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 86% owner on December 31, 2000.
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, 2000, these individuals owned approximately 47% 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 these entities have been certified as Preferred Lenders by the agency. 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 13% of the total loan portfolio at December 31, 2000. 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 and the early months of 2000, 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 5,000 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 $622 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 2000 census, the city of Dubuque had a total population of approximately 58,000.
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 2000 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 38,000, 20,000 and 7,400, 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 11,000.
RCB is located on the northeast edge of Rockford, Illinois, which is approximately 75 miles west of Chicago in Winnebago County. Based on the 2000 census, the county had a population of 278,000 and the city of Rockford had a population of 150,000.
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 2000 census, the county had a population of 427,000, and the village of Cottage Grove had a population of 3,800. 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 113,000, 227,000 and 93,000, respectively, according to the 2000 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 2000 census, Monroe had a population of 11,000, and Green County had a population of 34,000.
NMB operates four offices within Albuquerque, New Mexico in Bernalillo County. Based upon the 2000 census, the county had a population of 557,000, and the city had a population of 449,000. 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 33,000 according to the 2000 census, and Curry County had a population of 45,000.
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, 2000, Heartland employed 541 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. In June 2000, the FASB issued FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FAS No. 133. Heartland implemented FAS 133 on January 1, 2001 and determined that there was no material impact on the consolidated financial statements as a result of the implementation.
In September 2000, the FASB issued FAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but carries over most of FAS 125's provisions. The collateral and disclosure provisions of FAS 140 are effective for the December 31, 2000, financial statements. The other provisions of FAS 140 are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Heartland does not expect the impact of the revised provisions 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.
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 that have not received approval to operate as financial 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, this authority would permit Heartland 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. Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. As of the date of this filing, Heartland has not applied for nor received approval to operate as a financial holding company.
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% or more 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: (i) a risk-based requirement expressed as a percentage of total risk-weighted assets; and (ii) 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 Heartland'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, 2000, Heartland had regulatory capital in excess of the Federal Reserve's minimum requirements, with a risk- based capital ratio of 9.90% and a leverage ratio of 7.25%.
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, Heartland is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
THE BANK SUBSIDIARIES
General
DB&T is an Iowa-chartered bank, the 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, 2000, both BIF and SAIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2001, 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, 2000, the FICO assessment rate for BIF and SAIF members was approximately 0.02% of deposits.
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, 2000, the Bank Subsidiaries paid supervisory assessments totaling $183.
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: (i) 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 (ii) 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, 2000, 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, 2000, each of the Bank Subsidiaries exceeded its minimum regulatory capital requirements, as follows:
Total Risk-Based Leverage Tangible Capital Ratio Capital Ratio Capital Ratio ---------------- ------------- -------------
DB&T 10.93% 7.94% N/A GSB 10.91% 7.51% N/A RCB 10.10% 7.26% N/A WCB 11.35% 8.39% N/A NMB 11.41% 8.75% N/A FCB 11.45% 7.70% 7.76%
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: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution's asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution. As of December 31, 2000, 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, 2000. 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, 2000, approximately $33,959 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.
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
Until June 30, 2004, Iowa banks, such as DB&T, have authority under Iowa law to establish up to three branches at any location in Iowa, subject to regulatory approval. Beginning July 1, 2004, Iowa banks may establish any number of branches at any location in Iowa, still subject to regulatory approval.
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 has 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, 2000, 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.
Eligible state banks are also authorized to engage, through "financial subsidiaries," in certain activities that are permissible for financial holding companies (as described above) and certain activities that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity. As of the date of this filing, none of Heartland's state banks has applied for or received approval to establish any financial subsidiaries.
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 prior 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, 2000, FCB satisfied the QTL test, with a ratio of qualified thrift investments to portfolio assets of 72.54%, and qualified as a "domestic building and loan association," as defined in the Internal Revenue Code.
Liquidity Requirements
In 2000, OTS regulations required 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 was 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 also required each savings association to maintain a higher level of liquidity than the minimum 4% requirement if the OTS deemed it necessary to ensure the safe and sound operation of the association. Penalties could have been imposed for failure to meet liquidity ratio requirements. As of December 31, 2000, FCB was in compliance with OTS liquidity requirements, with a liquidity ratio of 14.30%.
The OTS issued an interim final rule, effective March 15, 2001, eliminating the requirement that each savings association maintain an average daily balance of liquid assets of at least 4% of its liquidity base. The change was made to implement a recent change to the Home Owners' Loan Act. The rule would, nevertheless, require each savings association and service corporation to maintain sufficient liquidity to ensure its safe and sound operation.
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 $42.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $42.8 million, the reserve requirement is $1.284 million plus 10% of the aggregate amount of total transaction accounts in excess of $42.8 million. The first $5.5 million of otherwise reservable balances are 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 could have been 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.
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.
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.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2000 to a vote of security holders.
PART II ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Heartland's common stock was held by approximately 886 shareholders of record as of March 21, 2001, 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 ---- --- 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
2000: First $18 1/2 $14 7/8 Second 16 1/4 14 Third 15 14 Fourth 14 5/8 12 1/2
Cash dividends have been declared by Heartland quarterly during the past two years ending December 31, 2000. The following table sets forth the cash dividends per share paid on Heartland's common stock for the past two years:
Calendar Quarter 2000 1999 ---- ----
First $.09 $.08 Second .09 .08 Third .09 .09 Fourth .09 .09
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
For the Years Ended December 31, 2000 1999 1998 ----------------------------------
STATEMENT OF INCOME DATA
Interest income $ 104,250 $ 74,154 $ 64,517 Interest expense 59,709 40,849 36,304 ---------- ---------- ---------- Net interest income 44,541 33,305 28,213 Provision for loan and lease losses 3,301 2,626 951 ---------- ---------- ---------- Net interest income after provision for loan and lease losses 41,240 30,679 27,262 Noninterest income 27,008 25,424 17,297 Noninterest expense 54,446 44,722 31,781 Provision for income taxes 4,216 3,156 3,757 ---------- ---------- ---------- Net income $ 9,586 $ 8,225 $ 9,021 ========== ========== ==========
PER COMMON SHARE DATA Net income-basic $ 1.00 $ 0.86 $ 0.95 Net income-diluted 0.98 0.84 0.94 Cash dividends 0.36 .34 .31 Dividend payout ratio 36.15% 39.47% 32.48% Book value $ 10.00 $ 9.03 $ 8.84 Weighted average shares outstanding 9,628,038 9,555,194 9,463,313
BALANCE SHEET DATA Investments and federal funds sold $ 274,365 $ 213,452 $ 259,964 Total loans and leases, net of unearned 1,042,096 835,146 590,133 Allowance for loan and lease losses 13,592 10,844 7,945 Total assets 1,466,387 1,184,147 953,785 Total deposits 1,101,313 869,659 717,877 Long-term obligations 67,681 76,657 57,623 Stockholders' equity 96,146 86,573 84,270
EARNINGS PERFORMANCE DATA Return on average total assets 0.70% 0.78% 1.01% Return on average stockholders' equity 10.69 9.61 11.26 Net interest margin ratio(1) 3.74 3.64 3.58 Earnings to fixed charges: Excluding interest on deposits 1.82x 2.15x 2.65x Including interest on deposits 1.23 1.28 1.35
ASSET QUALITY RATIOS Nonperforming assets to total assets 0.51% 0.19% 0.28% Nonperforming loans and leases to total loans and leases 0.65 0.20 0.30 Net loan and lease charge-offs to average loans and leases 0.17 0.06 0.07 Allowance for loan and lease losses to total loans and leases 1.30 1.30 1.35 Allowance for loan and lease losses to nonperforming loans and leases 201.60 657.49 453.74
CAPITAL RATIOS Average equity to average assets 6.54% 8.12% 9.01% Total capital to risk-adjusted assets 9.90 11.68 12.13 Tier 1 leverage 7.25 8.85 8.58
SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
For the Years Ended December 31, 1997 1996 ----------------------- STATEMENT OF INCOME DATA
Interest income $ 59,261 $ 51,886 Interest expense 31,767 27,644 ---------- ---------- Net interest income 27,494 24,242 Provision for loan and lease losses 1,279 1,408 ---------- ---------- Net interest income after provision for loan and lease losses 26,215 22,834 Noninterest income 8,565 7,364 Noninterest expense 22,927 19,507 Provision for income taxes 3,338 2,685 ---------- ---------- Net income $ 8,515 $ 8,006 ========== ========== PER COMMON SHARE DATA Net income-basic $ 0.90 $ 0.85 Net income-diluted 0.89 0.84 Cash dividends .26 .20 Dividend payout ratio 28.96% 23.53% Book value $ 8.19 $ 7.42 Weighted average shares outstanding 9,476,342 9,430,018
BALANCE SHEET DATA Investments and federal funds sold $ 234,666 $ 183,966 Total loans and leases, net of unearned 556,406 484,085 Allowance for loan and lease losses 7,362 6,191 Total assets 852,060 736,552 Total deposits 623,532 558,343 Long-term obligations 43,023 42,506 Stockholders' equity 77,772 70,259
EARNINGS PERFORMANCE DATA Return on average total assets 1.09% 1.16% Return on average stockholders' equity 11.59 12.00 Net interest margin ratio (1) 3.89 3.98 Earnings to fixed charges: Excluding interest on deposits 2.97x 3.38x Including interest on deposits 1.37 1.39
ASSET QUALITY RATIOS Nonperforming assets to total assets 0.34% 0.34% Nonperforming loans and leases to total loans and leases 0.37 0.41 Net loan and lease charge-offs to average loans and leases 0.08 0.17 Allowance for loan and lease losses to total loans and leases 1.32 1.28 Allowance for loan and lease losses to nonperforming loans and leases 362.30 313.63
CAPITAL RATIOS Average equity to average assets 9.39% 9.66% Total capital to risk-adjusted assets 12.71 14.28 Tier 1 leverage 8.76 9.54
(1) Tax equivalent using a 34% tax rate.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of the consolidated financial condition and results of operations of Heartland Financial USA, Inc. ("Heartland") as of the dates and for the periods indicated. This discussion should be read in conjunction with the Selected Financial Data, Heartland's Consolidated Financial Statements and the Notes thereto and other financial data appearing elsewhere in this report. The consolidated financial statements include the accounts of Heartland and its subsidiaries. All of Heartland's subsidiaries are wholly-owned except for New Mexico Bank & Trust, of which Heartland was an 86% owner on December 31, 2000.
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 and 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 areas; Heartland's implementation of new technologies; Heartland's ability to develop and maintain secure and reliable electronic systems and changes in 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 is a diversified financial services holding company providing full-service community banking through six banking subsidiaries with a total of 31 banking locations in Iowa, Illinois, Wisconsin and New Mexico. In addition, Heartland has separate subsidiaries in the consumer finance, vehicle leasing/fleet management, insurance agency and investment management businesses. Heartland's primary strategy is to balance its focus on increasing profitability with asset growth and diversification through acquisitions, de novo bank formations, branch openings and expansion into non-bank subsidiary activities.
Heartland's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges, fees and gains on loans, rental income on operating leases and trust income, also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy and equipment costs, depreciation on equipment under operating leases and provision for loan and lease losses.
During 1999, Heartland crossed the one billion dollar mark, as total assets reached $1.2 billion at the end of the year, an increase of 24% over year-end 1998 and the largest percentage increase since 1992. Again in 2000, total assets grew by 24%, nearly reaching $1.5 billion at year-end 2000. Of particular note was the significant growth experienced in the loan portfolio, which increased 42% and 25% during 1999 and 2000, respectively. Growth in deposits was also substantial during these years, increasing 21% and 27% during 1999 and 2000, respectively.
For the past two years, Heartland has invested substantial resources into the expansion of its franchise and the diversification of its earnings stream. The 2000 results continue to reinforce and encourage Heartland's community banking approach. For 2000, earnings increased $1.361 million or nearly 17% when compared to 1999. Earnings grew to $1.00 per basic common share and $.98 per diluted common share compared to $.86 and $.84, respectively, recorded during 1999. Return on common equity was 10.69% and return on assets was .70% for 2000, compared to 9.61% and .78%, respectively, for the same period in 1999. Exclusive of the amortization on merger-related intangibles, earnings increased $2.281 million or 26% for the periods under comparison. Diluted earnings per share, exclusive of this same amortization expense, increased to $1.13 in 2000 from $.90 in 1999. The improvement in earnings during 2000 resulted from an expansion of net interest income, additional service charge and fee income and the leveling off of noninterest expenses.
Net income recorded during 1999 totaled $8.225 million or $.86 on a basic per common share basis and $.84 on a diluted earnings per common share basis. During 1998, annual earnings were $9.021 million or $.95 on a basic per common share basis and $.94 on a diluted 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.
The initiatives undertaken to position Heartland for future increased earnings included:
New Mexico Bank & Trust was established in Albuquerque, New Mexico in May of 1998 and subsequently opened three additional branches during the second and third quarters of 1999. The First National Bank of Clovis was acquired and subsequently merged into New Mexico Bank & Trust on January 1, 2000. Total assets at New Mexico Bank & Trust reached $247.8 million at December 31, 2000.
Wisconsin Community Bank 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 $54.0 million at year-end 1998 to $211.4 million on December 31, 2000.
Riverside Community Bank, Heartland's 1995 de novo bank in Rockford, Illinois, opened two additional branch locations, one in July of 1999 and the other in March of 2000. Total assets at Riverside Community Bank reached $102.7 million at December 31, 2000.
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 margin expressed as a percentage of average earning assets increased to 3.74% during 2000 compared to 3.64% for 1999. Heartland was able to improve its net interest margin in spite of a turbulent rate environment and due, in part, to the 49% growth in demand deposits. Heartland's net interest margin was 3.64% in 1999 compared to 3.58% in 1998. This increase was primarily the result of a shift in the asset mix on the balance sheet as gross loans increased from 62% of total assets at December 31, 1998, to nearly 71% at December 31, 1999.
Net interest income on a fully tax equivalent basis was $45.658, $34.125 and $28.999 million for 2000, 1999 and 1998, respectively, an increase of 34% for 2000 and 18% for 1999. 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.
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. Dividing income or expense by the average balance of assets or liabilities derives such yields and costs. Average balances are derived from daily balances, and nonaccrual loans are included in each respective loan category.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) (Dollars in thousands) For the Year Ended December 31, 2000
Average Balance Interest Rate ------- -------- ---- EARNING ASSETS Securities: Taxable $ 189,610 $ 11,824 6.24% Nontaxable (1) 31,026 2,748 8.86 ---------- ---------- ------ Total securities 220,636 14,572 6.60 ---------- ---------- ------ Interest bearing deposits 5,796 333 5.75 Federal funds sold 16,874 911 5.40 ---------- ---------- ------ Loans and leases: Commercial and commercial real estate (1) 520,777 45,228 8.68 Residential mortgage 202,429 16,376 8.09 Agricultural and agricultural real estate (1) 133,043 11,848 8.91 Consumer 118,455 12,625 10.66 Direct financing leases, net 15,027 1,056 7.03 Fees on loans - 2,418 - Less: allowance for loan and lease losses (12,984) - - ---------- ---------- ------ Net loans and leases 976,747 89,551 9.17 ---------- ---------- ------ Total earning assets 1,220,053 105,367 8.64 ---------- ---------- ------ NONEARNING ASSETS Total nonearning assets 150,345 - - ---------- ---------- ------ TOTAL ASSETS $1,370,398 $ 105,367 7.69% ========== ========== ====== INTEREST BEARING LIABILITIES Interest bearing deposits: Savings accounts $ 385,047 $ 13,913 3.61% Time, $100,000 and over 99,322 6,001 6.04 Other time deposits 400,096 23,281 5.82 Short-term borrowings 169,036 10,188 6.03 Other borrowings 80,426 6,326 7.87 ---------- ---------- ------ Total interest bearing liabilities 1,133,927 59,709 5.27 ---------- ---------- ------ NONINTEREST BEARING LIABILITIES Noninterest bearing deposits 124,117 - - Accrued interest and other liabilities 22,681 - - ---------- ---------- ------ Total noninterest bearing liabilities 146,798 - - ---------- ---------- ------ Stockholders' Equity 89,673 - - ---------- ---------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,370,398 $ 59,709 4.36% ========== ========== ====== Net interest income (1) $ 45,658 ========== Net interest income to total earning assets (1) 3.74% ====== Interest bearing liabilities to earning assets 92.94% ==========
(1) Tax equivalent basis is calculated using an effective tax rate of 34%.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) (Dollars in thousands) 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) (Dollars in thousands) 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%.
