SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30,2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period __________ to __________
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices Zip Code)
(319) 589-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
classes of Registrant's common stock as of the latest practicable
date: As of August 9, 2000, the Registrant had outstanding
9,620,492 shares of common stock, $1.00 par value per share.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Form 10-Q Signature Page
<PAGE>
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
6/30/00 12/31/99
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 37,769 $ 34,078
Federal funds sold 10,950 1,875
----------- -----------
Cash and cash equivalents 48,719 35,953
Time deposits in other
financial institutions 5,366 6,084
Securities:
Available for sale-at market
(cost of $216,666 for 2000 and
$211,782 for 1999) 213,260 209,381
Held to maturity-at cost
(approximate market value of $2,162
for 2000 and $2,264 for 1999) 2,112 2,196
Loans and leases:
Held for sale 18,513 16,636
Held to maturity 983,303 818,510
Allowance for loan and
lease losses (12,912) (10,844)
----------- -----------
Loans and leases, net 988,904 824,302
Assets under operating leases 35,031 35,495
Premises, furniture and equipment, net 29,976 26,995
Goodwill and core deposit intangible, net 21,565 13,997
Other real estate, net 345 585
Other assets 33,051 29,159
----------- -----------
TOTAL ASSETS $1,378,329 $1,184,147
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 123,896 $ 91,391
Savings 392,159 367,413
Time 487,495 410,855
----------- -----------
Total deposits 1,003,550 869,659
Short-term borrowings 178,494 132,300
Accrued expenses and other liabilities 20,829 18,958
Other borrowings 86,358 76,657
----------- -----------
TOTAL LIABILITIES 1,289,231 1,097,574
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share;
authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 12,000,000 shares; issued,
9,905,783 shares at June 30, 2000,
and 9,707,252 at December 31, 1999) 9,906 9,707
Capital surplus 18,819 15,339
Retained earnings 67,631 65,132
Accumulated other comprehensive loss (2,151) (1,511)
Treasury stock at cost
(285,291 and 120,478 shares at June
30, 2000, and December 31, 1999,
respectively) (5,107) (2,094)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 89,098 86,573
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,378,329 $1,184,147
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 21,961 $ 14,205 $ 42,145 $ 27,026
Interest on securities:
Taxable 2,943 2,804 6,057 5,824
Nontaxable 462 306 887 598
Interest on federal
funds sold 99 26 148 79
Interest on interest
bearing deposits in
other financial
institutions 81 111 182 212
-------- -------- -------- --------
TOTAL INTEREST INCOME 25,546 17,452 49,419 33,739
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 10,328 7,305 19,893 14,497
Interest on short-term
borrowings 2,553 1,290 4,691 2,304
Interest on other
borrowings 1,525 875 2,986 1,755
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 14,406 9,470 27,570 18,556
-------- -------- -------- --------
NET INTEREST INCOME 11,140 7,982 21,849 15,183
Provision for possible
loan and lease losses 1,007 762 1,826 1,296
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 10,133 7,220 20,023 13,887
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 1,316 902 2,471 1,768
Trust fees 793 631 1,507 1,225
Brokerage commissions 246 143 491 248
Insurance commissions 194 195 386 397
Securities gains (losses),
net (11) 194 232 717
Gains on sale of loans 104 343 144 750
Rental income on
operating leases 3,702 3,675 7,354 7,298
Impairment loss on
equity securities (233) - (233) -
Other 301 215 513 421
-------- -------- -------- --------
TOTAL OTHER INCOME 6,412 6,298 12,865 12,824
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 6,017 4,497 11,933 8,914
Occupancy 727 467 1,483 930
Furniture and equipment 732 562 1,458 1,093
Outside services 579 555 1,340 1,004
FDIC deposit insurance
assessment 60 30 128 61
Advertising 427 386 786 649
Depreciation on equipment
under operating leases 2,770 2,683 5,508 5,323
Goodwill and core deposit
amortization 453 62 907 124
Other operating expenses 1,711 1,340 3,443 2,617
-------- -------- -------- --------
TOTAL OTHER EXPENSES 13,476 10,582 26,986 20,715
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 3,069 2,936 5,902 5,996
Income taxes 880 863 1,669 1,784
-------- -------- -------- --------
NET INCOME $ 2,189 $ 2,073 $ 4,233 $ 4,212
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC $ 0.23 $ 0.22 $ 0.44 $ 0.44
EARNINGS PER COMMON
SHARE-DILUTED $ 0.22 $ 0.21 $ 0.43 $ 0.43
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.09 $ 0.08 $ 0.18 $ 0.16
