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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, 1997
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, 1998, the Registrant had issued and outstanding
4,728,107 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, 1998, was $83,221,271.* Such figures
include 424,010 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 17, 1998, 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 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III.
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Business
A. General Description
B. Recent Developments
C. Market Areas
D. Competition
E. Employees
F. Accounting Standards
G. Supervision and Regulation
H. Governmental Monetary Policy and Economic Conditions
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I.
ITEM 1.
BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. ("Heartland"), reincorporated in
the state of Delaware in 1993, is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). Heartland has four wholly-owned bank subsidiaries which
are located in Dubuque, Iowa, Cottage Grove, Wisconsin and Galena
and Rockford, Illinois and one wholly-owned federal savings bank
subsidiary which is located in Keokuk, Iowa (collectively, the
"Bank Subsidiaries"). All five Bank Subsidiaries are members of
the Federal Deposit Insurance Corporation ("FDIC"). Dubuque Bank
and Trust Company ("DB&T") is chartered under the laws of the
State of Iowa and has 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
("FCB") is organized under the laws of the United States. FCB has
one wholly-owned subsidiary, KFS Services, Inc. Wisconsin
Community Bank, previously Cottage Grove State Bank, ("WCB") is
chartered under the laws of the State of Wisconsin and has one
subsidiary, DBT Investment Corporation ("DBT Investment"), an
investment management company. The Bank Subsidiaries operate 17
banking locations in Iowa, Illinois and Wisconsin. Heartland has
three wholly-owned 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. During the fourth quarter of 1997, Heartland entered
into an agreement with a group of New Mexico business leaders to
establish a new bank in Albuquerque, New Mexico. Pending
regulatory approval, the new bank will begin operations in the
second quarter of 1998 and will be organized under the laws of
the state of New Mexico. Heartland will own 80% of the proposed
organization.
The Bank Subsidiaries provide full service retail banking within
Dubuque and Lee Counties in Iowa, within Jo Daviess, Hancock and
Winnebago Counties in Illinois and within Dane County in
Wisconsin. Deposit products include checking and other demand
deposit accounts, NOW accounts, savings accounts, money market
accounts, certificates of deposit, individual retirement accounts
and other time deposits. The deposits in the Bank Subsidiaries
are insured by the FDIC to the full extent permitted by law.
Loans include commercial and industrial, agricultural, real
estate mortgage, consumer, home equity, credit cards and lines of
credit. Other products and services include VISA debit cards,
automatic teller machines, safe deposit boxes and trust services.
The principal service of the Bank Subsidiaries consists of making
loans to businesses and individuals. These loans are made at the
offices of the Bank Subsidiaries. The Bank Subsidiaries also
engage in activities that are closely related to banking,
including investment brokerage.
Although each of the subsidiaries of Heartland operates under the
direction of its own Board of Directors, Heartland has standard
operating policies regarding asset/liability management,
liquidity management, investment management, lending policies and
deposit structure management. Heartland has historically
centralized certain operations where economies of scale can be
achieved.
Operating Strategy
Corporate policy, strategy and goals are established by the Board
of Directors of Heartland (the "Heartland Board"). Pursuant to
Heartland's philosophy, operational and administrative policies
for the Bank Subsidiaries are also established by the Heartland
Board. Within this framework, each of the Bank Subsidiaries
focuses on providing personalized services and quality products
to its customers to meet the needs of the communities which it
serves.
Heartland operates its banking subsidiaries as traditional
community banks with conveniently located facilities and
professional, highly motivated staffs which are active in the
communities in which they are located. Heartland focuses on long-
term relationships with customers and provides individualized
quality service. In addition, within credit and rate of return
parameters, Heartland attempts to ensure that each of the Bank
Subsidiaries meets the credit needs of its communities and
invests in local municipal obligations.
Heartland uses a variety of marketing strategies to attract and
retain customers, with a particular emphasis on a strong sales
culture within the Bank Subsidiaries and an outside officer
calling program. Many of Heartland's sales employees work on a
salary plus commission basis, thus providing them with a strong
incentive to aggressively market Heartland's financial products.
Officers of each of the Bank Subsidiaries also regularly call on
customers and potential customers of the institutions to maintain
and develop deposit and other special service relationships,
including cash management, employee benefit plan administration,
and trust services.
Heartland has an internal data processing division and has
attempted to remain at the forefront of the banking industry in
new technological innovations. Heartland believes that retaining
control of its data processing leads to decreased operating costs
and more effective service to its customers. Accordingly, during
1997, all Bank Subsidiaries converted to the Fiserv Comprehensive
Banking System program, a national leader in bank software
technology. To provide a high level of customer service and to
manage effectively its growth, acquisition and operating
strategies, Heartland also focuses on continued improvement of
the internal operating systems of the Bank Subsidiaries.
Acquisition and Expansion Strategy
Heartland seeks to diversify both its market area and asset base
while increasing profitability through acquisitions and
expansion. Heartland's goal is to expand through the acquisition
of established financial service organizations, primarily
commercial banks or thrifts, to the extent suitable candidates
can be identified and acceptable business terms negotiated.
Heartland's acquisition strategy is focused on traditional
community banks and thrifts located in stable and growing areas
of Iowa, Wisconsin, Minnesota and Illinois. Heartland intends to
look beyond these geographic areas for acquisition opportunities
as evidenced by the proposed de novo bank in Albuquerque, New
Mexico. In addition to price and terms, other factors considered
by Heartland in determining the desirability of an acquisition
candidate include financial condition, earnings potential,
quality of management, market area and competitive environment.
The Heartland Board may in the future consider establishing
branches, loan production offices or other business facilities as
a means of expanding its presence in current or new market areas.
The Heartland Board may also investigate expansion into other
lines of business closely related to banking if it believes these
lines could be profitable without undue risk to Heartland and if
Heartland can be competitive. Heartland does not currently have
any definitive understandings or agreements for any acquisitions
material to Heartland. However, Heartland will continue to look
for further expansion opportunities.
Lending Activities
General
The Bank Subsidiaries provide a range of commercial and retail
lending services to corporations, partnerships and individuals.
These credit activities include agricultural, commercial,
residential real estate and installment loans, as well as loan
participations and lines of credit.
The Bank Subsidiaries aggressively market their services to
qualified lending customers. Lending officers actively solicit
the business of new companies entering their market areas as well
as long-standing members of the Bank Subsidiaries' respective
business communities. Through professional service and
competitive pricing, the Bank Subsidiaries have been successful
in attracting new lending customers. Heartland also actively
pursues consumer lending opportunities. With convenient
locations, advertising and customer communications, the Bank
Subsidiaries have been successful in capitalizing on the credit
needs of their market areas.
Commercial Loans
The Bank Subsidiaries have a strong commercial loan base and
DB&T, in particular, continues to be a premier commercial lender
in the tri-state area of northeast Iowa, northwest Illinois and
southwest Wisconsin. The Bank Subsidiaries' areas of emphasis
include, but are not limited to, loans to wholesalers, hotel and
real estate developers, manufacturers, building contractors,
business services companies and retailers. The Bank Subsidiaries
provide a wide range of business loans, including lines of credit
for working capital and operational purposes and term loans for
the acquisition of equipment and real estate. Loans may be made
on an unsecured basis where warranted by the overall financial
condition of the borrower. Terms of commercial business loans
generally range from one to five years. The majority of the Bank
Subsidiaries' commercial business loans have floating interest
rates or reprice within one year.
DB&T has also generated loans which are guaranteed by the U.S.
Small Business Administration and has been certified as one of
that agency's Preferred Lenders. Management believes that making
these guaranteed loans helps its local communities as well as
provides Heartland with a source of income and solid future
lending relationships as such businesses grow and prosper. DB&T
is also currently one of the state of Iowa's top lenders in the
"Linked Investment for Tomorrow" program. This state-sponsored
program offers interest rate reductions to businesses opened by
minorities and those in rural areas.
The primary repayment risk for commercial loans is the failure of
the business due to economic or financial factors. In most cases,
the Bank Subsidiaries have collateralized these loans and/or
taken personal guarantees to help assure repayment.
As the credit portfolios of the Bank Subsidiaries have continued
to grow, several changes have been made in their lending
departments resulting in an overall increase in these
departments' skill levels. Loan review personnel and commercial
lenders interact with their respective Boards of Directors each
month. Heartland also utilizes an internal loan review function
to analyze credits of the Bank Subsidiaries. Management has
attempted to identify problem loans at an early date and to
aggressively seek a resolution of these situations. The result
has been a significantly below average level of problem loans
compared to the Heartland Banks' industry peer groups in recent
years.
Agricultural Loans
DB&T is one of the largest agricultural lenders in the state of
Iowa. Agricultural loans continue to be emphasized by both DB&T
and GSB due to their concentration of customers in rural markets.
Agricultural loans remain balanced, however, in proportion to the
rest of Heartland's consolidated loan portfolio. In connection
with their agricultural lending, all of the Bank Subsidiaries
have remained close to their traditional geographic market areas.
The majority of the outstanding agricultural operating and real
estate loans are within 60 miles of their main or branch offices.
Agricultural loans, many of which are secured by crops, machinery
and real estate, are provided to finance capital improvements and
farm operations as well as acquisitions of livestock and
machinery. The agricultural loan departments work closely with
all agricultural customers, including companies and individual
farmers, and review the preparation of budgets and cash flow
projections for the ensuing crop year. These budgets and cash
flow projections are monitored closely during the year and
reviewed with agricultural customers at least once a year. In
addition, the Bank Subsidiaries work closely with governmental
agencies, including the Farmers Home Administration, to assist
agricultural customers in obtaining credit enhancement products
such as loan guarantees.
Real Estate Mortgage Loans
Mortgage lending has been a focal point of the Bank Subsidiaries
as each of them continues to build real estate lending business.
A stable rate environment along with expanded production
capabilities at RCB combined to increase the number of loan
originations as compared to prior years. The majority of home
loans generated by the Bank Subsidiaries were sold to government
agencies in the secondary mortgage market with servicing rights
retained. Management believes that the retention of mortgage
servicing provides the Bank Subsidiaries with a relatively steady
source of fee income as compared to fees generated solely from
mortgage origination operations. Moreover, the retention of such
servicing rights allows each of the Bank Subsidiaries to continue
to have regular contact with mortgage customers.
Consumer Lending
The Bank Subsidiaries' consumer lending departments provide all
types of consumer loans including motor vehicle, home
improvement, home equity, student loans, credit cards, signature
loans and small personal credit lines.
Consumer loan demand is also serviced through Citizens which
currently serves the consumer credit needs of over 2,200
customers in the three state area of Iowa, Illinois and Wisconsin
from its Dubuque, Iowa, and Madison, Wisconsin, offices.
Trust Departments
The trust departments for DB&T, GSB and FCB have been providing
trust services to their respective communities for many years.
Trust personnel from DB&T also work with RCB and WCB personnel to
provide trust services to all bank subsidiaries. Currently, the
Bank Subsidiaries have over $434 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 within DB&T's main office, Grandview and
Kennedy Mall branch offices and GSB's main office. DB&T's Farley
office also schedules regular hours for a broker to be available
to meet with customers. Focused Investments LLC offers full-
service stock and bond trading, direct investments, annuities and
mutual funds.
DB&T Insurance has continued to grow its personal and commercial
insurance lines and the number of independent insurance companies
it represents. DB&T Insurance is a multi-line insurance agency in
the Dubuque area and offers a complete array of vehicle, property
and casualty, life and disability insurance, as well as
commercial lines and tax-free annuities.
B. MARKET AREAS
DB&T is located in the Dubuque County area of 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, an office was opened
in Madison, Wisconsin, during June, 1996.
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. The county had a population of
390,000 and the village of Cottage Grove had a population of
1,100 according to the 1990 census.
C. COMPETITION
Heartland encounters competition in all areas of its business
pursuits. In order to compete effectively, to develop its market
base, to maintain flexibility and to move in pace with changing
economic and social conditions, Heartland continuously refines
and develops its products and services. The principal methods of
competition in the financial services industry are price, service
and convenience.
The Bank Subsidiaries' combined market area is highly
competitive. Many financial institutions based in the communities
surrounding Dubuque, Galena, Rockford, Cottage Grove and Keokuk
actively compete for customers within Heartland's market area.
The Bank Subsidiaries also face competition from finance
companies, insurance companies, mortgage companies, securities
brokerage firms, money market funds, loan production offices and
other providers of financial services.
Heartland competes for loans principally through the range and
quality of the services it provides, interest rates and loan
fees. Heartland believes that its long-standing presence in the
community and personal service philosophy enhance its ability to
compete favorably in attracting and retaining individual and
business customers. Heartland actively solicits deposit-oriented
clients and competes for deposits by offering customers personal
attention, professional service and competitive interest rates.
D. EMPLOYEES
At December 31, 1997, Heartland employed 338 full-time equivalent
employees. Heartland places a high priority on staff development
which involves extensive training, including customer service
training. New employees are selected on the basis of both
technical skills and customer service capabilities. None of
Heartland's employees are covered by a collective bargaining
agreement with Heartland. Heartland offers a variety of employee
benefits and management considers its employee relations to be
excellent.
E. ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS")- SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125") was
effective for Heartland for transactions occurring after December
31, 1996, and provided standards for accounting recognition or
derecognition of assets and liabilities. The adoption of SFAS
No. 125 did not have a material effect on Heartland.
SFAS No. 130 "Reporting Comprehensive Income" will be effective
for Heartland for the year beginning January 1, 1998 and
establishes the standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive
income represents net earnings and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain
or loss on available-for-sale securities.
F. SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are
extensively regulated under federal and state law. As a result,
the growth and earnings performance of Heartland can be affected
not only by management decisions and general economic conditions,
but also by the requirements of applicable state and federal
statutes and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the Board
of Governors of the Federal Reserve System (the "FRB"), the FDIC,
the OTS, the Iowa Superintendent of Banking (the
"Superintendent"), the Illinois Commissioner of Banks and Real
Estate (the "Commissioner"), the Wisconsin Division of Banking
(the "Division"), the Internal Revenue Service and state taxing
authorities and the Securities and Exchange Commission (the
"SEC"). The effect of such statutes, regulations and policies can
be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as Heartland and 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 references to material statutes and regulations
affecting Heartland and its subsidiaries are brief summaries
thereof and do not purport to be complete, and are qualified in
their entirety by reference to such statutes and regulations.
Any change in applicable law or regulations may have a material
effect on the business of Heartland and its subsidiaries.
Recent Regulatory Developments
Pending Legislation
Legislation is pending in the Congress that would allow bank
holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities
and insurance activities. The expanded powers generally would be
available to a bank holding company only if the bank holding
company and its bank subsidiaries remain well-capitalized and
well-managed. Additionally, the pending legislation would
eliminate the federal thrift charter by requiring each federal
thrift to convert to a national bank or to a state bank or state
thrift. Under the pending legislation, any federal thrift that
failed to convert to a national or state bank within two years
following enactment of the legislation would, by operation of
law, become a national bank as of the second anniversary of
enactment of the legislation. The pending legislation would
combine the OTS with the Office of the Comptroller of the
Currency by the second anniversary of the enactment of the
legislation, and would merge the Bank Insurance Fund (the "BIF")
and the Savings Association Insurance Fund (the "SAIF") as of the
earlier of January 1, 2000 or the second anniversary of enactment
of the legislation. At this time, Heartland is unable to predict
whether the proposed legislation will be enacted and, therefore,
is unable to predict the impact such legislation may have on the
operations of Heartland and the Bank Subsidiaries.
Heartland
General
Heartland, as the sole shareholder of DB&T, GSB, RCB and WCB, is
a bank holding company. As a bank holding company, Heartland is
registered with, and is subject to regulation by, the FRB under
the BHCA. In accordance with FRB policy, Heartland is expected
to act as a source of financial strength to the Bank Subsidiaries
and to commit resources to support the Bank Subsidiaries in
circumstances where Heartland might not do so absent such policy.
Under the BHCA, Heartland is subject to periodic examination by
the FRB and is required to file with the FRB periodic reports of
its operations and such additional information as the FRB may
require.
Heartland's ownership of FCB makes Heartland a savings and loan
holding company as defined in 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
exempt from OTS supervision, although federal law requires the
FRB to consult with the OTS, as appropriate, in establishing the
scope of an FRB examination of any such company, to provide the
OTS, upon request, with copies of FRB examination reports and
other supervisory information concerning any such company and to
cooperate with the OTS in any enforcement action against any such
holding company if the conduct at issue involves the company's
savings association subsidiary.
Investments and Activities
Under the BHCA, a bank holding company must obtain FRB approval
before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating
with another bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by
the BHCA), the FRB may allow a bank holding company to acquire
banks located in any state of the United States without regard to
whether the acquisition is prohibited by the law of the state in
which the target bank is located. In approving interstate
acquisitions, however, the FRB is required to give effect to
applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company
and its insured depository institution affiliates in the state in
which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or
their holding companies) or which require that the target bank
have been in existence for a minimum period of time (not to
exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also prohibits, with certain exceptions, Heartland from
acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their
subsidiaries. The principal exception to this prohibition allows
bank holding companies to engage in, and to own shares of
companies engaged in, certain businesses found by the FRB to be
"so closely related to banking ... as to be a proper incident
thereto." Under current regulations of the FRB, Heartland and
its non-bank subsidiaries are permitted to engage in, among other
activities, such banking-related businesses as the operation of a
thrift, sales and consumer finance, equipment leasing, 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 acquisition of "control" of federally-
insured depository institutions, such as the Bank Subsidiaries,
or bank holding companies, such as Heartland, without prior
notice to certain federal bank regulators. "Control" is defined
in certain cases as acquisition of 10% of the outstanding shares
of a depository institution or bank holding company.