The following table allocates the changes in net interest income to differences in either average balances or average rates for earning assets and interest bearing liabilities. The changes have been allocated proportionately to the change due to volume and change due to rate. Interest income is measured on a tax equivalent basis using a 34% tax rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in thousands)
For the Year Ended December 31, 2000 Compared to 1999 Change Due to Volume Rate Net -------------------------- EARNING ASSETS/INTEREST INCOME Securities Taxable $ (607) $ 1,318 $ 711 Nontaxable 878 28 906 Interest bearing deposits (136) 1 (135) Federal funds sold 484 17 501 Loans and leases 24,077 4,333 28,410 ------- ------ ------- TOTAL EARNING ASSETS 24,696 5,697 30,393
LIABILITIES/INTEREST EXPENSE Interest bearing deposits Savings accounts 2,014 1,110 3,124 Time, $100,000 and over 2,127 652 2,779 Other time deposits 4,844 1,268 6,112 Short-term borrowings 2,878 1,680 4,558 Other borrowings 1,331 956 2,287 ------- ------- ------- TOTAL INTEREST BEARING LIABILITIES 13,194 5,666 18,860 ------- ------- ------- NET INTEREST INCOME $11,502 $ 31 $11,533 ======= ======= =======
ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in thousands)
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 (Dollars in thousands)
For the Year Ended December 31, 1998 Compared to 1997 Change Due to Volume Rate Net ------------------------- EARNING ASSETS/INTEREST INCOME Securities Taxable $ 3,706 $ (583) $ 3,123 Nontaxable (1,052) (340) (1,392) Interest bearing deposits 150 73 223 Federal funds sold 968 4 972 Loans and leases 8,612 645 9,257 ------- ------- ------- TOTAL EARNING ASSETS 12,384 (201) 12,183
LIABILITIES/INTEREST EXPENSE Interest bearing deposits Savings accounts 1,809 229 2,038 Time, $100,000 and over 760 14 774 Other time deposits 2,432 211 2,643 Short-term borrowings 2,167 (34) 2,133 Other borrowings 850 222 1,072 ------- ------- ------- TOTAL INTEREST BEARING LIABILITIES 8,018 642 8,660 ------- ------- ------- NET INTEREST INCOME $ 4,366 $ (843) $ 3,523 ======= ======= =======
PROVISION FOR LOAN AND LEASE LOSSES
During 2000, the provision for loan and lease losses increased $675 thousand or 26% when compared to 1999. During 1999, the provision for loan and lease losses increased $1.675 million or 176% when compared to 1998. In part, these increases were recorded in response to the loan growth experienced and an increase in nonperforming loans and were made to provide, in Heartland's opinion, an adequate allowance for loan and lease losses. The adequacy of the allowance for loan and lease losses is determined by management using factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, past loss experience, loan delinquencies, and probable substandard and doubtful credits. For additional details on the specific factors considered, refer to the loans and provision for loan and lease losses section of this report.
OTHER INCOME (Dollars in thousands)
For the Years Ended December 31, 2000 1999 1998 --------------------------- Service charges and fees $ 5,386 $ 3,906 $ 3,013 Trust fees 3,088 2,662 2,284 Brokerage commissions 846 655 413 Insurance commissions 862 803 751 Securities gains, net 501 713 1,897 Rental income on operating leases 14,918 14,718 7,428 Gains on sale of loans 521 1,028 1,212 Impairment loss on equity securities (244) - - Other noninterest income 1,130 939 299 ------- ------- ------- Total other income $27,008 $25,424 $17,297 ======= ======= =======
The above table shows Heartland's other income for the years indicated. Total other income increased $1.584 million or 6% during 2000, as compared to an increase of $8.127 million or 47% during 1999.
Gains on sale of loans decreased by $507 thousand or 49% for 2000 and $184 thousand or 15% for 1999. The volume of mortgage loans sold into the secondary market began to decline 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. The volume of mortgage loans sold into the secondary market continued to fall significantly during the first half of 2000 as rates continued to move upward.
Securities gains decreased $212 thousand or 30% during 2000 and $1.184 million or 62% during 1999 when compared to respective previous year. Securities gains during 1998 were attributable to the strong performance of Heartland's equity portfolio.
An impairment loss on equity securities of $244 thousand was recorded during 2000. This loss resulted from the announcement that Safety Kleen Corp. had filed bankruptcy under Chapter 11. Heartland's investment subsidiary held 20,000 shares of Safety Kleen's common stock in its equity portfolio. The carrying value of this stock on Heartland's balance sheet as of December 31, 2000, was $4 thousand.
A large portion of the decrease in securities gains and gains on sale of loans has been offset by an increase in the amount of service charges and fees collected. Emphasis during the past several years on enhancing revenues from services provided to customers has resulted in significant growth in service charges, trust fees and brokerage commissions. In the aggregate, these fees grew $2.097 million or 29% during 2000 and $1.513 million or 26% during 1999. Individually, these categories grew by more than 15% during each of the past two years.
Expansion into vehicle leasing and fleet management was responsible for the significant growth in other income during 1999 as rental income on operating leases accounted for 90% of the $8.127 million change. ULTEA's first full year of operation as a Heartland subsidiary occurred in 1997. During the third quarter of 1998, ULTEA acquired Arrow Motors Inc., a Wisconsin corporation doing business as Lease Associates Group, and, as a result, more than doubled in asset size going from $15 million to $35 million. Also as a result of the increased activity at ULTEA, other noninterest income increased $640 thousand or 214% during 1999 primarily due to gains on the disposal of leased assets.
OTHER EXPENSE (Dollars in thousands)
For the Years Ended December 31, 2000 1999 1998 --------------------------- Salaries and employee benefits $23,876 $18,945 $15,218 Occupancy, net 2,904 2,076 1,695 Furniture and equipment 3,015 2,416 1,998 Depreciation on equipment under operating leases 11,199 10,844 5,296 Outside services 2,661 2,239 1,416 FDIC deposit insurance assessment 228 121 118 Advertising 1,492 1,376 1,150 Goodwill and core deposit intangibles amortization 1,814 682 234 Other noninterest expenses 7,257 6,023 4,656 ------- ------- ------- Total other expense $54,446 $44,722 $31,781 ======= ======= ======= Efficiency ratio (1) 75.45% 76.01% 71.58% ======= ======= =======
(1) Other expense divided by the sum of net interest income and other income less securities gains.
The above table shows Heartland's other expense for the years indicated. Other expense increased $9.724 million or 22% in 2000 and $12.941 million or 41% in 1999.
Salaries and employee benefits expense, the largest component of other expense, experienced increases of $4.931 million or 26% and $3.727 million or 24% during 2000 and 1999, respectively. In addition to the normal merit and cost of living raises, these increases were attributable to Heartland's continued acquisition and expansion efforts, particularly the additions at New Mexico Bank & Trust, Wisconsin Community Bank and Riverside Community Bank. The number of full-time equivalent employees increased from 396 at year-end 1998 to 484 at December 31, 1999, and 544 at December 31, 2000.
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, advertising/public relations costs and other operating expenses. In the aggregate, these expenses increased $2.777 million or 23% during 2000 and $2.392 million or 25% during 1999. Some of the expenses included within the other operating expenses that experienced significant growth as a result of the expansion efforts were amortization and maintenance expense on software, office supplies, postage, telephone charges and fees relating to the processing of credit cards for merchants and the conversion of acquired entities to the banking software utilized by the Heartland banks.
The acquisitions made during the past two years have also resulted in additional goodwill and core deposit intangible amortization. This amortization of merger-related intangibles increased $1.132 million or 166% during 2000 and $448 thousand or 191% for 1999. Wisconsin Community Bank's acquisition of the Monroe branch was completed in July of 1999 and New Mexico Bank & Trust's acquisition of the Clovis offices was completed in January of 2000.
During 1999, the largest component of the increase in other expense was related to the operations of ULTEA and its acquisition of Lease Associates Group, as depreciation on equipment under operating leases increased $5.548 million or 105%. This expense leveled off during 2000, as the impact of the Lease Associates Group acquisition was included for a full year during both 2000 and 1999.
Fees for outside services increased $823 thousand or 58% 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 began in 2000.
INCOME TAXES
Income tax expense increased $1.060 million or 34% for 2000 primarily as a result of increased pre-tax earnings. Conversely, income tax expense for 1999 decreased $601 thousand or 16% primarily as a result of a reduction in pre-tax earnings. Heartland's effective tax rate was 30.55% for 2000, 27.73% for 1999 and 29.40% for 1998. The increase for 2000 was, in part, a result of the amount of additional merger-related amortization expense recorded that is not deductible for federal income tax purposes. Additional tax-exempt interest income on securities and loans contributed to the decline in the effective tax rate for 1999.
FINANCIAL CONDITION LENDING ACTIVITIES
Heartland's major source of income is interest on loans and leases. The table below presents the composition of Heartland's loan portfolio at the end of the years indicated.
LOAN PORTFOLIO (Dollars in thousands)
December 31, 2000 1999 Amount Percent Amount Percent ---------- ------- ---------- ------- Commercial and commercial real estate $ 550,366 52.62% $ 448,991 53.53% Residential mortgage 215,638 20.62 180,347 21.50 Agricultural and agricultural real estate 133,614 12.78 92,936 11.08 Consumer 128,685 12.30 103,608 12.35 Lease financing, net 17,590 1.68 12,886 1.54 ---------- ------- ---------- ------- Gross loans and leases 1,045,893 100.00% 838,768 100.00% ======= ======= Unearned discount (3,397) (3,169) Deferred loan fees (400) (453) ---------- ---------- Total loans and leases 1,042,096 835,146 Allowance for loan and lease losses (13,592) (10,844) ---------- ---------- Loans and leases, net $1,028,504 $ 824,302 ========== ==========
LOAN PORTFOLIO (Dollars in thousands)
December 31, 1998 1997 Amount Percent Amount Percent ---------- ------- ---------- ------- Commercial and commercial real estate $ 277,765 46.88% $ 242,868 43.46% Residential mortgage 156,415 26.40 175,268 31.37 Agricultural and agricultural real estate 77,211 13.03 69,302 12.40 Consumer 72,642 12.26 64,223 11.49 Lease financing, net 8,508 1.43 7,171 1.28 ---------- ------- ---------- ------- Gross loans and leases 592,541 100.00% 558,832 100.00% ======= ======= Unearned discount (2,136) (2,077) Deferred loan fees (272) (349) ---------- ---------- Total loans and leases 590,133 556,406 Allowance for loan and lease losses (7,945) (7,362) ---------- ---------- Loans and leases, net $ 582,188 $ 549,044 ========== ==========
LOAN PORTFOLIO (Dollars in thousands)
December 31, Amount Percent -------- ------- Commercial and commercial real estate $206,523 42.46% Residential mortgage 166,999 34.33 Agricultural and agricultural real estate 57,526 11.83 Consumer 48,361 9.94 Lease financing, net 7,042 1.44 -------- ------- Gross loans and leases 486,451 100.00% ======= Unearned discount (1,962) Deferred loan fees (404) -------- Total loans and leases 484,085 Allowance for loan and lease losses (6,191) -------- Loans and leases, net $477,894 ========
The table below sets forth the remaining maturities by loan and lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1) December 31, 2000 (Dollars in thousands)
Over 1 Year Through 5 Years One Year Fixed Floating or less Rate Rate ---------------------------------- Commercial and commercial real estate $ 219,066 $ 192,056 $ 70,409 Residential mortgage 38,706 41,821 35,942 Agricultural and agricultural real estate 66,457 38,779 19,639 Consumer 36,055 57,539 16,133 Lease financing, net 4,594 12,061 - ---------- ---------- ---------- Total $ 364,878 $ 342,256 $ 142,123 ========== ========== ==========
Over 5 Years Fixed Floating Rate Rate Total ---------------------------------- Commercial and commercial real estate $ 29,230 $ 39,605 $ 550,366 Residential mortgage 23,640 75,529 215,638 Agricultural and agricultural real estate 8,739 - 133,614 Consumer 6,366 12,592 128,685 Lease financing, net 935 - 17,590 ---------- ---------- ---------- Total $ 68,910 $ 127,726 $1,045,893 ========== ========== ==========
(1) Maturities based upon contractual dates.
Heartland experienced significant growth in net loans and leases during both 2000 and 1999. This growth was $204.2 million or 25% in 2000 and $242.1 million or 42% in 1999. The acquisition of the bank in Clovis, New Mexico accounted for $66.5 million or 33% of the growth in 2000. Expansion into new markets in Wisconsin accounted for $106.9 million or 44% of the growth during 1999, with the acquisition of the Monroe banking office making up $37.9 million or 35% of this increase.
During both years, the largest dollar growth occurred in commercial and commercial real estate loans, which increased $101.4 million or 23% during 2000 and $171.2 million or 62% during 1999. This growth was the result of aggressive calling efforts combined with the expansion into new markets. The Clovis acquisition was responsible for $26.5 million or 26% of the growth in 2000. During 1999, Wisconsin Community Bank was responsible for $72.6 million or 42% of the increase, with the Monroe acquisition contributing $26.4 million.
Agricultural and agricultural real estate loans outstanding grew $40.7 million or 44% during 2000. The Clovis acquisition was responsible for $33.0 million or 81% of the agricultural loan growth as nearly half of the acquired loans were in the agricultural sector. During 1999, agricultural and agricultural real estate loans outstanding experienced an increase of $15.7 million or 20%. Exclusive of the Monroe acquisition, these loans grew $4.6 million or 6%. Without these acquisitions, the growth occurred at our banks in Wisconsin and Keokuk, Iowa during 2000 and at Dubuque Bank and Trust Company, our flagship bank in Dubuque, Iowa during 1999.
The $35.3 million or 20% growth in residential mortgage loan outstandings during 2000 was primarily the result of customers electing to take adjustable-rate mortgage loans which Heartland elected to retain in its loan portfolio. During 1999, residential mortgage loan outstandings grew $23.9 million or 15%. Nearly all this growth was recorded at Wisconsin Community Bank, as Heartland's full real estate loan product line was introduced to this market. The Clovis acquisition did not initially contribute to the growth in 2000, as it had not maintained a mortgage loan portfolio prior to joining the Heartland group.
Consumer loan outstandings, exclusive of the $8.0 million portfolio at First National Bank of Clovis, grew $17.1 million or 16% during 2000. The majority of this growth resulted from increased selling efforts at Riverside Community Bank and Wisconsin Community Bank. During 1999, consumer loans grew $30.0 million or 41%, exclusive of the Monroe acquisition. Indirect paper, primarily on new automobiles, at Dubuque Bank and Trust Company and Citizens Finance, Heartland's consumer finance subsidiary, were responsible for the majority of this growth.
Although the risk of nonpayment for any reason exists with respect to all loans, specific risks are associated with each type of loan. The primary risks associated with commercial and agricultural loans are the quality of the borrower's management and the impact of national and regional economic factors. Additionally, risks associated with commercial and agricultural real estate loans include fluctuating property values and concentrations of loans in a specific type of real estate. Repayment on consumer loans, including those on residential real estate, are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances and deteriorating economic conditions. Heartland monitors its loan concentrations and does not believe it has concentrations in any specific industry.
Heartland's strategy with respect to the management of these types of risks, whether loan demand is weak or strong, is to encourage the Heartland banks to follow tested and prudent loan policies and underwriting practices which include: (i) granting loans on a sound and collectible basis; (ii) ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; (iii) administering loan policies through a board of directors and an officers' loan committee; (iv) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category; and (v) ensuring that each loan is properly documented and, if appropriate, guaranteed by government agencies and that insurance coverage is adequate.
NONPERFORMING LOANS AND LEASES AND OTHER NONPERFORMING ASSETS
The table below sets forth the amounts of nonperforming loans and leases and other nonperforming assets on the dates indicated.
