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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, 2001
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)
(563) 589-2100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Exchange Class)
None
(Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $1.00 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The index to exhibits follows the signature page.
As of March 25, 2002, the Registrant had issued and outstanding
9,828,333 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 25, 2002, was $112,727,735.* Such figures
include 1,871,358 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 25, 2002, 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 2002 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 32 banking locations in Iowa, Illinois, Wisconsin and New
Mexico. Heartland has six 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 and
Heartland Statutory Trust II are special purpose trust
subsidiaries of Heartland formed for the purpose of the offering
of cumulative capital securities. All of Heartland's subsidiaries
are wholly-owned, except for NMB, of which Heartland was an 86%
owner on December 31, 2001.
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, 2001, these individuals owned approximately 45% 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.
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,
2001. 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 long-term rates decreased during 2001, customers refinanced
their mortgage loans into fifteen- and thirty-year fixed rate
loans, which Heartland usually sells into the secondary market.
Conversely, during 2000, customers elected to take adjustable-
rate mortgage loans, which Heartland elected to retain in its
loan portfolio, during this period of increasing long-term rates.
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. 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 almost 6,000
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 $701 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
Heartland contracts with a third-party vendor, Invest Financial
Corporation, to operate independent securities offices at DB&T,
GSB, RCB and FCB. Invest Financial Corporation offers full-
service stock and bond trading, direct investments, annuities and
mutual funds.
DB&T Insurance has continued to grow its personal 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 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.
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. In
addition to its main banking office, RCB has two branch offices,
all of which are located in the Winnebago County area. 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 five 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 four 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, effective in March 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 customer's personal
attention, professional service and competitive interest rates.
D. EMPLOYEES
At December 31, 2001, Heartland employed 581 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 July 2001, the FASB issued FAS No. 141, Business Combinations,
and FAS No. 142, Goodwill and Other Intangible Assets. FAS No.
141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well
as all purchase method business combinations completed after June
30, 2001. FAS No. 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. FAS No.
142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
FAS No. 142. FAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. Heartland adopted the provisions
of FAS No. 141 immediately, and FAS No. 142 effective January 1,
2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001, continued to be
amortized and tested for impairment in accordance with the
appropriate pre-FAS No. 142 accounting requirements prior to
adoption of FAS No. 142. As of December 31, 2001, Heartland had
unamortized goodwill in the amount of $16.064 million and
unamortized identifiable intangible assets in the amount of
$2.931 million. Amortization expense related to goodwill was
$1.064 million and $1.063 million for the years ended December
31, 2001, and December 31, 2000, respectively. Amortization
expense related to identifiable intangible assets was $608
thousand and $751 thousand for the years ended December 31, 2001,
and December 31, 2000, respectively. All of Heartland's
identifiable intangible assets are core deposit premiums related
to acquisitions. The estimated impact of adopting FAS No. 141 and
142 on January 1, 2002 will be the discontinuance of amortization
on $9.521 million of Heartland's unamortized goodwill. The
corresponding amortization expense for the year ended December
31, 2001 was $538 thousand. Goodwill in the amount of $6.543
million will continue to be amortized in accordance with the
provisions of FAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions. No transitional impairment
charges are anticipated.
In August 2001, the FASB issued FAS Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
supersedes both FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business (as previously defined in
that Opinion). FAS No. 144 retains the fundamental provisions in
FAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant
implementation issues associated with FAS No. 121. For example,
FAS No. 144 provides guidance on how a long-lived asset that is
used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for
sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. FAS No. 144 retains the
basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a
business). Unlike FAS No. 121, an impairment assessment under
FAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under FAS No. 142,
Goodwill and Other Intangible Assets. Heartland is required to
adopt FAS No. 144 no later than the year beginning after December
15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption
of FAS No. 144 for long-lived assets held for use to have a
material impact on Heartland's financial statements because the
impairment assessment under FAS No. 144 is largely unchanged from
FAS No. 121. The provisions of FAS No. 144 for assets held for
sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential
effects that adoption of FAS No. 144 will have on Heartland's
financial statements.
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 No. 137, Deferring
Statement 133's Effective Date, which defers the effective date
for implementation of FAS NO. 133 by one year, making FAS No. 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 No. 133 on January 1, 2001, and reclassified, at that date,
all investments previously included in its held to maturity
investment portfolio to the available for sale investment
portfolio. There was no material impact on the consolidated
financial statements as a result of the implementation.
F. SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are
extensively regulated under federal and state law. As a result,
the growth and earnings performance of Heartland can be affected
not only by management decisions and general economic conditions,
but also by the requirements of applicable state and federal
statutes and regulations and the policies of various governmental
regulatory authorities, including the Iowa Superintendent of
Banking ("Iowa Superintendent"), the Illinois Commissioner of
Banks and Real Estate ("Illinois Commissioner"), the Division of
Banking of the Wisconsin Department of Financial Institutions
("Wisconsin DFI"), the New Mexico Financial Institutions Division
("New Mexico Division"), the Office of Thrift Supervision
("OTS"), the Board of Governors of the Federal Reserve System
("Federal Reserve"), the FDIC, the Internal Revenue Service and
state taxing authorities and the Securities and Exchange
Commission ("SEC"). The effect of applicable statutes,
regulations and regulatory policies can be significant, and
cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as Heartland and its subsidiaries,
regulate, among other things, the scope of business, investments,
reserves against deposits, capital levels relative to operations,
the nature and amount of collateral for loans, the establishment
of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to Heartland and its
subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial
institutions.
The following is a summary of the material elements of the
regulatory framework that applies to Heartland and its
subsidiaries. It does not describe all of the statutes,
regulations and regulatory policies that apply to Heartland and
its subsidiaries, nor does it restate all of the requirements of
the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by
reference to the applicable statutes, regulations and regulatory
policies. Any change in applicable law, regulations or regulatory
policies may have a material effect on the business of Heartland
and its subsidiaries.