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 1999 $ 9,707 $14,984 $60,154
Net Income-First six months
1999 - - 4,212
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in net income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.16 per share - - (1,522)
Purchase of 25,339 shares
of common stock for treasury - - -
Sale of 79,079 shares
of common stock - 297 -
------- ------- -------
Balance at June 30, 1999 $ 9,707 $15,281 $62,844
======= ======= =======
Balance at January 1, 2000 $ 9,707 $15,339 $65,132
Net Income-First six months
2000 - - 4,233
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in net income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.18 per share - - (1,734)
Issuance of 319,010 shares of
common stock 199 3,480 -
Purchase of 285,292 shares
of common stock for treasury - - -
------- ------- -------
Balance at June 30, 2000 $ 9,906 $18,819 $67,631
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income(Loss) Stock Total
------------- -------- -----
Balance at January 1, 1999 $ 2,107 $(2,682) $84,270
Net Income-First six months
1999 - - 4,212
Unrealized loss on securities
available for sale (3,052) - (3,052)
Reclassification adjustment for
gains realized in net income (717) - (717)
Income taxes 1,281 - 1,281
-------
Comprehensive income 1,724
Cash dividends declared:
Common, $.16 per share - - (1,522)
Purchase of 25,339 shares
of common stock for treasury - (468) (468)
Sale of 79,079 shares
of common stock - 1,166 1,463
------- ------- -------
Balance at June 30, 1999 $ (381) $(1,984) $85,467
======= ======= =======
Balance at January 1, 2000 $(1,511) $(2,094) $86,573
Net Income-First six months
2000 - - 4,233
Unrealized loss on securities
available for sale (737) - (737)
Reclassification adjustment for
gains realized in net income (232) - (232)
Income taxes 329 - 329
-------
Comprehensive income 3,593
Cash dividends declared:
Common, $.18 per share - - (1,734)
Issuance of 319,010 shares of
common stock - 2,094 5,773
Purchase of 285,292 shares
of common stock for treasury - (5,107) (5,107)
------- ------- -------
Balance at June 30, 2000 $(2,151) $(5,107) $89,098
======= ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
6/30/00 6/30/99
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,233 $ 4,212
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 8,023 6,708
Provision for loan and lease
losses 1,826 1,296
Provision for deferred income taxes 253 456
Net amortization/(accretion) of
premium/(discount) on investment
securities (2) 1,010
Securities gains, net (232) (717)
Loans originated for sale (17,122) (53,217)
Proceeds on sales of loans 10,755 51,482
Net gain on sales of loans (144) (352)
Increase in accrued interest
receivable (3,053) (560)
Increase (decrease) in accrued
payable 897 (435)
Loss on impairment of equity
security 233 -
Other, net 760 (2,613)
--------- ---------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 6,427 7,270
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (600) (5)
Proceeds on maturities of time
deposits 1,318 -
Proceeds from the sale of
securities available for sale 30,628 11,705
Proceeds from the maturity of and
principal paydowns on
securities held to maturity 3,065 82
Proceeds from the maturity of and
principal paydowns on
securities available for sale 30,884 67,797
Purchase of securities available
for sale (52,572) (57,117)
Net increase in loans and leases (92,792) (101,001)
Increase in assets under operating
leases (5,972) (7,906)
Net cash and cash equivalents received
in acquisition of subsidiary 18,603 -
Capital expenditures (1,920) (4,059)
Proceeds on sale of fixed assets - 13
Proceeds on sale of OREO and other
repossessed assets 542 302
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (68,816) (90,189)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts (633) 24,217
Net increase (decrease) in time
deposit accounts 40,208 (12,180)
Proceeds from other borrowings 10,176 4,419
Net increase in short-term borrowings 31,861 57,477
Purchase of treasury stock (5,107) (468)
Proceeds from sale of treasury stock - 1,463
Proceeds from the sale of minority
interest 384 57
Dividends (1,734) (1,522)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 75,155 73,463
--------- ---------
Net increase (decrease) in cash
and cash equivalents 12,766 (9,456)
Cash and cash equivalents at
beginning of year 35,953 42,831
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 48,719 $ 33,375
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 1,212 $ 1,348
========= =========
Cash paid for interest $ 26,673 $ 18,991
========= =========
Acquisitions:
Assets acquired $119,837 $ -
========= =========
Cash paid for purchase of stock $(14,364) $ -
Cash acquired 32,967 -
--------- ---------
Net cash received in acquisitions $ 18,603 $ -
