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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, 1999
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. Employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices) (Zip Code)
(319) 589-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Exchange Class)
None
(Name of Each Exchange on which Registered)
Common Stock $1.00 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The index to exhibits follows the signature page.
As of March 23, 2000, the Registrant had issued and outstanding
9,627,465 shares of the Registrant's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the
Registrant as of March 23, 2000, was $88,521,510. * Such figures
include 735,460 shares of the Registrant's Common Stock held in a
fiduciary capacity by the Trust Department of the Dubuque Bank &
Trust Company, a wholly-owned subsidiary of the Registrant.
*Based on the last reported price of an actual transaction in
Registrant's Common Stock on March 23, 2000, and reports of
beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the
outstanding shares of Common Stock of Registrant; however, such
determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares
of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III.
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Business
A. General Description
B. Market Areas
C. Competition
D. Employees
E. Accounting Standards
F. Supervision and Regulation
G. Governmental Monetary Policy and Economic Conditions
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I.
ITEM 1.
BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. ("Heartland"), reincorporated in
the state of Delaware in 1993, is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). Heartland has five bank subsidiaries in the states of
Iowa, Wisconsin, Illinois and New Mexico and one federal savings
bank subsidiary in Iowa (collectively, the "Bank Subsidiaries").
All six Bank Subsidiaries are members of the Federal Deposit
Insurance Corporation ("FDIC"). Dubuque Bank and Trust Company,
Dubuque, Iowa, ("DB&T") is chartered under the laws of the State
of Iowa and has two wholly-owned subsidiaries: DB&T Insurance,
Inc. ("DB&T Insurance"), a multi-line insurance agency and DB&T
Community Development Corp. ("DB&T Development"), majority owner
of a senior housing project. Galena State Bank and Trust
Company, Galena, Illinois, ("GSB") and Riverside Community Bank,
Rockford, Illinois, ("RCB") are chartered under the laws of the
State of Illinois. First Community Bank, FSB, Keokuk, Iowa,
("FCB") is a federal savings association organized under the laws
of the United States. Wisconsin Community Bank, Cottage Grove,
Wisconsin, ("WCB") is chartered under the laws of the State of
Wisconsin and has one subsidiary, DBT Investment Corporation
("DBT Investment"), an investment management company. New Mexico
Bank & Trust, Albuquerque, New Mexico, ("NMB") is chartered under
the laws of the state of New Mexico. The Bank Subsidiaries
operate 29 banking locations in Iowa, Illinois, Wisconsin and New
Mexico. Heartland has four non-bank subsidiaries. Citizens
Finance Co. ("Citizens") is a consumer finance company. ULTEA,
Inc. ("ULTEA") is a fleet leasing company headquartered in
Madison, Wisconsin. Keokuk Bancshares, Inc. ("Keokuk") is an
investment management company. Heartland Capital Trust I is a
special purpose trust subsidiary of Heartland formed for the
purpose of the offering of cumulative capital securities in
October, 1999.
All of Heartland's subsidiaries are wholly-owned, except for NMB,
of which Heartland was an 80% owner on December 31, 1999. On
January 1, 2000, Heartland completed the acquisition of National
Bancshares, Inc. ("NBI") the one-bank holding company of First
National Bank of Clovis ("FNB") in New Mexico. Heartland merged
FNB into its NMB subsidiary immediately after the closing of the
NBI acquisition. As a result of this affiliate bank merger,
Heartland's ownership in NMB increased to approximately 88%.
The Bank Subsidiaries provide full service retail banking within
Dubuque and Lee Counties in Iowa; within Jo Daviess, Hancock and
Winnebago Counties in Illinois; within Dane, Green, Sheboygan,
Brown, and Eau Claire Counties in Wisconsin; and Bernalillo and
Curry Counties in New Mexico. Deposit products include checking
and other demand deposit accounts, NOW accounts, savings
accounts, money market accounts, certificates of deposit,
individual retirement accounts and other time deposits. The
deposits in the Bank Subsidiaries are insured by the FDIC to the
full extent permitted by law. Loans include commercial and
industrial, agricultural, real estate mortgage, consumer, home
equity, credit cards and lines of credit. Other products and
services include VISA debit cards, automatic teller machines,
safe deposit boxes and trust services. The principal service of
the Bank Subsidiaries consists of making loans to businesses and
individuals. These loans are made at the offices of the Bank
Subsidiaries. The Bank Subsidiaries also engage in activities
that are closely related to banking, including investment
brokerage.
Operating Strategy
Heartland's primary operating strategy is to differentiate the
company as a growing consortium of strong community banks through
community involvement, active boards of directors, local
presidents and local decision-making. As part of the operating
strategy, all directors, officers and employees are encouraged to
maintain a strong ownership interest in Heartland. As of
December 31, 1999, these individuals owned approximately 50% of
Heartland's outstanding common stock.
Management believes that the personal and professional service
that is offered to customers provides an appealing alternative to
the "megabanks" that have resulted from the recent mergers and
acquisitions in the financial services industry. While Heartland
employs a community banking philosophy, management believes that
Heartland's size, combined with the full line of financial
products and services, is sufficient to effectively compete in
the respective market areas. At the same time, management
realizes that to remain price competitive Heartland must manage
expense levels by centralizing the back office support functions
to gain economies of scale. Each of the subsidiaries of
Heartland operates under the direction of its own board of
directors, although Heartland has standard operating policies
regarding asset/liability management, liquidity management,
investment management, lending policies and deposit structure
management.
In order to accomplish these strategic objectives, management has
focused on improving the performance of the existing subsidiaries
while simultaneously pursuing an acquisition and expansion
strategy. With respect to the existing subsidiaries, Heartland
has primarily focused on the following strategies:
- Improving the bank subsidiaries' funding costs by reducing
the levels of higher-cost certificates of deposit, increasing the
percentage of lower-cost transaction accounts such as checking,
savings and money market accounts, emphasizing relationship
banking and capitalizing on cross-selling opportunities;
- Emphasizing the expansion of non-traditional sources of
income, including trust and investment services, consumer finance
and vehicle leasing and fleet management;
- Centralizing back office support functions to enable the
Bank Subsidiaries to operate as efficiently as possible; and
- Continually evaluating new technology and acquiring it
when the expected return justifies the cost.
Acquisition and Expansion Strategy
Heartland's strategy is to diversify both its market area and
asset base while increasing profitability through acquisitions
and through expansion of its current subsidiaries. The goal is
to expand through the acquisition of established financial
services organizations, primarily commercial banks or thrifts,
when suitable candidates can be identified and acceptable
business terms negotiated. Heartland has also formed de novo
banking institutions in market areas where management has
identified market potential and management with banking expertise
and philosophy similar to Heartland's. In evaluating expansion
and acquisition opportunities, Heartland has focused on
geographic areas in the Midwest or Southwest with growth
potential.
Heartland continually seeks and evaluates opportunities to
establish branches, loan production offices or other business
facilities as a means of expanding its presence in current or new
market areas. Heartland also looks for opportunities beyond the
Midwest and beyond the categories of community banks and thrifts
when the Heartland board of directors and management believes
that the opportunity will provide a desirable strategic fit
without posing undue risk. Heartland does not currently have any
definitive understandings or agreements for any acquisitions
material to Heartland. However, Heartland will continue to look
for further expansion opportunities.
Lending Activities
General
The Bank Subsidiaries provide a range of commercial and retail
lending services to corporations, partnerships and individuals.
These credit activities include agricultural, commercial,
residential real estate and installment loans, as well as loan
participations and lines of credit.
The Bank Subsidiaries aggressively market their services to
qualified lending customers. Lending officers actively solicit
the business of new companies entering their market areas as well
as long-standing members of the Bank Subsidiaries' respective
business communities. Through professional service and
competitive pricing, the Bank Subsidiaries have been successful
in attracting new lending customers. Heartland also actively
pursues consumer lending opportunities. With convenient
locations, advertising and customer communications, the Bank
Subsidiaries have been successful in capitalizing on the credit
needs of their market areas.
Commercial Loans
The Bank Subsidiaries have a strong commercial loan base and
DB&T, in particular, continues to be a premier commercial lender
in the tri-state area of northeast Iowa, northwest Illinois and
southwest Wisconsin. The Bank Subsidiaries' areas of emphasis
include, but are not limited to, loans to wholesalers, hotel and
real estate developers, manufacturers, building contractors,
business services companies and retailers. The Bank Subsidiaries
provide a wide range of business loans, including lines of credit
for working capital and operational purposes and term loans for
the acquisition of equipment and real estate. Loans may be made
on an unsecured basis where warranted by the overall financial
condition of the borrower. Terms of commercial business loans
generally range from one to five years.
DB&T and WCB have also generated loans that are guaranteed by the
U.S. Small Business Administration, and DB&T has been certified
as one of that agency's Preferred Lenders. Management believes
that making these guaranteed loans helps its local communities as
well as provides Heartland with a source of income and solid
future lending relationships as such businesses grow and prosper.
DB&T is also currently one of the state of Iowa's top lenders in
the "Linked Investment for Tomorrow" program. This state-
sponsored program offers interest rate reductions to businesses
opened by minorities and those in rural areas.
The primary repayment risk for commercial real estate loans is
the failure of the business due to economic events or
governmental regulations outside of the control of the borrower
or lender that negatively impact the future cash flow and market
values of the affected properties. In most cases, the Bank
Subsidiaries have collateralized these loans and/or taken
personal guarantees to help assure repayment.