Recent Regulatory Developments
The terrorist attacks in September, 2001, have impacted the
financial services industry and have already led to federal
legislation that attempts to address certain related issues
involving financial institutions. On October 26, 2001, President
Bush signed into law the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "USA PATRIOT Act"). Among its other
provisions, the USA PATRIOT Act requires each financial
institution: (i) to establish an anti-money laundering program;
(ii) to establish due diligence policies, procedures and controls
with respect to its private banking accounts and correspondent
banking accounts involving foreign individuals and certain
foreign banks; and (iii) to avoid establishing, maintaining,
administering, or managing correspondent accounts in the United
States for, or on behalf of, foreign banks that do not have a
physical presence in any country. The USA PATRIOT Act also
requires the Secretary of the Treasury to prescribe, by
regulations to be issued jointly with the federal banking
regulators and certain other agencies, minimum standards that
financial institutions must follow to verify the identity of
customers, both foreign and domestic, when a customer opens an
account. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory
authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably
suspected of engaging in, terrorist acts or money laundering
activities. At this time, Heartland is unable to determine
whether the provisions of the USA PATRIOT Act will have a
material impact 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 ("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, as
amended ("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 the company'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 voting shares of the other bank or
bank holding company (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating
with another bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by
the BHCA), the Federal Reserve may allow a bank holding company
to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the
law of the state in which the target bank is located. In
approving interstate acquisitions, however, the Federal Reserve
is required to give effect to applicable state law limitations on
the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is
located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies)
and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years)
before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits Heartland from acquiring direct
or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling
banks or furnishing services to banks and their subsidiaries.
This general prohibition is subject to a number of exceptions.
The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses
found by the Federal Reserve to be "so closely related to banking
... as to be a proper incident thereto." Under current
regulations of the Federal Reserve, 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. Additionally, bank holding companies that meet certain
eligibility requirements prescribed by the BHCA and 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 nonbank subsidiaries of bank holding companies or
financial holding companies. As of the date of this filing,
Heartland has neither 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 nonbank 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%, and a minimum ratio of Tier 1
capital to total risk-weighted assets of 4%. 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
loan 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, 2001, Heartland had regulatory capital in
excess of the Federal Reserve's minimum requirements.
Dividends.
The Delaware General Corporation Law ("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 nonbank 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 ("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, which under federal law is designated as the primary
federal regulator of state-chartered, FDIC-insured banks that are
not members of the Federal Reserve System.
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 the primary federal regulator of
state-chartered, FDIC-insured banks that are not members of the
Federal Reserve System.
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
the primary federal regulator of state-chartered, FDIC-insured
banks that are not members of the Federal Reserve System.
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 the primary federal regulator of state-chartered,
FDIC-insured banks that are not members of the Federal Reserve
System.
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, 2001, both BIF and SAIF
assessments ranged from 0% of deposits to 0.27% of deposits. For
the semi-annual assessment period beginning January 1, 2002, 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 until the final maturity of such obligations in 2019.
These FICO assessments are in addition to amounts assessed by the
FDIC for deposit insurance. During the year ended December 31,
2001, 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, 2001, the Bank Subsidiaries paid supervisory assessments
totaling $256 thousand.
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%, and a minimum ratio of Tier 1 capital to
total risk-weighted assets of 4%. 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%, and a minimum
ratio of core capital to total risk-weighted assets of 4%. Core
capital consists primarily of permanent stockholders' equity
less: (i) intangible assets other than certain supervisory
goodwill, certain loan 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.
Further, federal law and regulations provide various incentives
to financial institutions to maintain regulatory capital at
levels in excess of minimum regulatory requirements. For example,
a financial institution that is "well-capitalized" may qualify
for exemptions from prior notice or application requirements
otherwise applicable to certain types of activities and may
qualify for expedited processing of other required notices or
applications. Additionally, one of the criteria which determines
a bank holding company's eligibility to operate as a financial
holding company is a requirement that all of its financial
institution subsidiaries be "well-capitalized". Under the
regulations of the FDIC and the OTS, in order to be "well-
capitalized" a financial institution must maintain a ratio of
total capital to total risk-weighted assets of 10% or greater, a
ratio of Tier 1 capital to total risk-weighted assets of 6% or
greater and a ratio of Tier 1 capital to total assets of 5% or
greater. For purposes of these provisions of OTS regulations,
"Tier 1 capital" is defined to mean core capital.
Federal law also 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 "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, 2001: (i) none of the Bank Subsidiaries was
subject to a directive from the FDIC or the OTS to increase its
capital to an amount in excess of the minimum regulatory capital
requirements; (ii) each of the Bank Subsidiaries exceeded its
minimum regulatory capital requirements under applicable capital
adequacy guidelines; and (iii) 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, 2001.
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, 2001, approximately
$34.356 million was available to be paid as dividends to
Heartland by the Bank Subsidiaries. Notwithstanding the
availability of funds for dividends, however, the banking
regulators may prohibit the payment of any dividends by the Bank
Subsidiaries if such payment is deemed to constitute an unsafe or
unsound practice.
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 2001, an Iowa state bank, such as DB&T, could only
establish a bank office within the boundaries of the counties
contiguous to, or cornering upon, the county in which the
principal place of business of the bank was located. Further,
Iowa law prohibited an Iowa bank from establishing de novo
branches in a municipality other than the municipality in which
the bank's principal place of business was located, if another
bank already operated one or more offices in the municipality in
which the de novo branch was to be located. Under a recent change
to the Iowa Banking Act, until June 30, 2004, Iowa banks, such as
DB&T, have authority under Iowa law to establish up to three de
novo branches at any location in Iowa, subject to regulatory
approval, in addition to any branches established under the
branching rules described above. Beginning July 1, 2004, Iowa
banks may establish any number of branches at any location in
Iowa, 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, 2001, 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 directly or
indirectly making or retaining equity investments of a type, or
in an amount, that are not permissible for a national bank.
Federal law and FDIC regulations also prohibit FDIC insured state
banks and their subsidiaries, subject to certain exceptions, from
engaging as principal in any activity that is not permitted for a
national bank or its subsidiary, respectively, unless the bank
meets, and continues to meet, its minimum regulatory capital
requirements and the FDIC determines the activity would not pose
a significant risk to the deposit insurance fund of which the
bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations
of DB&T, GSB, RCB, WCB or NMB.
Qualified Thrift Lender Test.
The HOLA requires every savings association to satisfy a
"qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed to meet the QTL test if it either (i)
maintains at least 65% of its "portfolio assets" in "qualified
thrift investments" on a monthly basis in nine out of every 12
months or (ii) qualifies as a "domestic building and loan
association," as defined in the Internal Revenue Code. For
purposes of the QTL test, "qualified thrift investments" consist
of mortgage loans, mortgage-backed securities, education loans,
small business loans, credit card loans and certain other housing
and consumer-related loans and investments. "Portfolio assets"
consist of a savings association's total assets less goodwill and
other intangible assets, the association's business properties
and a limited amount of the liquid assets maintained by the
association pursuant to OTS 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, 2001, FCB satisfied the QTL test, with a ratio of
qualified thrift investments to portfolio assets of 65.97%, and
qualified as a "domestic building and loan association," as
defined in the Internal Revenue Code.