NONPERFORMING ASSETS (Dollars in thousands)
December 31, 2000 1999 1998 1997 1996 ------------------------------------ Nonaccrual loans and leases $5,860 $1,414 $1,324 $1,819 $1,697 Loan and leases contractually past due 90 days or more 523 236 426 187 247 Restructured loans and leases 357 - - 26 30 ------ ------ ------ ------ ------ Total nonperforming loans and leases 6,740 1,650 1,750 2,032 1,974 Other real estate 583 585 857 774 532 Other repossessed assets 125 67 77 124 21 ------ ------ ------ ------ ------ Total nonperforming assets $7,448 $2,302 $2,684 $2,930 $2,527 ====== ====== ====== ====== ====== Nonperforming loans and leases to total loans and leases 0.65% 0.20% 0.30% 0.37% 0.41%
Nonperforming assets to total loans and leases plus repossessed property 0.71% 0.28% 0.45% 0.53% 0.52%
Nonperforming assets to total assets 0.51% 0.19% 0.28% 0.34% 0.34%
Under Heartland's internal loan review program, a loan review officer is responsible for reviewing existing loans and leases, identifying potential problem loans and leases and monitoring the adequacy of the allowance for loan and lease losses at the Heartland banks.
Heartland constantly monitors and continues to develop systems to oversee the quality of its loan portfolio. One integral part is a loan rating system, which assigns a rating on each loan and lease within the portfolio based on the borrower's financial position, repayment ability, collateral position and repayment history. This emphasis on quality is reflected in Heartland's credit quality figures, which compare favorably to peer data in the Bank Holding Company Performance Reports published by the Federal Reserve Board for bank holding companies with total assets of $1 to $3 billion. In this report, the peer group reported nonperforming assets to total assets of .51% and .46% for September 30, 2000, and December 31, 1999, respectively. Heartland's ratios at December 31, 2000 and 1999, were .51% and .19%, respectively. The $5.1 million increase in nonperforming assets during 2000 was primarily the result of one large commercial loan customer at Dubuque Bank and Trust Company and a few agricultural customers in the Clovis, New Mexico market. Workout plans are in process on these loans and, because of the net realizable value of collateral, guarantees and other factors, anticipated losses on these credits are expected to be minimal.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The adequacy of the allowance for loan and lease losses is determined by management using factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, past loss experience, loan delinquencies, and potential substandard and doubtful credits. The adequacy of the allowance for loan and lease losses is monitored on an ongoing basis by the loan review staff, senior management and the board of directors. Factors considered by the loan review committee included the following:
Heartland has continued to experience an increase in higher- risk consumer and more-complex commercial loans as compared to relatively lower-risk residential real estate loans.
Heartland has entered new markets in which it had little or no previous lending experience.
The amount of nonperforming loans has increased.
The nation appears to be entering a period of economic slowdown.
The allowance for loan and lease losses increased by $2.7 million or 25% during 2000, primarily as a result of the Clovis acquisition which accounted for $1.1 million or 42% of this change. The remaining growth occurred, in part, as a result of the expansion of the loan portfolio and growth in nonperforming loans. At December 31, 2000, the allowance for loan and lease losses was 1.30% of loans and 202% of nonperforming loans, compared to 1.30% of loans and 657% of nonperforming loans at year-end 1999.
There can be no assurances that the allowance for loan and lease losses will be adequate to cover all losses, but management believes that the allowance for loan and lease losses was adequate at December 31, 2000. While management uses available information to provide for loan and lease losses, the ultimate collectibility of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses carried by the Heartland subsidiaries. Such agencies may require Heartland to make additional provisions to the allowance based upon their judgment about information available to them at the time of their examinations. It is virtually certain that the weakening economy will result in increased problem loans, but we expect the problems to be manageable and of a lesser scope for Heartland than for the industry as a whole.
During 2000, Heartland recorded net charge-offs of $1.7 million compared to $392 thousand for the same period in 1999. The Clovis acquisition was responsible for 45% of the net charge-offs during 2000. Since the Clovis acquisition, Heartland's loan review area, along with management at New Mexico Bank & Trust, have spent considerable time aggressively managing the exposure within the loan portfolio in this new market. Comprising 36% of the net charge-offs in 2000 were losses at Citizens Finance. The increased losses at Citizens Finance related directly to the rapid growth that it experienced, as its loan portfolio increased 128% over the past two years with expansion into the Appleton, Wisconsin and Rockford, Illinois markets. Losses as a percentage of gross loans at Citizens Finance were 2.96%, 1.82% and 2.87% in 1998, 1999 and 2000, respectively. Net charge-offs decreased in 1999, primarily due to the newness of a large portion of the portfolio, so that the identification of problem loans in the portfolio had not yet occurred. As the portfolio began to mature in 2000, losses increased, but remained below the loss ratios of 1998, which compare favorably to the consumer finance industry.
The table below summarizes activity in the allowance for loan and lease losses for the years indicated, including amounts of loans and leases charged off, amounts of recoveries, additions to the allowance charged to income and the ratio of net charge-offs to average loans and leases outstanding.
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
December 31, 2000 1999 1998 1997 1996 ----------------------------------------- Allowance at beginning of year $10,844 $ 7,945 $7,362 $6,191 $5,580 Charge-offs: Commercial and commercial real estate 407 81 289 93 578 Residential mortgage 54 - 20 21 23 Agricultural and agricultural real estate 580 8 41 21 2 Consumer 1,239 546 473 449 323 Lease financing - - - - - ------- ------- ------ ------ ------ Total charge-offs 2,280 635 823 584 926 ------- ------- ------ ------ ------ Recoveries: Commercial and commercial real estate 97 74 372 36 16 Residential mortgage 4 12 - 8 1 Agricultural and agricultural real estate 176 6 1 2 45 Consumer 308 151 82 99 67 Lease financing - - - - - ------- ------- ------ ------ ------ Total recoveries 585 243 455 145 129 ------- ------- ------ ------ ------ Net charge-offs (1) 1,695 392 368 439 797 Provision for loan and lease losses 3,301 2,626 951 1,279 1,408 Additions related to acquisitions 1,142 665 - 331 - ------- ------- ------ ------ ------ Allowance at end of period $13,592 $10,844 $7,945 $7,362 $6,191 ======= ======= ====== ====== ====== Net charge-offs to average loans and leases 0.17% 0.06% 0.07% 0.08% 0.17% ======= ======= ====== ====== ======
(1) Includes net charge-offs at Citizens Finance, Heartland's consumer finance company, of $614 for 2000, $256 for 1999, $278 for 1998, $256 for 1997 and $173 for 1996.
The table below shows Heartland's allocation of the allowance for loan and lease losses by types of loans and leases and the amount of unallocated reserves. The amount of unallocated reserves has decreased over the past two years as Heartland has enhanced its allowance adequacy methodology to identify a specific allowance for each credit.
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
As of December 31, 2000 1999 --------------------------------------- Loan/ Loan/ Lease Lease Category Category to Gross to Gross Loans & Loans & Amount Leases Amount Leases ------ -------- ------ -------- Commercial and commercial real estate $ 7,324 52.62% $ 6,108 53.53% Residential mortgage 1,004 20.62 756 21.50 Agricultural and agricultural real estate 2,377 12.78 1,016 11.08 Consumer 1,743 12.30 1,917 12.35 Lease financing(1) 106 1.68 91 1.54 Unallocated 1,038 - 956 - ------- ------- ------- ------- $13,592 100.00% $10,844 100.00% ======= ======= ======= =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
As of December 31, 1998 1997 --------------------------------------- Loan/ Loan/ Lease Lease Category Category to Gross to Gross Loans & Loans & Amount Leases Amount Leases ------ -------- ------ -------- Commercial and commercial real estate $2,180 46.88% $1,889 43.46% Residential mortgage 697 26.40 725 31.37 Agricultural and agricultural real estate 583 13.03 577 12.40 Consumer 1,096 12.26 1,044 11.49 Lease financing(1) 44 1.43 30 1.28 Unallocated 3,345 - 3,097 - ------ ------- ------ ------- $7,945 100.00% $7,362 100.00% ====== ======= ====== =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
As of December 31, 1996 -------------------------- Loan/ Lease Category to Gross Loans & Amount Leases ------ -------- Commercial and commercial real estate $1,568 42.46% Residential mortgage 590 34.33 Agricultural and agricultural real estate 480 11.83 Consumer 818 9.94 Lease financing(1) 28 1.44 Unallocated 2,707 - ------ ------- $6,191 100.00% ====== =======
SECURITIES
The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 16% of total assets at December 31, 2000, as compared to 18% at December 31, 1999.
During both 2000 and 1999, management elected to replace paydowns received on mortgage-backed securities with less volatile U.S. government agency securities, as the spreads on mortgage-backed securities compared to comparable U.S. treasury securities with the same maturities narrowed. The state tax-exempt nature of selected U.S. government agency securities also made them attractive purchases for Heartland's Illinois bank subsidiaries. The tables below present the composition and maturities of the securities portfolio by major category.
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Held to Maturity Available for Sale % of % of December 31, 2000 Amount Portfolio Amount Portfolio --------------------------------------- U.S. Treasury securities $ - -% $ - -% U.S. government agencies - - 118,897 52.13 Mortgage-backed securities - - 53,407 23.42 States and political subdivisions 2,111 0.93 31,933 14.00 Other securities - - 21,717 9.52 ------ ------- -------- ------- Total $2,111 0.93% $225,954 99.07% ====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Total % of December 31, 2000 Amount Portfolio ------------------- U.S. Treasury securities $ - -% U.S. government agencies 118,897 52.13 Mortgage-backed securities 53,407 23.42 States and political subdivisions 34,044 14.93 Other securities 21,717 9.52 -------- ------- Total $228,065 100.00% ======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Held to Maturity Available for Sale % of % of December 31, 1999 Amount Portfolio Amount Portfolio --------------------------------------- U.S. Treasury securities $ - -% $ - -% U.S. government agencies - - 90,536 42.79 Mortgage-backed securities - - 75,637 35.75 States and political subdivisions 2,196 1.04 23,708 11.20 Other securities - - 19,500 9.22 ------ ------- -------- ------- Total $2,196 1.04% $209,381 98.96% ====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Total % of December 31, 1999 Amount Portfolio ------------------- U.S. Treasury securities $ - -% U.S. government agencies 90,536 42.79 Mortgage-backed securities 75,637 35.75 States and political subdivisions 25,904 12.24 Other securities 19,500 9.22 -------- ------- Total $211,577 100.00% ======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Held to Maturity Available for Sale % of % of December 31, 1998 Amount Portfolio Amount Portfolio --------------------------------------- U.S. Treasury securities $ - -% $ 1,709 0.71% U.S. government agencies - - 77,361 31.90 Mortgage-backed securities - - 128,317 52.92 States and political subdivisions 2,718 1.12 18,818 7.76 Other securities - - 13,565 5.59 ------ ------- -------- ------- Total $2,718 1.12% $239,770 98.88% ====== ======= ======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Total % of December 31, 1998 Amount Portfolio ------------------- U.S. Treasury securities $ 1,709 0.71% U.S. government agencies 77,361 31.90 Mortgage-backed securities 128,317 52.92 States and political subdivisions 21,536 8.88 Other securities 13,565 5.59 -------- ------- Total $242,488 100.00% ======== =======
SECURITIES PORTFOLIO MATURITIES (Dollars in thousands)
After One But Within One Year Within Five Years --------------- ----------------- December 31, 2000 Amount Yield Amount Yield ------------------------------------ U.S. government agencies 20,053 6.34 97,822 6.48 Mortgage-backed securities 11,255 5.80 25,571 6.88 States and political subdivisions (1) 3,983 8.93 3,946 7.87 Other securities 5,092 5.54 5,029 5.75 ------- ------ ------- ------- Total $40,383 6.35% $132,368 6.57% ======= ====== ======== =======
SECURITIES PORTFOLIO MATURITIES (Dollars in thousands)
After Five But Within Ten Years After Ten Years ---------------- ----------------- Amount Yield Amount Yield ------------------------------------ U.S. government agencies 1,022 6.95 - - Mortgage-backed securities 7,143 7.08 9,438 7.06 States and political subdivisions (1) 8,282 7.98 17,833 8.05 Other securities - - - - ------- ------- ------- ------ Total $16,447 7.53% $27,271 7.71% ======= ======= ======= ======
SECURITIES PORTFOLIO MATURITIES (Dollars in thousands)
Total Amount Yield ------------------- U.S. government agencies 118,897 6.46 Mortgage-backed securities 53,407 6.71 States and political subdivisions (1) 34,044 7.09 Other securities (2) 10,121 5.65 -------- ------ Total $216,469 6.72% ======== ======
(1) Rates on obligations of states and political subdivisions have been adjusted to tax equivalent yields using a 34% income tax rate. (2) Other securities does not include equity securities.
DEPOSITS AND BORROWED FUNDS
Total average deposits experienced an increase of $230.7 million or 30% during 2000 compared to an increase of $117.6 million or 18% during 1999. The Clovis acquisition comprised $97.5 million or 42% of the increase in 2000 while the Monroe acquisition accounted for $40.1 million or 34% of the growth in average deposits during 1999. Without including these acquisitions, growth was $133.2 million or 17% during 2000 and $77.5 million or 12% during 1999. All of the subsidiary banks grew average deposits during both years. The de novo community banks in Rockford, Illinois and Albuquerque, New Mexico made up $46.4 million or 35% of the 2000 growth and $36.6 or 47% of the 1999 growth, exclusive of the acquisitions.
Heartland continued to focus efforts on shifting the mix of total deposits from the time deposit category to the demand and savings deposit categories. In order to attract additional deposit customers into these categories, the subsidiary banks enhanced their checking and money market deposit product lines. As a result, all the banks experienced success in growing demand deposit balances during the past two years, as each grew these balances by more than 3%, with much more significant growth occurring in Heartland's newer markets targeted by New Mexico Bank & Trust, Wisconsin Community Bank and Riverside Community Bank. The shift in 2000 from savings to certificate of deposit accounts occurred as interest rates rose over the year and deposit customers became more interested in certificate of deposit products and less interested in savings products.
The table below sets forth the distribution of Heartland's average deposit account balances and the average interest rates paid on each category of deposits for the years indicated.
AVERAGE DEPOSITS (Dollars in thousands) For the year ended December 31, 2000 Percent Average of Balance Deposits Rate -------------------------- Demand deposits $ 124,117 12.30% -% Savings accounts 385,047 38.18 3.61 Time deposits less than $100,000 400,096 39.67 5.82 Time deposits of $100,000 or more 99,322 9.85 6.04 ---------- ------- Total deposits $1,008,582 100.00% ========== =======
AVERAGE DEPOSITS (Dollars in thousands) For the year ended December 31, 1999 Percent Average of Balance Deposits Rate -------------------------- Demand deposits $ 81,511 10.48% -% Savings accounts 324,476 41.71 3.33 Time deposits less than $100,000 312,051 40.12 5.50 Time deposits of $100,000 or more 59,822 7.69 5.39 ---------- ------- Total deposits $ 777,860 100.00% ========== =======
AVERAGE DEPOSITS (Dollars in thousands) For the year ended December 31, 1998 Percent Average of Balance Deposits Rate -------------------------- Demand deposits $ 60,514 9.17% -% Savings accounts 266,282 40.33 3.57 Time deposits less than $100,000 282,142 42.73 5.75 Time deposits of $100,000 or more 51,283 7.77 5.66 ---------- ------- Total deposits $ 660,221 100.00% ========== =======
The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 2000.
Time Deposits $100,000 and Over (Dollars in thousands)
December 31, ------------ 3 months or less $ 32,312 Over 3 months through 6 months 30,540 Over 6 months through 12 months 49,628 Over 12 months 21,988 -------- $134,468 ========
All of the Heartland banks own stock in the Federal Home Loan Bank ("FHLB") of Des Moines, Chicago or Dallas, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at December 31, 2000 and 1999, were $51.1 million and $33.6 million, respectively. Additional FHLB advances were utilized during 2000 at the bank subsidiaries to fund a portion of the loan growth experienced.
