice President of
Heartland in 1999 and 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 was appointed Senior Vice President of Heartland
in 1999 and 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 information in the 2000 Proxy Statement, under the caption
"Executive Compensation" is incorporated by reference, except for
the information contained under the heading "Compensation
Committee Report on Executive Compensation" and "Stockholder
Return Performance Presentation."
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2000 Proxy Statement, under the caption
"Security Ownership of Certain Beneficial Owners and Management"
is incorporated by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2000 Proxy Statement under the caption
"Transactions with Management" is incorporated by reference.
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.
<PAGE>
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 22, 2000.
Heartland Financial USA, Inc.
By:/s/ Lynn S. Fuller /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 22, 2000
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 22, 2000.
/s/ Lynn B. Fuller /s/ Lynn S. Fuller
- ----------------------------- -----------------------------
Lynn B. Fuller Lynn S. Fuller
President and Director Chairman, CEO and Director
/s/ James A. Schmid /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
<PAGE>
3. Exhibits
3.1 Certificate of Incorporation of Heartland Finan-
cial 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 ref-
erence 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 in-
corporated 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 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.)
10.5 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 agreements are in place at Galena State Bank and Trust
Company, First Community Bank, FSB, Riverside Community
Bank, Wisconsin Community Bank, New Mexico Bank & Trust
and ULTEA. (Filed as Exhibit 10.25 to Registrant's Form
10-K for the fiscal year ended December 31, 1995, and
incorporated by reference herein.)
10.6 Investment Center Agreement between 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.)
10.7 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.)
10.8 License and Service Agreement, Software License
Agreement, and Professional Services Agreement between
Fiserv and Heartland Financial USA, Inc. dated June 21,
1996. (Filed as Exhibit 10.43 to Registrant's form 10Q
for the quarter ended June 30, 1996, and incorporated
by reference herein.)
10.9 The Stock Purchase Agreement between Heartland Financial
USA, Inc. and the stockholders of Cottage Grove State Bank
dated November 8, 1996. (Filed as Exhibit 10.36 to Regis-
trant's Form 10K for the fiscal year ended December 31, 1996,
and incorporated by reference herein.)
10.10 Stockholder Agreement between Heartland Financial USA,
Inc. and Investors in the Proposed New Mexico Bank
dated November 5, 1997. (Filed as Exhibit 10.23 to
Registrant's Form 10K for the fiscal year ended
December 31, 1997, and incorporated by reference
herein.)
10.11 Change of Control Agreements including Golden Parachute
Payment Adjustments and Restrictive Covenants between
Heartland Financial USA, Inc. and Executive Officers
dated January 1, 1999. (Filed as Exhibit 10.11 to
Registrant's Form 10K for the fiscal year ended
December 31, 1998, and incorporated by reference
herein.)
10.12 Change of Control Agreements between Heartland
Financial USA, Inc. and Executive Officers dated
January 1, 1999. (Filed as Exhibit 10.12 to
Registrant's Form 10K for the fiscal year ended
December 31, 1998, and incorporated by reference
herein.)
10.13 Heartland Financial USA, Inc. Health Care Plan dated
January 1, 1999. (Filed as Exhibit 10.13 to
Registrant's Form 10K for the fiscal year ended
December 31, 1998, and incorporated by reference
herein.)
10.14 Letter Agreement between Wisconsin Community Bank and
Bank One Wisconsin dated February 9, 1999. (Filed as
Exhibit 10.14 to Registrant's Form 10K for the fiscal
year ended December 31, 1998, and incorporated by
reference herein.)
10.15 Office Purchase and Assumption Agreement by and between
Bank One Wisconsin and Wisconsin Community Bank dated February 9,
1999, excluding Schedules A through S. (Filed as Exhibit 10.15 to
Registrant's Form 10K for the fiscal year ended December 31,
1998, and incorporated by reference herein.)
10.16 Amended and Restated Credit Agreement between Heartland
Financial USA, Inc. and The Northern Trust Company dated July 23,
1999 (Filed as Exhibit 10.16 to Registrant's Form 10Q for the six
months ended June 30, 1999, and incorporated by reference
herein.)
10.17 Agreement and Plan of Merger, dated as of August 17,
1999, by and among Heartland Financial USA, Inc., National
Bancshares, Inc. and NBI Acquisition Corporation. (Filed as
Exhibit 2.1 to Registrant's Form 8K dated August 25, 1999, and
incorporated by reference herein.)