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 $41.3 million or less, the reserve requirement is 3%
of total transaction accounts; and for transaction accounts
aggregating in excess of $41.3 million, the reserve requirement
is $1.239 million plus 10% of the aggregate amount of total
transaction accounts in excess of $41.3 million. The first $5.7
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.
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 9
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 1
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 2001 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 930
stockholders of record as of March 12, 2002, 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
---- ---
2000:
First $18 1/2 $14 7/8
Second 16 1/4 14
Third 15 14
Fourth 14 5/8 12 1/2
2001:
First $14 1/4 $12 1/2
Second 14 10 1/4
Third 13 13/16 13 5/32
Fourth 13 1/2 12 25/32
Cash dividends have been declared by Heartland quarterly during
the past two years ending December 31, 2001. The following table
sets forth the cash dividends per share paid on Heartland's
common stock for the past two years:
Calendar Quarter
2001 2000
---- ----
First $.09 $.09
Second .09 .09
Third .09 .09
Fourth .10 .09
ITEM 6.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended December 31,
2001 2000 1999
---------------------------------
STATEMENT OF INCOME DATA
Interest income $ 110,088 $ 104,250 $ 74,154
Interest expense 60,193 59,709 40,849
---------- ---------- ----------
Net interest income 49,895 44,541 33,305
Provision for loan and
lease losses 4,283 3,301 2,626
---------- ---------- ----------
Net interest income after
provision for loan and
lease losses 45,612 41,240 30,679
Noninterest income 30,334 27,008 25,424
Noninterest expense 58,818 54,446 44,722
Provision for income
taxes 5,714 4,216 3,156
---------- ---------- ----------
Net income $ 11,414 $ 9,586 $ 8,225
========== ========== ==========
PER COMMON SHARE DATA
Net income-basic $ 1.19 $ 1.00 $ 0.86
Net income-diluted 1.18 0.98 0.84
Cash dividends 0.37 0.36 0.34
Dividend payout ratio 37.07% 36.15% 39.47%
Book value $ 11.06 $ 10.00 $ 9.03
Weighted average shares
outstanding 9,602,520 9,628,038 9,555,194
BALANCE SHEET DATA
Investments and federal
funds sold $ 349,417 $ 274,365 $ 213,452
Total loans and leases,
net of unearned 1,105,205 1,042,096 835,146
Allowance for loan and
lease losses 14,660 13,592 10,844
Total assets 1,644,064 1,466,387 1,184,147
Total deposits 1,205,159 1,101,313 869,659
Long-term obligations 143,789 102,856 105,737
Stockholders' equity 107,090 96,146 86,573
EARNINGS PERFORMANCE DATA
Return on average total
assets 0.72% 0.70% 0.78%
Return on average
stockholders' equity 11.32 10.69 9.61
Net interest margin
ratio(1) 3.65 3.74 3.64
Earnings to fixed charges:
Excluding interest on
deposits 2.18x 1.82x 2.15x
Including interest on
deposits 1.28 1.23 1.28
ASSET QUALITY RATIOS
Nonperforming assets to total
assets 0.52% 0.51% 0.19%
Nonperforming loans and leases
to total loans and leases 0.73 0.65 0.20
Net loan and lease charge-offs
to average loans and leases 0.30 0.17 0.06
Allowance for loan and lease
losses to total loans and
leases 1.33 1.30 1.30
Allowance for loan and lease
losses to nonperforming
loans and leases 180.47 201.60 657.49
CAPITAL RATIOS
Average equity to average
assets 6.47% 6.54% 8.12%
Total capital to risk-adjusted
assets 10.89 9.90 11.68
Tier 1 leverage 7.53 7.25 8.85
(1) Tax equivalent using a 34% tax rate.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
1998 1997
-----------------------
STATEMENT OF INCOME DATA
Interest income $ 64,517 $ 59,261
Interest expense 36,304 31,767
---------- ----------
Net interest income 28,213 27,494
Provision for loan and lease losses 951 1,279
---------- ----------
Net interest income after provision
for loan and lease losses 27,262 26,215
Noninterest income 17,297 8,565
Noninterest expense 31,781 22,927
Provision for income taxes 3,757 3,338
---------- ----------
Net income $ 9,021 $ 8,515
========== ==========
PER COMMON SHARE DATA
Net income-basic $ 0.95 $ 0.90
Net income-diluted 0.94 0.89
Cash dividends 0.31 0.26
Dividend payout ratio 32.48% 28.96%
Book value $ 8.84 $ 8.19
Weighted average shares
outstanding 9,463,313 9,476,342
BALANCE SHEET DATA
Investments and federal funds sold $ 259,964 $ 234,666
Total loans and leases, net of unearned 590,133 556,406
Allowance for loan and lease losses 7,945 7,362
Total assets 953,785 852,060
Total deposits 717,877 623,532
Long-term obligations 80,016 71,756
Stockholders' equity 84,270 77,772
EARNINGS PERFORMANCE DATA
Return on average total assets 1.01% 1.09%
Return on average stockholders' equity 11.26 11.59
Net interest margin ratio(1) 3.58 3.89
Earnings to fixed charges:
Excluding interest on deposits 2.65x 2.97x
Including interest on deposits 1.35 1.37
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.28% 0.34%
Nonperforming loans and leases
to total loans and leases 0.30 0.37
Net loan and lease charge-offs
to average loans and leases 0.07 0.08
Allowance for loan and lease losses
to total loans and leases 1.35 1.32
Allowance for loan and lease losses
to nonperforming loans and leases 453.74 362.30
CAPITAL RATIOS
Average equity to average assets 9.01% 9.39%
Total capital to risk-adjusted assets 12.13 12.71
Tier 1 leverage 8.58 8.76
(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, 2001.
This report (including information incorporated by reference)
contains, and future oral and written statements of Heartland and
its management may contain, forward-looking statements, within
the meaning of such term in the Private Securities Litigation
Reform Act of 1995, with respect to the financial condition,
results of operations, plans, objectives, future performance and
business of Heartland. Forward-looking statements, which may be
based upon beliefs, expectations and assumptions of Heartland's
management and on information currently available to management,
are generally identifiable by the use of words such as "believe",
"expect", "anticipate", "plan", "intend", "estimate", "may",
"will", "would", "could", "should" or other similar expressions.