========= =========
Noncash investing and financing
activities:
Notes issued in acquisitions $ 3,820 $ -
========= =========
Common stock issued in acquisitions $ 5,773 $ -
========= =========
Other borrowings transferred to
short-term borrowings $ 3,439 $ 7,323
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained
herein should be read in conjunction with the audited
consolidated financial statements and accompanying notes to the
financial statements for the fiscal year ended December 31, 1999,
included in Heartland Financial USA, Inc.'s (the "Company") Form
10-K filed with the Securities and Exchange Commission on March
30, 2000. Accordingly, footnote disclosure that would
substantially duplicate the disclosure contained in the audited
consolidated financial statements has been omitted.
The financial information of the Company included herein is
prepared pursuant to the rules and regulations for reporting on
Form 10-Q. Such information reflects all adjustments (consisting
of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. The results of the interim periods ended June
30, 2000, are not necessarily indicative of the results expected
for the year ending December 31, 2000.
Basic earnings per share is determined using net income and
weighted average common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average
common shares and assumed incremental common shares issued.
Amounts used in the determination of basic and diluted earnings
per share for the three and six month periods ended June 30, 2000
and 1999, are shown in the tables below:
Three Months Ended
6/30/00 6/30/99
------- -------
Net Income $ 2,189 $ 2,073
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,626 9,523
Assumed incremental common shares issued
upon exercise of stock options (000's) 133 196
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,759 9,719
======= =======
Six Months Ended
6/30/00 6/30/99
------- -------
Net Income $ 4,233 $ 4,212
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,639 9,526
Assumed incremental common shares issued
upon exercise of stock options (000's) 144 195
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,783 9,721
======= =======
NOTE 2. ACQUISITIONS
On January 1, 2000, the Company 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 $5,773 was paid in common stock of the Company 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 the
Company's common stock originally issued to them. The Company
merged FNB into its New Mexico bank subsidiary, New Mexico Bank &
Trust ("NMB") immediately after the closing of the NBI
acquisition. As a result of this affiliate bank merger, the
Company's ownership in NMB increased from its initial 80% to
approximately 88%. The acquisition of NBI has been accounted for
as a purchase; accordingly, the results of operations of FNB are
included in the financial statements from the acquisition date.
The resultant acquired deposit base intangible and goodwill of
approximately $8,473 will be amortized over a period of 10 to 25
years. The pro forma effect of the acquisition was not material
to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 laws, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, accounting principles, policies and
guidelines, 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,
Heartland's ability to develop and maintain secure and reliable
electronic systems and implement new technologies. 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.
GENERAL
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.
During the first half of 2000, Heartland continued to experience
growth, as total assets increased $194.182 million or 16.40% to
$1.378 billion since year end 1999. The loan portfolio grew
$166.670 million or 19.96% to $1.002 billion since year end 1999.
Of these increases, $120.113 million in total assets and $67.601
million in total loans were attributable to an increase in
Heartland's New Mexico operations through the acquisition of the
First National Bank of Clovis ("FNB"), which was completed on
January 1 of this year. The continued strong growth, combined
with increased earnings, confirm the value of Heartland's
community banking approach. By the end of the year, Heartland
anticipates becoming the largest bank holding company
headquartered in the state of Iowa as merger activity occurs
across the state.
Earnings increased during the second quarter of 2000 as net
income totaled $2.189 million, or $.23 on a basic per common
share basis, compared to the $2.073 million, or $.22 on a basic
per common share basis, earned during the same quarter in 1999.
Return on common equity was 10.01%, and return on assets was .65%
for the second quarter of 2000. For the same period in 1999,
return on equity was 9.78% and return on assets was .83%.