10.18 Amendment Agreement, dated as of November 1, 1999,
between Heartland Financial USA, Inc. and the Northern
Trust Company
11. Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
99.1 2000 Proxy Statement (only such parts as are incorporated by
reference into this Form 10-K)
Exhibit 10.18
AMENDMENT, DATED
AS OF NOVEMBER 1, 1999
THIS AMENDMENT AGREEMENT, dated as of November 1, 1999, is
entered into between HEARTLAND FINANCIAL USA, INC., a Delaware
corporation (the "BORROWER"), and THE NORTHERN TRUST COMPANY, an
Illinois banking corporation having its principal office at 50
South LaSalle Street, Chicago, Illinois 60675 (the "BANK").
RECITALS:
A. The Borrower and the Bank have entered into an Amended
and Restated Credit Agreement, dated as of July 23, 1999, (said
Agreement, as amended, shall hereinafter be referred to as "THE
AGREEMENT"). Terms defined in the Agreement and not otherwise
defined herein shall be used herein as in the Agreement.
B. The Borrower and the Bank wish to amend the Agreements
to change the definition of "Tangible Net Worth" by executing
this Amendment.
C. Therefore, the parties hereto agree as follows:
1. AMENDMENTS TO THE AGREEMENT.
1.1 SECTION 8.1(K) OF THE AGREEMENT. SECTION 8.1(K)
of the Agreement is hereby amended and restated in
its entirety as of the date hereof as follows.
"(k) The term "Tangible Net Worth" shall mean at any
date Borrower's Tier 1 Capital, as defined herein."
2. WARRANTIES. To induce the Bank to enter into this
Amendment, the Borrower warrants that:
2.1 AUTHORIZATION. The Borrower is duly authorized to
execute and deliver this Amendment and is and will
continue to be duly authorized to borrow monies under
the Notes, and to perform its obligations under the
Agreement, as amended hereby, and under the Notes.
2.2 NO CONFLICTS. The execution and delivery of this
Amendment, and the performance by the Borrower of its
obligations under the Agreement, as amended hereby,
and under the Notes, do not and will not conflict
with any provision of law or of the charter or by-laws
of the Borrower or of any agreement binding upon the
Borrower.
2.3 VALIDITY AND BINDING EFFECT. The Agreement, as
amended hereby, is, and when duly executed and delivered
will be legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance
with its terms, except as enforceability may be limited
by bankruptcy, insolvency or other similar laws of general
application affecting the enforcement of creditors'
rights or by general principles of equity limiting the
availability of equitable remedies.
3. CONDITIONS PRECEDENT TO AMENDMENT. The amendment
contemplated by SECTION 1 hereof is subject to the satisfaction
of each of the following conditions precedent:
3.1 DOCUMENTATION. The Borrower shall have delivered
to the Bank all of the following, each duly executed
and dated the closing date hereof, in form and substance
satisfactory to the Bank:
(a) AMENDMENT. This Amendment.
(b) INCUMBENCY CERTIFICATE. A certificate of the
secretary or an assistant secretary of the Borrower
certifying the names of the Borrower's officers authorized
to sign this Amendment and all other documents or
certificates to be delivered hereunder, together with
the true signatures of such officers.
(c) CERTIFICATE. A certificate of the president or
chief financial officer of the Borrower as to the matters
set out in SECTION 3.2 and 3.3 hereof.
(d) GUARANTORS' ACKNOWLEDGMENT. The acknowledgment and
consent of each Guarantor to this Amendment as evidenced
by its signed acknowledgment of this Amendment on the
signature page hereof.
(e) OTHER. Such other documents as the Bank may reasonably
request.
3.2 NO DEFAULT. As of the closing date hereof, no Event of
Default or Unmatured Event of Default under the Agreements
shall have occurred and be continuing.
3.3 WARRANTIES. As of the closing date hereof, the warranties
in the Agreement and in SECTION 2 of this Amendment
shall be true and correct as though made on such date,
except for such changes as are specifically permitted under
the Agreement.
4. GENERAL.
4.1 EXPENSES. The Borrower agrees to pay the Bank upon demand
for all reasonable expenses, including reasonable attorneys'
and legal assistants' fees (which attorneys and legal
assistants may be employees of the Bank), incurred by the
Bank in connection with the preparation, negotiation and
execution of this Amendment and any document required to be
furnished herewith or therewith.