Additionally, all statements in this document, including forward-
looking statements, speak only as of the date they are made, and
Heartland undertakes no obligation to update any statement in
light of new information or future events.
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 effect on the operations and future
prospects of Heartland and its subsidiaries include, but are not
limited to, the following:
- The strength of the United States economy in general and
the strength of the local economies in which Heartland
conducts its operations which may be less favorable than
expected and may result in, among other things, a
deterioration in the credit quality and value of
Heartland's assets.
- The economic impact of the terrorist attacks that
occurred on September 11th, as well as any future threats
and attacks, and the response of the United States to any
such threats and attacks.
- The effects of, and changes in, federal, state and local
laws, regulations and policies affecting banking,
securities, insurance and monetary and financial matters.
- The effects of changes in interest rates (including the
effects of changes in the rate of prepayments of
Heartland's assets) and the policies of the Board of
Governors of the Federal Reserve System.
- The ability of Heartland to compete with other financial
institutions as effectively as Heartland currently
intends due to increases in competitive pressures in the
financial services sector.
- The inability of Heartland to obtain new customers and to
retain existing customers.
- The timely development and acceptance of products and
services, including products and services offered through
alternative delivery channels such as the Internet.
- Technological changes implemented by Heartland and by
other parties, including third party vendors, which may
be more difficult or more expensive than anticipated or
which may have unforeseen consequences to Heartland and
its customers.
- The ability of Heartland to develop and maintain secure
and reliable electronic systems.
- The ability of Heartland to retain key executives and
employees and the difficulty that Heartland may
experience in replacing key executives and employees in
an effective manner.
- Consumer spending and saving habits which may change in a
manner that affects Heartland's business adversely.
- Business combinations and the integration of acquired
businesses may be more difficult or expensive than
expected.
- The costs, effects and outcomes of existing or future
litigation.
- Changes in accounting policies and practices, as may be
adopted by state and federal regulatory agencies and the
Financial Accounting Standards Board.
- The ability of Heartland to manage the risks associated
with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be
placed on such statements. Additional information concerning
Heartland and its business, including other 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 32 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.
The year 2001 proved to be a challenging one as the economy
weakened and the effects of the September 11 tragedy lingered. In
spite of all the turmoil occurring, Heartland was able to record
double-digit growth in both earnings and assets for the second
consecutive year. For the year ended December 31, 2001, net
income totaled $11.414 million, an increase of $1.828 million or
19% when compared to the net income of $9.586 million recorded in
2000. Diluted earnings per common share grew to $1.18 from the
$.98 recorded during 2000. Return on common equity was 11.32% and
return on assets was .72% for 2001, compared to 10.69% and .70%,
respectively, for 2000. Contributing to the increased earnings
during 2001 was the 12% increase in net interest income, due in
large part to growth in average earning assets. Additionally,
noninterest income experienced a 12% increase, primarily due to
additional gains on sale of loans and service charges and fees.
As interest rates moved downward throughout the year, customers
frequently elected to refinance into fifteen- and thirty-year,
fixed-rate mortgage loans, which Heartland usually elects to sell
into the secondary market while retaining servicing.
Total assets reached $1.644 billion at year-end 2001, an increase
of 12% over year-end 2000. Even though the economy weakened
throughout the year, Heartland was able to grow its loan
portfolio by 6% and its deposit account balances by 9% in 2001.
For the year ended December 31, 2000, earnings increased $1.361
million or nearly 17% when compared to the net income of $8.225
million recorded in 1999. Earnings grew to $.98 per diluted
common share compared to $.84 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. The improvement in earnings during 2000 resulted primarily
from an expansion of net interest income by 34%. Noninterest
income improved by 6% and noninterest expenses began to level off
at a 22% increase over the prior year.
Total assets reached $1.466 billion at year-end 2000, an increase
of 24% over year-end 1999. Of particular note was the significant
growth experienced in the loan portfolio, which increased 25% in
2000. Growth in deposits was also substantial, increasing 27% in
2000.
The initiatives undertaken in previous years to position
Heartland for the increased earnings experienced in 2001 and 2000
were:
- New Mexico Bank & Trust was established in Albuquerque,
New Mexico, in May of 1998 and subsequently opened three
branches during the second and third quarters of 1999 and
one during the last quarter of 2001. 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 $300.2 million at
December 31, 2001.
- 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 grew from $54.0 million at year-end 1998
to $233.1 million on December 31, 2001.
- 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
$131.6 million at December 31, 2001.
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, decreased from 3.74% during 2000 to 3.65% during 2001.
During 2000, national prime increased from 8.50% at the beginning
of the year to 9.50% at the end of the year. Conversely, during
2001, national prime decreased from 9.50% to 4.75%. Heartland's
negative gap position suggested a larger improvement in the net
interest margin during such a period of downward movement in
interest rates, but management elected to remain competitive in
the market areas it serves and not reprice its deposit products
as quickly. In addition to the delay in repricing of deposit
products, also negatively impacting the net interest margin was
the change in the composition of the balance sheet, as the
percentage of average loans to total average earning assets
decreased from 80% in 2000 to 76% in 2001. Loan growth slowed due
to paydowns experienced in the mortgage loan portfolio and
reduced demand in the commercial loan portfolio. As rates
declined, the real estate loan portfolio experienced refinancing
activity into fifteen- and thirty-year mortgages, which Heartland
usually elects to sell into the secondary market. Growth in the
commercial loan portfolio increased during the last half of 2001
and management continues to feel that opportunities for growth
within this portfolio will exist during 2002.
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 due, in part, to the 52% growth in
average noninterest bearing demand deposit balances. These
balances made up 12% of the total average deposits during 2000
compared to 10% during 1999. Additionally, the percentage of
average loans to average earning assets increased from 75% during
1999 to 80%.
Net interest income on a fully tax equivalent basis was $50.986,
$45.658 and $34.125 million for 2001, 2000 and 1999,
respectively, an increase of 12% for 2001 and 34% for 2000. These
increases were the largest contributors to the double-digit
growth in earnings experienced during both years and were
primarily attributable to the growth in earning assets and the
ability to keep the increase in interest expense below the growth
in interest income. Average earning assets grew $175 million or
14% and $282 million or 30% during 2001 and 2000, respectively.