Capital Requirements
Bank holding companies are required to maintain minimum levels of
capital in accordance with FRB capital adequacy guidelines. If
capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or
establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: a
risk-based requirement expressed as a percentage of total
risk-weighted assets and a leverage requirement expressed as a
percentage of total assets. The risk-based requirement consists
of a minimum ratio of total capital to total risk-weighted assets
of 8%, 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 minimum requirements of 4% to 5% for all others.
For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible
assets (other than certain mortgage servicing rights and
purchased credit card relationships) and total capital means Tier
1 capital plus certain other debt and equity instruments which do
not qualify as Tier 1 capital and a portion of the allowance for
loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. For example, the FRB'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, 1997, Heartland had regulatory capital in
excess of the FRB's minimum requirements, with a risk-based
capital ratio of 12.71% and a leverage ratio of 8.76%.
Dividends
The FRB has issued a policy statement with regard to the payment
of cash dividends by bank holding companies. In the policy
statement, the FRB expressed its view that a bank holding company
should not pay cash dividends 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. Additionally,
the FRB possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable
statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding
companies. In addition to the restrictions on dividends that may
be imposed by the FRB, the Delaware General Corporation Law (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.
Federal Securities Regulation
Heartland's common stock is registered with the SEC under the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently,
Heartland is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the
SEC under the Exchange Act.
The Bank Subsidiaries
General
DB&T is an Iowa-chartered bank, the accounts of which are insured
by the BIF of the FDIC. As a BIF-insured, Iowa-chartered bank,
DB&T is subject to the examination, supervision, reporting and
enforcement requirements of the 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 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 Division, as the
chartering authority for Wisconsin banks, and the FDIC, as
administrator of the BIF.
FCB is a federally chartered savings association, the deposits of
which are insured by the SAIF of the FDIC. As a SAIF-insured,
federally chartered savings association, 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, 1997, FDIC deposit insurance
assessments for both BIF and SAIF members ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment
period beginning January 1, 1998, assessment rates for both BIF
and SAIF members 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 has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no
tangible capital. Management of Heartland is not aware of any
activity or condition that could result in termination of the
deposit insurance of any of the Bank Subsidiaries.
FICO Assessments
Since 1987, a portion of the deposit insurance assessments paid
by SAIF members has been used to cover interest payments due on
the outstanding obligations of the FICO, the entity created to
finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the SAIF's predecessor insurance fund.
Pursuant to federal legislation enacted September 30, 1996,
commencing January 1, 1997, both SAIF members and BIF members
became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance.
Until January 1, 2000, the FICO assessments made against BIF
members may not exceed 20% of the amount of the FICO assessments
made against SAIF members. Between January 1, 2000 and the
maturity of the outstanding FICO obligations in 2019, BIF members
and SAIF members will share the cost of the interest on the FICO
bonds on a pro rata basis. During the year ended December 31,
1997, the FICO assessment rate for SAIF members was approximately
0.063% of deposits while the FICO assessment rate for BIF members
was approximately 0.013% of deposits. During the year ended
December 31, 1997, the Bank Subsidiaries paid FICO assessments
totaling $116,000.
Supervisory Assessments
All Iowa banks, Illinois banks, Wisconsin banks, and Federal
savings associations are required to pay supervisory fees to the
Superintendent, the Commissioner, the Division, and the OTS,
respectively, to fund the operations of such agencies. The
amount of such supervisory fees is based upon each institution's
total assets. During the year ended December 31, 1997, the Bank
Subsidiaries paid supervisory assessments totaling $61,000.
Capital Requirements
The FDIC has established the following minimum capital standards
for state-chartered insured non-member banks, such as DB&T, GSB,
RCB and WCB: a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-
rated banks with minimum requirements of 4% to 5% for all others,
and a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8%, at
least one-half of which must be Tier 1 capital. For purposes of
these capital standards, Tier 1 capital and total capital consist
of substantially the same components as Tier 1 capital and total
capital under the FRB's capital guidelines for bank holding
companies (see "--Heartland--Capital Requirements").
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%; a tangible
capital requirement consisting of a minimum ratio of tangible
capital to total assets of 1.5%; and a risk-based capital
requirement, consisting of a minimum ratio of total capital to
total risk-weighted assets of 8%, at least one-half of which must
consist of core capital. For purposes of these capital
standards, core capital consists primarily of permanent
stockholders' equity less intangible assets other than certain
supervisory goodwill, certain mortgage servicing rights and
certain purchased credit card relationships and less investments
in subsidiaries engaged in activities not permitted for national
banks; tangible capital is substantially the same as core capital
except that all intangible assets other than certain mortgage
servicing rights must be deducted; and total capital means core
capital plus certain debt and equity instruments that do not
qualify as core capital and a portion of the allowances for loan
and lease losses.
The capital requirements described above are minimum
requirements. Higher capital levels will be required if warranted
by the particular circumstances or risk profiles of individual
institutions. For example, the regulations of the FDIC and the
OTS provide that additional capital may be required to take
adequate account of, among other things, interest rate risk or
the risks posed by concentrations of credit or nontraditional
activities.
During the year ended December 31, 1997, none of the Bank
Subsidiaries was required by its primary federal regulator to
increase its capital to an amount in excess of the minimum
regulatory requirements. As of December 31, 1997, each of the
Bank Subsidiaries exceeded its minimum regulatory capital
requirements, as follows:
Total Risk-Based Leverage Tangible
Capital Ratio Capital Ratio Capital Ratio
DB&T 10.92% 7.81% N/A
GSB 13.09 7.06 N/A
RCB 12.04 7.79 N/A
WCB 18.32 11.11 N/A
FCB 11.05 7.53 7.69%
The OTS has proposed to amend its regulations to establish a
minimum core capital requirement of 3% of total assets for any
savings association assigned a composite rating of 1 under the
Uniform Financial Institutions Rating System ("UFIRS") 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. It is not anticipated that the adoption of this
proposal would affect FCB's ability to comply with the OTS
capital requirements.
Federal law provides the federal banking regulators with broad
power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which
an institution is assigned, the regulators' corrective powers
include: requiring the submission of a capital restoration plan;
placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the
interest rate the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for
any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with the default of commonly controlled
FDIC insured depository institutions or any assistance provided
by the FDIC to commonly controlled FDIC-insured depository
institutions in danger of default.
Dividends
Iowa law provides that an Iowa-chartered bank, such as DB&T, may
not pay dividends in an amount greater than its undivided
profits. Under the laws of Illinois and Wisconsin, Illinois-
chartered banks, such as GSB and RCB, and Wisconsin-chartered
banks, such as WCB, respectively, are subject to a substantially
similar limitation on dividends.
OTS regulations impose limitations upon all capital distributions
by savings associations, including cash dividends. The rule
establishes three tiers of institutions. An institution that
exceeds all fully phased-in capital requirements before and after
the proposed capital distribution (a "Tier 1 Institution") can,
after prior notice to, but without the approval of, the OTS, make
capital distributions during a calendar year in an aggregate
amount of up to the higher of (i) 100% of its net income to date
during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (i.e., the excess capital
over its fully phased-in capital requirements) at the beginning
of the calendar year, or (ii) 75% of its net income over the most
recent preceding four quarter period. Any additional capital
distributions would require prior OTS approval. As of December
31, 1997, FCB was a Tier 1 Institution.
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, 1997.
Further, under applicable regulations of the OTS, 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 FCB's conversion from the mutual to the stock
form of ownership in 1991. As of December 31, 1997,
approximately $21.7 million 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.
The OTS has proposed to amend its regulations governing capital
distributions (including cash dividends) by savings associations,
such as FCB. The proposed amendment would 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 UFIRS 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 would be required to obtain OTS approval prior to
making a capital distribution only if the amount of the proposed
capital distribution, when aggregated with all other capital
distributions during the same calendar year, would exceed an
amount equal to the association's year-to-date net income plus
its retained net income for the preceding two years. The
proposed amendment will continue to require that the OTS 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 savings and loan holding company.
Insider Transactions
The Bank Subsidiaries are subject to certain restrictions imposed
by the Federal Reserve Act on extensions of credit to Heartland
and its subsidiaries, on investments in the stock or other
securities of Heartland and its subsidiaries and the acceptance
of the stock or other securities of Heartland or its subsidiaries
as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the Bank
Subsidiaries to their respective directors and officers, to
directors and officers of Heartland and its subsidiaries, to
principal stockholders of Heartland, and to "related interests"
of such directors, officers and principal stockholders. In
addition, 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 any 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. In general, the guidelines prescribe the goals to be
achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an
institution fails to comply with any of the standards set forth
in the guidelines, the institution's primary federal regulator
may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the guidelines states
that the agencies expect to require a compliance plan from an
institution whose failure to meet one or more of the guidelines
is of such severity that it could threaten the safety and
soundness of the institution. Failure to submit an acceptable
plan, or failure to comply with a plan that has been accepted by
the appropriate federal regulator, would constitute grounds for
further enforcement action.
Branching Authority
Iowa law strictly regulates the establishment of bank offices.
Under the Iowa Banking Act, an Iowa state bank, such as DB&T, may
not establish a bank office outside the boundaries of the
counties contiguous to or cornering upon the county in which the
principal place of business of the bank is located. Further,
Iowa law prohibits an Iowa bank from establishing de novo
branches in a municipality other than the municipality in which
the bank's principal place of business is located, if another
bank already operates one or more offices in the municipality in
which the de novo branch is to be located. The number of offices
an Iowa bank may establish in a particular municipality is also
limited depending upon the municipality's population.
Illinois banks, such as GSB and RCB, have the authority under
Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory
approvals. Likewise, under Wisconsin law, Wisconsin banks may,
subject to regulatory approval, establish branch offices anywhere
in the State of Wisconsin.
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 branch offices anywhere in the United States, either de
novo or through acquisitions of all or part of another financial
institution. If a federal savings association fails to qualify
as a "domestic building and loan association," as defined in the
Internal Revenue Code, 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, 1997, FCB qualified as a
"domestic building and loan association," as defined in the
Internal Revenue Code, and met the QTL test.
Effective June 1, 1997 (or earlier if expressly authorized by
applicable state law), the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows
banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits
that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo
interstate branches or the acquisition of individual branches of
a bank in another state (rather than the acquisition of an out-of-
state bank in its entirety) is allowed by the Riegle-Neal Act
only if specifically authorized by state law. The legislation
allows individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997. The laws of Iowa, Illinois and Wisconsin permit
interstate bank mergers, subject to certain conditions,
including, in each case, a prohibition against interstate mergers
unless any Iowa, Illinois or Wisconsin bank involved has been in
existence and continuous operation for more than five years.
State Bank Activities
Under federal law and FDIC regulations, FDIC-insured state banks
are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are
not permissible for a national bank. Federal law and FDIC
regulations also prohibit FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as
principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and
continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant
risk to the deposit insurance fund of which the bank is a member.
Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC. These
restrictions have not had, and are not currently expected to
have, a material impact on the operations of DB&T, GSB, RCB or
WCB.
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 activities. A savings association
that fails the QTL test may requalify as a QTL but it may do so
only once. As of December 31, 1997, FCB satisfied the QTL test,
with a ratio of qualified thrift investments to portfolio assets
of 74.25% 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, 1997, FCB was in compliance with OTS liquidity
requirements, with a liquidity ratio of 8.91%.
Federal Reserve System
FRB regulations, as presently in effect, require depository
institutions to maintain non-interest earning reserves against
their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating
$47.8 million or less, the reserve requirement is 3% of total
transaction accounts; and for transaction accounts aggregating in
excess of $47.8 million, the reserve requirement is $1.434
million plus 10% of the aggregate amount of total transaction
accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances are exempted from the reserve
requirements. These reserve requirements are subject to annual
adjustment by the FRB. The Bank Subsidiaries are in compliance
with the foregoing requirements. The balances used to meet the
reserve requirements imposed by the FRB may be used by FCB to
satisfy liquidity requirements imposed by the OTS.
G. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of Heartland are affected by the policies of
regulatory authorities, including the Federal 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 principal offices of Heartland are located in DB&T's main
office at 1398 Central Avenue, Dubuque, Iowa 52001. This office
is owned by DB&T and consists of a three-story glazed terra cotta
building constructed in 1922. The main office building currently
comprises approximately 59,500 square feet, all of which is
occupied by DB&T and Heartland. Construction of a three-story
addition of approximately 32,000 square feet was completed in
1994.
DB&T has a total of seven branch offices in addition to its main
office. Five of these offices are located in the city of Dubuque,
and three branches are located in the surrounding Iowa
communities of Epworth, Farley and Holy Cross. DB&T owns all of
its branch offices without material encumbrances, except its
branch located at Kennedy Mall. DB&T owns the buildings but
leases the land under long term agreements at its Kennedy Mall
branch and Main Street office location. The DB&T subsidiaries,
operate out of the main office.
Citizens' Dubuque office is located in the Main Street Office
location of DB&T. The Madison office for Citizens is located in
a leased building at 1771 Thierer Road, Madison, Wisconsin 53707.
GSB's main office is located at 971 Gear Street on the west side
of Galena, Illinois. Construction of this new 18,000 square foot
brick banking facility was completed in 1996. A drive-up facility
is also located in downtown Galena. One branch office is located
in Stockton, Illinois, which is located approximately 24 miles
east of Galena. Each of these offices is owned without material
encumbrances.
The main office of FCB is located at 4th and Concert Street,
Keokuk, Iowa 52632. The property was purchased by FCB in 1983 and
consists of a one-story brick building constructed in 1951. This
building comprises approximately 6,000 square feet, all of which
is occupied by FCB. During 1996, FCB opened a 2,100 square foot
branch on the northwest side of Keokuk. FCB also has one branch
office located in Carthage, Illinois, which is located
approximately 15 miles east of Keokuk, Iowa. The one-story wooden
frame building constructed in 1976 comprises approximately 3,000
square feet, all of which is occupied by FCB. Each of these
offices are owned without material encumbrances.
RCB operates from an 8,000 square foot one-story brick building
located at 6700 East Riverside Boulevard, Rockford, Illinois
61114.
The main office of WCB is located at 580 N. Main Street, Cottage
Grove, Wisconsin 53527. The property was constructed by WCB in
1972 and consists of a one-story stucco building. This building
comprises approximately 6,000 square feet, all of which is
occupied by WCB. A branch facility was purchased in Middleton,
Wisconsin in 1997. This branch facility is a one-story wood
building totaling 2,500 square feet, all of which is occupied by
WCB and is owned without material encumbrances.
ULTEA leases a 1900 square foot facility at 2976 Triverton Pike,
Madison, Wisconsin 53711.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
Heartland or any of its subsidiaries is a party or of which any
of their property is the subject.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 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 750
shareholders of record as of March 23, 1998, and is traded in the
over-the-counter market.
The following table shows, for the periods indicated, the range
of reported prices per share of Heartland's Common Stock in the
over-the-counter market. These quotations represent inter-dealer
prices without retail markups, markdowns or commissions and do
not necessarily represent actual transactions.