The Bank Subsidiaries' commercial loans and leases are primarily
made based on the identified cash flow of the borrower and
secondarily on the underlying collateral provided by the
borrower. Credit support provided by the borrower for most of
these loans and leases and the probability of repayment is based
on the liquidation of the pledged collateral and enforcement of a
personal guarantee, if any exists. The primary repayment risks
of commercial loans and leases are that the cash flows of the
borrower may be unpredictable, and the collateral securing these
loans may fluctuate in value.
As the credit portfolios of the Bank Subsidiaries have continued
to grow, several changes have been made in their lending
departments resulting in an overall increase in these
departments' skill levels. Commercial lenders interact with
their respective Boards of Directors each month. Heartland also
utilizes an internal loan review function to analyze credits of
the Bank Subsidiaries and to provide periodic reports to the
respective boards of directors. Management has attempted to
identify problem loans at an early date and to aggressively seek
a resolution of these situations. The result has been a
significantly below average level of problem loans compared to
the Heartland Banks' industry peer groups in recent years.
Agricultural Loans
Agricultural loans are emphasized by DB&T, WCB's Monroe banking
center and NMB's Clovis banking offices due to their
concentration of customers in rural markets. DB&T maintains its
status as one of the largest agricultural lenders in the state of
Iowa. Agricultural loans remain balanced, however, in proportion
to the rest of Heartland's loan portfolio, constituting
approximately 11% of the total loan portfolio at December 31,
1999. In connection with their agricultural lending, all of the
Bank Subsidiaries have remained close to their traditional
geographic market areas. The majority of the outstanding
agricultural operating and real estate loans are within 60 miles
of their main or branch offices.
Agricultural loans, many of which are secured by crops, machinery
and real estate, are provided to finance capital improvements and
farm operations as well as acquisitions of livestock and
machinery. The ability of the borrower to repay may be affected
by many factors outside of the borrower's control including
adverse weather conditions, loss of livestock due to disease or
other factors, declines in market prices for agricultural
products and the impact of government regulations. Payments on
agricultural loans are ultimately dependent on the profitable
operation or management of the farm property securing the loan.
The agricultural loan departments work closely with all of their
customers, including companies and individual farmers, and review
the preparation of budgets and cash flow projections for the
ensuing crop year. These budgets and cash flow projections are
monitored closely during the year and reviewed with the customers
at least once a year. In addition, the Bank Subsidiaries work
closely with governmental agencies, including the Farmers Home
Administration, to assist agricultural customers in obtaining
credit enhancement products such as loan guarantees.
Real Estate Mortgage Loans
Mortgage lending has been a focal point of the Bank Subsidiaries
as each of them continues to build real estate lending business.
As interest rates rose during 1999, residential mortgage
outstandings grew as customers elected to take three-, five- and
seven-year adjustable rate mortgage loans, which were retained in
the loan portfolios. During prior years, the majority of home
loans generated by the Bank Subsidiaries were sold to government
agencies in the secondary mortgage market with servicing rights
retained. Management believes that the retention of mortgage
servicing provides the Bank Subsidiaries with a relatively steady
source of fee income as compared to fees generated solely from
mortgage origination operations. Moreover, the retention of such
servicing rights allows each of the Bank Subsidiaries to continue
to have regular contact with mortgage customers.
Consumer Lending
The Bank Subsidiaries' consumer lending departments provide all
types of consumer loans including motor vehicle, home
improvement, home equity, student loans, credit cards, signature
loans and small personal credit lines. Consumer loans typically
have shorter terms and lower balances with higher yields as
compared to one- to four-family residential mortgage loans, but
generally carry higher risks of default. Consumer loan
collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse
personal circumstances.
Consumer loan demand is also serviced through Citizens, which
currently serves the consumer credit needs of over 3,900
customers in the three state area of Iowa, Illinois and Wisconsin
from its Dubuque, Iowa, Madison and Appleton, Wisconsin, and
Loves Park, Illinois offices. Citizens typically lends to
borrowers with past credit problems or limited credit histories.
Heartland expects to incur a higher level of credit losses on
Citizens loans as compared to other consumer loans.
Trust Departments
The trust departments for DB&T, GSB and FCB have been providing
trust services to their respective communities for many years.
Trust personnel from DB&T also work with RCB, WCB and NMB
personnel to provide trust services to all Bank Subsidiaries.
Currently, the Bank Subsidiaries have over $600 million of
consolidated assets under management and provide a full
complement of trust and investment services for individuals and
corporations.
The trust department of DB&T is nationally recognized as a
leading provider of socially responsible investment services and
manages investment portfolios for religious and other non-profit
organizations located throughout the United States. The Bank
Subsidiaries' trust departments are also active in the management
of employee benefit and retirement plans in their market areas.
The Bank Subsidiaries have targeted their trust departments as
primary areas for future growth.
Brokerage and Other Services
DB&T contracts with a third-party vendor, Focused Investments
LLC, an affiliate of Wayne Hummer & Co., to operate independent
securities offices at DB&T, GSB and FCB. Focused Investments LLC
offers full-service stock and bond trading, direct investments,
annuities and mutual funds. RCB also contracts with Invest
Financial Corporation to operate an independent securities office
at the main facility.
DB&T Insurance has continued to grow its personal and commercial
insurance lines and the number of independent insurance companies
it represents. DB&T Insurance is a multi-line insurance agency
in the Dubuque area and offers a complete array of vehicle,
property and casualty, life and disability insurance, as well as
commercial lines and tax-free annuities.
B. MARKET AREAS
DB&T is located in Dubuque County, Iowa, which encompasses the
city of Dubuque and a number of surrounding rural communities.
The city of Dubuque is located in northeastern Iowa, on the
Mississippi River, approximately 175 miles west of Chicago,
Illinois, and approximately 200 miles northeast of Des Moines,
Iowa. It is strategically situated at the intersection of the
state borders of Iowa, Illinois and Wisconsin. Based upon the
results of the 1990 census, the city of Dubuque had a total
population of approximately 61,000.
In addition to its main banking office, DB&T has seven branch
offices, all of which are located in the Dubuque County area. As
a subsidiary of DB&T, DB&T Insurance has substantially the same
market area as the parent organization. Citizens also operates
within this market area, and, in addition, offices were opened in
Madison, Wisconsin, during June, 1996, Appleton, Wisconsin,
during August, 1998 and Loves Park, Illinois during February,
1999.
GSB is located in Galena, Illinois, which is less than five miles
from the Mississippi River, approximately 20 miles east of
Dubuque and 155 miles west of Chicago. GSB also has an office in
Stockton, Illinois, and as such, services customers in Jo Daviess
County, Illinois. Based on the 1990 census, the county had a
population of approximately 22,000 people.
FCB's main office is in Keokuk, Iowa, which is located in the
southeast corner of Iowa near the borders of Iowa, Missouri and
Illinois. Due to its location, FCB serves customers in the tri-
county region of Lee County, Iowa, Hancock County, Illinois and
Clark County, Missouri. Lee, Hancock and Clark Counties have
populations of approximately 43,100, 23,900 and 8,500,
respectively. FCB has one branch office in Keokuk and another
branch in the city of Carthage in Hancock County, Illinois.
Keokuk is an industrial community with a population of
approximately 13,500.
RCB is located on the northeast edge of Rockford, Illinois, which
is approximately 75 miles west of Chicago in Winnebago County.
Based on the 1990 census, the county had a population of 284,000
and the city of Rockford had a population of 140,000.
WCB operates one office from its location in Cottage Grove,
Wisconsin, which is approximately 10 miles east of Madison in
Dane County. A branch office was opened in Middleton, a suburb
of Madison, in February, 1998. According to the 1990 census, the
county had a population of 390,000, and the village of Cottage
Grove had a population of 1,100. Wisconsin Business Bank, a
branch of WCB, opened three offices in Sheboygan, DePere and Eau
Claire, Wisconsin during 1999. These three facilities are
located in the northeastern Wisconsin counties of Sheboygan and
Brown and the west central Wisconsin county of Eau Claire with
populations of 104,000, 195,000 and 85,000, respectively,
according to the 1990 census. WCB also acquired the Bank One
Monroe Wisconsin banking center in July of 1999. The city of
Monroe, which is approximately 50 miles southwest of Madison, is
located in Green County in south central Wisconsin. According to
the 1990 census, Monroe had a population of 13,700, and Green
County had a population of 30,000.
NMB operates four offices within Albuquerque, New Mexico in
Bernalillo County. Based upon the 1990 census, the county had a
population of 480,000 and the city had a population of 385,000.
NMB also operates two locations in the New Mexico communities of
Clovis and Melrose, both located in Curry County. Clovis is
located in east central New Mexico, approximately 220 miles from
Albuquerque, 100 miles northwest of Lubbock, Texas and 105 miles
southwest of Amarillo, Texas. Clovis had a population of
approximately 31,000, and Curry County had a population of 42,000
according to the 1990 census.
C. COMPETITION
Heartland encounters competition in all areas of its business
pursuits. In order to compete effectively, to develop its market
base, to maintain flexibility and to move in pace with changing
economic and social conditions, Heartland continuously refines
and develops its products and services. The principal methods of
competition in the financial services industry are price, service
and convenience.
The Bank Subsidiaries' combined market area is highly
competitive. Many financial institutions based in the
communities surrounding the Bank Subsidiaries actively compete
for customers within Heartland's market area. The Bank
Subsidiaries also face competition from finance companies,
insurance companies, mortgage companies, securities brokerage
firms, money market funds, loan production offices and other
providers of financial services. Under the Gramm-Leach-Bliley
Act of 1999, effective March 11, 2000, securities firms and
insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions.