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, 2001
Average
Balance Interest Rate
------- -------- ----
EARNING ASSETS
Securities:
Taxable $ 253,290 $ 14,143 5.58%
Nontaxable(1) 30,909 2,712 8.77
---------- ----------
Total securities 284,199 16,855 5.93
---------- ----------
Interest bearing deposits 7,320 243 3.32
Federal funds sold 49,126 1,981 4.03
---------- ----------
Loans and leases:
Commercial and commercial
real estate(1) 595,969 47,187 7.92
Residential mortgage 191,081 15,364 8.04
Agricultural and agricultural
real estate(1) 139,421 11,767 8.44
Consumer 126,027 13,278 10.54
Direct financing leases, net 16,574 1,242 7.49
Fees on loans - 3,262 -
Less: allowance for loan
and lease losses (14,528) - -
---------- ----------
Net loans and leases 1,054,544 92,100 8.73
---------- ----------
Total earning assets 1,395,189 111,179 7.97
---------- ----------
NONEARNING ASSETS
Total nonearning assets 163,143 - -
---------- ----------
TOTAL ASSETS $1,558,332 $ 111,179 7.13%
========== ========== ======
INTEREST BEARING LIABILITIES
Interest bearing deposits:
Savings accounts $ 427,953 $ 11,967 2.80%
Time, $100 and over 143,429 8,227 5.74
Other time deposits 441,505 25,714 5.82
Short-term borrowings 151,626 5,963 3.93
Other borrowings 123,959 8,322 6.71
---------- ----------
Total interest bearing
liabilities 1,288,472 60,193 4.67
---------- ----------
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits 139,870 - -
Accrued interest and other
liabilities 29,154 - -
---------- ----------
Total noninterest bearing
liabilities 169,024 - -
---------- ----------
Stockholders' Equity 100,836 - -
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,558,332 $ 60,193 3.86%
========== ========== ======
Net interest income(1) $ 50,986
==========
Net interest income
to total earning assets(1) 3.65%
======
Interest bearing liabilities
to earning assets 92.35%
==========
(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, 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 and over 99,322 6,001 6.04
Other time deposits 400,096 23,281 5.82
Short-term borrowings 120,717 6,993 5.79
Other borrowings 128,745 9,521 7.40
---------- ----------
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 and over 59,822 3,222 5.39
Other time deposits 312,051 17,169 5.50
Short-term borrowings 87,376 4,046 4.63
Other borrowings 84,967 5,623 6.62
---------- ----------
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%.
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,
2001 Compared to 2000
Change Due to
Volume Rate Net
--------------------------
EARNING ASSETS/INTEREST INCOME
Securities
Taxable $ 3,971 $(1,652) $ 2,319
Nontaxable (10) (26) (36)
Interest bearing deposits 88 (178) (90)
Federal funds sold 1,741 (671) 1,070
Loans and leases 7,133 (4,584) 2,549
------- ------- -------
TOTAL EARNING ASSETS 12,923 (7,111) 5,812
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits
Savings accounts 1,550 (3,496) (1,946)
Time, $100 and over 2,665 (439) 2,226
Other time deposits 2,410 23 2,433
Short-term borrowings 1,791 (2,821) (1,030)
Other borrowings (354) (845) (1,199)
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 8,062 (7,578) 484
------- ------- -------
NET INTEREST INCOME $ 4,861 $ 467 $ 5,328
======= ======= =======
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 and over 2 127 652 2,779
Other time deposits 4,844 1,268 6,112
Short-term borrowings 1,544 1,403 2,947
Other borrowings 2,897 1,001 3,898
------- ------- -------
TOTAL INTEREST BEARING
LIABILITIES 13,426 5,434 18,860
------- ------- -------
NET INTEREST INCOME $11,270 $ 263 $11,533
======= ======= =======
PROVISION FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a
provision charged to expense. The provision for loan and lease
losses was $4.283 million during 2001, $3.301 million during 2000
and $2.626 million during 1999, increases of $982 thousand or 30%
during 2001 and $675 thousand or 26% during 2000. In part, these
increases were recorded in response both to the loan growth
experienced and to an increase in nonperforming loans. They 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. A
weakening economy will inevitably result in increased problem
loans, but Heartland expects the problems to be manageable and of
a lesser scope for Heartland than for the industry as a whole.
For additional details on the specific factors considered, refer
to the allowance for loan and lease losses section of this
report.
NONINTEREST INCOME (Dollars in thousands)
For the Years Ended
December 31,
2001 2000 1999
---------------------------
Service charges and fees $ 6,381 $ 5,386 $ 3,906
Trust fees 3,148 3,088 2,662
Brokerage commissions 615 846 655
Insurance commissions 807 862 803
Securities gains, net 1,489 501 713
Loss on trading account securities (417) - -
Impairment loss on equity
securities (773) (244) -
Rental income on operating leases 15,446 14,918 14,718
Gains on sale of loans 2,738 521 1,028
Other noninterest income 900 1,130 939
------- ------- -------
Total noninterest income $30,334 $27,008 $25,424
======= ======= =======
The above table shows Heartland's noninterest income for the
years indicated. Total noninterest income increased $3.326
million or 12% during 2001, compared to an increase of $1.584
million or 6% during 2000. During both periods, the noninterest
income categories reflecting significant improvement were service
charges and fees and gains on sale of loans.
Emphasis during the past several years on enhancing revenues from
services provided to customers has resulted in significant growth
in service charges and fees. These fees increased $995 thousand
or 18% during 2001. Exclusive of the Clovis, New Mexico
acquisition, these fees increased $1.102 million or 28% during
2000. Average noninterest bearing checking account balances
increased $15.753 million or 13% during 2001. These balances
increased $16.796 million or 21%, exclusive of the Clovis
acquisition, during 2000. The growth in these types of accounts
generates additional service charge revenue as activity fees are
charged to these accounts. Service fees are also collected on the
mortgage loans Heartland has sold into the secondary market while
retaining servicing. Heartland's servicing portfolio was $188.258
million at year-end 1999, $183.880 million at year-end 2000 and
$268.625 million at year-end 2001. Also contributing to the
increase in service charges and fees was the growth in fees
collected for the processing of merchant credit card activity.
Gains on sale of loans totaled $2.738 million during 2001, $521
thousand during 2000 and $1.028 million during 1999. The volume
of mortgage loans sold into the secondary market during 2001 was
significantly greater than those sold during 2000. As rates moved
downward, customers frequently elected to take fifteen- and
thirty-year, fixed-rate mortgage loans, which Heartland usually
elects to sell into the secondary market. 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.