Heartland Common Stock Actual
Calendar Quarter High Low
1996:
First $17 11/16 $16 3/16
Second 20 17 1/4
Third 25 17 1/4
Fourth 24 3/4 24
1997:
First $24 $26 19/32
Second 25 1/4 27 9/32
Third 25 30 9/32
Fourth 26 30
Cash dividends have been declared by Heartland quarterly during
the past two years ending December 31, 1997. The following table
sets forth the cash dividends per share paid on Heartland's
Common Stock for the past two years:
Calendar Quarter
1997 1996
First $.13 $.10
Second .13 .10
Third .13 .10
Fourth .13 .10
ITEM 6.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended December 31,
1997 1996 1995
--------------------------------
STATEMENT OF INCOME DATA
Interest income $ 59,261 $ 51,886 $ 49,149
Interest expense 31,767 27,644 25,529
-------- -------- --------
Net interest income 27,494 24,242 23,620
Provision for loan and
lease losses 1,279 1,408 820
-------- -------- --------
Net interest income after
provision for loan and
lease losses 26,215 22,834 22,800
Noninterest income 8,565 7,364 4,981
Noninterest expense 22,927 19,507 17,323
Provision for income taxes 3,338 2,685 2,884
-------- -------- --------
Net income $ 8,515 $ 8,006 $ 7,574
======== ======== ========
PER COMMON SHARE DATA
Net income-basic $ 1.80 $ 1.70 $ 1.58
Net income-diluted 1.78 1.69 1.58
Cash dividends 0.52 .40 .30
Dividend payout ratio 28.96% 23.53% 19.03%
Book value $ 16.38 $ 14.84 $ 13.76
Weighted average shares
outstanding-basic 4,738,171 4,715,009 4,805,184
BALANCE SHEET DATA
Investments and federal
funds sold $234,666 $183,966 $171,726
Total loans and leases,
net of unearned 556,406 484,085 454,905
Allowance for loan and lease
losses 7,362 6,191 5,580
Total assets 852,060 736,552 677,313
Total deposits 623,532 558,343 534,587
Long-term obligations 43,023 42,506 45,400
Redeemable preferred stock - - -
Stockholders' equity 77,772 70,259 64,506
EARNINGS PERFORMANCE DATA
Return on average total assets 1.09% 1.16% 1.18%
Return on average stockholders'
equity 11.59 12.00 12.28
Net interest margin ratio (1) 3.89 3.98 4.13
ASSET QUALITY RATIOS
Nonperforming assets to total
assets 0.34% 0.34% 0.28%
Nonperforming loans and leases
to total loans and leases 0.37 0.41 0.26
Net loan and lease charge-offs
to average loans and leases 0.08 0.17 0.08
Allowance for loan and lease
losses to total loans and
leases 1.32% 1.28% 1.23%
Allowance for loan and lease
losses to nonperforming
loans and leases 362.30 313.63 463.84
CAPITAL RATIOS
Average equity to average
assets 9.39% 9.66% 9.59%
Total capital to risk-adjusted
assets 12.71 14.28 14.46
Tier 1 leverage 8.76 9.54 9.47
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
1994 1993
--------------------
STATEMENT OF INCOME DATA
Interest income $43,373 $ 43,265
Interest expense 20,128 21,126
-------- --------
Net interest income 23,245 22,139
Provision for loan and lease losses 811 1,014
-------- --------
Net interest income after provision
for loan and lease losses 22,434 21,125
Noninterest income 4,965 5,470
Noninterest expense 17,244 16,338
Provision for income taxes 3,015 3,251
-------- --------
Net income $ 7,140 $ 7,006
======== ========
PER COMMON SHARE DATA
Net income-basic $ 1.47 $ 1.47
Net income-diluted 1.47 1.47
Cash dividends .26 .20
Dividend payout ratio 17.99% 13.33%
Book value $ 11.76 $ 11.52
Weighted average shares
outstanding-basic 4,845,648 4,774,718
BALANCE SHEET DATA
Investments and federal funds sold $162,968 $211,394
Total loans and leases, net of unearned 422,216 374,778
Allowance for loan and lease losses 5,124 4,433
Total assets 626,490 620,214
Total deposits 513,239 498,279
Long-term obligations 23,562 25,055
Redeemable preferred stock - 67
Stockholders' equity 56,930 55,098
EARNINGS PERFORMANCE DATA
Return on average total assets 1.18% 1.17%
Return on average stockholders' equity 12.82 14.20
Net interest margin ratio (1) 4.32 4.11
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.17% 0.30%
Nonperforming loans and leases
to total loans and leases 0.21 0.32
Net loan and lease charge-offs
to average loans and leases
Allowance for loan and lease losses 0.03 0.04
to total loans and leases 1.21% 1.18%
Allowance for loan and lease losses
to nonperforming loans and leases 580.95 374.09
CAPITAL RATIOS
Average equity to average assets 9.22% 8.23%
Total capital to risk-adjusted assets 15.04 14.37
Tier 1 leverage 9.32 8.49
(1) Tax equivalent using a 34% tax rate.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of
the consolidated financial condition and results of operations of
Heartland Financial USA, Inc. ("Heartland") as of the dates and
for the periods indicated. This discussion should be read in
conjunction with the Selected Financial Data, Heartland's
Consolidated Financial Statements and the Notes thereto and other
financial data appearing elsewhere in this report.
The consolidated financial statements include the accounts of
Heartland and its wholly-owned subsidiaries: Dubuque Bank and
Trust Company ("DB&T"); DB&T Insurance, Inc.; DB&T Community
Development Corp.; Galena State Bank and Trust Company ("GSB");
Riverside Community Bank ("RCB"); First Community Bank, FSB
("FCB"); Wisconsin Community Bank ("WCB"; previously Cottage
Grove State Bank); Citizens Finance Co. ("Citizens"); ULTEA, Inc.
("ULTEA"); DBT Investment Corporation and Keokuk Bancshares, Inc.
This report, including the Chairman's Report to Stockholders and
President's Message, 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 recorded its seventh consecutive year of increased
annual earnings during 1997, up $509,000 (6.36%) from 1996. On a
basic per common share basis, the 1997 earnings increased 5.88%.
These sustained increases are particularly gratifying given the
increased emphasis and the related costs associated with the
expansion of Heartland's asset base and development of other
noninterest income sources. The initiatives undertaken included:
The conversion of all Heartland banks to new banking software.
The acquisition of WCB on March 1 and its purchase of a branch
facility in Middleton, Wisconsin.
Expansion into the vehicle leasing and fleet management
business with the purchase of ULTEA in December, 1996.
Enhancement of banking operations in Rockford, Illinois and
the recently announced de novo expansion into Albuquerque, New
Mexico.
Net income increased $432,000 (5.70%) in 1996 from 1995. On a
basic per common share basis, 1996 net income increased 7.59%
from 1995. This performance reflected significantly improved
noninterest income during 1996, which was partially mitigated by
increased costs related to the first full year of operation of
RCB and the one-time Savings Association Insurance Fund ("SAIF")
special assessment at FCB.
Total noninterest income increased 16.31% during 1997 compared to
an increase of 47.84% during 1996. Gains on sales of securities
accounted for 61.94% of the $2,383,000 change during 1996.
During 1997, gains on sales of securities decreased $443,000.
Exclusive of these gains on sales of securities, noninterest
income increased 30.03% during 1997. During both years, there
were substantial increases in core noninterest income components
which include service charges, trust fees and gains on the sale
of loans. Rental income on operating leases at ULTEA was also a
major contributor to the 1997 growth in noninterest income.
Concurrent with the growth of the Heartland organization,
noninterest expense increased $3,420,000 (17.53%) and $2,184,000
(12.61%) during 1997 and 1996, respectively, compared to the
previous year. The increases were largely due to costs
associated with the initiatives discussed earlier. While
management remains committed to the control of overhead, they are
also committed to investing sufficient resources to profitably
expand the franchise.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest income
earned on earning assets and interest expense paid on interest
bearing liabilities. As such, net interest income is affected by
changes in the volume and yields on earning assets and the volume
and rates paid on interest bearing liabilities. Net interest
margin is the ratio of tax equivalent net interest income to
average earning assets.
Net interest income on a fully tax equivalent basis was
$28,280,000, $25,476,000 and $24,721,000 for 1997, 1996 and 1995,
respectively, an increase of 11.01% for 1997 and 3.05% for 1996.
Expressed as a percentage of average earning assets, Heartland's
net interest margin decreased to 3.89% in 1997 and 3.98% in 1996,
compared to 4.13% in 1995. These decreases occurred for several
reasons:
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 to 1.75 years at
December 31, 1997.
The additional investment during 1996 of nearly $3 million in
low-income housing projects, while the investment generates
income tax credits, negatively impacted the net interest
margin calculation.
With strong loan demand, rates paid on interest bearing
deposits were elevated somewhat to sustain deposit growth.
Growth in noninterest bearing deposits remained relatively
flat during both years.
Heartland bank subsidiaries increased their reliance on
Federal Home Loan Bank ("FHLB") funding, which is typically
more expensive than core deposits.
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)
(Dollars in thousands)
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%
=========
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
(Dollars in thousands)
For the Year Ended
December 31, 1996
Average
Balance Interest Rate
------- -------- ----
EARNING ASSETS
Securities:
Taxable $136,107 $ 8,392 6.17%
Nontaxable (1) 31,005 3,108 10.02
--------- --------- ------
Total securities 167,112 11,500 6.88
--------- --------- ------
Interest bearing deposits 4,332 163 3.76
Federal funds sold 11,532 610 5.29
--------- --------- ------
Loans and leases:
Commercial and commercial
real estate (1) 195,372 17,058 8.73
Residential mortgage 160,511 12,637 7.87
Agricultural and agricultural
real estate (1) 58,975 5,377 9.12
Consumer 41,302 4,250 10.29
Direct financing leases, net 7,502 549 7.32
Fees on loans - 976 -
Less: allowance for loan
and lease losses (6,026) - -
--------- --------- ------
Net loans and leases 457,636 40,847 8.93
--------- --------- ------
Total earning assets 640,612 53,120 8.29
--------- --------- ------
NONEARNING ASSETS
Total nonearning assets 50,473 - -
--------- --------- ------
TOTAL ASSETS $691,085 $ 53,120 7.69%
========= ========= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $214,401 $ 7,474 3.49%
Time, $100,000 and over 37,806 2,131 5.64
Other time deposits 239,300 13,585 5.68
Short-term borrowings 37,100 1,943 5.24
Other borrowings 41,936 2,511 5.99
--------- --------- ------
Total interest bearing
liabilities 570,543 27,644 4.85
--------- --------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 45,205 - -
Accrued interest and other
liabilities 8,606 - -
--------- --------- ------
Total noninterest bearing
liabilities 53,811 - -
--------- --------- ------
Stockholders' equity 66,731 - -
--------- --------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $691,085 $ 27,644 4.00%
========= ========= ======
Net interest income (1) $ 25,476
=========
Net interest income
to total earning assets (1) 3.98%
======
Interest bearing liabilities
to earning assets 89.06%
=========
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS & RATES (1)
(Dollars in thousands)
For the Year Ended
December 31, 1995
Average
Balance Interest Rate
------- -------- ----
EARNING ASSETS
Securities:
Taxable $116,683 $ 7,562 6.48%
Nontaxable (1) 25,518 2,671 10.47
-------- ------- ------
Total securities 142,201 10,233 7.20
-------- ------- ------
Interest bearing deposits 3,059 116 3.79
Federal funds sold 12,765 740 5.80
-------- -------- ------
Loans and leases:
Commercial and commercial
real estate (1) 186,062 16,403 8.82
Residential mortgage 155,208 12,211 7.87
Agricultural and agricultural
real estate (1) 60,171 5,422 9.01
Consumer 35,881 3,650 10.17
Direct financing leases, net 9,362 670 7.16
Fees on loans - 805 -
Less: allowance for loan
and lease losses (5,454) - -
--------- -------- ------
Net loans and leases 441,230 39,161 8.88
--------- -------- ------
Total earning assets 599,255 50,250 8.39
--------- -------- ------
NONEARNING ASSETS
Total nonearning assets 43,501 - -
--------- -------- ------
TOTAL ASSETS $642,756 $50,250 7.82%
========= ======== ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $206,353 $ 7,338 3.56%
Time, $100,000 and over 30,091 1,658 5.51
Other time deposits 233,983 13,033 5.57
Short-term borrowings 21,665 1,236 5.71
Other borrowings 37,253 2,264 6.08
--------- -------- ------
Total interest bearing
liabilities 529,345 25,529 4.82
--------- -------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 43,467 - -
Accrued interest and other
liabilities 8,281 - -
--------- -------- ------
Total noninterest bearing
liabilities 51,748 - -
--------- -------- ------
Stockholders' equity 61,663 - -
--------- -------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $642,756 $25,529 3.97%
========= ======== ======
Net interest income (1) $24,721
========
Net interest income 4.13%
to total earning assets (1) ======
Interest bearing liabilities
to earning assets 88.33%
=========
(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
(Dollars in thousands)
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
======= ======= =======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
For the Year Ended
December 31,
1996 Compared to 1995
Change Due to
Volume Rate Net
-----------------------
EARNING ASSETS/
INTEREST INCOME
Securities
Taxable $1,260 $ (430) $ 830
Nontaxable 574 (137) 437
Interest bearing deposits 48 (1) 47
Federal funds sold (71) (59) (130)
Loans and leases 1,456 230 1,686
------- ------- -------
TOTAL EARNING ASSETS 3,267 (397) 2,870
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 286 (150) 136
Time, $100,000 and over 425 48 473
Other time deposits 296 256 552
Short-term borrowings 883 (176) 707
Other borrowings 285 (38) 247
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 2,175 (60) 2,115
------- ------- -------
NET INTEREST INCOME $1,092 $(337) $ 755
======= ======= =======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
For the Year Ended
December 31,
1995 Compared to 1994
Change Due to
Volume Rate Net
-----------------------
EARNING ASSETS/
INTEREST INCOME
Securities
Taxable $(1,267) $ 582 $ (685)
Nontaxable (154) (385) (539)
Interest bearing deposits 12 32 44
Federal funds sold 363 185 548
Loans and leases 3,831 2,413 6,244
-------- ------- -------
TOTAL EARNING ASSETS 2,785 2,827 5,612
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts (36) 1,851 1,815
Time, $100,000 and over 368 270 638
Other time deposits 658 1,112 1,770
Short-term borrowings (111) 387 276
Other borrowings 737 165 902
-------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 1,616 3,785 5,401
------- ------- -------
NET INTEREST INCOME $ 1,169 $ (958) $ 211
======= ======= =======
PROVISION FOR LOAN AND LEASE LOSSES
The provision expense for loan and lease losses decreased
$129,000 (9.16%) during 1997 compared to an increase of $588,000
(71.71%) during 1996. The additional provision expense during
1996 resulted from a $433,000 (118.96%) increase in net charge-
offs, primarily due to a $469,000 writedown on a pool of leases
purchased from the Bennett Funding Group. The allowance for loan
and lease losses as a percentage of total loans and leases was
1.32% at December 31, 1997, 1.28% at December 31, 1996 and 1.23%
at December 31, 1995.
NONINTEREST INCOME
(Dollars in thousands)
For the Years Ended
December 31,
1997 1996 1995
------------------------
Service charges and fees $ 2,723 $ 2,437 $ 2,106
Trust fees 2,009 1,810 1,472
Brokerage commissions 324 212 110
Insurance commissions 563 650 611
Securities gains, net 1,446 1,889 413
Rental income on operating leases 811 - -
Gains on sale of loans 373 131 73
Other noninterest income 316 235 196
-------- -------- --------
Total noninterest income $ 8,565 $ 7,364 $ 4,981
======== ======== ========
The above table shows Heartland's noninterest income for the
years indicated. Total noninterest income increased $1,201,000
(16.31%) during 1997, as compared to an increase of $2,383,000
(47.84%) during 1996.
One of the most significant components of noninterest income is
service charges and fees, which increased $286,000 (11.74%)
during 1997 when compared to 1996. Of this increase, $173,000
was attributable to the acquisition of WCB. During 1996, service
charges and fees increased $331,000 (15.72%) compared to 1995.
The growth experienced during 1996 reflected the addition of new
merchants in the credit card processing area. The increased
emphasis Heartland has placed on enhancing revenues from services
provided to customers has influenced the growth of fee income
over the two-year period.
Trust fees increased $199,000 (10.99%) in 1997 and $338,000
(22.96%) in 1996, as compared to the respective previous year's
total. This strong performance resulted from the increase in
assets under management, ending 1997 at $434,003,000, an increase
of $67,845,000 (18.53%) during 1997 and $76,813,000 (26.55%)
during 1996. This growth reflected especially strong equity and
debt markets, combined with the development of new trust
relationships through continued calling efforts.
Brokerage commissions increased $112,000 (52.83%) in 1997 from
the previous year's total. During 1996, brokerage commissions
increased $102,000 (92.73%) from 1995's total. Results for both
years benefited from the replacement of two sales personnel lost
in 1995, combined with continued efforts to integrate the
brokerage area into Heartland's retail divisions.
Securities gains decreased $443,000 (23.45%) during 1997 compared
to 1996. During 1996, securities gains increased $1,476,000
(357.38%) over the 1995 total. The significant increase
experienced during 1996 resulted from the recognition of a gain
of $1,174,000 on the sale of Federal Home Loan Mortgage
Corporation common stock held in the investment portfolio at FCB.
Heartland was able to sustain a portion of those gains during
1997 due to the strong performance of its equity portfolio.
The expansion into the vehicle leasing and fleet management
business with the first full year of operation of ULTEA as a
Heartland subsidiary contributed an additional $811,000 to
noninterest income during 1997.
NONINTEREST EXPENSE
(Dollars in thousands)
For the Years Ended
December 31,
1997 1996 1995
------------------------
Salaries and employee
benefits $13,070 $11,035 $ 9,730
Occupancy, net 1,354 1,268 1,059
Furniture and equipment 1,880 1,336 1,315
Outside services 1,439 1,155 1,164
FDIC deposit insurance
assessment 116 746 681
Advertising 826 996 696
Depreciation on equipment under
operating leases 584 - -
Other noninterest expense 3,658 2,971 2,678
-------- -------- --------
Total noninterest expense $22,927 $19,507 $17,323
======== ======== ========
Efficiency ratio (1) 64.77% 63.03% 59.15%
======== ======== ========
(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 $3,420,000
(17.53%) in 1997 as compared to 1996. Total 1996 noninterest
expense represented an increase of $2,184,000 (12.61%) from the
1995 total.
Salaries and employee benefits expense represented 57.01% of the
total 1997 noninterest expense, increasing $2,035,000 (18.44%)
from the total for 1996. During 1996, salaries and employee
benefits expense increased $1,305,000 (13.41%) over the 1995
total. In addition to the normal merit and cost of living
raises, these increases were attributable to Heartland's
continued expansion efforts, particularly the additions of RCB,
WCB and ULTEA. Also recorded during 1997 was $267,000 in
compensation expense associated with the final distribution of
stock under the Heartland Executive Restricted Stock Purchase
Plan.
The $209,000 (19.74%) increase in occupancy costs for 1996
represented additional depreciation and property tax costs
associated with the construction of new facilities at the
subsidiary banks.
Equipment expenses increased $544,000 (40.72%) during 1997
compared to the 1996 total. The conversion to Fiserv's
Comprehensive Banking Systems software was the major component of
this increase. Heartland elected to maintain the data processing
function in-house to provide its subsidiary banks with enhanced
technology and flexibility.