Cash earnings, which is net income exclusive of amortization on
merger-related intangibles, increased $440 thousand or 20.61%
during the second quarter of 2000 compared to the second quarter
of 1999. Basic earnings per share, exclusive of this same
amortization expense, increased to $.27 from the $.22 recorded
during the same quarter of 1999.
For the first six months of 2000, earnings remained consistent at
$4.233 million when compared to the $4.212 million earned during
the first six months of 1999. Basic earnings per share remained
the same at $.44 for the periods under comparison. Return on
common equity was 9.71% and return on assets was .64%. For the
same period in 1999, return on equity was 10.03% and return on
assets was .87%. Cash earnings increased $939 thousand or 21.66%
for the six month periods under comparison. On a per common
share basis, cash earnings increased to $.52 in 2000 from $.46 in
1999.
NET INTEREST INCOME
Net interest margin expressed as a percentage of average earning
assets increased to 3.79% during the second quarter of 2000
compared to 3.66% for the same quarter in 1999. A shift in the
composition of the balance sheet continued during the second
quarter of 2000, as the percentage of loans to total assets
increased from 67% at June 30, 1999, to 73% at June 30, 2000.
Management has continued to emphasize investments in higher-
yielding loans rather than purchases of securities.
For the three and six month periods ended June 30, 2000, interest
income increased $8.094 million or 46.38% and $15.680 million or
46.47%, respectively, when compared to the same periods in 1999.
These increases were primarily attributable to the significant
growth in loans.
Net interest income was further enhanced as Heartland was able to
keep the increase in interest expense below the growth in
interest income. For the three and six month periods ended June
30, 2000, interest expense increased $4.936 million or 52.12% and
$9.014 million or 48.58%, respectively, when compared to the same
periods in 1999. These increases were primarily attributable to
the rise in rates and growth in borrowings and deposits, which
were used to fund the significant loan growth experienced.
PROVISION FOR LOAN AND LEASE LOSSES
Heartland's provision for loan and lease losses increased $245
thousand or 32.15% and $530 thousand or 40.90% for the three and
six month periods ended June 30, 2000, respectively, compared to
the same periods in 1999. In part, these increases were recorded
in response to the significant loan growth experienced by
Heartland and was made to provide, in Heartland's opinion, an
adequate 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. For additional details on the
specific factors considered during this quarter, refer to the
loans and provision for loan and lease losses section of this
report.
OTHER INCOME
Other income increased $114 thousand or 1.81% during the quarter
ended on June 30, 2000, compared to the same period in 1999. On
a year-to-date comparative basis, other income remained
consistent at a slight increase of $41 thousand or .32%. In
addition to the recording of an impairment loss on equity
securities during the second quarter of 2000, securities gains
and gains on sale of loans were the other two categories to
experience a decline during the periods under comparison.
The impairment loss on equity securities recorded during the
second quarter of 2000 was $233 thousand. This loss resulted
from the recent announcement that Safety Kleen Corp. had filed
bankruptcy under chapter 11. Heartland's investment subsidiary
held 20,000 shares of Safety Kleen's common stock in its equity
portfolio. The carrying value of this stock on Heartland's
balance sheet as of June 30, 2000, was $14 thousand.
Securities gains for the second quarter of 2000 were $205
thousand or 105.67% below the amount recorded during the second
quarter of 1999. On a year-to-date comparison, securities gains
decreased $485 thousand or 67.64%.
Gains on sale of loans decreased by $239 thousand or 69.68% for
the quarter under comparison and $606 thousand or 80.80% for the
six month period under comparison. The volume of mortgage loans
sold into the secondary market during the first half of 2000 was
significantly below those sold during the same period in 1999.
As rates moved upward, customers frequently elected to take three-
and five-year adjustable rate mortgage loans, which Heartland
elected to retain in its loan portfolio.
A large portion of the decrease in securities gains and gains on
sale of loans was offset by an increase in the amount of service
charges and fees collected during the periods under comparison.