The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which Heartland and the Bank
Subsidiaries conduct business. The financial services industry
is also likely to become more competitive as further
technological advances enable more companies to provide financial
services. These technological advances may diminish the
importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
Heartland competes for loans principally through the range and
quality of the services it provides, interest rates and loan
fees. Heartland believes that its long-standing presence in the
community and personal service philosophy enhance its ability to
compete favorably in attracting and retaining individual and
business customers. Heartland actively solicits deposit-oriented
clients and competes for deposits by offering customers personal
attention, professional service and competitive interest rates.
D. EMPLOYEES
At December 31, 1999, Heartland employed 484 full-time equivalent
employees. Heartland places a high priority on staff
development, which involves extensive training, including
customer service training. New employees are selected on the
basis of both technical skills and customer service capabilities.
None of Heartland's employees are covered by a collective
bargaining agreement. Heartland offers a variety of employee
benefits and management considers its employee relations to be
excellent.
E. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No.
133, Accounting for Derivative Instruments and Hedging
Activities. In July 1999, the FASB issued FAS 137, Deferring
Statement 133's Effective Date, which defers the effective date
for implementation of FAS 133 by one year, making FAS 133
effective no later than January 1, 2001 for Heartland's financial
statements. Management does not believe the adoption of FAS 133
will have a material impact on the consolidated financial
statements.
F. SUPERVISION AND REGULATION (dollars in thousands)
General
Financial institutions and their holding companies are
extensively regulated under federal and state law. As a result,
the growth and earnings performance of Heartland can be affected
not only by management decisions and general economic conditions,
but also by the requirements of applicable state and federal
statutes and regulations and the policies of various governmental
regulatory authorities, including the Iowa Superintendent of
Banking (the "Iowa Superintendent"), the Illinois Commissioner of
Banks and Real Estate (the "Illinois Commissioner"), the Division
of Banking of the Wisconsin Department of Financial Institutions
(the "Wisconsin DFI"), the New Mexico Financial Institutions
Division (the "New Mexico Division"), the Office of Thrift
Supervision (the "OTS"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the Federal Deposit
Insurance Corporation (the "FDIC"), the Internal Revenue Service
and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes,
regulations and regulatory policies can be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as Heartland and its subsidiaries,
regulate, among other things, the scope of business, investments,
reserves against deposits, capital levels relative to operations,
the nature and amount of collateral for loans, the establishment
of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to Heartland and its
subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial
institutions.
The following is a summary of the material elements of the
regulatory framework that applies to Heartland and its
subsidiaries. It does not describe all of the statutes,
regulations and regulatory policies that apply to Heartland and
its subsidiaries, nor does it restate all of the requirements of
the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety
by reference to the applicable statutes, regulations and
regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business
of Heartland and its subsidiaries.
Recent Regulatory Developments
On November 12, 1999, President Clinton signed legislation that
will allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Gramm-Leach-
Bliley Act (the "Act"), a bank holding company that elects to
become a financial holding company may engage in any activity
that the Federal Reserve, in consultation with the Secretary of
the Treasury, determines by regulation or order is (i) financial
in nature, (ii) incidental to any such financial activity, or
(iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The Act
specifies certain activities that are deemed to be financial in
nature, including lending, exchanging, transferring, investing
for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic
advisory services; underwriting, dealing in or making a market
in, securities; and any activity currently permitted for bank
holding companies by the Federal Reserve under section 4(c)(8) of
the Bank Holding Company Act. A bank holding company may elect
to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory
rating under the Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for
a financial holding company (as described above) and any activity
that the Secretary of the Treasury, in consultation with the
Federal Reserve, determines is financial in nature or incidental
to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate
investment activities (unless otherwise permitted by law), (iii)
insurance company portfolio investments and (iv) merchant
banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital
the bank's outstanding investments in financial subsidiaries).
The Act provides that state banks may invest in financial
subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same
conditions that apply to national bank investments in financial
subsidiaries.
At this time, it is not possible to predict the impact the Act
may have on Heartland. Various bank regulatory agencies have
just begun issuing regulations as mandated by the Act. The
Federal Reserve has issued an interim rule that sets forth
procedures by which bank holding companies may become financial
holding companies, the criteria necessary for such a conversion,
and the Federal Reserve's enforcement powers should a holding
company fail to maintain compliance with the criteria. The
Office of the Comptroller of the Currency has issued a final rule
discussing the procedures by which national banks may establish
financial subsidiaries as well as the qualifications and
safeguards that will be required. In addition, in February,
2000, all federal bank regulatory agencies jointly issued a
proposed rule that would implement the financial privacy
provisions of the Act.
Heartland
General
Heartland, as the sole shareholder of DB&T, GSB, RCB and WCB and
the controlling shareholder of NMB, is a bank holding company.
As a bank holding company, Heartland is registered with, and is
subject to regulation by, the Federal Reserve under the Bank
Holding Company Act, as amended (the "BHCA"). In accordance with
Federal Reserve policy, Heartland is expected to act as a source
of financial strength to the Bank Subsidiaries and to commit
resources to support the Bank Subsidiaries in circumstances where
Heartland might not otherwise do so. Under the BHCA, Heartland
is subject to periodic examination by the Federal Reserve.
Heartland is also required to file with the Federal Reserve
periodic reports of Heartland's operations and such additional
information regarding Heartland and its subsidiaries as the
Federal Reserve may require.
Heartland's ownership of FCB makes Heartland a savings and loan
holding company, as defined in the Home Owners' Loan Act (the
"HOLA"). Although savings and loan holding companies generally
are subject to supervision and regulation by the OTS, companies
that, like Heartland, are both bank holding companies and savings
and loan holding companies are generally exempt from OTS
supervision. Federal law, however, requires the Federal Reserve
to consult with the OTS, as appropriate, in establishing the
scope of a Federal Reserve examination of such holding company,
to provide the OTS, upon request, with copies of Federal Reserve
examination reports and other supervisory information concerning
any such holding company, and to cooperate with the OTS in any
enforcement action against any such holding company if the
conduct at issue involves Heartland's savings association
subsidiary.
Investments and Activities
Under the BHCA, a bank holding company must obtain Federal
Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank
holding company if, after the acquisition, it would own or
control more than 5% of the shares of the other bank or bank
holding company (unless it already owns or controls the majority
of such shares); (ii) acquiring all or substantially all of the
assets of another bank; or (iii) merging or consolidating with
another bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by
the BHCA), the Federal Reserve may allow a bank holding company
to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the
law of the state in which the target bank is located. In
approving interstate acquisitions, however, the Federal Reserve
is required to give effect to applicable state law limitations on
the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is
located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies)
and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years)
before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits Heartland from acquiring direct
or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries.
This general prohibition is subject to a number of exceptions.
The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses
found by the Federal Reserve to be "so closely related to banking
... as to be a proper incident thereto." Under current
regulations of the Federal Reserve, Heartland and its non-bank
subsidiaries are permitted to engage in a variety of banking-
related businesses, including the operation of a thrift, sales
and consumer finance, equipment leasing, the operation of a
computer service bureau (including software development), and
mortgage banking and brokerage. The BHCA generally does not
place territorial restrictions on the domestic activities of non-
bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of an FDIC-insured depository institution or its
holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of an institution or
holding company.
Capital Requirements
Bank holding companies are required to maintain minimum levels of
capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a
bank holding company, among other things, may be denied approval
to acquire or establish additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding
companies: a risk-based requirement expressed as a percentage of
total risk-weighted assets, and a leverage requirement expressed
as a percentage of total assets. The risk-based requirement
consists of a minimum ratio of total capital to total risk-
weighted assets of 8%, at least one-half of which must be Tier 1
capital. The leverage requirement consists of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly rated
companies, with a minimum requirement of 4% for all others. For
purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible
assets (other than certain mortgage servicing rights and
purchased credit card relationships). Total capital consists
primarily of Tier 1 capital plus certain other debt and equity
instruments which do not qualify as Tier 1 capital and a portion
of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. For example, the Federal
Reserve's capital guidelines contemplate that additional capital
may be required to take adequate account of, among other things,
interest rate risk, or the risks posed by concentrations of
credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (i.e., Tier
1 capital less all intangible assets), well above the minimum
levels.
As of December 31, 1999, Heartland had regulatory capital in
excess of the Federal Reserve's minimum requirements, with a risk-
based capital ratio of 11.68% and a leverage ratio of 8.85%.
Dividends
The Delaware General Corporation Law (the "DGCL") allows
Heartland to pay dividends only out of its surplus (as defined
and computed in accordance with the provisions of the DGCL) or if
Heartland has no such surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the
preceding fiscal year. Additionally, the Federal Reserve has
issued a policy statement with regard to the payment of cash
dividends by bank holding companies. The policy statement
provides that a bank holding company should not pay cash
dividends which exceed its net income or which can only be funded
in ways that weaken the bank holding company's financial health,
such as by borrowing. The Federal Reserve also possesses
enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe
or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Federal Securities Regulation
Heartland's common stock is registered with the SEC under the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the
SEC under the Exchange Act.
The Bank Subsidiaries
General
DB&T is an Iowa-chartered bank, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF-
insured, Iowa-chartered bank, DB&T is subject to the examination,
supervision, reporting and enforcement requirements of the Iowa
Superintendent, as the chartering authority for Iowa banks, and
the FDIC, as administrator of the BIF.