Heartland also utilizes securities sold under agreements to repurchase as a source of funds. All of the bank subsidiaries provide repurchase agreements to their customers as a cash management tool, sweeping excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements, nor does it create an expense relating to FDIC premiums on deposits. Although the aggregate balance of repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. With the entry into new markets, these balances have grown from $66.8 million at December 31, 1999, to $93.0 million at December 31, 2000.
On September 28, 2000, Heartland entered into a credit agreement with two unaffiliated banks to replace an existing term credit line as well as to increase availability under a revolving credit line. Under the new unsecured revolving credit lines, Heartland may borrow up to $50.0 million. At December 31, 2000, $39.3 million was outstanding on the revolving credit lines with the total classified as short-term borrowings. The additional $10.0 million credit line was established primarily to provide additional working capital to the nonbanking subsidiaries and to meet general corporate commitments. On July 23, 1999, Heartland had amended its credit agreement to increase its unsecured credit line from $20.0 to $40.0 million. The additional credit line provided the $18.0 million capital investment required at Wisconsin Community Bank to complete the Monroe acquisition.
The following table reflects short-term borrowings, which in the aggregate have average balances during the period greater than 30% of stockholders' equity at the end of the period.
SHORT-TERM BORROWINGS (Dollars in thousands)
At or for the Year Ended December 31, 2000 1999 1998 ---------------------------- Balance at end of period $175,084 $132,300 $ 75,920 Maximum month-end amount Outstanding 182,600 140,992 102,313 Average month-end amount Outstanding 171,272 116,252 80,277 Weighted average interest rate at year-end 5.79% 4.80% 5.00% Weighted average interest rate for the year ended 6.03% 5.03% 5.19%
CAPITAL RESOURCES
Heartland's risk-based capital ratios, which take into account the different credit risks among banks' assets, met all capital adequacy requirements over the past three years. Tier 1 and total risk-based capital ratios were 8.74% and 9.90%, respectively, on December 31, 2000, compared with 10.56% and 11.68%, respectively, on December 31, 1999, and 11.05% and 12.13% at December 31, 1998. At December 31, 2000, Heartland's leverage ratio, the ratio of Tier 1 capital to total average assets, was 7.25% compared to 8.85% and 8.58% at December 31, 1999 and 1998, respectively. It has been management's intent to fully utilize its capital resources and, as planned, these capital ratios have declined over the years as Heartland experienced substantial growth. All the Heartland banks have been, and will continue to be, managed so they meet the well capitalized requirements under the regulatory framework for prompt corrective action.
Commitments for capital expenditures are an important factor in evaluating capital adequacy. As a result of the acquisition of Wisconsin Community Bank in March of 1997, one remaining cash payment to previous stockholders is due in 2001 totaling $584 thousand, plus interest at rates of 7.00% to 7.50%. The acquisition and merger of Lease Associates Group into ULTEA in July of 1998 included an agreement to make three equal cash payments to the previous principal stockholder of $643 thousand, plus interest at 7.50%, with the final payment due in 2001.
In July of 1999, Wisconsin Community Bank completed its acquisition of Bank One Wisconsin's Monroe banking center. As part of this transaction, Heartland infused an additional capital investment at Wisconsin Community Bank of $18.0 million.
On January 1, 2000, Heartland completed its acquisition of National Bancshares, Inc., the one-bank holding company of First National Bank of Clovis. The bank has four locations in the New Mexico communities of Clovis and Melrose, with $120.1 million in assets and $97.5 million in deposits at December 31, 1999. The total purchase price was $23.1 million, of which $5.8 million was paid in common stock of Heartland to National Bancshares' Employee Stock Ownership Plan (the "ESOP") and $3.8 million in notes payable over three or five years, at the stockholders' discretion, bearing interest at 7.00%. The remaining requisite cash payments under these notes payable total $855 thousand in 2001 and 2002, and $637 thousand in 2003 and 2004, plus interest. As provided in the merger agreement, participants in the ESOP elected to receive a cash payment totaling $4.6 million for 255,180 of the 319,009 shares of Heartland common stock originally issued to them. Immediately following the closing of the acquisition, the bank was merged into New Mexico Bank & Trust. As a result of this affiliate bank merger, Heartland's ownership in New Mexico Bank & Trust increased to approximately 88%.
In June of 2000, Heartland began offering a portion of its shares of New Mexico Bank & Trust's common stock to interested investors. Heartland will not allow its ownership to fall below 80% and all minority stockholders must enter into a stock transfer agreement before shares will be issued to them. This stock transfer agreement imposes certain restrictions on the investor's sale, transfer or other disposition of their shares and requires Heartland to repurchase the shares from the investor on April 9, 2003. As of December 31, 2000, a total of 600 shares had been sold, decreasing Heartland's ownership to 86%.
In October of 1999, Heartland completed an offering of $25.0 million of 9.60% cumulative capital securities representing undivided beneficial interests in Heartland Capital Trust I, a special purpose trust subsidiary formed for the sole purpose of this offering. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds were used for general corporate purposes.
Heartland continues to explore opportunities to expand its umbrella of independent community banks through mergers and acquisitions as well as de novo and branching opportunities. As evidenced by the recent expansion into New Mexico, Heartland is seeking to operate in high growth areas, even if they are outside of its traditional Midwest market areas. Future expenditures relating to these efforts are not estimable at this time.
Heartland's capital ratios are detailed in the table below.
RISK-BASED CAPITAL RATIOS(1) (Dollars in thousands)
December 31, 2000 1999 1998 Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------- Capital Ratios: Tier 1 capital $ 102,443 8.74% $101,665 10.56% $ 81,149 11.05% Tier 1 capital minimum requirement 46,878 4.00 38,517 4.00 29,379 4.00 ---------- ------ -------- ------ -------- ------ Excess $ 55,565 4.74% $ 63,148 6.56% $ 51.770 7.05% ========== ====== ======== ====== ======== ====== Total capital $ 116,034 9.90% $112,508 11.68% $ 89,093 12.13% Total capital minimum requirement 93,756 8.00 77,035 8.00 58,757 8.00 ---------- ------ -------- ------ -------- ------ Excess $ 22,278 1.90% $ 35,473 3.68% $ 30,336 4.13% ========== ====== ======== ====== ======== ====== Total risk- adjusted assets $1,171,951 $962,933 $734,463 ========== ======== ========
(1) Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 to risk-adjusted assets ratio of 4.00% and total to risk-adjusted assets ratio of 8.00%.
LEVERAGE RATIOS(1) (Dollars in thousands)
December 31, 2000 1999 Amount Ratio Amount Ratio --------------------------------------- Capital Ratios: Tier 1 capital $ 102,443 7.25% $ 101,665 8.85% Tier 1 capital minimum requirement(2) 56,492 4.00 45,965 4.00 ---------- ----- ---------- ------ Excess $ 45,951 3.25% $ 55,700 4.85% ========== ===== ========== ====== Average adjusted assets $1,412,304 $1,149,125 ========== ==========
LEVERAGE RATIOS(1) (Dollars in thousands)
December Amount Ratio ------------------ Capital Ratios: Tier 1 capital $ 81,149 8.58% Tier 1 capital minimum requirement(2) 37,810 4.00 ---------- ------ Excess $ 43,339 4.58% ========== ====== Average adjusted assets $ 945,242 ==========
(1) The leverage ratio is defined as the ratio of Tier 1 capital to average total assets.
(2) Management of Heartland has established a minimum target leverage ratio of 4.00%. Based on Federal Reserve guidelines, a bank holding company generally is required to maintain a leverage ratio of 3.00% plus an additional cushion of at least 100 basis points.
OTHER DEVELOPMENTS
Current president and chief executive officer, Lynn B. Fuller, was elected to serve as chairman of the board at Heartland's regular board meeting held in July, 2000. After many years of dedicated service, former chairman Lynn S. Fuller retired from Heartland's board of directors at that time. Mr. Fuller will continue to serve as vice chairman on the board of directors of Dubuque Bank and Trust Company. James F. Conlan, a partner with the international law firm of Sidley & Austin of Chicago, Illinois was appointed to fill Mr. Fuller's unexpired term on Heartland's board of directors.
In February of 2001, Heartland was saddened by the death of vice chairman of the board, James A. Schmid. Mr. Schmid first joined the board of directors of DB&T in 1957 and was appointed its chairman in 1982, a position he held at the time of his death. He was also one of the initial directors of Heartland when it was formed in 1981 and became vice chairman in 1990. John K. Schmidt, executive vice president and chief financial officer, has been elected to fill Mr. Schmid's unexpired term on Heartland's board of directors.
LIQUIDITY
Liquidity refers to Heartland's ability to maintain a cash flow, which is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers' credit needs. Heartland's usual and primary sources of funding have been deposits, loan and mortgage-backed security principal repayments, sales of loans, cash flow generated from operations and FHLB borrowings.
Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as such, will normally fluctuate. Heartland believes these balances, on average, to be stable sources of funds; however, it intends to rely on deposit growth and additional FHLB borrowings in the future.
In the event of short-term liquidity needs, the bank subsidiaries may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs.
Heartland's revolving credit agreements, as of December 31, 2000, provided an additional borrowing capacity of $10.7 million. These agreements contain specific covenants which, among other things, limit dividend payments and restrict the sale of assets by Heartland under certain circumstances. Also contained within the agreements are certain financial covenants, including the maintenance by Heartland of a maximum nonperforming assets to total loans ratio, minimum return on average assets ratio and maximum funded debt to total equity capital ratio. In addition, Heartland and each of its bank subsidiaries must remain well capitalized, as defined from time to time by the federal banking regulators. At December 31, 2000, Heartland was in compliance with the covenants contained in this credit agreement, except that Heartland fell slightly below the 10% required risk-based capital ratio to be considered well-capitalized. The lending banks have been notified and have waived this requirement until June 30, 2001.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. The objective is to measure this risk and manage the balance sheet to avoid unacceptable potential for economic loss.
Heartland management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees at the banks and, on a consolidated basis, by the Heartland board of directors. Monthly, management utilizes both the standard balance sheet GAP report and an independently developed income statement GAP report to analyze the effect of changes in interest rates on net interest income and to manage interest rate risk. Also utilized periodically during the year is an interest rate sensitivity analysis, which simulates changes in net interest income in response to various interest rate scenarios. This analysis considers current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Through the use of these tools, Heartland has determined that the balance sheet is structured such that changes in net interest margin in response to changes in interest rates would be minimal, all other factors being held constant. Management does not believe that Heartland's primary market risk exposures and how those exposures were managed in 2000 have materially changed when compared to 1999.
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Heartland was not a party to these types of derivatives at December 31, 2000. However, Heartland does enter into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to guarantee the performance of a customer to a third party up to a stated amount and with specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the balance sheet until the instrument is exercised.
The table below summarizes the scheduled maturities of market risk sensitive assets and liabilities as of December 31, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK TABLE OF MARKET RISK-SENSITIVE INSTRUMENTS (Dollars in thousands) December 31, 2000
MATURING IN: 2001 2002 2003 2004 ------------------------------------ ASSETS Federal funds sold $ 46,300 $ - $ - $ - Time deposits in other financial institutions 966 2 536 - Securities 40,383 43,362 64,584 14,855 Loans and leases: Fixed rate loans 194,075 147,453 108,861 57,277 Variable rate loans 167,006 39,009 42,973 27,001 -------- -------- -------- -------- Loans and leases, net 361,081 186,462 151,834 84,278 -------- -------- -------- -------- Total Market Risk- Sensitive Assets $448,730 $229,826 $216,954 $ 99,133 ======== ======== ======== ======== LIABILITIES Savings $406,712 $ - $ - $ - Time deposits: Fixed rate time certificates less than $100,000 260,682 112,119 29,734 9,647 Variable rate time certificates less than $100,000 988 2,027 - - -------- -------- -------- -------- Time deposits less than $100,000 261,670 114,146 29,734 9,647 Time deposits of $100,000 or more 112,480 16,610 4,371 200 Federal funds purchased, securities sold under repurchase agreements and other short-term borrowings 175,084 - - - Other fixed rate borrowings - 22,592 10,866 633 -------- -------- -------- -------- Other borrowings - 22,592 10,866 633 -------- -------- -------- -------- Total Market Risk- Sensitive Liabilities $955,946 $153,348 $ 44,971 $ 10,480 ======== ======== ======== ========
Average Estimated Interest Fair MATURING IN: 2005 Thereafter Total Rate Value --------------------------------------------- ASSETS Federal funds sold $ - $ - $ 46,300 6.21% $ 46,300 Time deposits in other financial institutions - - 1,504 5.32 1,504 Securities 9,567 55,314 228,065 6.74 228,108 Loans and leases: Fixed rate loans 28,665 68,910 605,241 8.72 604,644 Variable rate loans 33,140 127,726 436,855 9.25 436,910 ------- -------- ---------- ---------- Loans and leases, net 61,805 196,636 1,042,096 1,041,554 ------- -------- ---------- ---------- Total Market Risk- Sensitive Assets $71,372 $251,950 $1,317,965 $1,317,466 ======= ======== ========== ========== LIABILITIES Savings $ - $ - $ 406,712 3.89% $ 406,712 Time deposits Fixed rate time certificates less than $100,000 8,368 702 421,252 6.21 422,142 Variable rate time certificates less than $100,000 - - 3,015 5.62 3,015 ------- -------- ---------- ---------- Time deposits less than $100,000 8,368 702 424,267 425,157 Time deposits of $100,000 or more 607 200 134,468 6.20 134,778 Federal funds purchased, securities sold under repurchase agreements and other short-term borrowings - - 175,084 5.79 175,084 Other fixed rate borrowings 4,006 29,584 67,681 7.93 60,440 ------- -------- ---------- ---------- Other borrowings 4,006 29,584 67,681 60,440 ------- -------- ---------- ---------- Total Market Risk- Sensitive Liabilities $12,981 $ 30,486 $1,208,212 $1,202,171 ======= ======== ========== ==========
EFFECTS OF INFLATION
Consolidated financial data included in this report has been prepared in accordance with generally accepted accounting principles. Presently, these principles require reporting of financial position and operating results in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered.