Emphasis during the past several years on enhancing revenues from
services provided to customers has resulted in significant growth
in service charges, trust fees and brokerage commissions. In
total, these fees grew by $679 thousand or 40.51% during the
quarter under comparison and $1.228 million or 37.89% during the
six month period under comparison. Service charges and fees
increased $414 thousand or 45.90% for the quarter and $703
thousand or 39.76% for the six month period. Trust fees
increased $162 thousand or 25.67% for the quarter and $282
thousand or 23.02% for the six month period and brokerage
commissions grew $103 thousand or 72.03% for the quarter and $243
thousand or 97.98% for the six month period.
OTHER EXPENSE
During the second quarter of 2000, Heartland was able to hold the
increase in other expense to $2.894 million or 27.35% when
compared to the same quarter of 1999. For the first half of
2000, other expense grew $6.271 million or 30.27% when compared
to the same period in 1999.
The following expansion efforts have contributed significantly to
the growth in noninterest expense:
- New Mexico Bank and Trust ("NMB"), Heartland's de novo bank
subsidiary established in Albuquerque, New Mexico in May of
1998, opened three additional branches during the second and
third quarters of 1999. On January 1, 2000, the acquisition
and subsequent merger of FNB into NMB was completed, which
nearly doubled NMB's asset size. At the end of the quarter,
NMB's total assets had reached $227 million.
- During 1999, Wisconsin Community Bank ("WCB") opened offices
in Sheboygan, Green Bay and Eau Claire, Wisconsin and
acquired Bank One's Monroe branch in July. As of the end of
the second quarter of 2000, total assets at this entity had
grown to $188 million from $80 million at June 30, 1999.
- Riverside Community Bank opened its first branch location in
July of 1999 and its second branch location this March in
Rockford, Illinois.
Salaries and employee benefits, the largest component of
noninterest expense, increased $1.520 million or 33.80% for the
quarter under comparison. On a year-to-date basis, salaries and
employee benefits grew $3.019 million or 33.87%. These increases
were primarily attributable to the expansion efforts and to
normal merit increases. The number of full-time equivalent
employees increased from 444 at June 30, 1999, to 562 at June 30,
2000.
As a result of the acquisitions made during the past year,
goodwill and core deposit intangible amortization has increased
substantially. This amortization of merger-related intangibles
increased $391 thousand or 630.65% for the quarter under
comparison and $783 thousand or 631.45% for the six month period
under comparison.
INCOME TAX EXPENSE
Corresponding to the growth in earnings, income tax expense for
the second quarter of 2000 increased $17 thousand or 1.97% when
compared to the same period in 1999. On a six month comparative
basis, income tax expense decreased $115 thousand or 6.45.
Heartland's effective tax rate decreased to 28.67% during the
second quarter of 2000 compared to 29.39% for the second quarter
of 1999. For the six month periods ended June 30, 2000 and 1999,
the effective tax rate was 28.28% and 29.75%, respectively.
These decreases were, in part, a result of an increase in the
amount of tax-exempt income recorded during 2000.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Commercial and commercial real estate loans made up $77.244
million or 46.35% of the $166.670 million increase in Heartland's
loan portfolio during the first six months of 2000. The
acquisition of FNB was responsible for $26.454 million or 34.25%
of this growth. The remaining $50.790 million change in
commercial loans outstanding was primarily the result of
aggressive calling efforts. The other loan category to
experience significant growth, agricultural loans outstanding,
grew $42.037 million or 45.23%, since December 31, 1999. The FNB
acquisition was responsible for $32.997 million or 78.50% of the
agricultural loan growth as nearly half of FNB's loans are in the
agricultural sector.
The table below presents the composition of Heartland's loan
portfolio as of June 30, 2000, and December 31, 1999.