GSB and RCB are Illinois-chartered banks, the deposit accounts of
which are insured by the BIF of the FDIC. As BIF-insured,
Illinois-chartered banks, GSB and RCB are subject to the
examination, supervision, reporting and enforcement requirements
of the Illinois Commissioner, as the chartering authority for
Illinois banks, and the FDIC, as administrator of the BIF.
WCB is a Wisconsin-chartered bank, the deposit accounts of which
are insured by the BIF of the FDIC. As a BIF-insured, Wisconsin-
chartered bank, WCB is subject to the examination, supervision,
reporting and enforcement requirements of the Wisconsin DFI, as
the chartering authority for Wisconsin banks, and the FDIC, as
administrator of the BIF.
NMB is a New Mexico-chartered bank, the deposit accounts of which
are insured by the BIF of the FDIC. As a BIF-insured, New Mexico-
chartered bank, NMB is subject to the examination, supervision,
reporting and enforcement requirements of the New Mexico
Division, as the chartering authority for New Mexico banks, and
the FDIC, as administrator of the BIF.
FCB is a federally chartered savings association, the deposits of
which are insured by the FDIC's Savings Association Insurance
Fund ("SAIF"). As a SAIF-insured, federally chartered savings
association, FCB is subject to the examination, supervision,
reporting and enforcement requirements of the OTS, as the
chartering authority for federal savings associations, and the
FDIC, as administrator of the SAIF.
Deposit Insurance
As FDIC-insured institutions, the Bank Subsidiaries are required
to pay deposit insurance premium assessments to the FDIC. The
FDIC has adopted a risk-based assessment system under which all
insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their
respective levels of capital and results of supervisory
evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately
capitalized (as defined by the FDIC) and considered of
substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
During the year ended December 31, 1999, both BIF and SAIF
assessments ranged from 0% of deposits to 0.27% of deposits. For
the semi-annual assessment period beginning January 1, 2000, both
BIF and SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured
depository institution if the FDIC determines, after a hearing,
that the institution (i) has engaged or is engaging in unsafe or
unsound practices, (ii) is in an unsafe or unsound condition to
continue operations or (iii) has violated any applicable law,
regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no
tangible capital. Management of Heartland is not aware of any
activity or condition that could result in termination of the
deposit insurance of the Bank Subsidiaries.
FICO Assessments
Since 1987, a portion of the deposit insurance assessments paid
by SAIF members has been used to cover interest payments due on
the outstanding obligations of the Financing Corporation
("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result
of federal legislation enacted in 1996, beginning as of January
1, 1997, both SAIF members and BIF members became subject to
assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Between January 1,
2000 and the final maturity of the outstanding FICO obligations
in 2019, BIF members and SAIF members will share the cost of the
interest on the FICO bonds on a pro rata basis. During the year
ended December 31, 1999, the FICO assessment rate for SAIF
members ranged between approximately 0.058% of deposits and
approximately 0.061% of deposits, while the FICO assessment rate
for BIF members ranged between approximately 0.0116% of deposits
and approximately 0.0122% of deposits. During the year ended
December 31, 1999, the Bank Subsidiaries paid FICO assessments
totaling $121.
Supervisory Assessments
All Iowa banks, Illinois banks, Wisconsin banks, New Mexico banks
and federal savings associations are required to pay supervisory
assessments to the Iowa Superintendent, the Illinois
Commissioner, the Wisconsin DFI, the New Mexico Division and the
OTS, respectively, to fund the operations of such agencies. In
general, the amount of such supervisory assessments is based upon
each institution's total assets. During the year ended December
31, 1999, the Bank Subsidiaries paid supervisory assessments
totaling $152.
Capital Requirements
The FDIC has established the following minimum capital standards
for state-chartered insured non-member banks, such as DB&T, GSB,
RCB, WCB and NMB: a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-
rated banks with a minimum requirement of at least 4% for all
others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. For
purposes of these capital standards, Tier 1 capital and total
capital consist of substantially the same components as Tier 1
capital and total capital under the Federal Reserve's capital
guidelines for bank holding companies (see "--Heartland--Capital
Requirements").
Pursuant to the HOLA and OTS regulations, savings associations,
such as FCB, are subject to the following minimum capital
requirements: a core capital requirement, consisting of a
minimum ratio of core capital to total assets of 3% for savings
associations assigned a composite rating of 1 as of the
association's most recent OTS examination, with a minimum core
capital requirement of 4% of total assets for all other savings
associations; a tangible capital requirement, consisting of a
minimum ratio of tangible capital to total assets of 1.5%; and a
risk-based capital requirement, consisting of a minimum ratio of
total capital to total risk-weighted assets of 8%, at least one-
half of which must consist of core capital. Core capital
consists primarily of permanent stockholders' equity less (i)
intangible assets other than certain supervisory goodwill,
certain mortgage servicing rights and certain purchased credit
card relationships and (ii) investments in subsidiaries engaged
in activities not permitted for national banks. Tangible capital
is substantially the same as core capital except that all
intangible assets other than certain mortgage servicing rights
must be deducted. Total capital consists primarily of core
capital plus certain debt and equity instruments that do not
qualify as core capital and a portion of FCB's allowances for
loan and leases losses.
The capital requirements described above are minimum
requirements. Higher capital levels will be required if
warranted by the particular circumstances or risk profiles of
individual institutions. For example, the regulations of the
FDIC and the OTS provide that additional capital may be required
to take adequate account of, among other things, interest rate
risk or the risks posed by concentrations of credit or
nontraditional activities.
During the year ended December 31, 1999, none of the Bank
Subsidiaries was required by its primary federal regulator to
increase its capital to an amount in excess of the minimum
regulatory requirement. As of December 31, 1999, each of the
Bank Subsidiaries exceeded its minimum regulatory capital
requirements, as follows:
Risk-Based Leverage Tangible
Capital Capital Capital
Ratio Ratio Ratio
--------- --------- ---------
DB&T 10.75 7.94 N/A
GSB 12.16 7.68 N/A
RCB 11.57 8.23 N/A
WCB 10.99 8.43 N/A
NMB 19.02 18.00 N/A
FCB 12.01 8.08 8.04
Federal law provides the federal banking regulators with broad
power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation.
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring
the institution to submit a capital restoration plan; limiting
the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
restricting transactions between the institution and its
affiliates; restricting the interest rate the institution may pay
on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution. As of
December 31, 1999, each of the Bank Subsidiaries was well
capitalized, as defined by applicable regulations.
Additionally, institutions insured by the FDIC may be liable for
any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with the default of commonly controlled
FDIC insured depository institutions or any assistance provided
by the FDIC to commonly controlled FDIC insured depository
institutions in danger of default. Because Heartland owns more
than 25% of the outstanding stock of each of the Bank
Subsidiaries, the Bank Subsidiaries are deemed to be commonly
controlled.
Dividends
In general, under applicable state law, DB&T, GSB, RCB, WCB and
NMB may not pay dividends in excess of their undivided profits.
OTS regulations require prior OTS approval for any capital
distribution by a savings association that is not eligible for
expedited processing under the OTS's application processing
regulations. In order to qualify for expedited processing, a
savings association must: (i) have a composite examination
rating of 1 or 2; (ii) have a Community Reinvestment Act rating
of satisfactory or better; (iii) have a compliance rating of 1 or
2; (iv) meet all applicable regulatory capital requirements; and
(v) not have been notified by the OTS that it is a problem
association or an association in troubled condition. Savings
associations that qualify for expedited processing are not
required to obtain OTS approval prior to making a capital
distribution unless: (a) the amount of the proposed capital
distribution, when aggregated with all other capital
distributions during the same calendar year, will exceed an
amount equal to the association's year-to-date net income plus
its retained net income for the preceding two years; (b) after
giving effect to the distribution, the association will not be at
least "adequately capitalized" (as defined by OTS regulation); or
(c) the distribution would violate a prohibition contained in an
applicable statute, regulation or agreement with the OTS or the
FDIC or violate a condition imposed in connection with an OTS-
approved application or notice. The OTS must be given prior
notice of certain types of capital distributions, including any
capital distribution by a savings association that, like FCB, is
a subsidiary of a holding company, or by a savings association
that, after giving effect to the distribution, would not be "well-
capitalized" (as defined by OTS regulation).
The payment of dividends by any financial institution or its
holding company is affected by the requirement to maintain
adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally
is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described
above, each of the Bank Subsidiaries exceeded its minimum capital
requirements under applicable guidelines as of December 31, 1999.
Further, under applicable regulations of the OTS, the FCB may not
pay dividends in an amount, which would reduce its capital below
the amount required for the liquidation account established in
connection with the FCB's conversion from the mutual to the stock
form of ownership in 1991. As of December 31, 1999,
approximately $35,210 was available to be paid as dividends to
Heartland by the Bank Subsidiaries. Notwithstanding the
availability of funds for dividends, however, the banking
regulators may prohibit the payment of any dividends by the Bank
Subsidiaries if such payment is deemed to constitute an unsafe or
unsound practice.
Insider Transactions
The Bank Subsidiaries are subject to certain restrictions imposed
by federal law on extensions of credit to Heartland and its
subsidiaries, on investments in the stock or other securities of
Heartland and its subsidiaries and the acceptance of the stock or
other securities of Heartland or its subsidiaries as collateral
for loans. Certain limitations and reporting requirements are
also placed on extensions of credit by the Bank Subsidiaries to
their respective directors and officers, to directors and
officers of Heartland and its subsidiaries, to principal
stockholders of Heartland, and to "related interests" of such
directors, officers and principal stockholders. In addition,
federal law and regulations may affect the terms upon which any
person becoming a director or officer of Heartland or one of its
subsidiaries or a principal stockholder of Heartland may obtain
credit from banks with which one of the Bank Subsidiaries
maintains a correspondent relationship.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines, which
establish operational and managerial standards to promote the
safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, asset quality and
earnings. Since the fourth quarter of 1998, and through the
first quarter of 2000, the federal banking regulators have issued
safety and soundness standards for achieving Year 2000
compliance, including standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for
contingencies.