The addition of ULTEA added $584,000 to noninterest expense
during 1997 for the depreciation on equipment under operating
leases.
Federal Deposit Insurance Corporation ("FDIC") premium expense
decreased $630,000 (84.45%) during 1997 compared to 1996. The
one-time special assessment on all savings associations to
capitalize the SAIF amounted to $545,000 at FCB and was recorded
during 1996. Exclusive of this one-time charge, FDIC premiums
decreased $480,000 (70.48%) in 1996 compared to 1995. During
1995, the FDIC premium expense was reduced when the premium
charged to members of the Bank Insurance Fund ("BIF") dropped
from .23% to .04% of deposits and subsequently to $2,000 per year
for well capitalized banks. Three of Heartland's four banks were
affected by this reduction, which took effect in September of
1995. FCB, as a SAIF member, experienced a reduction in FDIC
premium expense on January 1, 1997, when the assessment dropped
from .23% to .065% of deposits.
Advertising and public relations expense was reduced $170,000
(17.07%) during 1997, compared to the 1996 total. During 1996,
advertising and public relations expense experienced the largest
single percentage increase within the noninterest expense
category, rising $300,000 (43.10%) compared to the 1995 total.
The contribution of stock from FCB's securities portfolio to a
public charitable trust during 1996 at a cost basis of $220,000,
with an associated market value of $820,000, during 1996 was the
primary component of the changes during both years.
Heartland utilizes and is dependent upon data processing systems
and software to conduct its business. The data processing
systems and software include those developed and maintained by
Heartland's third-party data processing vendor and purchased
software which is run on personal computer networks. Heartland
has completed an assessment and work plan to assure that all
hardware and software utilized by Heartland subsidiaries will
function properly in the year 2000. Management is working with
vendors to become compliant by the end of 1998. Noninterest
expense includes the cost of such projects. Heartland management
continues to review the cost associated with the year 2000
project and presently has not identified any situations that will
require material cost expenditures to become fully compliant.
INCOME TAXES
Income tax expense for 1997 increased $653,000 (24.32%) over
1996. The effective tax rate increased from 25.11% in 1996 to
28.16% in 1997. A reduction in tax-exempt income during 1997
contributed to this increase. The $199,000 (6.90%) decrease in
total tax expense for 1996, despite the increase in net income,
was driven primarily by the addition of $195,000 in tax credits
associated with the investment in low-income housing projects.
The one-time contribution of appreciated property to a public
charitable trust also was a factor in this decrease.
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
(Dollars in thousands)
At
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
(Dollars in thousands)
At
December 31,
1995 1994
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $191,866 42.00% $170,998 40.32%
Residential mortgage 158,324 34.66 150,147 35.41
Agricultural and
agricultural real estate 59,089 12.94 56,736 13.38
Consumer 38,988 8.54 36,068 8.51
Lease financing, net 8,530 1.86 10,076 2.38
-------- ------- -------- -------
Gross loans and leases 456,797 100.00% 424,025 100.00%
======= =======
Unearned discount (1,510) (1,438)
Deferred loan fees (382) (371)
--------- ---------
Total loans and leases 454,905 422,216
Allowance for loan and
lease losses (5,580) (5,124)
--------- ---------
Loans and leases, net $449,325 $417,092
========= =========
LOAN PORTFOLIO
(Dollars in thousands)
At
December 31,
1993
Amount Percent
------ -------
Commercial and commercial
real estate $156,117 41.49%
Residential mortgage 124,118 32.98
Agricultural and
agricultural real estate 54,998 14.61
Consumer 36,236 9.63
Lease financing, net 4,855 1.29
-------- -------
Gross loans and leases 376,324 100.00%
=======
Unearned discount (1,256)
Deferred loan fees (290)
---------
Total loans and leases 374,778
Allowance for loan and
lease losses (4,433)
---------
Loans and leases, net $370,345
=========
The table below sets forth the remaining maturities by loan and
lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1)
December 31, 1997
(Dollars in thousands)
Over 1 Year
Through 5 Years
One Year Fixed Floating
or less Rate Rate
------------------------------
Commercial and commercial
real estate $ 97,759 $ 86,592 $ 35,414
Residential mortgage 15,354 21,413 15,314
Agricultural and
agricultural real estate 34,861 22,402 6,103
Consumer 18,272 31,882 6,188
Lease financing, net 2,203 4,724 -
-------- -------- --------
Total $168,449 $167,013 $ 63,019
======== ======== ========
Over 5 Years
Fixed Floating
Rate Rate Total
-------------------------------
Commercial and commercial
real estate $ 5,596 $ 17,507 $242,868
Residential mortgage 25,103 98,084 175,268
Agricultural and
agricultural real estate 859 5,077 69,302
Consumer 1,649 6,232 64,223
Lease financing, net 244 - 7,171
-------- -------- --------
Total $ 33,451 $126,900 $558,832
======== ======== ========
(1) Maturities based upon contractual dates.
Net loans and leases grew $71,150,000 (14.89%) from December 31,
1996, to December 31, 1997, compared to $28,569,000 (6.36%) from
December 31, 1995, to December 31, 1996. The loan portfolio at
WCB accounted for $22,906,000 (32.19%) of the growth during 1997.
The largest dollar growth occurred in commercial and commercial
real estate loans, which increased $36,345,000 (17.60%) compared
to $14,657,000 (7.64%) during 1996. The WCB acquisition accounted
for $10,789,000 (29.68%) of the growth in commercial and
commercial real estate loans during 1997.
Exclusive of the WCB loan portfolio, agricultural and consumer
loan outstandings experienced the most significant percentage
growth during 1997. Agricultural and agricultural real estate
loans, exclusive of WCB, increased $10,569,000 (18.37%) during
1997 compared to a decrease of $1,563,000 (2.65%) during 1996.
The 1996 decrease reflected the consolidation occurring in the
agricultural sector and loan paydowns resulting from strong
commodity prices. Consumer loan outstandings grew $11,474,000
(23.73%) during 1997, exclusive of the WCB loan portfolio,
compared to $9,373,000 (24.04%) during 1996. These increases were
attributed to significant growth in consumer lines of credit and
dealer paper, partially as a result of the expansion of Citizens
into Madison, Wisconsin.
Growth in residential mortgage loan outstandings declined during
1997 as customers elected to take fixed rate 15- and 30- year
mortgages which the subsidiary banks elected to sell into the
secondary market while retaining servicing. In 1997, exclusive
of WCB, and 1996 Heartland's total outstanding residential
mortgage loans increased $1,406,000 (.84%) and $8,675,000
(5.48%), respectively.
Although the risk of nonpayment for any reason exists with
respect to all loans, specific risks are associated with each
type of loan. The primary risks associated with commercial and
agricultural loans are the quality of the borrower's management
and the impact of national and regional economic factors. Risks
associated with real estate loans include fluctuating land values
and concentrations of loans in a specific type of real estate.
Consumer loans also have risks associated with concentrations of
loans in a single type of loan and the risk of a borrower's
unemployment as a result of deteriorating economic conditions.
Heartland monitors its loan concentrations and does not believe
it has concentrations in any specific industry other than
agriculture.
Heartland's strategy with respect to the management of these
types of risks, whether loan demand is weak or strong, is to
encourage the Heartland banks to follow tested and prudent loan
policies and underwriting practices which include: (i) granting
loans on a sound and collectible basis; (ii) investing funds
profitably for the benefit of stockholders and the protection of
depositors; (iii) serving the needs of the community and each
bank's general market area while obtaining a balance between
maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the
amount of the loan; (v) administering loan policies through a
Board of Directors and an officers' loan committee; (vi)
developing and maintaining adequate diversification of the loan
portfolio as a whole and of the loans within each loan category;
and (vii) ensuring that each loan is properly documented and, if
appropriate, guaranteed by government agencies and that insurance
coverage is adequate.
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
(Dollars in thousands)
December 31,
1997 1996 1995 1994 1993
----------------------------------
Nonaccrual loans and
leases $1,819 $1,697 $ 977 $ 748 $ 979
Loan and leases
contractually past
due 90 days or more 187 247 226 134 206
Restructured loans
and leases 26 30 - - -
------ ------ ------ ------ ------
Total nonperforming
loans and leases 2,032 1,974 1,203 882 1,185
Other real estate 774 532 640 134 623
Other repossessed assets 124 21 51 39 23
------ ------ ------- ------ ------
Total nonperforming assets $2,930 $2,527 $1,894 $1,055 $1,831
====== ====== ====== ====== ======
Nonperforming loans and
leases to total loans
and leases 0.37% 0.41% 0.26% 0.21% 0.32%
Nonperforming assets
to total loans and
leases plus repossessed
property 0.53% 0.52% 0.42% 0.25% 0.49%
Nonperforming assets to
total assets 0.34% 0.34% 0.28% 0.17% 0.30%
Under Heartland's internal loan review program, a loan review
officer is responsible for reviewing existing loans and leases,
identifying potential problem loans and leases and monitoring the
adequacy of the allowance for possible loan and lease losses at
each of the Heartland banks.
Heartland constantly monitors and continues to develop systems to
oversee the quality of its loan portfolio. One integral part is a
loan rating system which assigns a rating on each loan and lease
within the portfolio based on the borrower's repayment ability,
collateral position and repayment history. This emphasis on
quality is reflected in Heartland's credit quality figures which
compare very favorably to peer data in the September 1997 Bank
Holding Company Performance Report published by the Federal
Reserve Board for bank holding companies with assets of $500
million to $1 billion. In this report, the peer group reported
nonperforming assets to total assets of .50%, .54% and .60% for
September 30, 1997, December 31, 1996 and 1995, respectively.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The adequacy of the allowance for loan and lease losses is
determined by an internally-developed system which equally weighs
formulas established by the Office of the Comptroller of the
Currency and the Bank Administration Institute, in addition to
Heartland's historical charge-offs. This system addresses loan
portfolio composition, loan and lease delinquencies, potential
and existing internally classified credits and other factors
that, in management's judgment, deserve evaluation in estimating
loan and lease losses. The adequacy of the allowance for loan and
lease losses is monitored on an ongoing basis by the loan review
staff, senior management and the Heartland Board of Directors.
Heartland increased its allowance for loan and lease losses
during 1997 and 1996 due to a number of factors considered by the
Heartland Loan Review Committee, including the following: (i) a
continued increase in higher-risk consumer and more-complex
commercial and agricultural loans from relatively lower-risk real
estate loans; (ii) the economies in Heartland's primary market
areas have been stable for some time and the growth of the
allowance is intended to anticipate the cyclical nature of most
economies; and (iii) the third consecutive year of increases in
the amount of nonaccrual loans.
There can be no assurances that the allowance for loan and lease
losses will be adequate to cover all losses, but management
believes that the allowance for loan and lease losses was
adequate at December 31, 1997. While management uses available
information to provide for loan and lease losses, the ultimate
collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the allowance for loan and lease losses
carried by the Heartland subsidiaries. Such agencies may require
Heartland to make additional provisions to the allowance based
upon their judgment about information available to them at the
time of their examinations.
The table below summarizes activity in the allowance for loan and
lease losses for the years indicated, including amounts of loans
and leases charged off, amounts of recoveries, additions to the
allowance charged to income and the ratio of net charge-offs to
average loans and leases outstanding.
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
December 31,
1997 1996 1995 1994 1993
--------------------------------------
Allowance at
beginning of year $6,191 $5,580 $5,124 $4,433 $3,406
Charge-offs:
Commercial and
commercial real
estate 93 578 108 94 4
Residential mortgage 21 23 6 16 48
Agricultural and
agricultural
real estate 21 2 - - 35
Consumer 449 323 381 244 214
Lease financing - - - - -
------ ------ ------ ------ ------
Total charge-offs 584 926 495 354 301
------ ------ ------ ------ ------
Recoveries:
Commercial and
commercial
real estate 36 16 22 27 50
Residential mortgage 8 1 15 5 23
Agricultural and
agricultural
real estate 2 45 8 43 5
Consumer 99 67 86 148 96
Lease financing - - - - -
------ ------ ------ ------ ------
Total recoveries 145 129 131 223 174
------ ------ ------ ------ ------
Net charge-offs 439 797 364 131 127
Provision for loan
and lease losses 1,279 1,408 820 811 1,014
Additions related
to acquisitions 331 - - - 140
Keokuk merger
adjustments - - - 11 -
------ ------ ------ ------ ------
Allowance at end
of period $7,362 $6,191 $5,580 $5,124 $4,433
====== ====== ====== ====== ======
Net charge-offs to
average loans and
leases 0.08% 0.17% 0.08% 0.03% 0.04%
======= ======= ======= ======= ======
The table below shows Heartland's allocation of the allowance for
loan and lease losses by types of loans and leases and the amount
of unallocated reserves.
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
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
(Dollars in thousands)
As of December 31,
1995 1994
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------ --------- ------ ---------
Commercial and
commercial real
estate $1,430 42.00% $1,321 40.32%
Residential
mortgage 500 34.66 501 35.41
Agricultural and
agricultural real
estate 518 12.94 423 13.38
Consumer 618 8.54 593 8.51
Lease financing(1) 34 1.86 45 2.38
Unallocated 2,480 - 2,241 -
------- ------- ------- -------
$5,580 100.00% $5,124 100.00%
======= ======= ======= =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
As of December 31, 1993
--------------------------
Loan/
Lease
Category
to Gross
Loans &
Amount Leases
------- --------
Commercial and commercial
real estate $1,535 41.49%
Residential mortgage 547 32.98
Agricultural and agricultural
real estate 395 14.61
Consumer 659 9.63
Lease financing(1) - 1.29
Unallocated 1,297 -
------- -------
$4,433 100.00%
======= =======
1) Prior to 1994, reserve allocations for lease financing
receivables were included in the commercial and commercial
real estate allocations.
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 23.68% of total assets at December 31, 1997, as
compared to 24.98% at December 31, 1996 and 21.88% at December
31, 1995.
Consistent with Heartland's efforts during 1996 to maximize the
return on the portfolio while maintaining a conservative
investment philosophy, the composition of the portfolio during
1997 was maintained at the 1996 levels. The most dramatic shift
occurred in the mortgage-backed securities area, which increased
$35,564,000 (90.14%) during 1996, as compared to 1995. This
increase reflected management's decision to increase its
investment in fixed-rate collateralized mortgage obligations
("CMO's"). To reduce its exposure to prepayments, Heartland
purchased tightly structured tranches in well-seasoned CMO's.
These investments closely resemble treasury securities in their
repayment predictability and accordingly are less volatile to
interest rate fluctuations, while still providing an increased
spread when compared to U.S. treasuries with similar maturities.
As treasury securities matured during 1997, many of the
replacement purchases were made in these CMO products. During
1997, the investment in mortgage-backed securities increased
$5,577,000 (7.43%), exclusive of the acquisition of WCB, and
treasury securities decreased $775,000 (5.49%).
Heartland increased its investment in U.S. government agencies by
$13,827,000 (29.11%) during 1996. While spreads between agencies
and comparable CMO's are typically wide, the state tax-exempt
nature on selected agencies purchased for Heartland's Illinois
bank subsidiaries made them attractive.
Management determined that its investment in mutual funds
provided insufficient returns compared to other investments of
similar duration. Accordingly, the total investment in mutual
funds was reduced by $6,617,000 (92.88%) during 1996. Heartland
also reduced its investment in state and political subdivisions
during 1996. This decrease was driven by calls on these
securities and more attractive returns on other comparable
maturity investments.
The tables below presents the composition and maturities of the
securities portfolio by major category.