In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. Heartland seeks to insulate itself from interest rate volatility by ensuring that rate-sensitive assets and rate-sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (Dollars in thousands, except per share data)
Notes 2000 1999 ----- ---------- ---------- ASSETS Cash and due from banks 3 $ 38,387 $ 34,078 Federal funds sold 46,300 1,875 ---------- ---------- Cash and cash equivalents 84,687 35,953 Time deposits in other financial institutions 1,504 6,084 Securities: 4 Available for sale-at market (cost of $223,892 for 2000 and $211,782 for 1999) 225,954 209,381 Held to maturity-at cost (approximate market value of $2,154 for 2000 and $2,264 for 1999) 2,111 2,196 Loans and leases: 5 Held for sale 18,127 16,636 Held to maturity 1,023,969 818,510 Allowance for loan and lease losses 6 (13,592) (10,844) ---------- ---------- Loans and leases, net 1,028,504 824,302 Assets under operating leases 35,285 35,495 Premises, furniture and equipment, net 7 30,155 26,995 Other real estate, net 583 585 Goodwill and core deposit premium, net 20,661 13,997 Other assets 36,943 29,159 ---------- ---------- TOTAL ASSETS $1,466,387 $1,184,147 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: 8 Demand $ 136,066 $ 91,391 Savings 406,712 367,413 Time 558,535 410,855 ---------- ---------- Total deposits 1,101,313 869,659 Short-term borrowings 9 175,084 132,300 Accrued expenses and other liabilities 26,163 18,958 Other borrowings 11 67,681 76,657 ---------- ---------- TOTAL LIABILITIES 1,370,241 1,097,574 ---------- ---------- STOCKHOLDERS' EQUITY: 13,14,16 Preferred stock (par value $1 per share; authorized 200,000 shares) - - Common stock (par value $1 per share; authorized, 12,000,000 shares; issued, 9,905,783 shares at December 31, 2000, and 9,707,252 shares at December 31, 1999) 9,906 9,707 Capital surplus 18,812 15,339 Retained earnings 71,253 65,132 Accumulated other comprehensive income (loss) 1,301 (1,511) Treasury stock at cost (287,573 and 120,478 shares at December 31, 2000, and December 31, 1999, respectively) (5,126) (2,094) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 96,146 86,573 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,466,387 $1,184,147 ========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2000, 1999 and 1998 (Dollars in thousands, except per share data)
Notes 2000 1999 1998 ----- -------- -------- -------- INTEREST INCOME: Interest and fees on loans and leases 5 $ 89,368 $60,947 $49,901 Interest on securities: Taxable 11,824 11,113 11,515 Nontaxable 1,814 1,216 1,133 Interest on federal funds sold 911 410 1,582 Interest on interest bearing deposits in other financial institutions 333 468 386 --------- -------- -------- TOTAL INTEREST INCOME 104,250 74,154 64,517 --------- -------- -------- INTEREST EXPENSE: Interest on deposits 8 43,195 31,180 28,645 Interest on short-term borrowings 10,188 5,630 4,076 Interest on other borrowings 6,326 4,039 3,583 --------- -------- --------
TOTAL INTEREST EXPENSE 59,709 40,849 36,304 --------- -------- -------- NET INTEREST INCOME 44,541 33,305 28,213 Provision for loan and lease losses 6 3,301 2,626 951 --------- -------- -------- Net interest income after provision for loan and lease losses 41,240 30,679 27,262 --------- -------- --------
OTHER INCOME: Service charges and fees 5,386 3,906 3,013 Trust fees 3,088 2,662 2,284 Brokerage commissions 846 655 413 Insurance commissions 862 803 751 Securities gains, net 501 713 1,897 Rental income on operating leases 14,918 14,718 7,428 Gains on sale of loans 521 1,028 1,212 Impairment loss on equity securities (244) - - Other noninterest income 1,130 939 299 --------- -------- -------- TOTAL OTHER INCOME 27,008 25,424 17,297 --------- -------- -------- OTHER EXPENSES: Salaries and employee benefits 12 23,876 18,945 15,218 Occupancy 13 2,904 2,076 1,695 Furniture and equipment 3,015 2,416 1,998 Depreciation on equipment under operating leases 11,199 10,844 5,296 Outside services 2,661 2,239 1,416 FDIC deposit insurance assessment 228 121 118 Advertising 1,492 1,376 1,150 Goodwill and core deposit intangibles amortization 1,814 682 234 Other operating expenses 7,257 6,023 4,656 --------- -------- -------- TOTAL OTHER EXPENSES 54,446 44,722 31,781 --------- -------- -------- Income before income taxes 13,802 11,381 12,778 Income taxes 10 4,216 3,156 3,757 --------- -------- -------- NET INCOME $ 9,586 $ 8,225 $ 9,021 ========= ======== ======== EARNINGS PER COMMON SHARE-BASIC $ 1.00 $ 0.86 $ 0.95 ========= ======== ======== EARNINGS PER COMMON SHARE- DILUTED 1 $ 0.98 $ 0.84 $ 0.94 ========= ======== ========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.36 $ 0.34 $ 0.31 ========= ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the years ended December 31, 2000, 1999 and 1998 (Dollars in thousands, except per share data)
Common Capital Retained Stock Surplus Earnings ------- ------- --------
Balance at January 1, 1998 $ 4,854 $13,706 $58,914 Net Income - 1998 9,021 Unrealized gain (loss) on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared: Common, $.31 per share (2,928) Two-for-one stock split 4,853 (4,853) Purchase of 166,970 shares of common stock Sale of 328,857 shares of common stock 1,278 ------- ------- ------- Balance at December 31, 1998 $ 9,707 $14,984 $60,154
Net Income - 1999 8,225 Unrealized gain (loss) on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared: Common, $.34 per share (3,247) Purchase of 44,907 shares of common stock Sale of 96,602 shares of common stock 355 ------- ------- ------- Balance at December 31, 1999 $ 9,707 $15,339 $65,132
Net Income - 2000 9,586 Unrealized gain (loss) on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared: Common, $.36 per share (3,465) Purchase of 291,501 shares of common stock Issuance of 322,937 shares of common stock 199 3,473 ------- ------- ------- BALANCE AT DECEMBER 31, 2000 $ 9,906 $18,812 $71,253 ======= ======= =======
Accumulated Other Comprehensive Treasury Income (Loss) Stock Total ------------- -------- -----
Balance at January 1, 1998 $ 2,545 $(2,247) $77,772 Net Income - 1998 9,021 Unrealized gain (loss) on securities available for sale 1,233 1,233 Reclassification adjustment for gains realized in net income (1,897) (1,897) Income taxes 226 226 ------- Comprehensive income 8,583 Cash dividends declared: Common, $.31 per share (2,928) Two-for-one stock split - Purchase of 166,970 shares of common stock (4,431) (4,431) Sale of 328,857 shares of common stock 3,996 5,274 ------- ------- ------- Balance at December 31, 1998 $ 2,107 $(2,682) $84,270
Net Income - 1999 8,225 Unrealized gain (loss) on securities available for sale (4,769) (4,769) Reclassification adjustment for gains realized in net income (713) (713) Income taxes 1,864 1,864 ------- Comprehensive income 4,607 Cash dividends declared: Common, $.34 per share (3,247) Purchase of 44,907 shares of common stock (837) (837) Sale of 96,602 shares of common stock 1,425 1,780 ------- ------- ------- Balance at December 31, 1999 $(1,511) $(2,094) $86,573
Net Income - 2000 9,586 Unrealized gain (loss) on securities available for sale 4,003 4,003 Reclassification adjustment for gains realized in net income 257 257 Income taxes (1,448) (1,448) ------- Comprehensive income 12,398 Cash dividends declared: Common, $.36 per share (3,465) Purchase of 291,501 shares of common stock (5,197) (5,197) Issuance of 322,937 shares of common stock 2,165 5,837 ------- ------- ------- BALANCE AT DECEMBER 31, 2000 $ 1,301 $(5,126) $96,146 ======= ======= =======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (Dollars in thousands, except per share data)
2000 1999 1998 ---- ---- ---- Cash Flows from Operating Activities: Net income $ 9,586 $ 8,225 $ 9,021 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,167 14,294 7,856 Provision for loan and lease losses 3,301 2,626 951 Provision for income taxes 41 (348) (488) Net amortization (accretion) of premium (discount) on securities (39) 1,417 875 Securities gains, net (501) (713) (1,897) Loans originated for sale (42,991) (80,804) (139,554) Proceeds on sales of loans 36,273 75,351 142,328 Net gain on sales of loans (521) (1,028) (1,212) Increase in accrued interest receivable (4,091) (826) (620) Increase in accrued interest payable 2,641 353 623 Loss on impairment of equity securities 244 - - Other, net (4,119) (5,613) 468 -------- -------- -------- Net cash provided by operating activities 15,991 12,934 18,351 -------- -------- -------- Cash Flows from Investing Activities: Purchase of time deposits (600) - (5,934) Proceeds on maturities of time deposits 5,180 43 - Proceeds from the sale of securities available for sale 34,442 22,454 30,204 Proceeds from the maturity of and principal paydowns on securities held to maturity 6,353 520 1,180 Proceeds from the maturity of and principal paydowns on securities available for sale 48,260 95,070 94,942 Purchase of securities available for sale (81,918) (92,611) (166,754) Net increase in loans and leases (132,761) (201,186) (36,262) Increase in assets under operating leases (11,409) (11,716) (12,161) Capital expenditures (3,647) (7,802) (4,365) Net cash and cash equivalents received in acquisition of subsidiaries 18,603 43,682 2,730 Net cash received from minority interest stockholders 780 58 2,950 Net cash and cash equivalents paid in acquisition of trust assets - (528) - Proceeds on sale of OREO and other repossessed assets 815 1,086 831 Proceeds on sale of fixed assets - 4 8 -------- -------- -------- Net cash used by investing activities (115,902) (150,926) (92,631)
Cash Flows from Financing Activities: Net increase in demand deposits and savings accounts 26,090 42,217 50,481 Net increase in time deposit accounts 111,248 18,165 43,864 Net increase in other borrowings 4,499 34,633 15,250 Net increase (decrease) in short-term borrowings 15,451 38,403 (42,979) Purchase of treasury stock (5,197) (837) (4,431) Proceeds from sale of treasury stock 19 1,780 669 Dividends (3,465) (3,247) (2,928) -------- -------- -------- Net cash provided by financing activities 148,645 131,114 59,926 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 48,734 (6,878) (14,354)
Cash and cash equivalents at beginning of year 35,953 42,831 57,185 -------- -------- -------- Cash and cash equivalents at end of period $ 84,687 $ 35,953 $ 42,831 ======== ======== ======== Supplemental disclosures: Cash paid for income/ franchise taxes $ 3,890 $ 3,596 $ 3,303
Cash paid for interest $ 57,068 $ 40,496 $ 35,681
Other borrowings transferred to short-term borrowings $ 16,439 $ 15,599 $ 15,323
Acquisitions: Assets acquired $119,837 $ 40,472 $ 28,000
Cash paid for purchase of stock $(14,364) $ - $ - Cash acquired 32,967 43,682 2,730 -------- -------- -------- Net cash received for acquisitions $ 18,603 $ 43,682 $ 2,730
Notes issued for acquisition $ 3,820 $ - $ 1,929 Common stock issued for acquisition $ 5,773 $ - $ 4,602
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data)
ONE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations-Heartland Financial USA, Inc. ("Heartland") is a multi-bank holding company primarily operating full-service retail banking offices in Dubuque and Lee Counties in Iowa; Jo Daviess, Hancock and Winnebago Counties in Illinois; Dane, Green, Sheboygan, Brown and Eau Claire Counties in Wisconsin; and Bernalillo and Curry Counties in New Mexico, serving communities in and around those counties. The principal services of Heartland, through its subsidiaries, are FDIC-insured deposit accounts and related services, and loans to businesses and individuals. The loans consist primarily of commercial and commercial real estate and residential real estate.
Principles of Presentation-The consolidated financial statements include the accounts of Heartland and its subsidiaries: Dubuque Bank and Trust Company ("DB&T"); Galena State Bank and Trust Company ("GSB"); Riverside Community Bank ("RCB"); Wisconsin Community Bank ("WCB"); New Mexico Bank & Trust ("NMB"); First Community Bank, FSB ("FCB"); Citizens Finance Co.("Citizens"); ULTEA, Inc. ("ULTEA"); DB&T Insurance, Inc.; DB&T Community Development Corp.; DBT Investment Corporation; and Keokuk Bancshares, Inc. (dba KBS Investment Corp.); and Heartland Capital Trust I ("Trust I"). All of Heartland's subsidiaries are wholly-owned except for NMB, of which Heartland was an 86.47% owner on December 31, 2000. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with general practice within the banking industry. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses.
Securities Available for Sale-Available for sale securities consist of those securities not classified as held to maturity or trading, which management intends to hold for indefinite periods of time or that may be sold in response to changes in interest rates, prepayments or other similar factors. Such securities are stated at fair value with any unrealized gain or loss, net of applicable income tax, reported as a separate component of stockholders' equity. Security premiums and discounts are amortized/accreted using the interest method over the period from the purchase date to the maturity or call date of the related security. Gains or losses from the sale of available for sale securities are determined based upon the adjusted cost of the specific security sold. Unrealized losses judged to be other than temporary are charged to operations for both securities available for sale and securities held to maturity.
Securities Held to Maturity-Securities which Heartland has the ability and positive intent to hold to maturity are classified as held to maturity. Such securities are stated at amortized cost, adjusted for premiums and discounts that are amortized/accreted using the interest method over the period from the purchase date to the maturity date of the related security.
Loans and Leases-Interest on loans is accrued and credited to income based primarily on the principal balance outstanding. Income from leases is recorded in decreasing amounts over the term of the contract resulting in a level rate of return on the lease investment. The policy of Heartland is to discontinue the accrual of interest income on any loan or lease when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for loan and lease losses. Nonaccrual loans and leases are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of interest and principal.
Under Heartland's credit policies, all nonaccrual and restructured loans are defined as impaired loans. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except where more practical, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.
Net nonrefundable loan and lease origination fees and certain direct costs associated with the lending process are deferred and recognized as a yield adjustment over the life of the related loan or lease.
Loans held for sale are stated at the lower of aggregate cost or estimated fair value. Loans are sold on a nonrecourse basis with either servicing released or retained, and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan.
Mortgage servicing rights associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the balance sheet. The values of these capitalized servicing rights are amortized in relation to the servicing revenue expected to be earned. The carrying values of these rights are periodically reviewed for impairment. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including loan type, note rate, prepayment trends and external market factors. There was no valuation allowance required as of December 31, 2000 and 1999.
Mortgage loans serviced for others were $183,880 and $188,258 as of December 31, 2000 and 1999, respectively. Custodial escrow balances maintained in connection with the loan servicing portfolio were approximately $1,126 and $1,112 as of December 31, 2000 and 1999, respectively.
Allowance for Loan and Lease Losses - The allowance for loan and lease losses is maintained at a level estimated by management to provide for known and inherent risks in the loan and lease portfolios. The allowance is based upon a continuing review of past loan and lease loss experience, current economic conditions, volume growth, the underlying collateral value of the loans and leases and other relevant factors. Loans and leases which are deemed uncollectible are charged off and deducted from the allowance. Provisions for loan and lease losses and recoveries on previously charged-off loans and leases are added to the allowance.
Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost less accumulated depreciation. The provision for depreciation of premises, furniture and equipment is determined by straight-line and accelerated methods over the estimated useful lives of 18 to 39 years for buildings, 15 years for land improvements and 3 to 7 years for furniture and equipment.
Other Real Estate - Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The excess, if any, of such costs at the time acquired over the fair value is charged against the allowance for loan and lease losses. Subsequent write downs estimated on the basis of later evaluations, gains or losses on sales and net expenses incurred in maintaining such properties are charged to operations.
Intangible Assets - Intangible assets consist of goodwill and core deposit premiums. Goodwill represents the excess of the purchase price of acquired subsidiaries' net assets over their fair value. Goodwill is amortized over periods of 15 to 25 years on the straight-line basis. Core deposit premiums are amortized over ten years on an accelerated basis. Periodically, Heartland reviews the intangible assets for events or circumstances that may indicate a change in the recoverability of the underlying basis.
Income Taxes - Heartland and its subsidiaries file a consolidated federal income tax return. For state tax purposes, DB&T, GSB, RCB, FCB, WCB and NMB ("Banks") file income or franchise tax returns as required. The other entities file corporate income or franchise tax returns as required by the various states.
Heartland has a tax allocation agreement which provides that each subsidiary of the consolidated group pay a tax liability to, or receive a tax refund from Heartland, computed as if the subsidiary had filed a separate return.
Heartland recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on an asset and liability approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax rate changes. Deferred tax assets are recognized if their expected realization is "more likely than not."
Treasury Stock - Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price.
Trust Department Assets - Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Banks.
Earnings Per Share - Amounts used in the determination of basic and diluted earnings per share for the years ended December 31, 2000, 1999 and 1998 are shown in the table below:
2000 1999 1998 ------ ------ ------ Net income $9,586 $8,225 $9,021 ====== ====== ====== Weighted average common shares outstanding for basic earnings per share (1) 9,628 9,555 9,463 Assumed incremental common shares issued upon exercise of stock options (1) 130 196 148 ------ ------ ------ Weighted average common shares for diluted earnings per share (1) 9,758 9,751 9,611 ====== ====== ====== (1) in thousands
Cash Flows - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Effect of New Financial Accounting Standards - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. In July 1999, the FASB issued FAS 137, Deferring Statement 133's Effective Date, which defers the effective date for implementation of FAS 133 by one year, making FAS 133 effective no later than January 1, 2001 for Heartland's financial statements. In June 2000, the FASB issued FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FAS No. 133. Heartland implemented FAS 133 on January 1, 2001 and determined that there was no material impact on the consolidated financial statements as a result of the implementation.
In September 2000, the FASB issued FAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces FAS 125 (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but carries over most of FAS 125's provisions. The collateral and disclosure provisions of FAS 140 are effective for the December 31, 2000, financial statements. The other provisions of FAS 140 are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Heartland does not expect the impact of the revised provisions will have a material impact on the consolidated financial statements.