In general, the safety and soundness guidelines prescribe the
goals to be achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those
goals. If an institution fails to comply with any of the
standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan
for achieving and maintaining compliance. If an institution
fails to submit an acceptable compliance plan, or fails in any
material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator's order
is cured, the regulator may restrict the institution's rate of
growth, require the institution to increase its capital, restrict
the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate
under the circumstances. Noncompliance with the standards
established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal
banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching Authority
Iowa law strictly regulates the establishment of bank offices.
Under the Iowa Banking Act, an Iowa state bank, such as DB&T, may
not establish a bank office outside the boundaries of the
counties contiguous to or cornering upon the county in which the
principal place of business of the bank is located. Further,
Iowa law prohibits an Iowa bank from establishing de novo
branches in a municipality other than the municipality in which
the bank's principal place of business is located, if another
bank already operates one or more offices in the municipality in
which the de novo branch is to be located.
Illinois banks, such as GSB and RCB, have authority under
Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory
approvals. Likewise, under the laws of Wisconsin and New Mexico,
Wisconsin banks and New Mexico banks, respectively, have
statewide branching authority, subject to regulatory approval.
Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act"), both state and national
banks are allowed to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits
that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of new
interstate branches or the acquisition of individual branches of
a bank in another state (rather than the acquisition of an out-of-
state bank in its entirety) is allowed by the Riegle-Neal Act
only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997. The laws of Iowa, Illinois, Wisconsin and New
Mexico permit interstate bank mergers, subject to certain
conditions, including a prohibition against interstate mergers
involving an Iowa, Illinois, Wisconsin or New Mexico bank,
respectively, that have been in existence and continuous
operation for fewer than five years.
Federally chartered savings associations which qualify as
"domestic building and loan associations," as defined in the
Internal Revenue Code, or meet the qualified thrift lender test
(see "-The Bank Subsidiaries -- Qualified Thrift Lender Test")
have the authority, subject to receipt of OTS approval, to
establish or acquire branch offices anywhere in the United
States. If a federal savings association fails to qualify as a
"domestic building and loan association," as defined in the
Internal Revenue Code, and fails to meet the qualified thrift
lender test, the association may branch only to the extent
permitted for national banks located in the savings association's
home state. As of December 31, 1999, FCB qualified as a
"domestic building and loan association," as defined in the
Internal Revenue Code and met the qualified thrift lender test.
State Bank Activities
Under federal law and FDIC regulations, FDIC insured state banks
are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are
not permissible for a national bank. Federal law and FDIC
regulations also prohibit FDIC insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as
principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and
continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant
risk to the deposit insurance fund of which the bank is a member.
These restrictions have not had, and are not currently expected
to have, a material impact on the operations of DB&T, GSB, RCB,
WCB or NMB.
Qualified Thrift Lender Test
The HOLA requires every savings association to satisfy a
"qualified thrift lender" ("QTL") test. Under the HOLA, a
savings association will be deemed to meet the QTL test if it
either (i) maintains at least 65% of its "portfolio assets" in
"qualified thrift investments" on a monthly basis in nine out of
every 12 months or (ii) qualifies as a "domestic building and
loan association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist
of mortgage loans, mortgage-backed securities, education loans,
small business loans, credit card loans and certain other housing
and consumer-related loans and investments. "Portfolio assets"
consist of a savings association's total assets less goodwill and
other intangible assets, the association's business properties
and a limited amount of the liquid assets maintained by the
association pursuant to the liquidity requirements of the HOLA
and OTS regulations (see "--The Bank Subsidiaries--Liquidity
Requirements"). A savings association that fails to meet the QTL
test must either convert to a bank charter or operate under
certain restrictions on its operations and activities.
Additionally, within one year following the loss of QTL status,
the holding company for the savings association will be required
to register as, and will be deemed to be, a bank holding company.
A savings association that fails the QTL test may requalify as a
QTL but it may do so only once. As of December 31, 1999, FCB
satisfied the QTL test, with a ratio of qualified thrift
investments to portfolio assets of 79.03%, and qualified as a
"domestic building and loan association," as defined in the
Internal Revenue Code.
Liquidity Requirements
OTS regulations currently require each savings association to
maintain, for each calendar quarter, an average daily balance of
liquid assets (including cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or
federal agency obligations) equal to at least 4% of either (i)
its liquidity base (i.e., its net withdrawable accounts plus
borrowings repayable in 12 months or less) as of the end of the
preceding calendar quarter or (ii) the average daily balance of
its liquidity base during the preceding calendar quarter. This
liquidity requirement may be changed from time to time by the OTS
to an amount within a range of 4% to 10% of the liquidity base,
depending upon economic conditions and the deposit flows of
savings associations. The OTS may also require a savings
association to maintain a higher level of liquidity than the
minimum 4% requirement if the OTS deems necessary to ensure the
safe and sound operation of the association. Penalties may be
imposed for failure to meet liquidity ratio requirements. At
December 31, 1999, FCB was in compliance with OTS liquidity
requirements, with a liquidity ratio of 8.73%.
Federal Reserve System
Federal Reserve regulations, as presently in effect, require
depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular
checking accounts), as follows: for transaction accounts
aggregating $44,300 or less, the reserve requirement is 3% of
total transaction accounts; and for transaction accounts
aggregating in excess of $44,300, the reserve requirement is
$1,329 plus 10% of the aggregate amount of total transaction
accounts in excess of $44,300. The first $5,000 of otherwise
reservable balances is exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by
the Federal Reserve. The Bank Subsidiaries are in compliance
with the foregoing requirements. The balances used to meet the
reserve requirements imposed by the Federal Reserve may be used
to satisfy liquidity requirements to which FCB is subject under
the HOLA and OTS regulations.
G. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of Heartland are affected by the policies of
regulatory authorities, including the Federal Reserve System
whose monetary policies have had a significant effect on the
operating results of commercial banks in the past and are
expected to continue to do so in the future. Because of changing
conditions in the economy and in the money markets, as a result
of actions by monetary and fiscal authorities, interest rates,
credit availability and deposit levels may change due to
circumstances beyond the control of Heartland. Future policies
of the Federal Reserve System and other authorities cannot be
predicted, nor can their effect on future earnings be predicted.
ITEM 2.
PROPERTIES
The following table is a listing of the principal operating
facilities of Heartland:
Main Main
Facility Facility Number
Name and Main Square Owned or of
Facility Address Footage Leased Locations
- ---------------- -------- -------- ---------
Banking Subsidiary
DB&T
1398 Central Avenue 59,500 Owned 8
Dubuque, IA 52001
GSB
971 Gear Street 18,000 Owned 3
Galena, IL 61036
RCB
6855 E. Riverside Blvd. 8,000 Owned 3
Rockford, IL 60114
FCB
320 Concert Street 6,000 Owned 3
Keokuk, IA 52632
WCB
580 North Main Street
Cottage Grove, WI 53527 6,000 Owned 6
NMB
320 Gold NW
Albuquerque, NM 87102 11,400 Lease term 6
through 2006
Main
Facility Number
Name and Main Owned or of
Facility Address Leased Locations
- ---------------- -------- ---------
Nonbanking Subsidiaries
Citizens
1275 Main Street Leased
Dubuque, IA 52001 from DB&T 4
ULTEA
2976 Triverton Pike
Madison, WI 53711 Leased 2
The principal offices of Heartland are located in DB&T's main
office.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
Heartland or any of its subsidiaries is a party or of which any
of their property is the subject.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to a
vote of security holders.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Heartland's common stock was held by approximately 870
shareholders of record as of March 23, 2000, and is traded in the
over-the-counter market.
The following table shows, for the periods indicated, the range
of reported prices per share of Heartland's common stock in the
over-the-counter market. These quotations represent inter-dealer
prices without retail markups, markdowns or commissions and do
not necessarily represent actual transactions.