SECURITIES PORTFOLIO COMPOSITION
(Dollars in thousands)
December 31,
1997 1996 1995
------------------------------------------------
% of % of % of
Portfolio Portfolio Portfolio
Amount Amount Amount
------------------------------------------------
U. S. Treasury
securities $ 13,342 6.61% $ 14,117 7.66% $ 11,501 7.75%
U. S. government
agencies 64,360 31.90 61,332 33.34 47,505 32.05
Mortgage-backed
securities 87,015 43.13 75,017 40.78 39,453 26.62
Mutual funds 512 0.26 507 0.28 7,124 4.81
States and
political
subdivisions 20,702 10.26 18,812 10.23 22,782 15.37
Other securities 15,817 7.84 14,181 7.71 19,861 13.40
-------- ------ -------- ------- ------- -------
Total $201,748 100.00% $183,966 100.00% $148,226 100.00%
======== ====== ======== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION
(Dollars in thousands)
Held to Maturity Available for Sale
% of % of
December 31, 1997 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. Treasury
securities $ - -% $ 13,342 6.61%
U.S. government
agencies 598 .30 63,762 31.60
Mortgage-backed
securities 325 .16 86,690 42.97
Mutual funds - - 512 0.26
States and political
subdivisions 2,956 1.46 17,746 8.80
Other securities - - 15,817 7.84
------ ------- -------- -------
Total $3,879 1.92% $197,869 98.08%
====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION
(Dollars in thousands)
Total
% of
December 31, 1997 Amount Portfolio
-------------------
U.S. Treasury securities $ 13,342 6.61%
U.S. government agencies 64,360 31.90
Mortgage-backed securities 87,015 43.13
Mutual funds 512 0.26
States and political
subdivisions 20,702 10.26
Other securities 15,817 7.84
-------- -------
Total $201,748 100.00%
======== =======
SECURITIES PORTFOLIO COMPOSITION
(Dollars in thousands)
Held to Maturity Available for Sale
% of % of
December 31, 1996 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. Treasury
securities $ - -% $ 14,117 7.66%
U.S. government
agencies - - 61,332 33.34
Mortgage-backed
securities - - 75,017 40.78
Mutual funds - - 507 0.28
States and political
subdivisions 2,151 1.17 16,661 9.06
Other securities - - 14,181 7.71
------ ------- -------- -------
Total $2,151 1.17% $181,815 98.83%
====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION
(Dollars in thousands)
Total
% of
December 31, 1996 Amount Portfolio
-------------------
U.S. Treasury securities $ 14,117 7.66%
U.S. government agencies 61,332 33.34
Mortgage-backed securities 75,017 40.78
Mutual funds 507 0.28
States and political
subdivisions 18,812 10.23
Other securities 14,181 7.71
-------- -------
Total $183,966 100.00%
======== =======
SECURITIES PORTFOLIO MATURITIES
(Dollars in thousands)
After One But
Within One Year Within Five Years
--------------- -----------------
December 31, 1997 Amount Yield Amount Yield
------------------------------------
U.S. Treasury
securities $ 5,055 5.93% $ 8,287 6.32%
U.S. government
agencies 35,560 5.90 26,843 6.11
Mortgage-backed
securities 4,003 6.35 6,751 7.62
States and political
subdivisions (1) 619 6.57 5,095 9.94
Other securities 101 9.05 623 8.38
------- ------- ------ -------
Total $45,338 5.96% $47,599 6.80%
======= ======= ======= =======
SECURITIES PORTFOLIO MATURITIES
(Dollars in thousands)
After Five But
Within Ten Years After Ten Years
---------------- -----------------
Amount Yield Amount Yield
------------------------------------
U.S. Treasury
securities $ - -% $ - -%
U.S. government
agencies 1,940 3.44 17 10.25
Mortgage-backed
securities 20,688 7.06 55,573 6.60
States and political
subdivisions (1) 5,103 8.32 9,885 9.17
Other securities - - - -
------- ------- ------- -------
Total $27,731 7.04% $65,475 6.99%
======= ======= ======= =======
SECURITIES PORTFOLIO MATURITIES
(Dollars in thousands)
Total
Amount Yield
-------------------
U.S. Treasury securities $ 13,342 6.17%
U.S. government agencies 64,360 5.92
Mortgage-backed securities 87,015 6.78
States and political
subdivisions (1) 20,702 9.07
Other securities 724 8.47
-------- -------
Total 186,143 6.70%
=======
Mutual funds 512
Equity securities 15,093
--------
Total $201,748
========
(1) Rates on obligations of states and political subdivisions
have been adjusted to tax equivalent yields using a 34% income
tax rate.
DEPOSITS AND BORROWED FUNDS
Heartland has a relatively stable core deposit base drawn
primarily from within its market areas. Exclusive of WCB, total
average deposits increased $27,578,000 (5.14%) from the total
average deposits during 1996. This is an improvement over the
$22,818,000 (4.44%) increase experienced during 1996 and was
primarily attributable to strong growth at GSB and RCB. Average
noninterest bearing deposits increased $2,575,000 (5.70%),
exclusive of WCB, during 1997 and $1,738,000 (4.00%) during 1996.
Average interest bearing deposits increased $25,003,000 (5.09%),
exclusive of WCB, during 1997 and $21,080,000 (4.48%) during
1996. Much of the deposit growth experienced during 1996 was a
direct result of the success RCB experienced in its first full
year of operation. Heartland's other subsidiary banks experienced
only moderate growth driven by continued nationwide customer
dissatisfaction with deposit rates and the attractiveness of
alternative investment products such as mutual funds.
For each of the years ended December 31, 1997, 1996 and 1995,
respectively, the mix of individual account balances to total
deposits has remained very constant. The table below sets forth
the distribution of Heartland's average deposit account balances
and the average interest rates paid on each category of deposits
for the years indicated.
AVERAGE DEPOSITS
(Dollars in thousands)
For the year ended December 31, 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%
======== =======
AVERAGE DEPOSITS
(Dollars in thousands)
For the year ended December 31, 1996
Percent
Average of
Balance Deposits Rate
------------------------
Demand deposits $ 45,205 8.42% 0.00%
Savings accounts 214,401 39.95 3.49
Time deposits less than $100,000 239,300 44.59 5.68
Time deposits of $100,000 or more 37,806 7.04 5.64
-------- -------
Total deposits $536,712 100.00%
======== =======
AVERAGE DEPOSITS
(Dollars in thousands)
For the year ended December 31, 1995
Percent
Average of
Balance Deposits Rate
------------------------
Demand deposits $ 43,467 8.46% 0.00%
Savings accounts 206,353 40.15 3.56
Time deposits less than $100,000 233,983 45.53 5.57
Time deposits of $100,000 or more 30,091 5.86 5.51
-------- -------
Total deposits $513,894 100.00%
======== =======
The following table sets forth the amount and maturities of time
deposits of $100,000 or more at December 31, 1997.
Time Deposits $100,000 and Over
(Dollars in thousands)
December 31,
1997
------------
3 months or less $ 6,564
Over 3 months through 6 months 8,892
Over 6 months through 12 months 10,593
Over 12 months 12,836
-------
$38,885
=======
The Heartland banks own stock in the FHLB of Des Moines and of
Chicago, enabling them to borrow funds from their respective FHLB
for short- or long-term purposes under a variety of programs.
During 1997, Heartland used additional FHLB advances as loan
demand exceeded deposit growth. Total FHLB borrowings at
December 31, 1997 and 1996, were $64,400,000 and $51,900,000,
respectively.
Heartland also utilizes securities sold under agreements to
repurchase as a source of funds. DB&T and RCB provide repurchase
agreements to their customers as a cash management tool, sweeping
excess funds from demand deposit accounts into these agreements.
This source of funding does not increase Heartland's reserve
requirements, nor does it create an expense relating to FDIC
premiums on deposits. Although the aggregate balance of
repurchase agreements is subject to variation, the account
relationships represented by these balances are principally local
and have been maintained for relatively long periods of time.
On October 31, 1997, Heartland entered into a four year,
unsecured revolving credit agreement with an unaffiliated bank.
The total borrowings under this credit line were $3,500,000 at
December 31, 1997.
The following table reflects short-term borrowings which in the
aggregate have average balances during the period greater than
30% of stockholders equity at the end of the period.
SHORT-TERM BORROWINGS
(Dollars in thousands)
At or for the
Year Ended December 31,
1997 1996 1995
------------------------
Balance at end of period $96,239 $56,358 $23,241
Maximum month-end amount
outstanding 96,239 56,358 42,205
Average month-end amount
outstanding 73,170 42,025 25,965
Weighted average interest
rate at year-end 5.49% 5.75% 5.56%
Weighted average interest
rate for the year ended 5.32% 5.24% 5.71%
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 11.54% and 12.71%, respectively, on December
31, 1997, compared with 13.10% and 14.28% at December 31, 1996,
and 13.28% and 14.46% for December 31, 1995. At December 31,
1997, Heartland's leverage ratio, the ratio of Tier 1 capital to
total average assets, was 8.76% compared to 9.54% and 9.47% at
December 31, 1996, and 1995, respectively.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. Heartland completed the acquisition
of WCB on March 1, 1997. Cash payments remaining under the
agreement are $823,000 in 1998, $823,000 in 1999, $594,000 in
2000 and $584,000 in 2001.
During the fourth quarter of 1997, Heartland entered into an
agreement with a group of New Mexico business leaders to
establish a new bank in Albuquerque. Pending regulatory approval,
the new bank is expected to begin operations in the spring of
1998. Heartland's portion of the $15,000,000 initial capital
investment is $12,000,000, of which $1,200,000 has already been
advanced. Additional expenditures relating to expansion efforts
are not estimable at this time. Heartland intends to fund this
transaction through its revolving credit line.
Heartland's capital ratios are detailed in the table below.
RISK-BASED CAPITAL RATIOS(1)
(Dollars in thousands)
December 31,
1997 1996 1995
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------
Capital Ratios:
Tier 1 capital $ 71,713 11.54% $ 67,701 13.10% $ 60,780 13.28%
Tier 1 capital
minimum
requirement 24,854 4.00 20,667 4.00 18,302 4.00
-------- ------ -------- ------ -------- -----
- -
Excess $ 46,859 7.54% $ 47,034 9.10% $ 42,478 9.28%
======== ====== ======== ====== ======== ======
Total capital $ 78,995 12.71% $ 73,777 14.28% $ 66,165 14.46%
Total capital
minimum
requirement 49,707 8.00 41,334 8.00 36,603 8.00
-------- ------ -------- ------ -------- ------
Excess $ 29,288 4.71% $ 32,443 6.28% $ 29,562 6.46%
======== ====== ======== ====== ======== ======
Total risk-
adjusted
assets $621,338 $516,678 $457,539
======== ======== ========
(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)
(Dollars in thousands)
December 31,
1997 1996 1995
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------
Capital Ratios:
Tier 1 capital $ 71,713 8.76% $ 67,701 9.54% $ 60,780 9.47%
Tier 1 capital
minimum
requirement (2) 32,729 4.00 28,375 4.00 25,666 4.00
-------- ------ -------- ------ -------- ------
Excess $ 38,984 4.76% $ 39,326 5.54% $ 35,114 5.47%
======== ====== ======== ====== ======== ======
Average adjusted
assets $818,232 $709,387 $641,650
======== ======== ========
(1)The leverage ratio is defined as the ratio of Tier 1 capital
to average total assets.
(2)Management of Heartland has established a minimum target
leverage ratio of 4.00%. Based on Federal Reserve
guidelines, a bank holding company generally is required to
maintain a leverage ratio of 3.00% plus an additional cushion
of at least 100 basis points.
LIQUIDITY
Liquidity refers to Heartland's ability to maintain a cash flow
which is adequate to meet maturing obligations and existing
commitments, to withstand fluctuations in deposit levels, to fund
operations and to provide for customers' credit needs.
Heartland's usual and primary sources of funding have been
deposits, loan and mortgage-backed security principal repayments,
sales of loans, cash flow generated from operations and, more
recently, FHLB borrowings.
Heartland's short-term borrowing balances are dependent on
commercial cash management and smaller correspondent bank
relationships and, as such, will normally fluctuate. Heartland
believes these balances, on average, to be stable sources of
funds; however, it intends to rely on deposit growth and
additional FHLB borrowings in the future.
In the event of short-term liquidity needs, the Heartland banks
may purchase federal funds from each other or from correspondent
banks. This source is used from time to time. The Heartland banks
may also borrow money from the Federal Reserve Bank, but have not
done so during any period covered in this report. Finally, the
Heartland banks' FHLB memberships give them the ability to borrow
funds for short- or long-term purposes under a variety of
programs.
To meet general corporate commitments and provide the nonbanking
subsidiaries with working capital, Heartland may borrow under its
revolving credit agreement which provides for total borrowings
pursuant to the agreement of up to $20,000,000 at any one time.
The agreement contains specific covenants which, among other
things, limit dividend payments and restrict the sale of assets
by 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 Heartland's banking subsidiaries remain well
capitalized, as defined from time to time by the federal banking
regulators. At December 31, 1997, Heartland was in compliance
with the above covenants.
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 Funds Management
Committee. 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 1997 have changed when compared
to 1996.
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, 1997.
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, 1997.
Quantitative and Qualitative
Disclosures about Market Risk
Table of Market Risk-Sensitive Instruments
(Dollars in thousands)
December 31, 1997
MATURING IN: 1998 1999 2000 2001
------------------------------------
ASSETS
Federal funds sold $ 32,918 $ - $ - $ -
Time deposits in other
financial institutions 134 36 2 -
Securities 60,610 51,573 18,139 8,853
Loans and leases:
Fixed rate loans 130,305 67,407 50,447 23,187
Variable rate loans 70,038 36,088 28,623 14,834
-------- -------- -------- --------
Loans and leases, net 200,343 103,495 79,070 38,021
-------- -------- -------- --------
Total Market Risk-
Sensitive Assets $294,005 $155,104 $ 97,211 $ 46,874
======== ======== ======== ========
LIABILITIES
Savings $252,292 $ - $ - $ -
Time deposits
Fixed rate time
certificates less
than $100,000 129,294 64,623 40,086 18,130
Variable rate time
certificates less
than $100,000 7,010 281 - -
-------- -------- -------- --------
Time deposits less
than $100,000 136,304 64,904 40,086 18,130
Time deposits of
$100,000 or more 26,049 8,030 3,203 800
Federal funds purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings 96,239 - - -
Other borrowings:
Fixed rate borrowings - 15,634 11,905 584
Variable rate borrowings - - - 3,500
-------- -------- -------- --------
Other borrowings - 15,634 11,905 4,084
-------- -------- -------- --------
Total Market Risk-
Sensitive Liabilities $510,884 $ 88,568 $ 55,194 $ 23,014
======== ======== ======== ========
Average Estimated
Interest Fair
MATURING IN: 2002 Thereafter Total Rate Value
------------------------------------------
ASSETS
Federal funds sold $ - $ - $ 32,918 6.13% $ 32,918
Time deposits in
other financial
institutions - 22 194 7.84 194
Securities 1,949 60,624 201,748 6.97 201,868
Loans and leases:
Fixed rate loans 25,962 20,184 317,492 8.76 312,867
Variable rate
loans 10,231 79,100 238,914 8.42 245,648
-------- -------- -------- --------
Loans and leases,
net 36,193 99,284 556,406 558,515
-------- -------- -------- --------
Total Market Risk-
Sensitive Assets $ 38,142 $159,930 $791,266 $793,495
======== ======== ======== ========
LIABILITIES
Savings $ - $ - $252,292 3.42% $252,292
Time deposits
Fixed rate time
certificates less
than $100,000 11,819 162 264,114 5.77 264,543
Variable rate time
certificates less
than $100,000 - - 7,291 5.83 7,291
-------- -------- -------- --------
Time deposits less
than $100,000 11,819 162 271,405 271,834
Time deposits of
$100,000 or more 803 - 38,885 5.75 39,035
Federal funds purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings - - 96,239 5.49 96,239
Other borrowings:
Fixed rate
borrowings 5,000 4,400 37,523 6.20 37,788
Variable rate
borrowings 2,000 - 5,500 6.65 5,500
-------- -------- -------- --------
Other borrowings 7,000 4,400 43,023 43,288
-------- -------- -------- --------
Total Market Risk
Sensitive
Liabilities $ 19,622 $ 4,562 $701,844 $702,688
======== ======== ======== ========
EFFECTS OF INFLATION
Consolidated financial data included in this report has been
prepared in accordance with generally accepted accounting
principles. Presently, these principles require reporting of
financial position and operating results in terms of historical
dollars. Changes in the relative value of money due to inflation
or recession are generally not considered.