The continual decline of interest rates during 2001 provided an
opportunity for Heartland to realize securities gains in its bond
portfolio. Securities gains recorded during 2001 totaled $1.489
million compared to the total of $501 thousand recorded during
2000. Securities gains would have been even larger had it not
been for losses realized in Heartland's equity securities
portfolio, driven primarily by the continued decline in the stock
market during 2001. Even with the decline in the stock market,
some net gains were realized in the equity securities portfolio,
but the majority of the securities gains during 2001 were
realized in the bond securities portfolio. Securities gains
decreased $212 thousand or 30% during 2000 as gains on the equity
securities portfolio were partially offset by losses realized
when short term agency securities were sold and replaced with
longer term agency securities to enhance the future total return
of the bond securities portfolio by lengthening the portfolio.
These trades were made during the first quarter of 2000 because
of the Heartland interest rate forecast, which called for
declining rates during the remainder of 2000. As rates declined
in 2001, Heartland's interest rate forecast changed to an upward
bias and therefore, longer-term agency securities were sold at a
gain to shorten the portfolio. In order to reduce the interest
rate risk of rising interest rates, the proceeds were invested in
well-seasoned premium mortgaged backed securities that were
projected to outperform the agency securities in a rising
interest rate environment.
During the first quarter of 2001, Heartland elected to begin
classifying some of its new equity securities purchases as
trading. Losses on this portfolio totaled $417 thousand for the
year, primarily as a result of the continual decline in the stock
market.
Impairment losses on equity securities totaled $773 thousand
during 2001. Heartland was a limited partner in an investment
partnership that had a portion of its funds invested in a company
that filed bankruptcy under Chapter 11 in 2001. The impairment
loss recorded on this investment totaled $700 thousand and
reflected Heartland's 30% ownership. Since year-end, Heartland
has begun the process of divesting its interest in this
partnership. The remaining $73 thousand of impairment losses
recorded during 2001 related to common stock held in the
available for sale equity securities portfolio. The carrying
value of this stock on Heartland's balance sheet at December 31,
2001, was $75 thousand. Similarly, during 2000, an impairment
loss on equity securities of $244 thousand was recorded. This
loss resulted from the announcement that Safety Kleen Corp. had
filed bankruptcy under Chapter 11. Heartland 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, 2001, was $4 thousand.
Rental income on operating leases increased $528 thousand or 4%
during 2001. This increase resulted from the normal replacement
of vehicles under lease at our vehicle leasing and fleet
management subsidiary, ULTEA. As vehicles within a fleet are
replaced every three or four years, rent levels rise
correspondingly to the increase in the cost of new vehicles.
NONINTEREST EXPENSE (Dollars in thousands)
For the Years Ended
December 31,
2001 2000 1999
---------------------------
Salaries and employee
benefits $25,460 $23,876 $18,945
Occupancy 3,076 2,904 2,076
Furniture and equipment 3,193 3,015 2,416
Depreciation on equipment under
operating leases 11,805 11,199 10,844
Outside services 3,470 2,661 2,239
FDIC deposit insurance
assessment 208 228 121
Advertising 1,596 1,492 1,376
Goodwill and core deposit
intangibles amortization 1,672 1,814 682
Other noninterest expenses 8,338 7,257 6,023
------- ------- -------
Total noninterest expense $58,818 $54,446 $44,722
======= ======= =======
Efficiency ratio(1) 73.68% 75.45% 76.01%
======= ======= =======
(1) Noninterest expense divided by the sum of net interest
income and noninterest income less securities gains.
The above table shows Heartland's noninterest expense for the
years indicated. Noninterest expense increased $4.372 million or
8% in 2001 and $9.724 million or 22% in 2000. Growth in some of
these expenses began to taper off in 2001 as Heartland began to
realize the full utilization of the resources it expended during
the early stages of its 1999 and 2000 growth initiatives.
Salaries and employee benefits expense, the largest component of
noninterest expense, experienced increases of $1.584 million or
7% and $4.931 million or 26% during 2001 and 2000, respectively.
In addition to the normal merit and cost of living raises, these
increases, particularly during 2000, were attributable to
Heartland's acquisition and expansion efforts. The number of full-
time equivalent employees increased from 484 at December 31,
1999, to 544 at December 31, 2000, and 581 at December 31, 2001.
Expansion efforts resulted in additional occupancy, furniture and
equipment and advertising/public relations costs during 2000. The
growth in these expenses leveled off in 2001. In the aggregate,
these expenses increased $1.543 million or 26% during 2000
compared to $454 thousand or 6% during 2001.
Consistent with the vehicle replacement activity occurring at
ULTEA, the depreciation on equipment under operating leases grew
$355 thousand or 3% during 2000 and $606 thousand or 5% during
2001.
Fees for outside services increased $809 thousand or 30% during
2001 and $422 thousand or 19% during 2000. Contributing to these
increases were the following:
- Beginning in 2001, Heartland elected to outsource its
internal audit function instead of fully staffing an
internal audit department.
- As on-line banking has grown in popularity, Heartland has
incurred additional costs to provide this service to its
customers.
- As a result of enhancing the fleet card program at ULTEA,
additional conversion costs were incurred during 2001.
- Legal and professional fees related to Heartland's
continuing exploration of potential acquisitions were
paid during 2001.
The Clovis acquisition made at the beginning of 2000 resulted in
additional goodwill and core deposit intangible amortization.
Additionally, 2000 was the first full year of amortization on the
merger-related intangibles that resulted from the acquisition of
Bank One Wisconsin's Monroe branch in July of 1999. This
amortization of merger-related intangibles increased $1.132
million or 166% during 2000.
Other noninterest expenses increased $1.081 million or 15% during
2001 and $1.234 million or 20% during 2000. Over half of the 2001
increase was the result of additional processing fees related to
the increased activity in the merchant credit card processing
area. Some of the expenses included within the other noninterest
expenses that experienced significant growth as a result of
expansion efforts were amortization and maintenance expense on
software, office supplies, postage and telephone charges. During
2000, the conversion of the Clovis entity to the banking software
utilized by the Heartland banks also contributed to the increase
in this category.
