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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. Employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices) (Zip Code)
(319) 589-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Exchange Class)
None
(Name of Each Exchange on which Registered)
Common Stock $1.00 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The index to exhibits follows the signature page.
As of March 21, 2001, the Registrant had issued and outstanding
9,618,210 shares of the Registrant's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 2001, was $92,665,730.* Such figures
include 733,786 shares of the Registrant's Common Stock held in a
fiduciary capacity by the Trust Department of the Dubuque Bank &
Trust Company, a wholly-owned subsidiary of the Registrant.
* Based on the last reported price of an actual transaction in
Registrant's Common Stock on March 21, 2001, and reports of
beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the
outstanding shares of Common Stock of Registrant; however, such
determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares
of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III.
HEARTLAND FINANCIAL USA, INC.
Form 10-K Annual Report
Table of Contents
Part I
Item 1. Business
A. General Description
B. Market Areas
C. Competition
D. Employees
E. Accounting Standards
F. Supervision and Regulation
G. Governmental Monetary Policy and Economic Conditions
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I.
ITEM 1.
BUSINESS
A. GENERAL DESCRIPTION
Heartland Financial USA, Inc. ("Heartland"), reincorporated in
the state of Delaware in 1993, is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended
("BHCA"). Heartland has five bank subsidiaries in the states of
Iowa, Wisconsin, Illinois and New Mexico and one federal savings
bank subsidiary in Iowa (collectively, the "Bank Subsidiaries").
All six Bank Subsidiaries are members of the Federal Deposit
Insurance Corporation ("FDIC"). Dubuque Bank and Trust Company,
Dubuque, Iowa, ("DB&T") is chartered under the laws of the State
of Iowa and has two wholly-owned subsidiaries: DB&T Insurance,
Inc. ("DB&T Insurance"), a multi-line insurance agency and DB&T
Community Development Corp. ("DB&T Development"), majority owner
of a senior housing project. Galena State Bank and Trust
Company, Galena, Illinois, ("GSB") and Riverside Community Bank,
Rockford, Illinois, ("RCB") are chartered under the laws of the
State of Illinois. First Community Bank, FSB, Keokuk, Iowa,
("FCB") is a federal savings association organized under the laws
of the United States. Wisconsin Community Bank, Cottage Grove,
Wisconsin, ("WCB") is chartered under the laws of the State of
Wisconsin and has one subsidiary, DBT Investment Corporation
("DBT Investment"), an investment management company. New Mexico
Bank & Trust, Albuquerque, New Mexico, ("NMB") is chartered under
the laws of the state of New Mexico. The Bank Subsidiaries
operate 29 banking locations in Iowa, Illinois, Wisconsin and New
Mexico. Heartland has four non-bank subsidiaries. Citizens
Finance Co. ("Citizens") is a consumer finance company. ULTEA,
Inc. ("ULTEA") is a fleet leasing company headquartered in
Madison, Wisconsin. Keokuk Bancshares, Inc. ("Keokuk") is an
investment management company. Heartland Capital Trust I is a
special purpose trust subsidiary of Heartland formed for the
purpose of the offering of cumulative capital securities in
October, 1999. All of Heartland's subsidiaries are wholly-owned,
except for NMB, of which Heartland was an 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.
PROPERTIES
The following table is a listing of the principal operating
facilities of Heartland:
Main Main
Facility Facility Number
Name and Main Square Owned or of
Facility Address Footage Leased Locations
- ---------------- -------- -------- ---------
Banking Subsidiary
DB&T
1398 Central Avenue 59,500 Owned 8
Dubuque, IA 52001
GSB
971 Gear Street 18,000 Owned 3
Galena, IL 61036
RCB
6855 E. Riverside Blvd. 8,000 Owned 3
Rockford, IL 60114
FCB
320 Concert Street 6,000 Owned 3
Keokuk, IA 52632
WCB
580 North Main Street
Cottage Grove, WI 53527 6,000 Owned 6
NMB
320 Gold NW
Albuquerque, NM 87102 11,400 Lease term 6
through 2006
Main
Facility Number
Name and Main Owned or of
Facility Address Leased Locations
- ---------------- -------- ---------
Nonbanking Subsidiaries
Citizens
1275 Main Street Leased
Dubuque, IA 52001 from DB&T 4
ULTEA
2976 Triverton Pike
Madison, WI 53711 Leased 2
The principal offices of Heartland are located in DB&T's main
office.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
Heartland or any of its subsidiaries is a party or of which any
of their property is the subject.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2000 to a
vote of security holders.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Heartland's common stock was held by approximately 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.
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.
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,
1996
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,
2000
------------
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
1998
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.
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
--------- ---------- ---------- --------
2000
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
--------- ---------- --------- ---------
1999
Securities held to
maturity:
Obligations of
states and political
subdivisions $ 2,196 $ 69 $ (1) $ 2,264
-------- -------- -------- --------
Total $ 2,196 $ 69 $ (1) $ 2,264
======== ======== ======== ========
Securities available
for sale:
U.S. government
corporations and
agencies $ 92,234 $ 3 $ (1,701) $ 90,536
Mortgage-backed
securities 75,959 212 (534) 75,637
Obligations of states
and political
subdivisions 23,583 683 (558) 23,708
Corporate debt
securities 11,415 - (116) 11,299
-------- -------- -------- --------
Total debt
securities 203,191 898 (2,909) 201,180
Equity securities 8,591 128 (518) 8,201
-------- -------- -------- --------
Total $211,782 $ 1,026 $ (3,427) $209,381
======== ======== ======== ========
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:
2000
--------
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:
2000
---------
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,
2000
-------------------------
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,
1999
-------------------------
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The information in the Heartland Proxy Statement for the 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.
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.
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.
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.
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)