TWO ACQUISITIONS
Heartland regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed.
On January 1, 2000, Heartland completed its acquisition of National Bancshares, Inc. ("NBI"), the one-bank holding company of First National Bank of Clovis ("FNB") in New Mexico. FNB has four locations in the New Mexico communities of Clovis and Melrose, with $120,113 in assets and $97,533 in deposits at December 31, 1999. The total purchase price for NBI was $23,103, of which $5,773 was paid in common stock of Heartland to NBI's Employee Stock Ownership Plan (the "ESOP") and $3,820 in notes payable over three or five years, at the stockholders' discretion, bearing interest at 7.00%. As provided in the merger agreement, participants in the ESOP elected to receive a cash payment totaling $4,619 for 255,180 of the 319,009 shares of Heartland's common stock originally issued to them. Heartland merged FNB into its New Mexico bank subsidiary NMB immediately after the closing of the NBI acquisition. As a result of this affiliate bank merger, Heartland's ownership in NMB increased from its initial 80% to approximately 88%. The acquisition of NBI has been accounted for as a purchase; accordingly, the results of operations of FNB are included in the consolidated financial statements from the acquisition date. The resultant acquired deposit base intangible of $1,986 is being amortized over a period of 10 years, and the remaining excess purchase price over the fair value of assets acquired of $6,337 is being amortized over a period of 25 years. The pro forma effect of the acquisition was not material to the consolidated financial statements.
On July 23, 1999, WCB completed its acquisition of Bank One Wisconsin's branch in Monroe, Wisconsin. Included in the acquisition were deposits of $93,780 and loans of $38,581. Trust assets of the Monroe branch were also acquired by WCB. The acquisition was accounted for as a purchase; accordingly, the results of operations of the Monroe banking center have been included in the financial statements from the acquisition date. The resultant acquired deposit base intangible of $2,505 is being amortized over a period of 10 years and the remaining excess purchase price over the fair value of assets acquired of $8,327 is being amortized over a period of 15 years. The pro forma effect of the acquisition was not material to the financial statements.
On July 17, 1998, Heartland acquired all of the assets and assumed certain liabilities of Arrow Motors, Inc., a Wisconsin corporation doing business as Lease Associates Group ("LAG") in Milwaukee. With $28,000 in total assets, LAG was merged into ULTEA, Heartland's fleet leasing subsidiary. The stockholders of LAG, at the acquisition date, received 287,644 shares of Heartland common stock and the remaining balance of $1,929 in a promissory note payable over three years bearing a rate of 7.50%. The excess of the purchase price over the fair value of net assets acquired was $632 and is being amortized over 25 years using the straight-line method. The transaction was accounted for as a purchase transaction, and accordingly, the results of operations are included in the consolidated financial statements from the acquisition date. The pro forma effect of the acquisition was not material to the financial statements.
THREE CASH AND DUE FROM BANKS
The Banks are required to maintain certain average cash reserve balances as a member of the Federal Reserve System. The reserve balance requirements at December 31, 2000 and 1999 were $2,627 and $1,443 respectively.
FOUR Securities
The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity and available for sale securities as of December 31, 2000 and 1999, are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------
Securities held to maturity: Obligations of states and political subdivisions $ 2,111 $ 44 $ (1) $ 2,154 -------- -------- -------- -------- Total $ 2,111 $ 44 $ (1) $ 2,154 ======== ======== ======== ========
Securities available for sale: U.S. government corporations and agencies $117,610 $ 1,499 $ (212) $118,897 Mortgage-backed securities 53,201 417 (211) 53,407 Obligations of states and political subdivisions 30,619 1,441 (127) 31,933 Corporate debt securities 10,182 - (61) 10,121 -------- -------- -------- -------- Total debt securities 211,612 3,357 (611) 214,358 Equity securities 12,280 470 (1,154) 11,596 -------- -------- -------- -------- Total $223,892 $ 3,827 $ (1,765) $225,954 ======== ======== ======== ========
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- --------- ---------
Securities held to maturity: Obligations of states and political subdivisions $ 2,196 $ 69 $ (1) $ 2,264 -------- -------- -------- -------- Total $ 2,196 $ 69 $ (1) $ 2,264 ======== ======== ======== ========
Securities available for sale: U.S. government corporations and agencies $ 92,234 $ 3 $ (1,701) $ 90,536 Mortgage-backed securities 75,959 212 (534) 75,637 Obligations of states and political subdivisions 23,583 683 (558) 23,708 Corporate debt securities 11,415 - (116) 11,299 -------- -------- -------- -------- Total debt securities 203,191 898 (2,909) 201,180 Equity securities 8,591 128 (518) 8,201 -------- -------- -------- -------- Total $211,782 $ 1,026 $ (3,427) $209,381 ======== ======== ======== ========
The amortized cost and estimated fair value of debt securities held to maturity and available for sale at December 31, 2000, by estimated maturity, are as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.
Estimated Amortized Fair Cost Value --------- --------- Securities held to maturity: Due in 1 year or less $ 610 $ 610 Due in 1 to 5 years 856 874 Due in 5 to 10 years 645 670 -------- -------- Total $ 2,111 $ 2,154 ======== ======== Securities available for sale: Due in 1 year or less $ 39,668 $ 39,773 Due in 1 to 5 years 130,223 131,512 Due in 5 to 10 years 15,339 15,802 Due after 10 years 26,382 27,271 -------- -------- Total $211,612 $214,358 ======== ========
As of December 31, 2000, securities with a fair value of $167,458 were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required by law.
Gross gains and losses related to sales of securities for the years ended December 31, 2000, 1999 and 1998, are summarized as follows:
2000 1999 1998 -------- -------- -------- Securities sold: Proceeds from sales $34,442 $22,454 $30,204 Gross security gains 1,084 1,007 1,945 Gross security losses 583 294 48
FIVE LOANS AND LEASES
Loans and leases as of December 31, 2000 and 1999, were as follows:
2000 1999 -------- -------- Loans: Commercial and commercial real estate $ 550,366 $ 448,991 Residential mortgage 215,638 180,347 Agricultural and agricultural real estate 133,614 92,936 Consumer 128,685 103,608 ---------- ---------- Loans, gross 1,028,303 825,882 Unearned discount (3,397) (3,169) Deferred loan fees (400) (453) ---------- ---------- Loans, net 1,024,506 822,260 ---------- ---------- Direct financing leases: Gross rents receivable 16,014 11,929 Estimated residual value 4,750 3,100 Unearned income (3,174) (2,143) ---------- ---------- Direct financing leases, net 17,590 12,886 ---------- ---------- Allowance for loan and lease losses (13,592) (10,844) ---------- ---------- Loans and leases, net $1,028,504 $ 824,302 ========== ==========
Direct financing leases receivable are generally short-term equipment leases. Future minimum lease payments as of December 31, 2000, were as follows: $5,501 for 2001, $4,774 for 2002, $3,850 for 2003, $3,446 for 2004, $2,030 for 2005 and $1,163 thereafter.
As DB&T is the largest subsidiary of Heartland, the majority of the loan portfolio is concentrated in northeast Iowa, northwest Illinois and southwest Wisconsin.
Loans and leases on a nonaccrual status amounted to $5,860 and $1,414 at December 31, 2000 and 1999, respectively. The allowance for loan and lease losses related to these nonaccrual loans was $3,087 and $104, respectively. Nonaccrual loans of $953 were not subject to a related allowance for loan and lease losses at December 31, 1999, because of the net realizable value of loan collateral, guarantees and other factors. All loans were subject to a related allowance at December 31, 2000, as Heartland enhanced its allowance adequacy methodology to identify a specific allocation for each credit. The average balances of nonaccrual loans for the years ended December 31, 2000, 1999 and 1998 were $3,209, $1,367 and $1,437, respectively. For the years ended December 31, 2000, 1999 and 1998, interest income which would have been recorded under the original terms of these loans and leases amounted to approximately $323, $63, and $59, respectively, and interest income actually recorded amounted to approximately $107, $16, and $10, respectively.
Loans are made in the normal course of business to directors, officers and principal holders of equity securities of Heartland. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions and do not involve more than a normal risk of collectibility. Changes in such loans during the year ended December 31, 2000, were as follows:
-------- Balance at beginning of year $ 22,718 New loans 27,840 Repayments (26,125) -------- Balance at end of year $ 24,433 ========
SIX ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the years ended December 31, 2000, 1999 and 1998, were as follows:
2000 1999 1998 ------- ------- ------- Balance at beginning of year $10,844 $ 7,945 $ 7,362 Provision for loan and lease losses 3,301 2,626 951 Recoveries on loans and leases previously charged off 585 243 455 Loans and leases charged off (2,280) (635) (823) Additions related to acquisitions 1,142 665 - ------- ------- ------- Balance at end of year $13,592 $10,844 $ 7,945 ======= ======= =======
SEVEN PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of December 31, 2000 and 1999, were as follows:
2000 1999 ------- ------- Land and land improvements $ 4,623 $ 4,204 Buildings and building improvements 24,322 21,630 Furniture and equipment 18,383 14,632 ------- ------- Total 47,328 40,466 Less accumulated depreciation (17,173) (13,471) ------- ------- Premises, furniture and equipment, net $30,155 $26,995 ======= =======
Depreciation expense on premises, furniture and equipment was $2,667 for 2000, $2,095 for 1999 and $1,730 for 1998.
EIGHT DEPOSITS
The aggregate amount of time certificates of deposit in denominations of one hundred thousand dollars or more as of December 31, 2000 and 1999, were $134,468 and $57,452, respectively. At December 31, 2000, the scheduled maturities of time certificates of deposit were as follows:
--------- 2001 $ 374,150 2002 130,756 2003 34,105 2004 9,847 2005 thereafter 9,677 --------- Total $ 558,535 =========
Interest expense on deposits for the years ended December 31, 2000, 1999 and 1998, was as follows:
2000 1999 1998 ------- ------- ------- Savings and insured money market accounts $13,913 $10,789 $ 9,512 Time certificates of deposit in denominations of $100 or more 6,001 3,222 2,905 Other time deposits 23,281 17,169 16,228 ------- ------- ------- Interest expense on deposits $43,195 $31,180 $28,645 ======= ======= =======
NINE SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 2000 and 1999, were as follows:
2000 1999 -------- -------- Securities sold under agreements to repurchase $ 92,991 $ 66,839 Federal funds purchased 4,150 28,600 Federal Home Loan Bank ("FHLB") advances 26,004 17,504 U.S. Treasury demand note 3,468 7,781 Notes payable on leased assets 7,090 6,339 Contracts payable to previous owners of LAG for acquisition 643 643 Contracts payable to previous stockholders of WCB for acquisition 594 594 Contracts payable to previous stockholders of NBI for acquisition 844 - Note payable to unaffiliated banks 39,300 4,000 -------- -------- Total $175,084 $132,300 ======== ========
On September 28, 2000, Heartland entered into a credit agreement with two unaffiliated banks to replace an existing term credit line, as well as to increase availability under a revolving credit line. Under the new unsecured revolving credit lines, Heartland may borrow up to $50,000 at any one time. At December 31, 2000, $39,300 was outstanding on the revolving credit lines, with the total classified as short-term borrowings. The additional credit line was established primarily to provide additional working capital to the nonbanking subsidiaries and to meet general corporate commitments. On July 23, 1999, Heartland had amended its credit agreement to increase its unsecured credit line from $20,000 to $40,000. The additional credit line provided the $18,000 capital investment required at WCB to complete the Monroe acquisition.
See note 11 related to collateral pledged for FHLB advances.
All repurchase agreements as of December 31, 2000 and 1999, were due within six months.
Average and maximum balances and rates on aggregate short-term borrowings outstanding during the years ended December 31, 2000, 1999 and 1998, were as follows:
2000 1999 1998 -------- -------- -------- Maximum month-end balance $182,600 $140,992 $102,313 Average month-end balance 171,272 116,252 80,277 Weighted average interest rate for the year 6.03% 5.03% 5.19% Weighted average interest rate at year-end 5.79 4.80 5.00
TEN INCOME TAXES
Income taxes for the years ended December 31, 2000, 1999 and 1998, were as follows: Current Deferred Total --------------------------
2000: Federal $3,504 $ (86) $3,418 State 850 (52) 798 ------ ------ ------ Total $4,354 $ (138) $4,216 ====== ====== ======
1999: Federal $2,790 $ 14 $2,804 State 504 (152) 352 ------ ------ ------ Total $3,294 $ (138) $3,156 ====== ====== ======
1998: Federal $2,900 $ 300 $3,200 State 577 (20) 557 ------ ------ ------ Total $3,477 $ 280 $3,757 ====== ====== ======
Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities result in deferred taxes. No valuation allowance was required for deferred tax assets. Based upon Heartland's level of historical taxable income and anticipated future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Heartland will realize the benefits of these deductible differences. Deferred tax liabilities and assets for the years ended December 31, 2000 and 1999, were as follows:
2000 1999 ------- -------
Deferred tax assets: Unrealized loss on Securities available for sale $ - $ 889 Allowance for loan and lease losses 5,008 4,020 Deferred compensation 518 280 Securities 67 30 Net operating loss 670 600 Other 42 - ------- ------- Gross deferred tax assets $ 6,305 $ 5,819 ------- -------
Deferred tax liabilities: Unrealized gain on securities available for sale $ (761) $ - Fixed assets (4,870) (4,580) Leases (2,500) (1,800) Tax bad debt reserves (610) (670) Discount on loans (590) (220) Prepaid expenses (214) (165) Other - (49) Mortgage servicing rights (207) (185) ------- ------- Gross deferred tax liabilities $(9,752) $(7,669) ------- ------- Net deferred tax (liability) $(3,447) $(1,850) ======= =======
The actual income taxes differ from the expected amounts (computed by applying the U.S. federal corporate tax rate of 35% for 2000, 1999 and 1998, to income before income taxes) as follows:
2000 1999 1998 --------------------------
Computed "expected" amount $4,831 $3,983 $4,472 Increase (decrease) resulting from: Nontaxable interest income (624) (515) (511) State income taxes, net of federal tax benefit 520 230 360 Graduated income tax rates (100) (100) (100) Tax credits (440) (440) (440) Other 29 (2) (24) ------ ------ ------ Income taxes $4,216 $3,156 $3,757 ====== ====== ======
Effective tax rates 30.5% 27.7% 29.4% ====== ====== ======
Heartland has investments in certain low-income housing projects totaling $4,894 and $5,091 as of December 31, 2000 and 1999, respectively, which are included in other assets in the consolidated financial statements. These investments are expected to generate federal income tax credits of approximately $440 per year through 2005.
ELEVEN OTHER BORROWINGS
Other borrowings at December 31, 2000 and 1999, were as follows: 2000 1999 ------- ------- Advances from the FHLB; weighted average maturity dates at December 31, 2000 and 1999, were July, 2004 and July, 2005, respectively; and weighted average interest rates were 6.55% and 6.03%, respectively $25,105 $16,109 Notes payable on leased assets with interest rates varying from 5.39% to 9.50% 15,466 13,322 Note payable with unaffiliated bank - 21,000 Trust preferred securities 25,000 25,000 Contracts payable to previous stock- holders of LAG for acquisition due over a three-year schedule at 7.50% through July, 2001 - 643 Contracts payable to previous stock- holders of WCB for acquisition due in annual payments over two-, three- or four-year schedules at interest rates of 7.00% to 7.50% through March, 2001 - 583 Contracts payable to previous stock- holders of NBI for acquisition due over a three- or five-year schedule at 7.00% through January, 2004 2,110 - ------- ------ Total $67,681 $76,657 ======= =======
The Banks are members of the FHLB of Des Moines, Chicago, or Dallas. The advances from the FHLB are collateralized by the Banks' investment in FHLB stock of $6,097 and $3,756 at December 31, 2000 and 1999, respectively. Additional collateral is provided by the Banks' one-to-four unit residential mortgages totaling $178,706 at December 31, 2000, and $113,133 at December 31, 1999.
See Note 9 related to the note payable to unaffiliated banks.