Heartland Common Stock
Calendar Quarter High Low
---- ---
1998:
First $14 5/16 $16
Second 14 16 7/8
Third 15 3/4 19
Fourth 16 3/4 19
1999:
First $19 1/2 $17 7/8
Second 19 3/4 18 1/4
Third 20 1/2 18 7/8
Fourth 19 3/8 16
Cash dividends have been declared by Heartland quarterly during
the past two years ending December 31, 1999. The following table
sets forth the cash dividends per share paid on Heartland's
common stock for the past two years:
Calendar Quarter
1999 1998
---- ----
First $.08 $.075
Second .08 .075
Third .09 .08
Fourth .09 .08
ITEM 6.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended December 31,
1999 1998 1997
--------------------------------
STATEMENT OF INCOME DATA
Interest income $ 74,154 $ 64,517 $ 59,261
Interest expense 40,849 36,304 31,767
-------- -------- --------
Net interest income 33,305 28,213 27,494
Provision for loan and
lease losses 2,626 951 1,279
-------- -------- --------
Net interest income after
provision for loan and
lease losses 30,679 27,262 26,215
Noninterest income 25,424 17,297 8,565
Noninterest expense 44,722 31,781 22,927
Provision for income taxes 3,156 3,757 3,338
-------- -------- --------
Net income $ 8,225 $ 9,021 $ 8,515
======== ======== ========
PER COMMON SHARE DATA
Net income-basic $ 0.86 $ 0.95 $ 0.90
Net income-diluted 0.84 0.94 0.89
Cash dividends 0.34 .31 .26
Dividend payout ratio 39.47% 32.48% 28.96%
Book value $ 9.03 $ 8.84 $ 8.19
Weighted average shares
outstanding 9,555,194 9,463,313 9,476,342
BALANCE SHEET DATA
Investments and federal
funds sold $213,452 $259,964 $234,666
Total loans and leases,
net of unearned 835,146 590,133 556,406
Allowance for loan and lease
losses 10,844 7,945 7,362
Total assets 1,184,147 953,785 852,060
Total deposits 869,659 717,877 623,532
Long-term obligations 76,657 57,623 43,023
Stockholders' equity 86,573 84,270 77,772
EARNINGS PERFORMANCE DATA
Return on average total assets 0.78% 1.01% 1.09%
Return on average stockholders'
equity 9.61 11.26 11.59
Net interest margin ratio (1) 3.64 3.58 3.89
Earnings to fixed charges:
Excluding interest on deposits 2.15x 2.65x 2.97x
Including interest on deposits 1.28 1.35 1.37
ASSET QUALITY RATIOS
Nonperforming assets to total
assets 0.19% 0.28% 0.34%
Nonperforming loans and leases
to total loans and leases 0.20 0.30 0.37
Net loan and lease charge-offs
to average loans and leases 0.06 0.07 0.08
Allowance for loan and lease
losses to total loans and
leases 1.30 1.35 1.32
Allowance for loan and lease
losses to nonperforming
loans and leases 657.49 453.74 362.30
CAPITAL RATIOS
Average equity to average
assets 8.12% 9.01% 9.39%
Total capital to risk-adjusted
assets 11.68 12.13 12.71
Tier 1 leverage 8.85 8.58 8.76
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
1996 1995
-------------------
STATEMENT OF INCOME DATA
Interest income $51,886 $ 49,149
Interest expense 27,644 25,529
-------- --------
Net interest income 24,242 23,620
Provision for loan and lease losses 1,408 820
-------- --------
Net interest income after provision
for loan and lease losses 22,834 22,800
Noninterest income 7,364 4,981
Noninterest expense 19,507 17,323
Provision for income taxes 2,685 2,884
-------- ---------
Net income $ 8,006 $ 7,574
======== ========
PER COMMON SHARE DATA
Net income-basic $ 0.85 $ 0.79
Net income-diluted 0.84 0.78
Cash dividends .20 .15
Dividend payout ratio 23.53% 19.03%
Book value $ 7.42 $ 6.88
Weighted average shares
outstanding 9,430,018 9,610,368
BALANCE SHEET DATA
Investments and federal funds sold $183,966 $171,726
Total loans and leases, net of unearned 484,085 454,905
Allowance for loan and lease losses 6,191 5,580
Total assets 736,552 677,313
Total deposits 558,343 534,587
Long-term obligations 42,506 45,400
Stockholders' equity 70,259 64,506
EARNINGS PERFORMANCE DATA
Return on average total assets 1.16% 1.18%
Return on average stockholders' equity 12.00 12.28
Net interest margin ratio (1) 3.98 4.13
Earnings to fixed charges:
Excluding interest on deposits 3.38x 3.97x
Including interest on deposits 1.39 1.41
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.34% 0.28%
Nonperforming loans and leases
to total loans and leases 0.41 0.26
Net loan and lease charge-offs
to average loans and leases 0.17 0.08
Allowance for loan and lease losses
to total loans and leases 1.28 1.23
Allowance for loan and lease losses
to nonperforming loans and leases 313.63 463.84
CAPITAL RATIOS
Average equity to average assets 9.66% 9.59%
Total capital to risk-adjusted assets 14.28 14.46
Tier 1 leverage 9.54 9.47
(1) Tax equivalent using a 34% tax rate.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollars in thousands)
The following presents management's discussion and analysis of
the consolidated financial condition and results of operations of
Heartland Financial USA, Inc. ("Heartland") as of the dates and
for the periods indicated. This discussion should be read in
conjunction with the Selected Financial Data, Heartland's
Consolidated Financial Statements and the Notes thereto and other
financial data appearing elsewhere in this report.
The consolidated financial statements include the accounts of
Heartland and its subsidiaries: Dubuque Bank and Trust Company
("DB&T"); Galena State Bank and Trust Company ("GSB"); Riverside
Community Bank ("RCB"); Wisconsin Community Bank ("WCB"); New
Mexico Bank & Trust ("NMB"); First Community Bank, FSB ("FCB");
Citizens Finance Co. ("Citizens"); ULTEA, Inc. ("ULTEA"); DB&T
Insurance, Inc.; DB&T Community Development Corp.; DBT Investment
Corporation; Keokuk Bancshares, Inc. (dba KBS Investment Corp.),
and Heartland Capital Trust I ("Trust I"). All of Heartland's
subsidiaries are wholly-owned except for NMB, of which Heartland
was an 80% owner on December 31, 1999.
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Heartland intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies and
expectations of Heartland are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Heartland's
ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Factors which could have
a material adverse affect on the operations and future prospects
of Heartland and the subsidiaries include, but are not limited
to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and
the Federal Reserve Board, the quality or composition of the loan
or investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in Heartland's
market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be
placed on such statements. Further information concerning
Heartland and its business, including additional factors that
could materially affect Heartland's financial results, is
included in Heartland's filings with the Securities and Exchange
Commission.
OVERVIEW
Heartland's results of operations depend primarily on net
interest income, which is the difference between interest income
from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income, which includes service
charges, fees and gains on loans, rental income on operating
leases and trust income, also affects Heartland's results of
operations. Heartland's principal operating expenses, aside from
interest expense, consist of compensation and employee benefits,
occupancy and equipment costs, depreciation on equipment under
operating leases and provision for loan and lease losses.
Heartland crossed the one billion dollar mark during 1999, as
total assets reached $1,184,147 at year-end, an increase of
$230,362 or 24.15% since year-end 1998 and the largest percentage
increase since 1992. Particularly gratifying was the significant
growth experienced in the loan portfolio, which grew to $835,146
at December 31, 1999, an increase of $245,013 or 41.52% since
December 31, 1998.
Net income recorded during 1999 totaled $8,225 or $.86 on a basic
per common share basis. During 1998, annual earnings were $9,021
or $.95 on a basic per common share basis. Return on common
equity was 9.61% and return on assets was .78% for 1999, compared
to 11.26% and 1.01% for 1998, respectively. Earnings declined
during the year, as compared to 1998, primarily as a result of an
increased loan loss provision associated with the strong loan
growth experienced. Additionally, earnings were affected by
expenses incurred to pursue growth initiatives in new and
existing markets, combined with a reduction in the amount of
securities gains realized.
During 1998, Heartland was able to sustain an increase in
earnings even though additional overhead was expended on growth
initiatives. Earnings increased $506 or 5.94% during 1998 when
compared to the $8,515 or $.90 per basic common share recorded
during 1997. Return on common equity was 11.59% and return on
assets was 1.09% for 1997. Heartland's total assets grew
$101,725 or 11.94% from year-end 1997. Loans and leases were up
$33,727 or 6.06% at December 31, 1998.
The initiatives undertaken in these years to position Heartland
for future increased earnings included:
NMB was established in Albuquerque, New Mexico in May of
1998 and subsequently opened three additional branches
during the second and third quarters of 1999. Total assets
at NMB reached $101,164 at December 31, 1999. The
acquisition and subsequent merger of First National Bank of
Clovis into NMB was completed on January 1, 2000, nearly
doubling NMB's asset size.
WCB was acquired in March of 1997 and subsequently opened a
branch office in Middleton, Wisconsin in early 1998.
Additional offices were opened during 1999 in Sheboygan,
Green Bay and Eau Claire, Wisconsin and the acquisition of
Bank One Wisconsin's Monroe branch was completed in July of
1999. Total assets at this entity went from $54,031 at year-
end 1998 to $185,837 on December 31, 1999.
RCB, Heartland's 1995 de novo bank in Rockford, Illinois,
opened an additional branch location in July of 1999.
ULTEA acquired Arrow Motors Inc., a Wisconsin corporation
doing business as Lease Associates Group ("LAG"), in July of
1998 and, as a result, became the largest fleet management
company based in Wisconsin.
Citizens, a consumer finance company, opened offices in
Appleton, Wisconsin and Rockford, Illinois during 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest income
earned on earning assets and interest expense paid on interest
bearing liabilities. As such, net interest income is affected by
changes in the volume and yields on earning assets and the volume
and rates paid on interest bearing liabilities. Net interest
margin is the ratio of tax equivalent net interest income to
average earning assets.
Net interest income on a fully tax equivalent basis was $34,125,
$28,999 and $28,280 for 1999, 1998 and 1997, respectively, an
increase of $5,126 or 17.68% for 1999 and $719 or 2.54% for 1998.
These increases were primarily attributable to the significant
growth in loans and the ability to keep the increase in interest
expense below the growth in interest income.
Expressed as a percentage of average earning assets, Heartland's
net interest margin was 3.64% in 1999, 3.58% in 1998 and 3.89% in
1997. The 1999 increase was primarily the result of a shift in
the asset mix on the balance sheet as gross loans went from
61.87% of total assets at December 31, 1998, to 70.53% at
December 31, 1999. The decrease in net interest margin during
1998 occurred for several reasons:
The operations of ULTEA resulted in additional interest
expense associated with debt utilized to fund the vehicles
under operating leases while the income derived from these
leases is recorded as noninterest income.