LOAN PORTFOLIO (Dollars in thousands)
June 30, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $ 526,235 52.33% $448,991 53.53%
Residential mortgage 205,825 20.47 180,347 21.50
Agricultural and
agricultural real estate 134,973 13.42 92,936 11.08
Consumer 123,254 12.25 103,608 12.35
Lease financing, net 15,398 1.53 12,886 1.54
---------- ------- -------- -------
Gross loans and leases 1,005,685 100.00% 838,768 100.00%
======= =======
Unearned discount (3,342) (3,169)
Deferred loan fees (527) (453)
----------- ---------
Total loans and leases 1,001,816 835,146
Allowance for loan and
lease losses (12,912) (10,844)
----------- ---------
Loans and leases, net $ 988,904 $824,302
=========== =========
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; and iii) uncertainties within
the agricultural markets. There can be no assurances that the
allowance for loan and lease losses will be adequate to cover all
losses, but management believes that the allowance for loan and
lease losses was adequate at June 30, 2000. The allowance for
loan and lease losses increased by $2.068 million or 19.07%
during the first six months of 2000, primarily as a result of the
FNB acquisition which accounted for $1.142 million or 55.22% of
this change. The remaining growth occurred, in part, as a result
of the expansion of the loan portfolio. The allowance for loan
and lease losses at June 30, 2000, was 1.29% of loans and 306% of
nonperforming loans, compared to 1.30% of loans and 657% of
nonperforming loans at year end 1999.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, increased to .42%
of total loans and leases at June 30, 2000, compared to .20% of
total loans and leases at December 31, 1999. The FNB acquisition
was responsible for $2.083 million of the $2.573 million increase
in nonperforming loans.
During the first half of 2000, Heartland recorded net charge offs
of $900 thousand compared to $70 thousand for the same period in
1999. The FNB acquisition was responsible for $682 thousand or
75.78% of the net charge-offs during the first half of 2000.
Heartland's loan review area continues in the process of
familiarizing itself with FNB's market and loan portfolio.
SECURITIES
The primary objective of the securities portfolio continues to be
to provide Heartland's bank subsidiaries with a source of
liquidity given their high loan-to-deposit ratios. Securities
represented 15.63% of total assets at June 30, 2000, as compared
to 17.87% at December 31, 1999. A reduction in the amount of
securities held in Heartland's portfolio has continued into the
first half of 2000 as growth in the loan portfolio continued to
outpace deposit growth.
The composition of the portfolio is managed to maximize the
return on the portfolio while considering the impact it has on
Heartland's asset/liability position and liquidity needs. The
U.S. Treasury securities held in the portfolio at June 30, 2000,
were a result of the FNB acquisition. Except for the U.S.
Treasury securities, the composition of the portfolio had not
changed significantly since year-end 1999. The table below
presents the composition of the securities portfolio by major
category as of June 30, 2000, and December 31, 1999.
SECURITIES PORTFOLIO (Dollars in thousands)
June 30, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 5,975 2.77% $ - -%
U.S. government agencies 96,001 44.58 90,536 42.79
Mortgage-backed securities 62,672 29.10 75,637 35.75
States and political
subdivisions 30,952 14.37 25,904 12.24
Other securities 19,772 9.18 19,500 9.22
-------- ------- -------- -------
Total securities $215,372 100.00% $211,577 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $133.891 million or
16.96% during the first six months of 2000. The FNB acquisition
comprised $97.533 million or 72.85% of this increase. Exclusive
of the FNB acquisition, demand deposits grew $15.503 million or
13.44% during the first six months of 2000 and certificates of
deposit grew $40.208 million or 9.79%. During this same period,
savings deposits experienced a decline of $16.136 million or
4.39%, exclusive of the FNB acquisition. Growth in demand
deposits was primarily attributable to efforts at Heartland's de
novo community banks, RCB in Rockford, Illinois and NMB in
Albuquerque, New Mexico. As interest rates have risen over the
past year, deposit customers have shown a renewed interest in
certificate of deposit products and a diminished interest in the
savings products.
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability.
Over the six month period ended June 30, 2000, the amount of
short-term borrowings increased $46.194 million or 34.92%. The
repurchase agreement balances at FNB were responsible for $11.841
million or 25.63% of this change. Also, Heartland utilized
additional short-term borrowings as loan growth outpaced deposit
growth during the first half of 2000.