INCOME TAXES
Income tax expense increased $1.498 million or 36% for 2001 and
$1.060 million or 34% for 2000, primarily as a result of
increased pre-tax earnings. Heartland's effective tax rate was
33.36% for 2001, 30.55% for 2000 and 27.73% for 1999. The
effective tax rate has grown over the years, in part, as a result
of the amount of additional merger-related goodwill and other
intangibles amortization expense recorded that is not deductible
for federal income tax purposes. These expenses have grown as a
percentage of pre-tax income from 2.90% in 1999 to 4.26% in 2000
and 5.71% in 2001. Additionally, tax-exempt interest income on
securities and loans as a percentage of pre-tax income has varied
over the past several years. Tax-exempt interest income was 12%
of pre-tax income during 2001 compared to 16% for 2000 and 14%
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,
2001 2000
Amount Percent Amount Percent
---------- ------- ---------- -------
Commercial and commercial
real estate $ 651,479 58.73% $ 550,366 52.62%
Residential mortgage 168,912 15.23 215,638 20.62
Agricultural and
agricultural real estate 145,460 13.11 133,614 12.78
Consumer 127,874 11.53 128,685 12.30
Lease financing, net 15,570 1.40 17,590 1.68
---------- ------- ---------- -------
Gross loans and leases 1,109,295 100.00% 1,045,893 100.00%
======= =======
Unearned discount (3,457) (3,397)
Deferred loan fees (633) (400)
---------- ----------
Total loans and leases 1,105,205 1,042,096
Allowance for loan and
lease losses (14,660) (13,592)
---------- ----------
Loans and leases, net $1,090,545 $1,028,504
========== ==========
LOAN PORTFOLIO (Dollars in thousands)
December 31,
1999 1998
Amount Percent Amount Percent
---------- ------- ---------- -------
Commercial and commercial
real estate $ 448,991 53.53% $ 277,765 46.88%
Residential mortgage 180,347 21.50 156,415 26.40
Agricultural and
agricultural real estate 92,936 11.08 77,211 13.03
Consumer 103,608 12.35 72,642 12.26
Lease financing, net 12,886 1.54 8,508 1.43
---------- ------- ---------- -------
Gross loans and leases 838,768 100.00% 592,541 100.00%
======= =======
Unearned discount (3,169) (2,136)
Deferred loan fees (453) (272)
---------- ----------
Total loans and leases 835,146 590,133
Allowance for loan and
lease losses (10,844) (7,945)
---------- ----------
Loans and leases, net $ 824,302 $ 582,188
========== ==========
LOAN PORTFOLIO (Dollars in thousands)
December 31,
1997
Amount Percent
-------- -------
Commercial and commercial
real estate $242,868 43.46%
Residential mortgage 175,268 31.37
Agricultural and
agricultural real estate 69,302 12.40
Consumer 64,223 11.49
Lease financing, net 7,171 1.28
-------- -------
Gross loans and leases 558,832 100.00%
=======
Unearned discount (2,077)
Deferred loan fees (349)
--------
Total loans and leases 556,406
Allowance for loan and
lease losses (7,362)
--------
Loans and leases, net $549,044
========
The table below sets forth the remaining maturities by loan and
lease category.
MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES(1)
December 31, 2001 (Dollars in thousands)
Over 1 Year
Through 5 Years
One Year Fixed Floating
or less Rate Rate
----------------------------------
Commercial and commercial
real estate $ 264,794 $ 199,547 $ 102,924
Residential mortgage 28,690 25,202 11,005
Agricultural and
agricultural real estate 70,984 41,221 16,491
Consumer 36,883 50,997 15,570
Lease financing, net 4,890 10,206 -
---------- ---------- ----------
Total $ 406,241 $ 327,173 $ 145,990
========== ========== ==========
Over 5 Years
Fixed Floating
Rate Rate Total
----------------------------------
Commercial and commercial
real estate $ 24,643 $ 59,571 $ 651,479
Residential mortgage 33,870 70,145 168,912
Agricultural and
agricultural real estate 8,848 7,916 145,460
Consumer 9,877 14,547 127,874
Lease financing, net 474 - 15,570
---------- ---------- ----------
Total $ 77,712 $ 152,179 $1,109,295
========== ========== ==========
(1) Maturities based upon contractual dates.
Heartland experienced growth in net loans and leases during both
2001 and 2000. This growth was $62.0 million or 6% in 2001 and
$204.2 million or 25% in 2000. Loan growth during 2001 was slower
than during 2000 due to paydowns experienced in the mortgage loan
portfolio and reduced demand in the commercial loan portfolio,
particularly during the first half of the year. Growth in the
commercial loan portfolio increased during the remaining half of
2001 and management continues to feel that opportunities for
growth within this portfolio will expand during 2002. The
acquisition of the bank in Clovis, New Mexico at the beginning of
2000, accounted for $66.5 million or 33% of the loan growth in
2000.
During both years, the largest growth occurred in commercial and
commercial real estate loans, which increased $101.1 million or
18% during 2001 and $101.4 million or 23% during 2000. All the
bank subsidiaries experienced growth in this loan category,
principally as a result of continued calling efforts. The Clovis
acquisition was responsible for $26.5 million or 26% of the
growth in 2000.
Agricultural and agricultural real estate loans outstanding
experienced an increase of $11.8 million or 9% during 2001. The
majority of this growth occurred at New Mexico Bank & Trust's
office in Clovis and at Dubuque Bank and Trust Company,
Heartland's flagship bank in Dubuque, Iowa. During 2000,
agricultural and agricultural real estate loans outstanding grew
$40.7 million or 44%. 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. The
remaining growth during 2000 occurred at Heartland's banks in
Wisconsin and Keokuk, Iowa.
The residential mortgage loan portfolio experienced a decline of
$46.7 million or 22% during 2001. As long-term rates decreased,
customers refinanced their mortgage loans into fifteen- and
thirty-year fixed rate loans, which Heartland usually sells into
the secondary market. Servicing is retained on a majority of
these loans so that the Heartland bank subsidiaries have an
opportunity to continue providing their customers the excellent
service they expect. Conversely, during 2000, the residential
mortgage loan portfolio grew by $35.3 million or 20%. Customers
elected to take adjustable-rate mortgage loans, which Heartland
elected to retain in its loan portfolio, during this period of
increasing long-term rates. 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 remained relatively flat during 2001,
as the economy weakened and consumers were provided other sources
of financing, i.e., zero percent automobile financing through
dealerships. Consumer loan outstandings, exclusive of the $8.0
million portfolio at 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.
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,
2001 2000 1999 1998 1997
------------------------------------
Nonaccrual loans and
leases $7,269 $5,860 $1,414 $1,324 $1,819
Loan and leases
contractually past
due 90 days or more 500 523 236 426 187
Restructured loans
and leases 354 357 - - 26
------ ------ ------ ------ ------
Total nonperforming
loans and leases 8,123 6,740 1,650 1,750 2,032
Other real estate 130 489 514 832 722
Other repossessed assets 343 219 138 102 176
------ ------ ------ ------ ------
Total nonperforming assets $8,596 $7,448 $2,302 $2,684 $2,930
====== ====== ====== ====== ======
Nonperforming loans and
leases to total loans
and leases 0.73% 0.65% 0.20% 0.30% 0.37%
Nonperforming assets
to total loans and
leases plus repossessed
property 0.78% 0.71% 0.28% 0.45% 0.53%
Nonperforming assets to
total assets 0.52% 0.51% 0.19% 0.28% 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 0.61% and 0.53% for
September 30, 2001, and December 31, 2000, respectively.