A decline and flattening of the yield curve resulted in an
acceleration of paydowns in the mortgage-backed securities and
loan portfolio and pressure from loan customers to lower rates
charged on their balances.
The return on Heartland's securities portfolio declined as
several higher-yielding securities matured or were called and
the average life of the portfolio was reduced as prepayments
accelerated on the mortgage-backed securities portfolio.
Heartland continues to manage its balance sheet on a proactive
basis. The following table sets forth certain information
relating to Heartland's average consolidated balance sheets and
reflects the yield on average earning assets and the cost of
average interest bearing liabilities for the years indicated.
Such yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities. Average balances
are derived from daily balances, and nonaccrual loans are
included in each respective loan category.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
For the Year Ended
December 31, 1999
Average
Balance Interest Rate
---------- -------- ------
EARNING ASSETS
Securities:
Taxable $ 200,559 $11,113 5.54%
Nontaxable (1) 21,010 1,842 8.77
---------- ------- ------
Total securities 221,569 12,955 5.85
----- ---- ------- ------
Interest bearing deposits 8,176 468 5.72
Federal funds sold 7,741 410 5.30
---------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 365,199 29,790 8.16
Residential mortgage 162,878 12,773 7.84
Agricultural and agricultural
real estate (1) 86,505 7,382 8.53
Consumer 86,132 8,683 10.08
Direct financing leases, net 9,401 659 7.01
Fees on loans - 1,854 -
Less: allowance for loan
and lease losses (9,336) - -
---------- ------- ------
Net loans and leases 700,779 61,141 8.72
---------- ------- ------
Total earning assets 938,265 74,974 7.99
---------- ------- ------
NONEARNING ASSETS
Total nonearning assets 115,757 - -
---------- ------- ------
TOTAL ASSETS $1,054,022 $74,974 7.11%
========== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $ 324,476 $10,789 3.33%
Time, $100,000 and over 59,822 3,222 5.39
Other time deposits 312,051 17,169 5.50
Short-term borrowings 111,853 5,630 5.03
Other borrowings 60,490 4,039 6.68
---------- ------- ------
Total interest bearing
liabilities 868,692 40,849 4.70
---------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 81,511 - -
Accrued interest and other
liabilities 18,254 - -
---------- ------- ------
Total noninterest bearing
liabilities 99,765 - -
---------- ------- ------
Stockholders' Equity 85,565 - -
---------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,054,022 $40,849 3.88%
========== ======= ======
Net interest income (1) $34,125
=======
Net interest income
to total earning assets (1) 3.64%
======
Interest bearing liabilities
to earning assets 92.58%
==========
(1) Tax equivalent basis is calculated using an effective tax
rate of 34%.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
For the Year Ended
December 31, 1998
Average
Balance Interest Rate
-------- -------- ------
EARNING ASSETS
Securities:
Taxable $196,206 $11,515 5.87%
Nontaxable (1) 20,507 1,716 8.37
-------- ------- ------
Total securities 216,713 13,231 6.11
-------- ------- ------
Interest bearing deposits 8,313 386 4.64
Federal funds sold 29,830 1,582 5.30
-------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 249,326 21,523 8.63
Residential mortgage 162,545 12,854 7.91
Agricultural and agricultural
real estate (1) 75,685 6,751 8.92
Consumer 66,138 6,702 10.13
Direct financing leases, net 8,367 625 7.47
Fees on loans - 1,649 -
Less: allowance for loan
and lease losses (7,944) - -
-------- ------- ------
Net loans and leases 554,117 50,104 9.04
-------- ------- ------
Total earning assets 808,973 65,303 8.07
-------- ------- ------
NONEARNING ASSETS
Total nonearning assets 80,317 - -
-------- ------- ------
TOTAL ASSETS $889,290 $65,303 7.34%
======== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $266,282 $ 9,512 3.57%
Time, $100,000 and over 51,283 2,905 5.66
Other time deposits 282,142 16,228 5.75
Short-term borrowings 78,484 4,076 5.19
Other borrowings 56,137 3,583 6.38
-------- ------- ------
Total interest bearing
liabilities 734,328 36,304 4.94
-------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 60,514 - -
Accrued interest and other
liabilities 14,343 - -
-------- ------- ------
Total noninterest bearing
liabilities 74,857 - -
-------- ------- ------
Stockholders' Equity 80,105 - -
-------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $889,290 $36,304 4.08%
======== ======= ======
Net interest income (1) $28,999
=======
Net interest income
to total earning assets (1) 3.58%
======
Interest bearing liabilities
to earning assets 90.77%
========
(1) Tax equivalent basis is calculated using an effective tax
rate of 34%.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
For the Year Ended
December 31, 1997
Average
Balance Interest Rate
-------- -------- ------
EARNING ASSETS
Securities:
Taxable $169,086 $10,393 6.15%
Nontaxable (1) 19,700 1,773 9.00
-------- ------- ------
Total securities 188,786 12,166 6.44
-------- ------- ------
Interest bearing deposits 2,972 98 3.30
Federal funds sold 12,570 681 5.42
-------- ------- ------
Loans and leases:
Commercial and commercial
real estate (1) 222,157 19,683 8.86
Residential mortgage 178,362 14,083 7.90
Agricultural and agricultural
real estate (1) 66,294 6,037 9.11
Consumer 55,218 5,672 10.27
Direct financing leases, net 6,739 501 7.43
Fees on loans - 1,126 -
Less: allowance for loan
and lease losses (6,998) - -
-------- ------- ------
Net loans and leases 521,772 47,102 9.03
-------- ------- ------
Total earning assets 726,100 60,047 8.27
-------- ------- ------
NONEARNING ASSETS
Total nonearning assets 56,596 - -
-------- ------- ------
TOTAL ASSETS $782,696 $60,047 7.67%
======== ======= ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $237,730 $ 8,317 3.50%
Time, $100,000 and over 34,913 1,961 5.62
Other time deposits 268,201 15,487 5.77
Short-term borrowings 70,313 3,740 5.32
Other borrowings 36,406 2,262 6.21
-------- ------- ------
Total interest bearing
liabilities 647,563 31,767 4.91
-------- ------- ------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 51,770 - -
Accrued interest and other
liabilities 9,906 - -
-------- ------- ------
Total noninterest bearing
liabilities 61,676 - -
-------- ------- ------
Stockholders' Equity 73,457 - -
-------- ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $782,696 $31,767 4.06%
======== ======= ======
Net interest income (1) $28,280
=======
Net interest income
to total earning assets (1) 3.89%
======
Interest bearing liabilities
to earning assets 89.18%
========
(1) Tax equivalent basis is calculated using an effective tax
rate of 34%.
The following table allocates the changes in net interest income
to differences in either average balances or average rates for
earning assets and interest bearing liabilities. The changes have
been allocated proportionately to the change due to volume and
change due to rate. Interest income is measured on a tax
equivalent basis using a 34% tax rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Year Ended
December 31,
1999 Compared to 1998
Change Due to
Volume Rate Net
--------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $ 255 $ (657) $ (402)
Nontaxable 42 84 126
Interest bearing deposits (6) 88 82
Federal funds sold (1,171) (1) (1,172)
Loans and leases 13,261 (2,224) 11,037
------- ------ -------
TOTAL EARNING ASSETS 12,381 (2,710) 9,671
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 2,079 (802) 1,277
Time, $100,000 and over 484 (167) 317
Other time deposits 1,720 (779) 941
Short-term borrowings 1,733 (179) 1,554
Other borrowings 278 178 456
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 6,294 (1,749) 4,545
------- ------- -------
NET INTEREST INCOME $ 6,087 $ (961) $ 5,126
======= ======= =======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Year Ended
December 31,
1998 Compared to 1997
Change Due to
Volume Rate Net
-------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $1,668 $(546) $1,122
Nontaxable 72 (129) (57)
Interest bearing deposits 176 112 288
Federal funds sold 935 (34) 901
Loans and leases 2,920 82 3,002
------ ----- ------
TOTAL EARNING ASSETS 5,771 (515) 5,256
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 999 196 1,195
Time, $100,000 and over 919 25 944
Other time deposits 805 (64) 741
Short-term borrowings 435 (99) 336
Other borrowings 1,226 95 1,321
------ ----- ------
TOTAL INTEREST BEARING
LIABILITIES 4,384 153 4,537
------ ----- ------
NET INTEREST INCOME $1,387 $(668) $ 719
====== ===== ======
ANALYSIS OF CHANGES IN NET INTEREST INCOME
For the Year Ended
December 31,
1997 Compared to 1996
Change Due to
Volume Rate Net
-------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $2,033 $ (32) $2,001
Nontaxable (1,133) (202) (1,335)
Interest bearing deposits (51) (14) (65)
Federal funds sold 55 16 71
Loans and leases 5,725 530 6,255
------ ----- ------
TOTAL EARNING ASSETS 6,629 298 6,927
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 813 30 843
Time, $100,000 and over (163) (7) (170)
Other time deposits 1,641 261 1,902
Short-term borrowings 1,739 58 1,797
Other borrowings (331) 82 (249)
------ ----- ------
TOTAL INTEREST BEARING
LIABILITIES 3,699 424 4,123
------ ----- ------
NET INTEREST INCOME $2,930 $(126) $2,804
====== ===== ======
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses increased $1,675 or
176.13% during 1999 when compared to 1998. This increase was
primarily in response to the significant loan growth experienced
and was made to provide, in management's opinion, an adequate
allowance for loan and lease losses. During 1998, the provision
for loan and lease losses decreased $328 or 25.65% when compared
to 1997. This reduction was primarily the result of a $357
recovery on a pool of leases written down during 1996.