Other borrowings increased $9.701 million or 12.66% during the
first six months of 2000. The majority of this increase resulted
from additional long-term FHLB advances utilized to fund a
portion of the growth in loans. Long-term FHLB advances totaled
$25.607 million on June 30, 2000, with a weighted average
remaining term of 4 years and a weighted average rate of 6.45%.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but the
composition of assets and capital and the amount of off-balance
sheet commitments. Heartland's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
June 30, December 31,
2000 1999
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 97,239 8.62% $ 101,664 10.56%
Tier 1 capital minimum
requirement 45,109 4.00% 38,517 4.00%
---------- ------ ---------- ------
Excess $ 52,130 4.62% $ 63,147 6.56%
========== ====== ========== ======
Total capital $ 110,151 9.77% $ 112,508 11.68%
Total capital minimum
requirement 90,219 8.00% 77,035 8.00%
---------- ------ ---------- ------
Excess $ 20,058 1.78% $ 35,473 3.68%
========== ====== ========== ======
Total risk-adjusted assets $1,127,736 $ 962,933
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 97,239 7.29% $ 101,664 8.85%
Tier 1 capital minimum
requirement(3) 53,363 4.00% 45,965 4.00%
---------- ------ ---------- ------
Excess $ 43,876 3.29% $ 55,699 4.85%
========== ====== ========== ======
Average adjusted assets
(less goodwill) $1,334,070 $1,149,147
========== ==========
(1) Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 capital to risk-adjusted assets ratio of 4.00% and
total capital to risk-adjusted assets ratio of 8.00%.
(2) The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(3) Management of 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 additional capital of
at least 100 basis points.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. As a result of the acquisition of
WCB in March of 1997, remaining cash payments to previous
stockholders total $584 thousand in 2001, plus interest at rates
of 7.00% to 7.50%. As part of the July, 1998 acquisition and
merger of Lease Associates Group into ULTEA, Inc., Heartland's
vehicle leasing and fleet management company, there are two equal
remaining cash payments to the previous principal stockholder of
$643 thousand in 2000 and 2001, plus interest at 7.50%.
This January, Heartland completed its acquisition of National
Bancshares, Inc. ("NBI"), the one-bank holding company of FNB.
The total purchase price for NBI was $23.103 million, of which
$5.774 million was paid in common stock of Heartland to NBI's
Employee Stock Ownership Plan (the "ESOP") and $3.820 million 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 total $855 thousand in 2001
and 2002, and $637 thousand in 2003 and 2004, plus interest. As
provided in the merger agreement, participants in the ESOP
elected to receive a cash payment totaling $4.619 million 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 June, Heartland began offering a portion of its shares of
NMB's common stock to interested investors. As of June 30, 2000,
a total of 295 shares had been sold. Heartland will not allow
its ownership in NMB to fall below 80% and all minority
stockholders must enter into a stock transfer agreement before
shares will be issued to them. This stock transfer agreement
imposes certain restrictions on the investor's sale, transfer or
other disposition of their shares and requires Heartland to
repurchase the shares from the investor on April 9, 2003.
Heartland's term loan with an unaffiliated bank is payable
quarterly in $1 million installments beginning March 31, 2000,
with the final payment of $10 million payable on December 31,
2003.
In October of 1999, Heartland completed an offering of $25
million of 9.60% cumulative capital securities. All of the
securities qualified as Tier 1 capital for regulatory purposes as
of June 30, 2000. Subsequent acquisitions accounted for under
the purchase method of accounting could cause a portion of these
securities to not qualify 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.
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.
RECENT DEVELOPMENTS
Current president and chief executive officer, Lynn B. Fuller,
was elected to serve as chairman of the board at Heartland's
regular board meeting held in July, 2000. After many years of
dedicated service, former chairman Lynn S. Fuller retired from
Heartland's board of directors this July. Mr. Fuller will
continue to serve as vice chairman on the board of directors of
Dubuque Bank and Trust Company, Heartland's flagship bank
headquartered in Dubuque, Iowa. Filling Mr. Fuller's unexpired
term on Heartland's board of directors is James F. Conlan, a
partner with the international law firm of Sidley & Austin of
Chicago, Illinois.
LIQUIDITY
Liquidity measures the ability of Heartland to meet maturing
obligations and its existing commitments, to withstand
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. The liquidity of Heartland
principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of
deposits and borrowings and its ability to borrow funds in the
money or capital markets.
Net cash outflows from investing activities decreased $21.373
million during the first six months of 2000 compared to the same
period in 1999. The FNB acquisition was responsible for 87.04%
of this change as it provided net cash and cash equivalents of
$18.603 million during the first half of 2000. The net increase
in loans and leases was $92.792 million during the first six
months of 2000 compared to $101.001 million during the same
period in 1999, an $8.209 million change. During the first six
months of 2000, proceeds from the sale and maturity of securities
decreased $15.007 million compared to the same period in 1999.