4.2 LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS.
4.3 SUCCESSORS. This Amendment shall be binding upon the Borrower
and the Bank and their respective successors and assigns,
and shall inure to the benefit of the Borrower and the
Bank and the successors and assigns of the Bank.
4.4 CONFIRMATION OF THE AGREEMENT. The Agreement, as amended
hereby, shall remain in full force and effect and is
hereby ratified and confirmed in all respects.
4.5 REFERENCES TO THE AGREEMENT. Each reference in the Agreement
to "this Agreement," "hereunder," "hereof," or words of
similar import in instruments or documents provided for
in such Agreement or delivered or to be delivered there-
under or in connection therewith, shall, except where the
context otherwise requires, be deemed a reference to such
Agreement as amended hereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed at Chicago, Illinois by their respective
officers thereunto duly authorized as of the date first written
above.
HEARTLAND FINANCIAL USA, INC.
By:
--------------------------
Title
------------------------
THE NORTHERN TRUST COMPANY
By:
--------------------------
Title
------------------------
GUARANTOR ACKNOWLEDGMENT
Each of the undersigned Guarantors hereby acknowledges and
consents to Borrower's execution of this Amendment.
CITIZENS FINANCE CO., as Guarantor ULTEA, INC., as Guarantor
By: By:
----------------------------- ---------------------------
Title Title
--------------------------- -------------------------
<PAGE>
The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Re: Amendment, dated as of November 1, 1999 (the
"AMENDMENT"), between Heartland Financial USA, Inc.
(the "BORROWER") and The Northern Trust Company (the
"BANK")
Ladies and Gentlemen:
This certificate is being delivered to the Bank pursuant to
SECTION 4.1(C) of the Amendment. Terms used in this certificate
which are defined in the Amendment shall have the same meaning
herein as therein.
In connection with Borrower's execution of the Amendment, the
undersigned officer of the Borrower hereby certifies as follows:
1. No Event of Default or Unmatured Event of Default under the
Agreement or Notes has occurred and is continuing.
2. The warranties in the Agreement and in SECTION 2
of the Amendment are true and correct as of the date
hereof as though made on the date hereof, except for
such changes as are specifically permitted under the
Agreement.
Very truly yours,
Dated November 1, 1999 HEARTLAND FINANCIAL USA, INC.
By:
-------------------------
Title:
----------------------
Exhibit 11
EARNINGS PER SHARE
Net income for the year ended December 31, 1999 $8,225,000
==========
Weighted average common shares outstanding 9,555,194
Assumed incremental common shares issued
upon exercise of stock options 196,280
----------
Weighted average common shares for diluted
earnings per share 9,751,474
==========
Earnings per common share - basic $ .86
=====
Earnings per common share - diluted $ .84
=====
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Galena State Bank and 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. DB&T Community Development Corp.
3. Keokuk Bancshares, Inc. (dba KBS Investment Corp.)
4. First Community Bank, FSB, a federal savings bank with
its main office located in Keokuk, Iowa
4.a. KFS Services, Inc.
5. Riverside Community Bank, an Illinois state bank with its
main office located in Rockford, Illinois
6. Citizens Finance Co.
7. ULTEA
7.a. Autorent Wisconsin, Inc.
7.b. Econo Lease, Inc.
8. Wisconsin Community Bank, a Wisconsin bank with its main
office located in Cottage Grove, Wisconsin
8.a. DBT Investment Corporation
9. New Mexico Bank & Trust, a New Mexico state bank with its
main office located in Albuquerque, New Mexico
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 20, 2000,
relating to the consolidated balance sheets of Heartland
Financial USA, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, changes
in stockholders' equity and comprehensive income, and cash flows
for each of the years in the three-year period ended December 31,
1999 which report appears in the December 31, 1999 annual report
on Form 10-K of Heartland Financial USA, Inc. and subsidiaries.
KPMG LLP
Des Moines, Iowa
March 27, 2000
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<ARTICLE> 9
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<NAME> HEARTLAND FINANCIAL USA, INC.
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<SHORT-TERM> 132,300
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000
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<COMMON> 9,707
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<INCOME-PRE-EXTRAORDINARY> 8,225
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 8,225
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<YIELD-ACTUAL> 3.64
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