In management's opinion, changes in interest rates affect the
financial condition of a financial institution to a far greater
degree than changes in the inflation rate. While interest rates
are greatly influenced by changes in the inflation rate, they do
not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on
changes in the expected rate of inflation, as well as on changes
in monetary and fiscal policies. A financial institution's
ability to be relatively unaffected by changes in interest rates
is a good indicator of its capability to perform in today's
volatile economic environment. Heartland seeks to insulate itself
from interest rate volatility by ensuring that rate-sensitive
assets and rate-sensitive liabilities respond to changes in
interest rates in a similar time frame and to a similar degree.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollars in thousands, except per share data)
Notes 1997 1996
----- --------- ---------
ASSETS
Cash and due from banks 3 $ 24,267 $ 40,080
Federal funds sold 32,918 -
--------- ---------
Cash and cash equivalents 57,185 40,080
Time deposits in other
financial institutions 194 167
Securities: 4
Available for sale-at market
(cost of $193,805 for 1997
and $179,697 for 1996) 197,869 181,815
Held to maturity-at cost
(approximate market value
of $3,999 for 1997 and
$2,245 for 1996) 3,879 2,151
Loans and leases: 5
Held for sale 10,437 2,412
Held to maturity 545,969 481,673
Allowance for possible
loan and lease losses 6 (7,362) (6,191)
--------- ---------
Loans and leases, net 549,044 477,894
Premises, furniture and
equipment, net 7 18,346 16,715
Other real estate, net 774 532
Other assets 24,769 17,198
--------- ---------
TOTAL ASSETS $852,060 $736,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: 8
Demand $ 60,950 $ 55,482
Savings 252,292 224,317
Time 310,290 278,544
--------- ---------
Total deposits 623,532 558,343
Short-term borrowings 9 96,239 56,358
Accrued expenses and other
liabilities 11,494 9,086
Other borrowings 11 43,023 42,506
--------- ---------
TOTAL LIABILITIES 774,288 666,293
--------- ---------
STOCKHOLDERS' EQUITY: 13,14,16
Preferred stock
(par value $1 per
share; authorized
200,000 shares) - -
Common stock
(par value $1 per share;
authorized, 7,000,000
shares;issued, 4,853,626
shares at December 31,
1997, and December 31,
1996,) 4,854 4,854
Capital surplus 13,706 13,366
Retained earnings 58,914 52,864
Net unrealized gain on
securities available for sale 2,545 1,327
Treasury stock at cost
(106,251 and 118,066 shares
at December 31, 1997, and
December 31, 1996, respectively) (2,247) (2,152)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 77,772 70,259
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $852,060 $736,552
========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
Notes 1997 1996 1995
----- -------- -------- --------
INTEREST INCOME:
Interest and fees on
loans and leases 5 $46,919 $40,670 $38,968
Interest on securities:
Taxable 10,393 8,392 7,552
Nontaxable 1,170 2,051 1,763
Interest on trading
account securities - - 10
Interest on federal funds sold 681 610 740
Interest on interest bearing
deposits in other financial
institutions 98 163 116
-------- -------- --------
TOTAL INTEREST INCOME 59,261 51,886 49,149
-------- ------- --------
INTEREST EXPENSE:
Interest on deposits 8 25,765 23,190 22,029
Interest on short-term
borrowings 3,740 1,943 1,236
Interest on other borrowings 2,262 2,511 2,264
-------- -------- --------
TOTAL INTEREST EXPENSE 31,767 27,644 25,529
-------- -------- --------
NET INTEREST INCOME 27,494 24,242 23,620
Provision for possible
loan and lease losses 6 1,279 1,408 820
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
AND LEASE LOSSES 26,215 22,834 22,800
-------- -------- --------
OTHER INCOME:
Service charges and fees 2,723 2,437 2,106
Trust fees 2,009 1,810 1,472
Brokerage commissions 324 212 110
Insurance commissions 563 650 611
Securities gains, net 1,446 1,889 413
Rental income on operating leases 811 - -
Gains on sale of loans 373 131 73
Other noninterest income 316 235 196
-------- -------- --------
TOTAL OTHER INCOME 8,565 7,364 4,981
-------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 12 13,070 11,035 9,730
Occupancy 13 1,354 1,268 1,059
Furniture and equipment 1,880 1,336 1,315
Outside services 1,439 1,155 1,164
FDIC deposit insurance
assessment 116 746 681
Advertising 826 996 696
Depreciation on equipment
under operating leases 584 - -
Other noninterest expenses 3,658 2,971 2,678
------- ------- -------
TOTAL OTHER EXPENSES 22,927 19,507 17,323
------- ------- -------
Income before income taxes 11,853 10,691 10,458
Income taxes 10 3,338 2,685 2,884
------- ------- -------
NET INCOME $ 8,515 $ 8,006 $ 7,574
======= ======= =======
EARNINGS PER COMMON SHARE-BASIC $1.80 $1.70 $1.58
======= ======= =======
EARNINGS PER COMMON SHARE-
DILUTED 1 $1.78 $1.69 $1.58
======= ======== =======
CASH DIVIDENDS DECLARED PER
COMMON SHARE $0.52 $0.40 $0.30
======= ======= =======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------ ------- --------
Balance at January 1, 1995 $2,427 $13,089 $43,035
Net Income - 1995 7,574
Cash dividends declared:
Common, $.30 per share (1,438)
Purchase of 85,138 shares of
common stock
Sale of 8,065 shares of
common stock 1
Net unrealized gain on
securities available for
sale (net of tax of $2,415)
------- -------- --------
Balance at December 31, 1995 2,427 13,090 49,171
Net Income - 1996 8,006
Cash dividends declared:
Common, $.40 per share (1,886)
Two-for-one stock split 2,427 (2,427)
Purchase of 32,446 shares
of common stock
Sale of 64,943 shares of common
stock 276
Net unrealized loss on securities
available for sale (net of tax
benefit of $769)
------- -------- --------
BALANCE AT DECEMBER 31, 1996 4,854 13,366 52,864
Net Income - 1997 8,515
Cash dividends declared:
Common, $.52 per share (2,465)
Purchase of 32,835 shares
of common stock
Sale of 44,650 shares of common
stock 340
Net unrealized gain on
securities available for sale
(net of tax of $724)
------- -------- --------
BALANCE AT DECEMBER 31, 1997 $ 4,854 $ 13,706 $ 58,914
======= ======== ========
Net
Unrealized
Gain (Loss)
on Securities
Available Treasury
For Sale Stock Total
------------- -------- -----
Balance at January 1, 1995 $ (1,439) $ (182) $ 56,930
Net Income - 1995 7,574
Cash dividends declared:
Common, $.30 per share (1,438)
Purchase of 85,138 shares of
common stock (2,855) (2,855)
Sale of 8,065 shares of
common stock 235 236
Net unrealized gain on
securities available for
sale (net of tax of $2,415) 4,059 4,059
-------- -------- ---------
Balance at December 31, 1995 2,620 (2,802) 64,506
Net Income - 1996 8,006
Cash dividends declared:
Common, $.40 per share (1,886)
Two-for-one stock split -
Purchase of 32,446 shares
of common stock (759) (759)
Sale of 64,943 shares of
common stock 1,409 1,685
Net unrealized loss on
securities available
for sale (net of tax
benefit of $769) (1,293) (1,293)
--------- -------- ---------
BALANCE AT DECEMBER 31, 1996 1,327 (2,152) 70,259
Net Income - 1997 8,515
Cash dividends declared:
Common, $.52 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
Net unrealized gain on
securities available for
sale (net of tax
of $724) 1,218 1,218
--------- -------- ---------
BALANCE AT DECEMBER 31, 1997 $ 2,545 $(2,247) $ 77,772
========= ======== =========
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Cash Flows from Operating
Activities:
Net income $ 8,515 $ 8,006 $ 7,574
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,635 1,341 1,223
Provision for possible loan
and lease losses 1,279 1,408 820
Provision for income taxes 114 (393) 141
Net accretion of discount
on securities (292) (769) (1,014)
Securities gains, net (1,446) (1,889) (410)
Market value adjustment on
trading account securities - - (3)
Proceeds on liquidation of
trading account - - 2,578
Loans originated for sale (44,035) (23,408) (13,601)
Proceeds on sales of loans 49,563 27,672 17,678
Net gain on sales of loans (373) (131) (74)
Increase in accrued
interest receivable (354) (530) (554)
Increase in accrued interest
payable 449 186 570
Other, net (2,265) (1,196) (79)
------- ------- -------
Net cash provided by operating
activities 13,790 10,297 14,849
------- ------- -------
Cash Flows from Investing
Activities:
Purchase of time deposits (33) (122) (2)
Proceeds on maturities of time
deposits 201 100 6
Proceeds from the sale of
securities available for sale 20,053 22,747 32,406
Proceeds from the sale of
mortgage-backed securities
available for sale 3,980 1,621 8,414
Proceeds from the maturity of
and principal paydowns on
securities held to maturity 2,732 717 12,135
Proceeds from the maturity of
and principal paydowns on
securities available for sale 13,647 36,384 12,644
Proceeds from the maturity of
and principal paydowns on
mortgage-backed securities
held to maturity - - 868
Proceeds from the maturity of
and principal paydowns on
mortgage-backed securities
available for sale 13,175 11,767 8,380
Purchase of securities
held to maturity - (500) -
Purchase of securities
available for sale (24,485) (58,841) (55,659)
Purchase of mortgage-backed
securities available for sale (30,612) (49,170) (9,701)
Purchase of interest in low-
income housing project - (2,865) (3,142)
Net increase in loans and leases (55,546) (33,384)
(37,269)
Net increase in assets under
operating leases (3,259) - -
Capital expenditures (2,522) (5,589) (2,209)
Net cash and cash equivalents
(paid)/received in acquisition
of subsidiaries 670 (43) -
Proceeds on sale of fixed assets 1 2
61
Proceeds on sale of repossessed
assets 7 208 197
-------- -------- --------
Net cash used by investing
activities (61,991) (76,968) (32,871)
Cash Flows from Financing
Activities:
Net increase in demand deposits
and savings accounts 17,137 19,663 1,618
Net increase in time deposit
accounts 15,182 4,093 19,730
Net increase in other
borrowings 23,886 4,500 21,838
Net increase (decrease) in
short-term borrowings 11,483 25,039 (1,036)
Purchase of treasury stock (865) (759) (2,855)
Proceeds from sale of
treasury stock 948 1,296 236
Dividends (2,465) (1,886) (2,360)
-------- -------- --------
Net cash provided by
financing activities 65,306 51,946 37,171
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 17,105 (14,725) 19,149
Cash and cash equivalents at
beginning of year 40,080 54,805 35,656
-------- -------- --------
Cash and cash equivalents at
end of period $57,185 $40,080 $54,805
======== ======== ========
Supplemental disclosures:
Cash paid for income/franchise
taxes $ 3,090 $ 3,065 $ 1,754
Cash paid for interest $31,318 $27,458 $24,959
Securities contributed to
public charitable trust fund - $ 220 -
Other borrowings transferred
to short-term borrowings $25,500 $ 8,000 -
Securities transferred from
held to maturity to available
for sale - - $23,204
Mortgage-backed securities
transferred from held to
maturity to available for sale - - $ 4,449
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 and Dane
County in Wisconsin, serving communities in and around those
counties. The principal services of Heartland, through its
subsidiaries, are FDIC-insured deposit accounts and related
services, and loans to businesses and individuals. The loans
consist primarily of commercial and commercial real estate and
residential real estate.
Principles of Presentation-The consolidated financial statements
include the accounts of Heartland and its wholly-owned
subsidiaries: Dubuque Bank and Trust Company ("DB&T"), DB&T
Insurance, Inc., DB&T Community Development Corp., Galena State
Bank and Trust Company ("GSB"), Riverside Community Bank ("RCB"),
Wisconsin Community Bank ("WCB", previously Cottage Grove State
Bank), First Community Bank, FSB ("FCB"), Citizens Finance
Co.("Citizens"), ULTEA, Inc. ("ULTEA"), DBT Investment
Corporation and Keokuk Bancshares, Inc. 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-All securities consist of debt or marketable equity
securities.
Trading Securities-Trading securities represent those which
Heartland intends to actively trade and are stated at fair value
with changes in market value reflected in other income.
Securities Available for Sale-Available for sale securities
consist of those securities not classified as held to maturity or
trading, which management intends to hold for indefinite periods
of time or that may be sold in response to changes in interest
rates, prepayments or other similar factors. Such securities are
stated at fair value with any unrealized gain or loss, net of
applicable income tax, reported as a separate component of
stockholders' equity. Security premiums and discounts are
amortized/accreted using the interest method over the period from
the purchase date to the maturity or call date of the related
security. Gains or losses from the sale of available for sale
securities are determined based upon the adjusted cost of the
specific security sold.
Securities Held to Maturity-Securities which Heartland has the
ability and positive intent to hold to maturity are classified as
held to maturity. Such securities are stated at amortized cost,
adjusted for premiums and discounts that are amortized/accreted
using the interest method over the period from the purchase date
to the maturity date of the related security.
Loans and Leases-Interest on loans is accrued and credited to
income based primarily on the principal balance outstanding.
Income from leases is recorded in decreasing amounts over the
term of the contract resulting in a level rate of return on the
lease investment. The policy of Heartland is to discontinue the
accrual of interest income on any loan or lease when, in the
opinion of management, there is a reasonable doubt as to the
timely collection of the interest and principal. When interest
accruals are deemed uncollectible, interest credited to income in
the current year is reversed and interest accrued in prior years
is charged to the allowance for possible loan and lease losses.
Nonaccrual loans and leases are returned to an accrual status
when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt
as to the timely payment of interest and principal.
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
servicing retained, and gains and losses are recognized based on
the difference between sales proceeds and the carrying value of
the loan.
Mortgage loan servicing rights retained on loans sold to others,
which are not material to the financial position or results of
operation, are not included in the accompanying consolidated
financial statements. The unpaid principal balances of these
loans as of December 31, 1997 and 1996, were $109,203 and
$84,515, respectively. Custodial escrow balances maintained in
connection with the loan servicing were approximately $667 and
$511 as of December 31, 1997 and 1996, respectively.
Allowance for Possible Loan and Lease Losses-The allowance for
possible loan and lease losses is maintained at a level estimated
by management to provide for known and inherent risks in the loan
and lease portfolios. The allowance is based upon a continuing
review of past loan and lease loss experience, current economic
conditions, volume growth, the underlying collateral value of the
loans and leases and other relevant factors. Loans and leases
which are deemed uncollectible are charged off and deducted from
the allowance. Provisions for possible loan and lease losses and
recoveries on previously charged-off loans and leases are added
to the allowance.
Premises, Furniture and Equipment-Premises, furniture and
equipment are stated at cost less accumulated depreciation. The
provision for depreciation of premises, furniture and equipment
is determined by straight-line and accelerated methods over the
estimated useful lives of 18 to 39 years for buildings, 15 years
for land improvements and 3 to 7 years for furniture and
equipment.
Other Real Estate-Other real estate represents property acquired
through foreclosures and settlements of loans. Property acquired
is carried at the lower of the principal amount of the loan
outstanding at the time of acquisition, plus any acquisition
costs, or the estimated fair value of the property, less cost to
dispose. The excess, if any, of such costs at the time acquired
over the fair value is charged against the allowance for possible
loan and lease losses. Subsequent 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.
Goodwill-Goodwill represents the excess of the purchase price of
acquired subsidiaries' net assets over their fair value. Goodwill
is amortized over periods from 15 to 25 years on the straight-
line basis. On a periodic basis, Heartland reviews goodwill for
events or circumstances that may indicate a change in the
recoverability of the underlying basis.
Income Taxes-Heartland and its subsidiaries file a consolidated
federal income tax return. For state tax purposes, DB&T, GSB,
FCB, WCB and RCB ("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 - Basic earning per share, pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings Per Share" ("SFAS No. 128"), is determined using net
income and weighted average common shares outstanding. Diluted
earnings per share, as defined by SFAS No. 128, 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
years ended December 31, 1997, 1996, and 1995 are shown in the
table below.
1997 1996 1995
------ ------ -------
Net income $8,515 $8,006 $7,574
====== ====== ======
Weighted average common shares
outstanding 4,738 4,715 4,805
Assumed incremental common shares
issued upon exercise of stock
options 50 20 3
------ ------ ------
Weighted average common shares
for diluted earnings per share 4,788 4,735 4,808
====== ====== ======
Cash Flows-For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
Effect of New Financial Accounting Standards - SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125") was effective
for Heartland for transactions occurring after December 31, 1996,
and provided standards for accounting recognition or
derecognition of assets and liabilities. The adoption of SFAS
No. 125 did not have a material effect on Heartland.
SFAS No. 130 "Reporting Comprehensive Income" will be effective
for Heartland for the year beginning January 1, 1998, and
establishes the standards for the reporting and display of
comprehensive income in the financial statements. Comprehensive
income represents net earnings and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain
or loss on available for sale securities.
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 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 three or four years, at their discretion,
bearing rates of 7.00% and 7.50%, respectively. The amount paid
in excess of the equity of WCB allocated to securities and office
property and equipment was $138 and $672, respectively. The
amounts are being amortized over the remaining lives of the
assets using the methods and lives as described in note one. The
remaining purchase price paid in excess of the fair value of net
assets acquired was $2,465 and is being amortized using the
straight-line method over 25 years. 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.
Pro forma unaudited operating results, giving effect to the WCB
acquisition as if it had occurred at the beginning of the years
ended December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Interest income $59,749 $54,758
Interest expense 32,037 29,214
Provision for loan losses 1,334 1,492
Noninterest income 8,606 7,623
Noninterest expense 23,075 20,527
------- -------
Income before income taxes 11,909 11,148
Income taxes 3,374 2,913
------- -------
Net income $ 8,535 $ 8,235
======= =======
Earnings per common
share-basic $ 1.80 $ 1.75
======= =======
On December 24, 1996, Heartland acquired all of the assets and
assumed certain liabilities of ULTEA, LLC of Madison, Wisconsin,
in exchange for 16,160 shares of Heartland common stock. ULTEA
had total assets of $1,916 at December 31, 1996. The excess of
the purchase price over the fair value of net assets acquired was
$293. The acquisition was accounted for as a purchase
transaction and, accordingly, the operations of ULTEA were
included in the consolidated results of operations of Heartland
beginning December 25, 1996. The acquisition did not have a
material effect on the results of operations for the year of
acquisition on either an actual or pro forma basis.
During the fourth quarter of 1997, Heartland entered into an
agreement with a group of New Mexico business leaders to
establish a new bank in Albuquerque. Pending regulatory approval,
the new bank will begin operations in the spring of 1998.
Heartland's portion of the $15,000 initial capital investment is
$12,000, of which $1,200 has already been advanced.