Likewise, the purchases of securities decreased $4.545 million
for the periods under comparison.
Financing activities provided net cash of $75.155 million during
the first six months of 2000 compared to $73.463 million during the
same period in 1999. A net increase in deposit accounts provided
cash of $39.575 million during the first six months of 2000
compared to $12.037 million during the same period in 1999. The
other category reflecting the most significant change during the
periods under comparison was short-term borrowings which provided
cash of $31.861 million in 2000 and $57.477 million in 1999.
Total cash inflows from operating activities decreased $843
thousand for the first six months of 2000 compared to the same
period in 1999. Management of investing and financing
activities, and market conditions, determine the level and the
stability of net interest cash flows. Management attempts to
mitigate the impact of changes in market interest rates to the
extent possible, so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
In the event of short-term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks and may also borrow from the Federal Reserve Bank.
Additionally, 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 June 30, 2000,
provided an additional borrowing capacity of $1.700 million.
This agreement contains specific covenants which, among other
things, limit dividend payments and restrict the sale of assets
by 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
June 30, 2000, Heartland was substantially in compliance with the
covenants contained in this credit agreement.
Recent Regulatory Developments
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in
November, 1999, allows eligible bank holding companies to engage
in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities. Under
the Act, an eligible bank holding company that elects to become a
financial holding company may engage in any activity that the
Board of Governors of the Federal Reserve System (the "Federal
Reserve"), in consultation with the Secretary of the Treasury,
determines by regulation or order is financial in nature,
incidental to any such financial activity, or 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. National banks are also authorized by
the Act to engage, through "financial subsidiaries", in certain
activity that is permissible for financial holding companies (as
described above) and certain 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.
Various bank regulatory agencies have begun issuing regulations
as mandated by the Act. During June, 2000, all of the federal
bank regulatory agencies jointly issued regulations implementing
the privacy provisions of the Act. In addition, the Federal
Reserve issued interim regulations establishing procedures for
bank holding companies to elect to become financial holding
companies and listing the financial activities permissible for
financial holding companies, as well as describing the extent to
which financial holding companies may engage in securities and
merchant banking activities. The Federal Deposit Insurance
Corporation issued an interim regulation regarding the parameters
under which state nonmember banks may conduct activities through
subsidiaries that national banks may conduct only in financial
subsidiaries. At this time, it is not possible to predict the
impact the Act and its implementing regulations may have on
Heartland. As of the date of this filing, Heartland had not
applied for or received approval to operate as a financial
holding company. In addition, Heartland's subsidiary banks have
not applied for or received approval to establish financial
subsidiaries.
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollars in thousands)
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. 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.
Management does not believe that Heartland's primary market risk
exposures and how those exposures have been managed to-date in
2000 changed significantly when compared to 1999.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 17,
2000. At the meeting, Lynn B. Fuller and Gregory R. Miller were
elected to serve as Class I directors (term expires in 2003).
Continuing as Class II directors (term expires in 2001) are Mark
C. Falb, James A. Schmid and Robert Woodward. Continuing as
Class III directors (term expires in 2002) are Lynn S. Fuller and
Evangeline K. Jansen. Lynn S. Fuller retired from the board in
July, 2000 and was replaced by James F. Conlan. The stockholders
also approved the appointment of KPMG LLP as the Company's
independent public accountants for the year ending December 31,
2000.
There were 9,627,465 issued and outstanding shares of common
stock entitled to vote at the annual meeting. The voting results
on the above described items were as follows:
For Withheld
--- --------
Election of Directors
Lynn B. Fuller 8,484,433 44,802
Gregory R. Miller 8,484,233 45,002
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
Appointment of KPMG
LLP 8,511,603 15,646 1,986 68,043
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
Principal Executive Officer
/s/ Lynn B. Fuller
-----------------------
By: Lynn B. Fuller
President
Principal Financial and
Accounting Officer
/s/ John K. Schmidt
-----------------------
By: John K. Schmidt
Executive Vice President
and Chief Financial Officer
Dated: August 14, 2000