On October 21, 1999, Heartland completed an offering of $25,000 of 9.60% cumulative capital securities representing undivided beneficial interests in Trust I, a special purpose trust subsidiary of Heartland formed for the sole purpose of this offering. The proceeds from the offering were used by Trust I to purchase junior subordinated debentures from Heartland. The proceeds are being used for general corporate purposes, including the repayment of $15,000 of indebtedness on the revolving credit loan and the financing of acquisitions. All of the securities qualified as Tier 1 capital for regulatory purposes as of December 31, 2000 and 1999. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year. The debentures will mature and the capital securities must be redeemed on September 30, 2029. Heartland has the option to shorten the maturity date to a date not earlier than September 30, 2004. Heartland will not shorten the maturity date without prior approval of the Board of Governors of the Federal Reserve System, if required. Prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. In connection with this offering, the balance of deferred issuance costs included in other assets was $1,103 as of December 31, 2000.
Future payments at December 31, 2000, for all other borrowings were as follows:
2002 $ 22,592 2003 10,866 2004 633 2005 4,006 Thereafter 29,584 -------- Total $ 67,681 ========
TWELVE EMPLOYEE BENEFIT PLANS
Heartland sponsors a retirement plan covering substantially all employees. Contributions to this plan are subject to approval by the Heartland Board of Directors. The Heartland subsidiaries fund and record as an expense all approved contributions. Costs charged to operating expenses were $692 for 2000, $530 for 1999 and $435 for 1998. This plan includes an employee savings program, under which the Heartland subsidiaries make matching contributions of up to 2% of the participants' wages. Costs charged to operating expenses were $262 for 2000, $183 for 1999 and $161 for 1998.
Heartland also has a non-contributory, defined contribution pension plan covering substantially all employees. Annual contributions are based upon 5% of qualified compensation as defined in the plan. Costs charged to operating expense were $692 for 2000, $530 for 1999 and $435 for 1998.
THIRTEEN COMMITMENTS AND CONTINGENT LIABILITIES
Heartland leases certain land and facilities under operating leases. Minimum future rental commitments at December 31, 2000, for all non-cancelable leases were as follows:
2001 $ 484 2002 433 2003 393 2004 413 2005 364 Thereafter 326 ------ Total $2,413 ======
Rental expense for premises and equipment leased under operating leases was $694 for 2000, $521 for 1999 and $268 for 1998.
In the normal course of business, the Banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 2000 and 1999, commitments to extend credit aggregated $371,654 and $274,406 and standby letters of credit aggregated $9,312 and $9,564, respectively. Heartland does not anticipate any material loss as a result of the commitments and contingent liabilities.
FOURTEEN STOCK PLANS
Heartland's Stock Option Plan ("Plan") is administered by the Compensation Committee ("Committee") of the Board of Directors whose members determine to whom options will be granted and the terms of each option. Under the Plan, 1,200,000 common shares have been reserved for issuance. Directors and key policy-making employees are eligible for participation in the Plan. Options may be granted that are either intended to be "incentive stock options" as defined under Section 422 of the Internal Revenue Code or not intended to be incentive stock options ("non- qualified stock options"). The exercise price of stock options granted will be established by the Committee, but the exercise price for the incentive stock options may not be less than the fair market value of the shares on the date that the option is granted. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. At December 31, 2000 and 1999 respectively, there were 245,467 and 283,467 shares available for issuance under the Plan.
Under the Plan, stock appreciation rights ("SARS") may also be granted alone or in tandem with or with reference to a related stock option, in which event the grantee, at the exercise date, has the option to exercise the option or the SARS, but not both. SARS entitle the holder to receive in cash or stock, as determined by the Committee, an amount per share equal to the excess of the fair market value of the stock on the date of exercise over the fair market value at the date the SARS or related options were granted. SARS may be exercisable for up to ten years after the date of grant. No SARS have been granted under the Plan.
A summary of the status of the Plan as of December 31, 2000, 1999 and 1998, and changes during the years ended follows:
2000 1999 1998 Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------ -------- ------ -------- ------ --------- Outstanding at beginning of year 760 $11 654 $10 522 $ 9 Granted 40 18 274 18 196 15 Exercised 0 - (79) 19 (28) 15 Forfeited (2) 16 (89) 19 (36) 16 --- --- --- Outstanding at end of year 798 $12 760 $11 654 $10 === === === Options exercisable at end of year 389 $ 9 217 $ 9 89 $ 8 Weighted-average fair value of options granted during the year $4.41 $1.96 $3.65
As of December 31, 2000 and 1999, options outstanding had exercise prices ranging from $8 to $18 per share and a weighted- average remaining contractual life of 5.48 and 6.77 years, respectively.
The fair value of stock options granted was determined utilizing the Black Scholes Valuation model. Significant assumptions include:
2000 1999 1998 ------ ------ ------ Risk-free interest rate 5.00% 6.28% 5.75% Expected option life 10 Years 10 Years 10 Years Expected volatility 13.04% 13.04% 24.27% Expected dividends 2.00% 1.94% 1.76%
Heartland applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost for its stock options has been recognized in the financial statements. Had Heartland determined compensation cost based on the fair value at the grant date for its stock options under FAS No. 123 "Accounting for Stock-Based Compensation", Heartland's net income would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 ------ ------ ------
Net income as reported $9,586 $8,225 $9,021 Pro forma 9,231 7,890 8,745
Earnings per share-basic as reported $ 1.00 $ .86 $ .95 Pro forma .96 .83 .92 Earnings per share-diluted as reported $ .98 $ .84 $ .94 Pro forma .95 .81 .91
Pro forma net income reflects only options granted in 2000, 1999, 1998, 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under FAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation is reflected over the options' vesting period, and compensation cost for options granted prior to January 1, 1995, is not considered.
In 1996, Heartland adopted the Heartland Employee Stock Purchase Plan ("ESPP"), which permits all eligible employees to purchase shares of Heartland common stock at a price of not less than 85% of the fair market value on the determination date (as determined by the Committee). A maximum of 400,000 shares is available for sale under the ESPP. For the years ended December 31, 2000 and 1999, Heartland approved a price of 100% of fair market value at December 31, 1999 and December 31, 1998, respectively. At December 31, 2000 and 1999, respectively, 2,539 and 16,481 shares were purchased under the ESPP at no charge to Heartland's earnings.
During each of the years ended December 31, 2000, 1999 and 1998, Heartland acquired shares for use in the Plan and the ESPP. Shares acquired totaled 291,501, 44,907 and 290,924 for 2000, 1999 and 1998, respectively.
FIFTEEN FAIR VALUE OF FINANCIAL INSTRUMENTS
Following are disclosures of the estimated fair value of Heartland's financial instruments. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Heartland could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
December 31, ------------------------- Carrying Fair Amount Value ------------------------- Financial Assets: Cash and cash equivalents $ 84,687 $ 84,687 Time deposits in other banks 1,504 1,504 Securities available for sale 225,954 225,954 Securities held to maturity 2,111 2,154 Loans and leases, net of unearned 1,042,096 1,041,554 Financial Liabilities: Demand deposits $ 136,066 $ 136,066 Savings deposits 406,712 406,712 Time deposits 558,535 559,935 Short-term borrowings 175,084 175,084 Other borrowings 67,681 60,440
December 31, ------------------------- Carrying Fair Amount Value ------------------------- Financial Assets: Cash and cash equivalents $ 35,953 $ 35,953 Time deposits in other banks 6,084 6,084 Securities available for sale 209,381 209,381 Securities held to maturity 2,196 2,264 Loans and leases, net of unearned 835,146 829,931 Financial Liabilities: Demand deposits $ 91,391 $ 91,391 Savings deposits 367,413 367,413 Time deposits 410,855 408,313 Short-term borrowings 132,300 132,300 Other borrowings 76,657 84,796
Cash and Cash Equivalents and Time Deposits in Other Banks - The carrying amount is a reasonable estimate of fair value.
Securities - For securities either held to maturity or available for sale, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans and Leases - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of loans held for sale is estimated using quoted market prices.
Deposits - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Short-term and Other Borrowings - Rates currently available to the Banks for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit - Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon our review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
SIXTEEN REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY DIVIDENDS
The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. The regulations prescribe specific capital adequacy guidelines that involve quantitative measures of a bank's assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. Capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and 1999, that the Banks met all capital adequacy requirements to which they were subject.
As of December 31, 2000, the most recent notification from the FDIC categorized each of the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed each institution's category.
The Banks' actual capital amounts and ratios are also presented in the table below.
To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- -----
As of December 31, 2000 Total Capital (to Risk- Weighted Assets)
Consolidated $116,034 9.90% $ 93,756 >8.0% N/A - DB&T 52,824 10.93 38.679 >8.0 $ 48,349 >10.0% GSB 12,691 10.91 9,305 >8.0 11,632 >10.0 FCB 9,045 11.45 6,321 >8.0 7,901 >10.0 RCB 8,063 10.10 6,385 >8.0 7,982 >10.0 WCB 17,978 11.35 12,674 >8.0 15,842 >10.0 NMB 22,512 11.41 15,790 >8.0 19,737 >10.0
Tier 1 Capital (to Risk- Weighted Assets) Consolidated $102,443 8.74% $ 46,878 >4.0% N/A - DB&T 47,448 9.81 19,340 >4.0 $ 29,009 >6.0% GSB 11,470 9.86 4,653 >4.0 6,979 >6.0 FCB 8,035 10.17 3,160 >4.0 4,741 >6.0 RCB 7,269 9.11 3,193 >4.0 4,789 >6.0 WCB 15,997 10.10 6,337 >4.0 9,505 >6.0 NMB 20,117 10.19 7,895 >4.0 11,842 >6.0
Tier 1 Capital (to Average Assets) Consolidated $102,443 7.25% $ 56,492 >4.0% N/A - DB&T 47,448 7.94 23,900 >4.0 $ 29,875 >5.0% GSB 11,470 7.51 6,111 >4.0 7,639 >5.0 FCB 8,035 7.70 4,173 >4.0 5,217 >5.0 RCB 7,269 7.26 4,005 >4.0 5,006 >5.0 WCB 15,997 8.39 7,631 >4.0 9.539 >5.0 NMB 20,117 8.75 9,193 >4.0 11,491 >5.0
To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- -----
As of December 31, 1999 Total Capital (to Risk- Weighted Assets)
Consolidated $112,508 11.68% $ 77,035 >8.0% $ N/A - DB&T 51,041 10.75 37,980 >8.0 47,475 >10.0% GSB 11,604 12.16 7,635 >8.0 9,544 >10.0 FCB 9,033 12.01 6,016 >8.0 7,520 >10.0 RCB 6,555 11.57 4,534 >8.0 5,667 >10.0 WCB 15,704 10.99 11,430 >8.0 14,287 >10.0 NMB 15,306 19.02 6,438 >8.0 8,048 >10.0
Tier 1 Capital (to Risk- Weighted Assets) Consolidated $101,665 10.56% $ 38,517 >4.0% $ N/A - DB&T 46,049 9.70 18,990 >4.0 28,485 >6.0% GSB 10,411 10.91 3,818 >4.0 5,726 >6.0 FCB 8,092 10.76 3,008 >4.0 4,512 >6.0 RCB 5,969 10.53 2,267 >4.0 3,400 >6.0 WCB 14,012 9.81 5,715 >4.0 8,572 >6.0 NMB 14,556 18.09 3,219 >4.0 4,829 >6.0
Tier 1 Capital (to Average Assets) Consolidated $101,665 8.85% $ 45,965 >4.0% $ N/A - DB&T 46,049 7.94 23,212 >4.0 29,015 >5.0% GSB 10,411 7.68 5,424 >4.0 6,780 >5.0 FCB 8,092 8.08 4,007 >4.0 5,009 >5.0 RCB 5,969 8.23 2,900 >4.0 3,625 >5.0 WCB 14,012 8.43 6,648 >4.0 8,310 >5.0 NMB 14,556 18.00 3,235 >4.0 4,044 >5.0
The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the Banks, certain portions of their retained earnings are not available for the payment of dividends. Retained earnings which could be available for the payment of dividends to Heartland totaled approximately $33,959 as of December 31, 2000, under the most restrictive minimum capital requirements.
SEVENTEEN PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc. is as follows:
Balance Sheets December 31, 2000 1999 -------- -------- Assets: Cash and interest bearing deposits $ 642 $ 3,744 Investment in subsidiaries 145,842 124,924 Other assets 2,844 2,434 Due from subsidiaries 16,750 7,550 -------- -------- Total $166,078 $138,652 ======== ======== Liabilities and stockholders' equity: Liabilities: Short-term borrowings $ 40,738 $ 4,594 Other borrowings 27,890 47,364 Accrued expenses and other liabilities 1,304 121 -------- -------- Total liabilities 69,932 52,079 -------- -------- Stockholders' equity: Common stock 9,906 9,707 Capital surplus 18,812 15,339 Retained earnings 71,253 65,132 Accumulated other comprehensive income (loss) 1,301 (1,511) Treasury stock (5,126) (2,094) -------- -------- Total stockholders' equity 96,146 86,573 -------- -------- Total $166,078 $138,652 ======== ========
Income Statements for the Years Ended December 31, 2000 1999 1998 ------- ------ ------ Operating revenues: Dividends from subsidiaries $21,768 $8,515 $7,413 Other 769 201 173 ------- ------ ------ Total operating revenues 22,537 8,716 7,586 ------- ------ ------ Operating expenses: Interest 4,934 2,087 1,115 Outside services 198 172 151 Other operating expenses 1,441 450 442 ------- ------ ------ Total operating expenses 6,573 2,709 1,708 ------- ------ ------ Equity in undistributed earnings (8,322) 1,430 2,684 ------- ------ ------ Income before income tax benefit 7,642 7,437 8,562 Income tax benefit 1,944 788 459 ------- ------ ------ Net income $ 9,586 $8,225 $9,021 ======= ====== ======
Statements of Cash Flows For the Years Ended December 31, 2000 1999 1998 ------ ------ ------ Cash flows from operating activities: Net income $ 9,586 $ 8,225 $ 9,021 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries 8,322 (1,430) (2,684) (Increase) decrease in due from subsidiaries (9,200) (7,550) 1,350 Increase (decrease) in other liabilities 1,183 (130) (6) (Increase) decrease in other assets (410) (992) 261 ------- ------- ------- Net cash provided (used) by operating activities 9,481 (1,877) 7,942 ------- ------- ------- Cash flows from investing activities: Capital injections for subsidiaries (4,150) (26,580) (13,152) Receipts for sale of minority interest 780 58 - Payments for purchase of subsidiaries (13,509) - - Other 88 (5) 2 ------- ------- ------- Net cash used by investing activities (16,791) (26,527) (13,150) ------- ------- ------- Cash flows from financing activities: Payments on other borrowings (35,949) (15,823) (7,018) Proceeds from other borrowings 48,800 49,580 18,895 Cash dividends paid (3,465) (3,247) (2,928) Purchase of treasury stock (5,197) (837) (4,431) Sale of treasury stock 19 1,780 669 ------- ------- -------
Net cash provided by financing activities 4,208 31,453 5,187 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3,102) 3,049 (21) Cash and cash equivalents at beginning of year 3,744 695 716 ------- ------- ------- Cash and cash equivalents at end of year $ 642 $ 3,744 $ 695 ======= ======= =======
EIGHTEEN SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 December 31 September 31 ----------- ------------
Net interest income $ 11,294 $ 11,398 Provision for loan and lease losses 696 779 Net interest income after provision for loan and lease losses 10,598 10,619 Noninterest income 7,211 6,932 Noninterest expense 13,737 13,723 Provision for income taxes 1,316 1,231 Net income 2,756 2,597
Per share: Basic earnings per share $ 0.29 $ 0.27 Diluted earnings per share 0.28 0.27 Cash dividends declared on common stock 0.09 0.09 Book value per common share 10.00 9.58 Market price - high 14.63 15.00 low 12.50 14.00 Weighted average common shares outstanding 9,615,392 9,619,934 Weighted average diluted common Shares outstanding 9,724,766 9,745,536
Ratios: Return on average assets 0.77% 0.74% Return on average equity 11.78 11.44 Net interest margin 3.61 3.75 Efficiency ratio 73.38 74.55
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 June 30 March 31 ----------- ------------
Net interest income $ 11,140 $ 10,709 Provision for loan and lease losses 1,007 819 Net interest income after provision for loan and lease losses 10,133 9,890 Noninterest income 6,645 6,453 Noninterest expense 13,709 13,510 Provision for income taxes 880 789 Net income 2,189 2,044
Per share: Basic earnings per share $ 0.23 $ 0.21 Diluted earnings per share 0.22 0.21 Cash dividends declared on common stock 0.09 0.09 Book value per common share 9.26 9.13 Market price - high 16.25 18.50 low 14.00 14.88 Weighted average common shares outstanding 9,626,131 9,518,805 Weighted average diluted common Shares outstanding 9,759,418 9,673,493
Ratios: Return on average assets 0.65% 0.63% Return on average equity 10.01 9.41 Net interest margin 3.79 3.84 Efficiency ratio 75.82 78.58
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 December 31 September 30 ----------- ------------
Net interest income $ 9,262 $ 8,860 Provision for loan and lease losses 650 680 Net interest income after provision for loan and lease losses 8,612 8,180 Noninterest income 6,242 6,358 Noninterest expense 12,205 11,802 Provision for income taxes 641 731 Net income 2,008 2,005
Per share: Basic earnings per share $ 0.21 $ 0.21 Diluted earnings per share 0.21 0.20 Cash dividends declared on common stock 0.09 0.09 Book value per common share 9.03 8.96 Market price - high 19.38 20.50 low 16.00 18.88 Weighted average common shares outstanding 9,528,149 9,588,244 Weighted average diluted common shares outstanding 9,723,616 9,795,018
Ratios: Return on average assets 0.68% 0.73% Return on average equity 9.20 9.23 Net interest margin 3.66 3.69 Efficiency ratio 77.40 76.73
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 June 30 March 31 ----------- ------------
Net interest income $ 7,982 $ 7,201 Provision for loan and lease losses 762 534 Net interest income after provision for loan and lease losses 7,220 6,667 Noninterest income 6,298 6,526 Noninterest expense 10,582 10,133 Provision for income taxes 863 921 Net income 2,073 2,139
Per share: Basic earnings per share $ 0.22 $ 0.22 Diluted earnings per share 0.21 0.22 Cash dividends declared on common stock 0.08 0.08 Book value per common share 8.91 8.84 Market price - high 19.75 19.50 low 18.25 17.88 Weighted average common shares outstanding 9,523,013 9,518,805 Weighted average diluted common shares 9,719,293 9,709,468
Ratios: Return on average assets 0.83% 0.91% Return on average equity 9.78 10.28 Net interest margin 3.66 3.51 Efficiency ratio 74.07 75.63
INDEPENDENT AUDITORS' REPORT
The Board of Directors Heartland Financial USA, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland Financial USA, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heartland Financial USA, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Des Moines, Iowa January 19, 2001
Representations of Management
Management is responsible for the contents of the consolidated financial statements and other information contained in other sections of this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate to reflect, in all material respects, the substance of events and transactions that should be included. The consolidated financial statements reflect management's judgments and estimates as to the effects of events and transactions that are accounted for or disclosed. The company maintains accounting and reporting systems, supported by an internal accounting control system, which are adequate to provide reasonable assurance that transactions are authorized, assets are safeguarded, and reliable consolidated financial statements are prepared, recognizing the cost and expected benefits of internal accounting controls. A staff of internal auditors conducts ongoing reviews of accounting practices and internal accounting controls.