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, 1997 and 1996, were $1,420
and $4,470 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, 1997 and 1996, are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
1997
Securities held to
maturity:
U. S. government
corporations and
agencies $ 598 $ 2 $ - $ 600
Mortgage-backed
securities 325 - - 325
Obligations of
states and political
subdivisions 2,956 119 (1) 3,074
-------- -------- --------- --------
Total $ 3,879 $ 121 $ (1) $ 3,999
======== ======== ========= ========
Securities available
for sale:
U.S. Treasury securities $ 13,232 $ 110 $ - $ 13,342
U.S. government
corporations and
agencies 63,649 177 (64) 63,762
Mortgage-backed
securities 86,010 813 (133) 86,690
Obligations of states
and political
subdivisions 16,741 1,054 (49) 17,746
Corporate debt
securities 700 24 - 724
-------- -------- --------- --------
Total debt
securities 180,332 2,178 (246) 182,264
Mutual funds 548 - (36) 512
Equity securities 12,925 2,199 (31) 15,093
-------- -------- --------- --------
Total $193,805 $ 4,377 $ (313) $197,869
======== ======== ========= ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
1996
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,151 $ 94 $ - $ 2,245
-------- -------- -------- --------
Total $ 2,151 $ 94 $ - $ 2,245
======== ======== ======== ========
Securities available
for sale:
U.S. Treasury securities $ 14,016 $ 101 $ - $ 14,117
U.S. government
corporations and
agencies 61,431 235 (334) 61,332
Mortgage-backed
securities 74,522 754 (259) 75,017
Obligations of states
and political
subdivisions 15,846 903 (88) 16,661
Corporate debt
securities 1,300 41 - 1,341
-------- -------- --------- --------
Total debt
securities 167,115 2,034 (681) 168,468
Mutual funds 548 - (41) 507
Equity securities 12,034 859 (53) 12,840
-------- -------- --------- --------
Total $179,697 $ 2,893 $ (775) $181,815
======== ======== ========= ========
The amortized cost and estimated fair value of debt securities
held to maturity and available for sale at December 31, 1997, by
contractual maturity, are as follows. Expected maturities will
differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Securities held to maturity:
Due in 1 year or less $ 350 $ 350
Due in 1 to 5 years 1,810 1,832
Due in 5 to 10 years 1,374 1,441
Due after 10 years 345 376
-------- --------
Total $ 3,879 $ 3,999
======== ========
Securities available for sale:
Due in 1 year or less $ 44,928 $ 44,988
Due in 1 to 5 years 45,150 45,789
Due in 5 to 10 years 26,020 26,357
Due after 10 years 64,234 65,130
-------- --------
Total $180,332 $182,264
======== ========
As of December 31, 1997, securities with a market value of
$113,126 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, 1997, 1996 and 1995, are summarized as
follows:
1997 1996 1995
-------- -------- --------
Securities sold:
Proceeds from sales $24,033 $24,368 $40,820
Gross security gains 1,526 2,240 571
Gross security losses 80 351 158
FIVE
LOANS AND LEASES
Loans and leases as of December 31, 1997 and 1996, were as
follows:
1997 1996
------ ------
Loans:
Commercial and commercial
real estate $242,868 $206,523
Residential mortgage 175,268 166,999
Agricultural and agricultural
real estate 69,302 57,526
Consumer 64,223 48,361
--------- ---------
Loans, gross 551,661 479,409
Unearned discount (2,077) (1,962)
Deferred loan fees (349) (404)
--------- ---------
Loans, net 549,235 477,043
--------- ---------
Direct financing leases:
Gross rents receivable 6,240 5,603
Estimated residual value 2,097 2,319
Unearned income (1,166) (880)
--------- ---------
Direct financing leases, net 7,171 7,042
--------- --------
Allowance for possible loan and
lease losses (7,362) (6,191)
--------- ---------
Loans and leases, net $549,044 $477,894
========= =========
Direct financing leases receivable are generally short-term
equipment leases. Future minimum lease payments as of December
31, 1997, are as follows: 1998 $2,563; 1999, $2,073; 2000,
$1,383; 2001, $1,125; 2002, $908 and thereafter, $285.
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 $1,819 and
$1,697 at December 31, 1997 and 1996, respectively. The allowance
for loan and lease losses related to these nonaccrual loans was
$208 and $198, respectively. Nonaccrual loans of $1,163 and
$1,210 were not subject to a related allowance for loan and lease
losses at December 31, 1997 and 1996, 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, 1997, 1996 and 1995 were $1,585, $1,212 and
$758, respectively. For the years ended December 31, 1997, 1996
and 1995, interest income which would have been recorded under
the original terms of these loans and leases amounted to
approximately $87, $108 and $54, respectively and interest income
actually recorded amounted to approximately $9, $7 and $14
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, 1997, were as follows:
1997
--------
Balance at beginning of year $14,408
New loans 9,190
Repayments (8,183)
--------
Balance at end of year $15,415
========
SIX
ALLOWANCE FOR POSSIBLE
LOAN AND LEASE LOSSES
Changes in the allowance for possible loan and lease losses for
the years ended December 31, 1997, 1996 and 1995, were as
follows:
1997 1996 1995
------ ------ -------
Balance at beginning of year $6,191 $5,580 $5,124
Provision for possible loan and
lease losses 1,279 1,408 820
Recoveries on loans and leases
previously charged off 145 129 131
Loans and leases charged off (584) (926) (495)
Additions related to acquisitions 331 - -
-------- ------- -------
Balance at end of year $7,362 $6,191 $5,580
======== ======= =======
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of December 31, 1997 and
1996, were as follows:
1997 1996
------- -------
Land and land improvements $ 2,107 $ 1,774
Buildings and building improvements 15,366 13,953
Furniture and equipment 12,064 10,034
------- -------
Total 29,537 25,761
Less accumulated depreciation (11,191) (9,046)
------- -------
Premises, furniture and equipment, net $18,346 $16,715
======= =======
Depreciation expense on premises, furniture and equipment was
$1,786 for 1997, $1,221 for 1996 and $1,100 for 1995.
EIGHT
DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of one hundred thousand dollars or more as of
December 31, 1997 and 1996, were $38,885 and $36,087,
respectively. At December 31, 1997, the scheduled maturities of
time certificates of deposit were as follows:
1997
---------
1998 $162,353
1999 72,934
2000 43,289
2001 18,930
2002 thereafter 12,784
--------
Total $310,290
========
Interest expense on deposits for the years ended December 31,
1997, 1996 and 1995, was as follows:
1997 1996 1995
------ ------ ------
Savings and insured money
market accounts $ 8,317 $ 7,474 $ 7,338
Time certificates of deposit in
denominations of $100 or more 1,961 2,131 1,658
Other time deposits 15,487 13,585 13,033
------- ------- -------
Interest expense on deposits $25,765 $23,190 $22,029
======= ======= =======
NINE
SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 1997 and 1996, were as
follows:
1997 1996
------- -------
Securities sold under
agreements to repurchase $45,328 $18,185
Federal funds purchased 6,550 23,450
Federal Home Loan Bank ("FHLB")
advances 27,500 10,000
U.S. Treasury demand note 15,728 4,645
Notes payable on leased assets 310 78
Contracts payable to previous
stockholders of WCB for
acquisition 823 -
------- -------
Total $96,239 $56,358
======= =======
See Note 11 related to collateral pledged for FHLB advances.
All repurchase agreements as of December 31, 1997 and 1996, were
due within six months.
Average and maximum balances and rates on aggregate short-term
borrowings outstanding during the years ended December 31, 1997,
1996 and 1995, were as follows:
1997 1996 1995
------- ------- -------
Maximum month-end balance $96,239 $56,358 $42,205
Average month-end balance 73,170 42,025 25,965
Weighted average interest
rate for the year 5.32% 5.24% 5.71%
Weighted average interest
rate at year-end 5.49 5.75 5.56
TEN
INCOME TAXES
Income taxes for the years ended December 31, 1997, 1996 and
1995, were as follows:
Current Deferred Total
-------------------------
1997:
Federal $2,977 $ (47) $2,930
State 428 (20) 408
------ ------ ------
Total $3,405 $ (67) $3,338
====== ====== ======
1996:
Federal $2,291 $ (42) $2,249
State 500 (64) 436
------ ------ ------
Total $2,791 $ (106) $2,685
====== ====== ======
1995:
Federal $2,258 $ 243 $2,501
State 347 36 383
------ ------ ------
Total $2,605 $ 279 $2,884
====== ====== ======
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, 1997, and 1996, were as follows:
1997 1996
------ ------
Deferred tax assets:
Allowance for possible loan
and lease losses $2,710 $ 2,385
Loan origination fees - 52
Deferred compensation 240 246
Bonus payable - 24
Net operating loss 225 175
------- --------
Gross deferred tax assets $3,175 $ 2,882
------- --------
Deferred tax liabilities:
Unrealized gain on securities
available for sale $(1,519) $ (790)
Fixed assets (1,440) (1,019)
Leases (1,360) (1,418)
Tax bad debt reserves (830) (790)
Securities (145) (124)
Prepaid expenses (120) (95)
Discount accretion (35) (13)
-------- --------
Gross deferred tax liabilities $(5,449) $(4,249)
-------- --------
Net deferred tax (liability) $(2,274) $(1,367)
======== ========
The actual income taxes differ from the expected amounts
(computed by applying the U.S. federal corporate tax rate of 35%
for 1997, 1996 and 1995, to income before income taxes) as
follows:
1997 1996 1995
--------------------------
Computed "expected" amount $4,149 $3,742 $3,660
Increase (decrease) resulting from:
Nontaxable interest income (510) (560) (658)
State income taxes, net of federal
tax benefit 260 280 249
Appreciated property contributed - (230) -
Graduated income tax rates (100) (110) (105)
Tax credits (440) (440) (200)
Other (21) 3 (62)
------ ------ -------
Income taxes $3,338 $2,685 $2,884
====== ====== =======
Effective tax rates 28.2% 25.1% 27.6%
Heartland has investments in certain low-income housing projects
totaling $6,028 and $5,993 as of December 31, 1997 and 1996,
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, 1997 and 1996, were
as follows:
1997 1996
------- -------
Advances from the FHLB;
weighted average maturity dates at
December 31, 1997 and 1996, were
August, 2001 and November, 2000,
respectively; and weighted average
interest rates were 6.06% and 5.89%,
respectively $36,900 $41,900
Notes payable on leased assets with
interest rates varying from 8.25% to
9.75% 622 606
Revolving credit line 3,500 -
Contracts payable to previous stock-
holders of WCB for acquisition due
in annual payments over three-or
four-year schedules at interest rates
of 7.00% to 7.50% through March, 2001. 2,001 -
------- ------
Total $43,023 $42,506
======= =======
DB&T, GSB and RCB 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 $6,431 and $5,567 at December
31, 1997, and December 31, 1996, respectively. Additional
collateral is provided by the Banks' one-to-four unit residential
mortgages totaling $142,777 at December 31, 1997, and $156,775 at
December 31, 1996.
On October 31, 1997, Heartland entered into a four-year,
unsecured revolving credit line with an unaffiliated bank, which
provides for variable-rate borrowings of up to $20,000. Under the
terms of this agreement, Heartland must maintain a minimum return
on average assets, maximum nonperforming assets to total loans
ratio, maximum funded debt to total equity capital ratio and each
of Heartland's banking subsidiaries must remain well capitalized.
Future payments at December 31, 1997, for all other borrowings
were as follows:
1999 $ 15,634
2000 11,905
2001 4,084
2002 7,000
Thereafter 4,400
--------
Total $ 43,023
========
TWELVE
EMPLOYEE BENEFIT PLANS
The Banks sponsor retirement plans covering substantially all
employees. Contributions to the plans are subject to approval by
the Boards of Directors of the Banks, which fund and record as an
expense all approved contributions. Costs charged to operating
expenses were $418 for 1997, $382 for 1996 and $335 for 1995.
Heartland also has a non-contributory, defined contribution
pension plan covering substantially all employees of the Banks.
Annual contributions are based upon 5% of qualified compensation
as defined in the plan. Costs charged to operating expense were
$418 for 1997, $382 for 1996 and $335 for 1995. The Banks also
have employee savings plans covering substantially all employees
of the Banks. Under the employee savings plans, the Banks make
matching contributions of up to 2% of the participants' wages.
Costs charged to operating expenses were $150 for 1997, $140 for
1996 and $124 for 1995.
THIRTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
Heartland leases certain land and facilities under operating
leases. Minimum future rental commitments at December 31, 1997,
for all non-cancelable leases were as follows:
1998 $208
1999 192
2000 53
2001 36
2002 22
Thereafter 112
----
Total $623
====
Rental expense for premises and equipment leased under operating
leases was $78 for 1997, $128 for 1996 and $59 for 1995.
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, 1997 and 1996, commitments to extend credit
aggregated $140,677 and $103,168 and standby letters of credit
aggregated $5,267 and $7,750, respectively. Heartland does not
anticipate any material loss as a result of the commitments and
contingent liabilities.
FOURTEEN
STOCK PLANS
In 1991, Heartland adopted a stock purchase plan which provides
executive officers of Heartland and the Banks the opportunity to
purchase up to a cumulative total of 200,000 common shares of
Heartland stock. Under this plan, Heartland may issue treasury
shares at a price equal to the price paid when acquired as
treasury shares. Cumulative shares sold through December 31,
1997 and 1996, under the plan were 199,900 and 172,366,
respectively. Total compensation expense associated with this
plan was $267 and $42 for 1997 and 1996, respectively. No
compensation expense was recognized for issuances prior to 1996,
as the issuance price was equal to market. A summary of the
activity in the executive restricted stock purchase plan for the
years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
------ ------ ------
Granted 27,634 69,538 15,350
Exercised 27,534 41,904 15,350
Forfeited 100 27,634 -
Average Offering Price $16.20 $16.20 $14.59
Heartland's Stock Option Plan ("Plan") is administered by the
Compensation Committee ("Committee") of the Board of Directors
whose members determine to whom options will be granted and the
terms of each option. Under the Plan, 600,000 common shares have
been reserved for issuance. Directors and key policy-making
employees are eligible for participation in the Plan. Options may
be granted that are either intended to be "incentive stock
options" as defined under Section 422 of the Internal Revenue
Code or not intended to be incentive stock options ("non-
qualified stock options"). The exercise price of stock options
granted will be established by the Committee but may not be less
than the fair market value of the shares on the date that the
option is granted. Each option granted is exercisable in full at
any time or from time to time, subject to vesting provisions, as
determined by the Committee and as provided in the option
agreement, but such time may not exceed ten years from the grant
date. At December 31, 1997 and 1996, respectively, there were
314,003 and 380,753 shares available for issuance under the Plan.
Under the Plan, stock appreciation rights ("SARS") may also be
granted alone or in tandem with or with reference to a related
stock option, in which event the grantee, at the exercise date,
has the option to exercise the option or the SARS, but not both.
SARS entitle the holder to receive in cash or stock, as
determined by the Committee, an amount per share equal to the
excess of the fair market value of the stock on the date of
exercise over the fair value at the date the SARS or related
options were granted. SARS may be exercisable for up to ten years
after the date of grant. No SARS have been granted under the
Plan.
A summary of the status of the Plan as of December 31, 1997, 1996
and 1995, and changes during the years ended follows:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------ -------- ------ -------- ------ --------
Outstanding
at beginning
of year 196 $17 124 $16 - $ -
Granted 73 24 111 19 124 16
Exercised (2) 26 (23) 21 - -
Forfeited (6) 26 (16) 22 - -
---- ---- --- ---
Outstanding at
end of year 261 $18 196 $17 124 $16
==== === ===
Options
exercisable
at end of year 3 $24 3 $24 -
Weighted-average
fair value of
options
granted during
the year $7.66 $4.13 $6.60
As of December 31, 1997 and 1996, options outstanding had
exercise prices ranging from $16.00 to $24.00 per share and a
weighted-average remaining contractual life of 8.00 and 8.62
years, respectively.
The fair value of stock options granted was determined utilizing
the Black Scholes Valuation model. Significant assumptions
include:
1997 1996 1995
------ ------ ------
Risk-free interest rate 6.30% 5.68% 6.59%
Expected option life 10 Years 10 Years 10 Years
Expected volatility 24.27% 28.62% 28.62%
Expected dividends 2.17% 2.29% 1.88%
Heartland applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost for its stock options has
been recognized in the financial statements. Had Heartland
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), Heartland's net
income would have been reduced to the pro forma amounts indicated
below:
1997 1996 1995
---- ---- ----
Net income as reported $8,515 $8,006 $7,574
Pro forma 8,317 7,853 7,514
Earnings per share-basic
as reported $1.80 $1.70 $1.58
Pro forma 1.76 1.67 1.56
Earnings per share-diluted
as reported $1.78 $1.69 $1.58
Pro forma 1.74 1.66 1.56
Pro forma net income reflects only options granted in 1997, 1996
and 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation
is reflected over the options' vesting period, and compensation
cost for options granted prior to January 1, 1995, is not
considered.
In 1996, Heartland adopted the Heartland Employee Stock Purchase
Plan ("ESPP"), which permits all eligible employees to purchase
shares of Heartland common stock at a price of not less than 85%
of the fair market value on the determination date (as determined
by the Committee). A maximum of 200,000 shares is available for
sale under the ESPP. For the years ended December 31, 1997 and
1996, Heartland approved a price of 100% of fair market value at
December 31, 1996 and July 1, 1996, respectively. At December
31, 1997 and 1996, respectively, 9,573 and 6,265 shares were
purchased under the ESPP at no charge to Heartland's earnings.
During each of the years ended December 31, 1997, 1996 and 1995,
Heartland acquired shares for use in the executive stock purchase
plan, the Plan and the ESPP. Shares acquired totaled 32,835,
37,309 and 85,138 for 1997, 1996 and 1995, respectively.
FIFTEEN
FAIR VALUE OF FINANCIAL INSTRUMENTS
Following are disclosures of the estimated fair value of
Heartland's financial instruments. The estimated fair value
amounts have been determined using available market information
and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
Heartland could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
December 31, December 31,
1997 1996
-------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------
Financial Assets:
Cash and cash equivalents $ 57,185 $ 57,185 $ 40,080 $ 40,080
Time deposits in other
banks 194 194 167 167
Securities available for
sale 197,869 197,869 181,815 181,815
Securities held to
maturity 3,879 3,999 2,151 2,245
Loans and leases, net of
unearned 556,406 558,515 484,085 484,828
Financial Liabilities:
Demand deposits $ 60,950 $ 60,950 $ 55,482 $ 55,482
Savings deposits 252,292 252,292 224,317 224,317
Time deposits 310,290 310,869 278,544 280,353
Short-term borrowings 96,239 96,239 56,358 56,368
Other borrowings 43,023 43,288 42,506 42,420
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, 1997 and 1996,
that the Banks met all capital adequacy requirements to which
they were subject.