NONINTEREST INCOME
For the Years Ended
December 31,
1999 1998 1997
--------------------------
Service charges and fees $ 3,906 $ 3,013 $2,723
Trust fees 2,662 2,284 2,009
Brokerage commissions 655 413 324
Insurance commissions 803 751 563
Securities gains, net 713 1,897 1,446
Rental income on operating leases 14,718 7,428 811
Gains on sale of loans 1,028 1,212 373
Other noninterest income 939 299 316
------- ------- ------
Total noninterest income $25,424 $17,297 $8,565
======= ======= ======
The above table shows Heartland's noninterest income for the
years indicated. Total noninterest income increased $8,127 or
46.99% during 1999, as compared to an increase of $8,732 or
101.95% during 1998.
Expansion into vehicle leasing and fleet management was
responsible for the significant growth in noninterest income
during both years. Rental income on operating leases accounted
for 89.70% and 75.78% of the change in 1999 and 1998,
respectively. ULTEA's first full year of operation as a
Heartland subsidiary occurred in 1997. During the third quarter
of 1998, ULTEA acquired LAG and, as a result, more than doubled
in asset size going from $15 million to $35 million.
Gains on sale of loans decreased $184 or 15.18% during 1999. The
volume of mortgage loans sold into the secondary market declined
during 1999 as rates moved upward and customers elected to take
three- and five-year adjustable rate mortgage loans, which
Heartland elected to retain in its loan portfolio. Conversely,
during 1998, gains on sale of loans increased $839 or 224.93% as
Heartland experienced refinancing activity in its real estate
mortgage loan portfolio as a result of decreasing interest rates.
The majority of these new fixed rate 15- and 30-year real estate
loans were sold into the secondary market.
Securities gains decreased $1,184 or 62.41% during 1999 compared
to 1998. During 1998, securities gains increased $451 or 31.19%
compared to 1997 and were attributable to the strong performance
of Heartland's equity portfolio.
Emphasis during the past several years on enhancing revenues from
services provided to customers has contributed to the growth of
fee income. Service charges, trust fees and brokerage
commissions all increased by more than 10% during each of the
past two years.
Other noninterest income increased $640 or 214.05% during 1999
primarily due to gains on the disposal of leased assets at ULTEA.
NONINTEREST EXPENSE
For the Years Ended
December 31,
1999 1998 1997
---------------------------
Salaries and employee
benefits $18,945 $15,218 $13,070
Occupancy, net 2,076 1,695 1,354
Furniture and equipment 2,416 1,998 1,537
Outside services 2,239 1,416 1,439
FDIC deposit insurance
assessment 121 118 116
Advertising 1,376 1,150 826
Depreciation on equipment under
operating leases 10,844 5,296 584
Other noninterest expense 6,705 4,890 4,001
------- ------- -------
Total noninterest expense $44,722 $31,781 $22,927
======= ======= =======
Efficiency ratio (1) 76.01% 71.58% 64.77%
======= ======= =======
(1) Noninterest expense divided by the sum of net interest
income and noninterest income less securities gains.
The above table shows Heartland's noninterest expense for the
years indicated. Noninterest expense increased $12,941 or 40.72%
in 1999 when compared to 1998. Total 1998 noninterest expense
represented an increase of $8,854 or 38.62% from the 1997 total.
The largest component of the increase in noninterest expense
during both 1999 and 1998 was related to the operations of ULTEA,
as depreciation on equipment under operating leases increased
$5,548 or 104.76% in 1999 and $4,712 or 806.85% in 1998.
Salaries and employee benefits expense continued to experience
increases during both 1999 and 1998, growing $3,727 or 24.49% and
$2,148 or 16.43%, respectively. In addition to the normal merit
and cost of living raises, these increases were attributable to
Heartland's continued expansion efforts, particularly the
additions at NMB and WCB. The number of full-time equivalent
employees increased from 396 at December 31, 1998, to 484 at
December 31, 1999.
In addition to the increases experienced in salaries and employee
benefits, the expansion efforts underway during the past two
years have resulted in additional occupancy, furniture and
equipment and advertising/public relations costs. These expenses
increased $1,025 or 21.16% during 1999 and $1,126 or 30.29%
during 1998.
Fees for outside services increased $823 or 58.12% during 1999
when compared to 1998. In addition to fees relating to expansion
efforts, this increase resulted from consulting fees paid for a
net interest margin and earnings improvement study. This
engagement was focused on identifying specific strategies to
increase earnings with an emphasis on reaching and expanding the
bank subsidiaries' core customers more effectively and
efficiently. The study was completed during the third quarter of
1999 and implementation of the recommendations is scheduled to be
completed by the second quarter of 2000.
Other noninterest expenses increased $1,815 or 37.12% during 1999
due primarily to the growth initiatives underway. Some of the
expenses included within this category that experienced
significant growth during 1999 as a result of the expansion
efforts were goodwill and core deposit intangibles amortization,
office supplies, telephone charges and fees relating to the
processing of credit cards for merchants. During 1998, other
noninterest expenses grew $889 or 22.22%. Amortization and
maintenance expense on software contributed to this increase,
primarily due to the conversion of the bank subsidiaries to
Fiserv's Comprehensive Banking Systems during the spring of 1997.
INCOME TAXES
Income tax expense decreased $601 or 16.00% for 1999 primarily as
a result of a reduction in pre-tax earnings. During 1998, income
tax expense increased $419 or 12.55% as a result of additional
pre-tax earnings. The effective tax rate was 27.73% in 1999,
29.40% in 1998 and 28.16% in 1997.
FINANCIAL CONDITION
LENDING ACTIVITIES
Heartland's major source of income is interest on loans and
leases. The table below presents the composition of Heartland's
loan portfolio at the end of the years indicated.
LOAN PORTFOLIO
December 31,
1999 1998
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and commercial
real estate $448,991 53.53% $277,765 46.88%
Residential mortgage 180,347 21.50 156,415 26.40
Agricultural and
agricultural real estate 92,936 11.08 77,211 13.03
Consumer 103,608 12.35 72,642 12.26
Lease financing, net 12,886 1.54 8,508 1.43
-------- ------- -------- -------
Gross loans and leases 838,768 100.00% 592,541 100.00%
======= =======
Unearned discount (3,169) (2,136)
Deferred loan fees (453) (272)
-------- --------
Total loans and leases 835,146 590,133
Allowance for loan and
lease losses (10,844) (7,945)
-------- --------
Loans and leases, net $824,302 $582,188
======== ========
LOAN PORTFOLIO
December 31,
1997 1996
Amount Percent Amount Percent
-------- ------- -------- -------
Commercial and commercial
real estate $242,868 43.46% $206,523 42.46%
Residential mortgage 175,268 31.37 166,999 34.33
Agricultural and
agricultural real estate 69,302 12.40 57,526 11.83
Consumer 64,223 11.49 48,361 9.94
Lease financing, net 7,171 1.28 7,042 1.44
-------- ------- -------- -------
Gross loans and leases 558,832 100.00% 486,451 100.00%
======= =======
Unearned discount (2,077) (1,962)
Deferred loan fees (349) (404)
-------- --------
Total loans and leases 556,406 484,085
Allowance for loan and
lease losses (7,362) (6,191)
-------- --------
Loans and leases, net $549,044 $477,894
======== ========
LOAN PORTFOLIO
December 31,
1995
Amount Percent
-------- -------
Commercial and commercial
real estate $191,866 42.00%
Residential mortgage 158,324 34.66
Agricultural and
agricultural real estate 59,089 12.94
Consumer 38,988 8.54
Lease financing, net 8,530 1.86
-------- -------
Gross loans and leases 456,797 100.00%
=======
Unearned discount (1,510)
Deferred loan fees (382)
--------
Total loans and leases 454,905
Allowance for loan and
lease losses (5,580)
--------
Loans and leases, net $449,325
========
The table below sets forth the remaining maturities by loan and
lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1)
December 31, 1999
Over 1 Year
Through 5 Years
One Year Fixed Floating
or less Rate Rate
------------------------------
Commercial and commercial
real estate $149,798 $201,105 $ 41,020
Residential mortgage 35,437 37,483 12,432
Agricultural and
agricultural real estate 35,699 40,240 5,657
Consumer 26,835 51,142 10,557
Lease financing, net 3,108 8,988 -
-------- -------- --------
Total $250,877 $338,958 $ 69,666
======== ======== ========
Over 5 Years
Fixed Floating
Rate Rate Total
-------------------------------
Commercial and commercial
real estate $ 25,816 $ 31,252 $448,991
Residential mortgage 11,828 83,167 180,347
Agricultural and
agricultural real estate 5,268 6,072 92,936
Consumer 6,223 8,851 103,608
Lease financing, net 790 - 12,886
-------- -------- --------
Total $ 49,925 $129,342 $838,768
======== ======== ========
(1) Maturities based upon contractual dates.
Net loans and leases grew $242,114 or 41.59% from December 31,
1998, to December 31, 1999, compared to $33,144 or 6.04% from
December 31, 1997, to December 31, 1998. Expansion at WCB
accounted for $106,951 or 44.17% of the growth during 1999, with
the acquisition of the Monroe banking office making up $37,916 of
this increase. Also contributing to the 1999 growth was the
$54,499 increase in the loan portfolio at DB&T, Heartland's lead
bank, which comprised 2