The consolidated financial statements as of December 31, 2000, 1999 and 1998, of Heartland Financial USA, Inc. and its subsidiaries: Dubuque Bank and Trust Company; Galena State Bank and Trust Company; Riverside Community Bank; Wisconsin Community Bank; New Mexico Bank & Trust; First Community Bank, FSB; DB&T Insurance, Inc.; DB&T Community Development Corp.; Citizens Finance Co.; ULTEA, Inc.; Keokuk Bancshares, Inc. (dba KBS Investment Corp); DBT Investment Corporation; and Heartland Capital Trust I were audited by independent certified public accountants. Their role is to render independent professional opinions of the fairness of the consolidated financial statements based upon performance of procedures they deem appropriate under generally accepted auditing standards.
The Audit Committees of the Boards of Directors of member banks meet periodically with the internal auditors to review matters relating to internal accounting controls and the nature, extent and results of audit efforts. The internal auditors and independent certified public accountants have free access to the Audit Committees.
/s/ Lynn B. Fuller - ----------------------------- Lynn B. Fuller President and CEO, Heartland Financial USA, Inc.
/s/ John K. Schmidt - ----------------------------- John K. Schmidt Executive Vice President and CFO, Heartland Financial USA, Inc.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The information in the Heartland Proxy Statement for the 2001 annual meeting of stockholders dated April 4, 2001 (the "2001 Proxy Statement") under the caption "Election of Directors" and under the caption, "Security Ownership of Directors and Executive Officers and Certain Beneficial Owners" is incorporated by reference. The information regarding executive officers is included pursuant to Instruction 3 to Item 401 (b) and (c) of Regulation S-K and is noted below.
EXECUTIVE OFFICERS
The term of office for the executive officers of Heartland is from the date of election until the next annual organizational meeting of the board of directors. The names and ages of the executive officers of Heartland as of December 31, 2000, offices held by these officers on that date and other positions held with Heartland and its subsidiaries are set forth below.
Position with Heartland and Subsidiaries Name Age and Principal Occupation
Lynn B. Fuller 51 Chairman, President and Chief Executive Officer of Heartland; Vice Chairman of DB&T; Director of GSB, FCB, RCB, WCB, NMB, Keokuk, and Citizens; Director and President of Citizens; Chairman and Director of ULTEA.
John K. Schmidt 41 Executive Vice President, Chief Financial Officer and Treasurer of Heartland; Director, President and Chief Executive Officer of DB&T; Treasurer of Citizens; Director of Keokuk; Treasurer of ULTEA
Kenneth J. Erickson 49 Executive Vice President, Credit Administration, of Heartland; Executive Vice President, Lending of DB&T; Senior Vice President of Citizens; Director of ULTEA
Edward H. Everts 49 Senior Vice President, Heartland, Operations and Retail Banking; Senior Vice President of Operations and Retail Banking of DB&T
Douglas J. Horstmann 47 Senior Vice President, Lending of Heartland; Executive Vice President, Head of Lending of DB&T
Paul J. Peckosh 55 Senior Vice President, Trust of Heartland; Executive Vice President, Trust, of DB&T
Mr. Lynn B. Fuller is the brother-in-law of Mr. James F. Conlan. There are no other family relationships among any of the directors or executive officers of Heartland.
Lynn B. Fuller has been a director of Heartland and of DB&T since 1984 and has been President of Heartland since 1987. He has been a director of GSB since its acquisition by Heartland in 1992 and of Keokuk and FCB since the merger in 1994. Mr. Fuller joined DB&T in 1971 as a consumer loan officer and was named DB&T's Executive Vice President and Chief Executive Officer in 1985. He was named Director of RCB in conjunction with the opening of the de novo operation in 1995, Director of WCB in conjunction with the purchase of Cottage Grove State Bank in 1997 and Director of NMB in conjunction with the opening of the de novo bank in 1998. Mr. Fuller was President of DB&T from 1987 until 1999 at which time he was named Chief Executive Officer of Heartland.
John K. Schmidt has been Heartland's Executive Vice President and Chief Financial Officer since 1991. He has been employed by DB&T since September, 1984 and became DB&T's Vice President, Finance in 1986, Senior Vice President and Chief Financial Officer in January, 1991 and President and Chief Executive Officer in 1999. Mr. Schmidt is a certified public accountant and worked at KPMG LLP in Des Moines, Iowa, from 1982 until joining DB&T. Mr. Schmidt was appointed in February, 2001, to the vacancy on the board of directors created by the death of James A. Schmid, the Vice Chairman of the Board who had served as a director of Heartland Financial USA, Inc. since 1981.
Kenneth J. Erickson was named Executive Vice President, Credit Administration, of Heartland in 1999 and has served as Executive Vice President since 2000, Senior Vice President since 1992 and Senior Vice President, Lending of DB&T since 1989. Mr. Erickson joined DB&T in 1975 and was appointed Vice President, Commercial Loans in 1985.
Edward H. Everts was appointed as Senior Vice President of Heartland in 1996. Mr. Everts joined DB&T as Senior Vice President, Operations and Retail Banking in 1992. Prior to his service with DB&T, Mr. Everts was Vice President and Lead Retail Banking Manager of First Bank, Duluth, Minnesota.
Douglas J. Horstmann was named as Senior Vice President of Heartland in 1999, and has been Executive Vice President, Lending since 2000 and Senior Vice President, Lending, of DB&T since 1989. Mr. Horstmann joined DB&T in 1980 and was appointed Vice President, Commercial Loans in 1985. Prior to joining DB&T, Mr. Horstmann was an examiner for the Iowa Division of Banking.
Paul J. Peckosh was appointed Senior Vice President of Heartland in 1999, and has been Executive Vice President, Trust, since 2000 and Senior Vice President, Trust, of DB&T since 1991. Mr. Peckosh joined DB&T in 1975 as Assistant Vice President, Trust and was appointed Vice President, Trust in 1980. Mr. Peckosh is an attorney and graduated from the Marquette University of Law School in 1970.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The information in the 2001 Proxy Statement, under the caption "Executive Compensation" is incorporated by reference, except for the information contained under the heading "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Presentation."
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2001 Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2001 Proxy Statement under the caption "Transactions with Management" is incorporated by reference.
PART IV
ITEM 14.
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The documents filed as a part of this report are listed below:
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are included along with this Form 10-K and are listed on the "Index of Exhibits" immediately following the signature page.
(b) Reports of Form 8-K:
There were no reports on Form 8-K filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 21, 2001.
Heartland Financial USA, Inc.
By: /s/ Lynn B. Fuller /s/ John K. Schmidt ------------------------ ------------------------ Lynn B. Fuller John K. Schmidt Principal Executive Officer Executive Vice President and Principal Financial and Accounting Officer
Date: March 21, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 21, 2001.
/s/ Lynn B. Fuller /s/ John K. Schmidt - ----------------------------- ----------------------------- Lynn B. Fuller John K. Schmidt President, CEO, Chairman Executive Vice President, CFO and Director and Director
/s/ James F. Conlan /s/ Mark C. Falb - ----------------------------- ----------------------------- John K. Schmidt Mark C. Falb Director Director
/s/ Gregory R. Miller /s/ Evangeline K. Jansen - ----------------------------- ----------------------------- Gregory R. Miller Evangeline K. Jansen Director Director
/s/ Robert Woodward - ----------------------------- Robert Woodward Director
3. Exhibits
3.1 Certificate of Incorporation of Heartland Financial USA, Inc. (Filed as Exhibit 3.1 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.)
3.2 Bylaws of Heartland Financial USA, Inc. (Filed as Exhibit 3.2 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.)
4. 1 Specimen Stock Certificate of Heartland Financial USA, Inc. (Exhibit 4.1 to the Registration Statement on Form S-4 filed with the Commission May 4, 1994, as amended (SEC File No. 33-76228)
10.1 Heartland Financial USA, Inc. 1993 Stock Option Plan (Filed as Exhibit 10.1 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.)
10.2 Heartland Financial USA, Inc. Executive Restricted Stock Purchase Plan (Filed as Exhibit 10.2 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.)
10.3 Dubuque Bank and Trust Management Incentive Compensation Plan (Filed as Exhibit 10.3 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.)
10.4 Heartland Financial Money Purchase Pension Plan and Defined Contribution Master Plan and Trust Agreement dated January 1, 1995. (Filed as Exhibit 10.21 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.)
10.5 Dubuque Bank and Trust Company Executive Death Benefit Program Plan Revisions, Enrollment Booklet, and Universal Life Split-Dollar Agreement effective December 1, 1995, and similar agreements are in place at Galena State Bank and Trust Company, First Community Bank, FSB, Riverside Community Bank, Wisconsin Community Bank, New Mexico Bank & Trust and ULTEA. (Filed as Exhibit 10.25 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.)
10.6 Investment Center Agreement between Focused Investment LLC and Heartland Financial USA, Inc. dated August 1, 1995. (Filed as Exhibit 10.30 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.)
10.7 Heartland Financial USA, Inc. Employee Stock Purchase Plan effective January 1, 1996. (Filed in conjunction with Form S-8 on June 18, 1996, and incorporated by reference herein.)
10.8 License and Service Agreement, Software License Agreement, and Professional Services Agreement between Fiserv and Heartland Financial USA, Inc. dated June 21, 1996. (Filed as Exhibit 10.43 to Registrant's form 10Q for the quarter ended June 30, 1996, and incorporated by reference herein.)
10.9 The Stock Purchase Agreement between Heartland Financial USA, Inc. and the stockholders of Cottage Grove State Bank dated November 8, 1996. (Filed as Exhibit 10.36 to Registrant's Form 10K for the fiscal year ended December 31, 1996, and incorporated by reference herein.)
10.10 Stockholder Agreement between Heartland Financial USA, Inc. and Investors in the Proposed New Mexico Bank dated November 5, 1997. (Filed as Exhibit 10.23 to Registrant's Form 10K for the fiscal year ended December 31, 1997, and incorporated by reference herein.)
10.11 Change of Control Agreements including Golden Parachute Payment Adjustments and Restrictive Covenants between Heartland Financial USA, Inc. and Executive Officers dated January 1, 1999. (Filed as Exhibit 10.11 to Registrant's Form 10K for the fiscal year ended December 31, 1998, and incorporated by reference herein.)
10.12 Change of Control Agreements between Heartland Financial USA, Inc. and Executive Officers dated January 1, 1999. (Filed as Exhibit 10.12 to Registrant's Form 10K for the fiscal year ended December 31, 1998, and incorporated by reference herein.)
10.13 Heartland Financial USA, Inc. Health Care Plan dated January 1, 1999. (Filed as Exhibit 10.13 to Registrant's Form 10K for the fiscal year ended December 31, 1998, and incorporated by reference herein.)
10.14 Letter Agreement between Wisconsin Community Bank and Bank One Wisconsin dated February 9, 1999. (Filed as Exhibit 10.14 to Registrant's Form 10K for the fiscal year ended December 31, 1998, and incorporated by reference herein.)
10.15 Office Purchase and Assumption Agreement by and between Bank One Wisconsin and Wisconsin Community Bank dated February 9, 1999, excluding Schedules A through S. (Filed as Exhibit 10.15 to Registrant's Form 10K for the fiscal year ended December 31, 1998, and incorporated by reference herein.)
10.16 Amended and Restated Credit Agreement between Heartland Financial USA, Inc. and The Northern Trust Company dated July 23, 1999. (Filed as Exhibit 10.16 to Registrant's Form 10Q for the six months ended June 30, 1999, and incorporated by reference herein.)
10.17 Agreement and Plan of Merger, dated as of August 17, 1999, by and among Heartland Financial USA, Inc., National Bancshares, Inc. and NBI Acquisition Corporation. (Filed as Exhibit 2.1 to Registrant's Form 8K dated August 25, 1999, and incorporated by reference herein.)
10.18 Amendment Agreement, dated as of November 1, 1999, between Heartland Financial USA, Inc. and the Northern Trust Company. (Filed as Exhibit 10.18 to Registrant's Form 10K for the fiscal year ended December 31, 1999, and incorporated by reference herein.)
10.19 Second Amended and Restated Credit Agreement between Heartland Financial USA, Inc. and The Northern Trust Company dated September 28, 2000. (Filed as Exhibit 10.19 to Registrant's Form 10Q for the nine months ended September 30, 2000, and incorporated by reference herein.)
10.20 See Exhibit 10.19 for substantially the same form of a Credit Agreement between Heartland Financial USA, Inc. and Harris Trust and Savings Bank dated September 28, 2000, except that the lender is Harris Trust and Savings Bank and the commitment is $20 million. (Filed as Exhibit 10.20 to Registrant's Form 10Q for the nine months ended September 30, 2000, and incorporated by reference herein.)
11. Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
99.1 2001 Preliminary Proxy Statement (only such parts as are incorporated by reference into this Form 10-K)