As of December 31, 1997, 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, 1997
Total Capital (to Risk-
Weighted Assets)
Consolidated $78,995 12.71% $49,707 >8.0% N/A
DB&T 43,180 10.92 31,629 >8.0 $39,537 >10.0%
GSB 9,526 13.09 5,821 >8.0 7,276 >10.0
FCB 9,068 11.05 6,563 >8.0 8,204 >10.0
RCB 3,710 12.04 2,465 >8.0 3,081 >10.0
WCB 4,855 18.32 2,120 >8.0 2,650 >10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $71,713 11.54% $24,854 >4.0% N/A
DB&T 38,754 9.80 15,815 >4.0 $23,722 > 6.0%
GSB 8,615 11.84 2,910 >4.0 4,366 > 6.0
FCB 8,197 9.99 3,282 >4.0 4,922 > 6.0
RCB 3,354 10.89 1,232 >4.0 1,849 > 6.0
WCB 4,524 17.07 1,060 >4.0 1,590 > 6.0
Tier 1 Capital
(to Average Assets)
Consolidated $71,713 8.76% $32,729 >4.0% N/A
DB&T 38,754 7.81 19,841 >4.0 $24,801 > 5.0%
GSB 8,615 7.06 4,883 >4.0 6,103 > 5.0
FCB 8,197 7.53 4,355 >4.0 5,444 > 5.0
RCB 3,354 7.79 1,723 >4.0 2,153 > 5.0
WCB 4,524 11.11 1,628 >4.0 2,035 > 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, 1996
Total Capital (to Risk-
Weighted Assets)
Consolidated $73,777 14.28% $41,334 >8.0% N/A
DB&T 43,882 12.67 27,709 >8.0 $34,637 >10.0%
GSB 9,140 13.74 5,322 >8.0 6,652 >10.0
FCB 13,322 15.17 7,026 >8.0 8,783 >10.0
RCB 3,171 19.42 1,306 >8.0 1,633 >10.0
Tier 1 Capital (to Risk-
Weighted Assets)
Consolidated $67,701 13.10% $20,667 >4.0% N/A
DB&T 39,593 11.43 13,855 >4.0 $20,782 > 6.0%
GSB 8,307 12.49 2,661 >4.0 3,991 > 6.0
FCB 12,603 14.35 3,513 >4.0 5,270 > 6.0
RCB 3,029 18.55 653 >4.0 980 > 6.0
Tier 1 Capital
(to Average Assets)
Consolidated $67,701 9.54% $28,375 >4.0% N/A
DB&T 39,593 8.50 18,634 >4.0 $23,293 > 5.0%
GSB 8,307 7.52 4,416 >4.0 5,520 > 5.0
FCB 12,603 10.93 4,613 >4.0 5,766 > 5.0
RCB 3,029 12.16 996 >4.0 1,245 > 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 $21,741 as of December 31, 1997,
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, 1997 1996
--------- ---------
Assets:
Cash and interest bearing deposits $ 716 $ 3,208
Investment in subsidiaries 80,584 66,722
Other assets 1,703 204
Due from subsidiaries 1,350 215
--------- ---------
Total $ 84,353 $ 70,349
========= =========
Liabilities
and stockholders' equity:
Liabilities:
Contracts payable for acquisition of
WCB $ 2,824 $ -
Notes payable 3,500 -
Accrued expenses and other liabilities 257 90
--------- ---------
Total liabilities 6,581 90
--------- ---------
Stockholders' equity:
Common stock 4,854 4,854
Capital surplus 13,706 13,366
Retained earnings 58,914 52,864
Net unrealized gain on securities
available for sale 2,545 1,327
Treasury stock (2,247) (2,152)
--------- ---------
Total stockholders' equity 77,772 70,259
--------- ---------
Total $ 84,353 $ 70,349
========= =========
Income Statements for the
Years Ended December 31, 1997 1996 1995
------ ------ ------
Operating revenues:
Dividends from subsidiaries $2,621 $5,611 $6,574
Other 10 4 -
------ ------ ------
Total operating revenues 2,631 5,615 6,574
------ ------ ------
Operating expenses:
Outside services 219 197 154
Other operating expenses 350 443 460
Interest 208 - -
------ ------ ------
Total operating expenses 777 640 614
------ ------ ------
Equity in undistributed earnings 6,398 2,815 1,421
------ ------ ------
Income before income tax benefit 8,252 7,790 7,381
Income tax benefit 263 216 193
------ ------ ------
Net income $8,515 $8,006 $7,574
====== ====== ======
Statements of Cash Flows For
the Years Ended December 31, 1997 1996 1995
------ ------ ------
Cash flows from operating
activities:
Net income $8,515 $8,006 $7,574
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (6,398) (2,815) (1,421)
(Increase) decrease in due
from subsidiaries (1,135) (215) 720
Increase (decrease) in other
liabilities 167 (54) 17
(Increase) decrease in other
assets (1,499) (178) 94
------- ------- -------
Net cash provided (used)
by operating activities (350) 4,744 6,984
------- ------- -------
Cash flows from investing
activities:
Capital injections for
subsidiaries (2,855) (543) (4,000)
Payments for purchase of
subsidiaries (7,890) - -
Retirement of subsidiary stock 4,500 - -
Other - - 18
------- ------- -------
Net cash used by
investing activities (6,245) (543) (3,982)
------- ------- -------
Cash flows from financing
activities:
Payments on other borrowings (1,042) - (162)
Proceeds from contracts payable 3,865 - -
Proceeds from notes payable 3,500 - -
Cash dividends paid (2,465) (1,886) (2,360)
Purchase of treasury stock (865) (759) (2,855)
Sale of treasury stock 1,110 1,296 236
------- ------- -------
Net cash provided (used) by
financing activities 4,103 (1,349) (5,141)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (2,492) 2,852 (2,139)
Cash and cash equivalents at
beginning of year 3,208 356 2,495
------- ------- -------
Cash and cash equivalents at
end of year $ 716 $3,208 $ 356
======= ======= =======
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, 1997,
1996 and 1995, of Heartland Financial USA, Inc. and its wholly-
owned subsidiaries: Dubuque Bank and Trust Company; DB&T
Insurance, Inc.; DB&T Community Development Corp.; Galena State
Bank and Trust Company; Riverside Community Bank; Keokuk
Bancshares, Inc.; First Community Bank, FSB; Wisconsin Community
Bank; Citizens Finance Co.; ULTEA, Inc. and DBT Investment
Corporation were audited by independent certified public
accountants. Their role is to render independent professional
opinions of the fairness of the consolidated financial statements
based upon performance of procedures they deem appropriate under
generally accepted auditing standards.
The Audit Committees of the Boards of Directors of member banks
meet periodically with the internal auditors to review matters
relating to internal accounting controls and the nature, extent
and results of audit efforts. The internal auditors and
independent certified public accountants have free access to the
Audit Committees.
/s/ Lynn B. Fuller
Lynn B. Fuller
President, Heartland Financial USA, Inc;
President and CEO, Dubuque Bank and Trust Company
/s/ John K. Schmidt
John K. Schmidt
Executive Vice President and CFO, Heartland Financial USA, Inc.;
Senior Vice President and CFO, Dubuque Bank and Trust Company
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,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Heartland Financial USA, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations
and their cash flows for each the years in the three-year period
ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Des Moines, IA
January 22, 1998
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 1998
annual meeting of stockholders dated April 6, 1998, (the "1998"
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, 1997, 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 48 Director and President
of Heartland; Director,
President and Chief Executive
Officer of DB&T; Director of
GSB, FCB, WCB, 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 73 Chairman of the Board
and Chief Executive Officer
of Heartland; Director and
Vice Chairman of the Board of
DB&T; Director of DB&T
Insurance, Citizens and DB&T
Development
James A. Schmid 74 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 38 Executive Vice President
and Chief Financial Officer
of Heartland; Senior Vice
President and Chief Financial
Officer of DB&T; Treasurer of
DB&T Insurance and Citizens;
Director of DBT Investment;
Vice President and Assistant
Secretary of ULTEA
Greg R. Miller 49 Executive Vice President
of Heartland; Director and
Vice-Chairman of the Board of
FCB
Kenneth J. Erickson 46 Senior Vice President of
Heartland; Senior Vice
President, Lending of DB&T;
Senior Vice President of Cit-
izens; Director of ULTEA
Edward H. Everts 46 Senior Vice President,
Heartland; Senior Vice
President of Operations and
Retail Banking of DB&T
Douglas J. Horstmann 44 Senior Vice President,
Lending of Heartland; Senior
Vice President, Lending of
DB&T; Executive Vice
President of DB&T Development
Paul J. Peckosh 52 Senior Vice President,
Trust of DB&T
Mr. Lynn B. Fuller is the son of Mr. Lynn S. Fuller. There are no
other family relationships among any of the directors or
executive officers of Heartland.
Lynn B. Fuller has been a director of Heartland and of DB&T since
1984 and has been President of Heartland and DB&T since 1987. He
has been a director of 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.
Lynn S. Fuller has been a director of Heartland since its
formation in 1981 and of DB&T since 1964. Mr. Fuller began his
banking career in 1946 in Minnesota, and he returned to Iowa in
1949 to serve as Executive Vice President and Cashier of Jackson
State Savings Bank in Maquoketa. Mr. Fuller joined DB&T in 1964.
He was later named President of DB&T and held this position until
1987. Mr. Fuller remains as the Chairman of the Board and Chief
Executive Officer of Heartland.
James A. Schmid has been a director of Heartland since its
formation in 1981 and of DB&T since 1966. Mr. Schmid also
currently serves as the Vice Chairman of Heartland and as the
Chairman of the Board of DB&T.
John K. Schmidt has been Heartland's Executive Vice President and
Chief Financial Officer since 1991. He has been employed by DB&T
since September, 1984 and became DB&T's Vice President, Finance
in 1986, and Senior Vice President and Chief Financial Officer in
January, 1991. Mr. Schmidt is a certified public accountant and
worked at KPMG Peat Marwick in Des Moines, Iowa, from 1982 until
joining DB&T.
Greg R. Miller was appointed Executive Vice President of
Heartland in 1996. Mr. Miller joined FCB in 1987 as Executive
Vice President and was appointed President and Chief Executive
Officer of FCB in 1988 and held these positions until 1997. Mr.
Miller remains as Vice-Chairman of the Board of FCB. He became a
Heartland director in 1994 in conjunction with the merger of
Heartland with FCB. Mr. Miller is a certified public accountant
and was the Chief Executive Officer of Keokuk Area Hospital
immediately prior to joining FCB.
Kenneth J. Erickson has been Senior Vice President of Heartland
since 1992 and Senior Vice President, Lending of DB&T since 1989.
Mr. Erickson joined DB&T in 1975 and was appointed Vice
President, Commercial Loans in 1985.
Edward H. Everts was appointed as Senior Vice President of
Heartland in 1996. Mr. Everts joined DB&T as Senior Vice
President, Operations and Retail Banking in 1992. Prior to his
service with DB&T, Mr. Everts was Vice President and Lead Retail
Banking Manager of First Bank, Duluth, Minnesota.
Douglas J. Horstmann has been Senior Vice President, Lending, of
DB&T since 1989. Mr. Horstmann joined DB&T in 1980 and was
appointed Vice President, Commercial Loans in 1985. Prior to
joining DB&T, Mr. Horstmann was an examiner for the Iowa Division
of Banking.
Paul J. Peckosh has been Senior Vice President, Trust, of DB&T
since 1991. Mr. Peckosh joined DB&T in 1975 as Assistant Vice
President, Trust and was appointed Vice President, Trust in 1980.
Mr. Peckosh is an attorney and graduated from the Marquette
University of Law School in 1970.
ITEM 11.
EXECUTIVE COMPENSATION
The information in the 1998 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 1998 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 1998 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.
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 17, 1998.
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 17, 1998
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 17, 1998.
/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
3. Exhibits
3.1 Certificate of Incorporation of Heartland Financial USA,
Inc. (Filed as Exhibit 3.1 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and incorporated
by reference herein.)
3.2 Bylaws of Heartland Financial USA, Inc. (Filed as
Exhibit 3.2 to Registrant's Form S-4 for the fiscal year
ended December 31, 1993, and incorporated by reference
herein.)
4.1 Specimen Stock Certificate of Heartland Financial USA, Inc.
(Exhibit 4.1 to the Registration Statement on Form S-4
filed with the Commission May 4, 1994, as amended
(SEC File No. 33-76228)
10.1 Heartland Financial USA, Inc. 1993 Stock Option Plan
(Filed as Exhibit 10.1 to Registrant's Form S-4 for the
fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.2 Heartland Financial USA, Inc. Executive Restricted Stock
Purchase Plan (Filed as Exhibit 10.2 to Registrant's Form
S-4 for the fiscal year ended December 31, 1993, and
incorporated by reference herein.)
10.3 Dubuque Bank and Trust Management Incentive Compensation
Plan (Filed as Exhibit 10.3 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.4 Dubuque Bank and Trust Executive Death Benefit Plan
(Filed as Exhibit 10.4 to Registrant's Form S-4 for the
fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.5 ATM License Agreement between Dubuque Bank and Trust Company
and Plus Systems, Inc., dated January 2, 1992,
(Filed as Exhibit 10.9 to Registrant's Form S-4 for the
fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.6 Service Mark License Agreement between Dubuque Bank and
Trust Company and Cirrus System, Inc., dated September 1,
1988, (Filed as Exhibit 10.10 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.7 CSMA/FI Debit Processing Agreement between Dubuque Bank and
Trust Company and Card Services--Members Associated dated
May 4, 1993, (Filed as Exhibit 10.11 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and
incorporated by reference herein.)
10.8 Bank Marketing Agreement between ADP, Inc. and Heartland
Bancorp dated August 26, 1993, (Filed as Exhibit 10.12 to
Registrant's Form S-4 for the fiscal year ended December 31,
1993, and incorporated by reference herein.)
10.9 Lease Agreement dated May 28, 1970, for Unit 710,
Kennedy Mall, Dubuque, Iowa, and as amended July 22, 1976,
between Dubuque Bank and Trust Company and The Kennedy Mall,
Inc. (Filed as Exhibit 10.14 to Registrant's Form S-4 for
the fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.10 Lease Agreement for 1275 Main Street, Dubuque, Iowa,
between Fischer & Co. and Dubuque Bank and Trust Company
(as successor to Epworth Savings Bank) dated February 1, 1968
(Filed as Exhibit 10.15 to Registrant's Form S-4 for the fiscal
year ended December 31, 1993, and incorporated by reference
herein.)
10.11 Processing Agreement between ITS, Inc., and Dubuque Bank and
Trust Company (Filed as Exhibit 10.16 to Registrant's Form S-4
for the fiscal year ended December 31, 1993, and incorporated by
reference herein.)
10.12 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.)
10.13 Heartland Financial USA, Inc. Self-Funded Employee Health
Benefit Plan dated January 1, 1996. (Filed as Exhibit 10.22
to Registrant's Form 10-K for the fiscal year ended December 31,
1995, and incorporated by reference herein.)
10.14 Heartland Financial USA, Inc. Self-Funded Employee Dental
Benefit Plan dated January 1, 1996. (Filed as Exhibit
10.23 to Registrant's Form 10-K for the fiscal year ended
December 31, 1995, and incorporated by reference herein.)
10.15 Claim Processing Agreement between Seabury & Smith, Inc. and
Heartland Financial USA, Inc. dated January 1, 1996. (Filed
as Exhibit 10.24 to Registrant's Form 10-K for the fiscal year
ended December 31, 1995, and incorporated by reference
herein.)
10.16 Dubuque Bank and Trust Company Executive Death Benefit
Program Plan Revisions, Enrollment Booklet, and Universal
Life Split-Dollar Agreement effective December 1, 1995, and
similar agreement are in place at Galena State Bank and Trust
Company, First Community Bank, FSB, and Riverside
Community Bank. (Filed as Exhibit 10.25 to Registrant's
Form 10-K for the fiscal year ended December 31, 1995,
and incorporated by reference herein.)
10.17 Employment Agreement between Heartland Financial USA, Inc.
and Willard C. Brenner dated August 1, 1995. (Filed as Exhibit
10.28 to Registrant's Form 10K for the fiscal year ended
December 31, 1995, and incorporated by reference
herein.)
10.18 Employment Agreement between Heartland Financial USA, Inc.
and Thomas E. Belmont dated August 11, 1995. (Filed as
Exhibit 10.29 to Registrant's Form 10-K for the fiscal year
ended December 31, 1995, and incorporated by reference
herein.)
10.19 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.)
10.20 Principal Member for Credit Card Issuance between Dubuque
Bank & Trust Company and VISA USA, Inc. dated June 26, 1995.
(Filed as Exhibit 10.31 to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and incorporated by
reference herein.)
10.21 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.)
10.22 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 Registrant's Form
10K for the fiscal year ended December 31, 1996, and
incorporated by reference herein.)
10.23 Agreement to Organize and Stockholder Agreement between
Heartland Financial USA, Inc. and Investors in the Proposed
New Mexico Bank dated November 5, 1997.
11. Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
99.1 1998 Proxy Statement (only such parts as are incorporated by
reference into this Form 10-K)