Heartland's ratios at December 31, 2001 and 2000, were 0.52% and
0.51%, respectively.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, increased to 0.73%
of total loans and leases at December 31, 2001, compared to 0.65%
of total loans and leases at December 31, 2000. Contributing to
the $1.4 million increase in nonperforming loans at year-end 2001
were a $1.4 million and $1.5 million increase at Wisconsin
Community Bank and New Mexico Bank & Trust, respectively. These
increases were attributable to a few large credits and not felt
to be an indication of a trend in either of these newer markets
for Heartland. These increases were offset by a $2.3 million
reduction in nonperforming loans at Dubuque Bank and Trust
Company, as payments totaling $1.5 million were received during
the first quarter of 2001 and a $900 thousand charge-off was
recorded during the last quarter of 2001 on the same credit. The
$5.1 million increase in nonperforming assets during 2000 was
primarily the result of this same 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 a majority of Heartland's nonperforming loans and, because of
the net realizable value of collateral, guarantees and other
factors, anticipated losses on these credits are expected to be
minimal. A weakening economy will inevitably result in increased
problem loans, but Heartland expects the problems to be
manageable and of a lesser scope for Heartland than for the
industry as a whole.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The process utilized by Heartland to estimate the adequacy of the
allowance for loan and lease losses is considered a critical
accounting practice for Heartland. The allowance for loan and
lease losses represents management's estimate of identified and
unidentified losses in the existing loan portfolio. The
miscalculation of this estimate could have a material impact on
Heartland's earnings. The adequacy of the allowance for loan and
lease losses is determined 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:
- The amount of Heartland's nonperforming loans has trended
upward.
- The nation has been in a period of economic slowdown.
- During the last several years, Heartland has entered new
markets in which it had little or no previous lending
experience.
- Heartland has continued to experience growth in more-
complex commercial loans as compared to relatively lower-
risk residential real estate loans.
The allowance for loan and lease losses increased by $1.1 million
or 8% during 2001. The allowance for loan and lease losses at
December 31, 2001, was 1.33% of loans and 180% of nonperforming
loans, compared to 1.30% of loans and 202% of nonperforming loans
at year-end 2000. 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.
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, 2001. 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. Along with other financial
institutions, management shares a concern for the possible
continued softening of the economy. Should the economic climate
continue to deteriorate, borrowers may experience difficulty, and
the level of non-performing loans, charge-offs, and delinquencies
could rise and require further increases in the provision for
loan and lease losses. 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.
During 2001, Heartland recorded net charge offs of $3.2 million
compared to $1.7 million in 2000. The Clovis acquisition was
responsible for 45% of the net charge-offs during 2000 and $468
thousand or 15% of the net charge-offs during 2001. 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 newest market for
Heartland. Citizens Finance Co., Heartland's consumer finance
subsidiary, was responsible for $1.0 million or 32% of the net
charge-offs during 2001 and $614 thousand or 36% during 2000.
Increased losses at Citizens relate directly to the rapid growth
it experienced during the previous two years with expansion into
the Appleton, Wisconsin, and Rockford, Illinois, markets.
Identification of problem loans in a portfolio begin to occur as
the portfolio matures. Additionally, the weakened economy has
affected the ability of borrowers to repay their consumer loans.
Losses as a percentage of gross loans at Citizens were 4.37% for
2001 compared to 2.87% for 2000. Loans with payments past due for
more than thirty days increased from 4.67% of gross loans at
December 31, 2000, to 5.30% at December 31, 2001. Management
believes these ratios still 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)
For the years ended
December 31,
2001 2000 1999 1998 1997
------------------------------------------
Allowance at
beginning of year $13,592 $10,844 $ 7,945 $7,362 $6,191
Charge-offs:
Commercial and
commercial real
estate 1,477 407 81 289 93
Residential mortgage 32 54 - 20 21
Agricultural and
agricultural real
estate 463 580 8 41 21
Consumer 1,785 1,239 546 473 449
Lease financing - - - - -
------- ------- ------- ------ ------
Total charge-offs 3,757 2,280 635 823 584
------- ------- ------- ------ ------
Recoveries:
Commercial and
commercial
real estate 79 97 74 372 36
Residential mortgage - 4 12 - 8
Agricultural and
agricultural
real estate 108 176 6 1 2
Consumer 355 308 151 82 99
Lease financing - - - - -
------- ------- ------- ------ ------
Total recoveries 542 585 243 455 145
------- ------- ------- ------ ------
Net charge-offs(1) 3,215 1,695 392 368 439
Provision for loan
and lease losses 4,283 3,301 2,626 951 1,279
Additions related
to acquisitions - 1,142 665 - 331
------- ------- ------- ------ ------
Allowance at end
of period $14,660 $13,592 $10,844 $7,945 $7,362
======= ======= ======= ====== ======
Net charge-offs to
average loans and
leases 0.30% 0.17% 0.06% 0.07% 0.08%
======= ====== ======= ====== ======
(1) Includes net charge-offs at Citizens Finance, Heartland's
consumer finance company, of $1,043 for 2001, $614 for 2000,
$256 for 1999, $278 for 1998 and $256 for 1997.
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,
2001 2000
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------ -------- ------ --------
Commercial and
commercial real
estate $ 7,534 58.73% $ 7,324 52.62%
Residential
mortgage 1,192 15.23 1,004 20.62
Agricultural and
agricultural real
estate 2,214 13.11 2,377 12.78
Consumer 2,009 11.53 1,743 12.30
Lease financing 162 1.40 106 1.68
Unallocated 1,549 - 1,038 -
------- ------- ------- -------
$14,660 100.00% $13,592 100.00%
======= ======= ======= =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in
thousands)
As of December 31,
1999 1998
---------------------------------------
Loan/ Loan/
Lease Lease
Category Category
to Gross to Gross
Loans & Loans &
Amount Leases Amount Leases
------- ------- ------ -------
Commercial and
commercial real
estate $ 6,108 53.53% $2,180 46.88%
Residential
mortgage 756 21.50 697 26.40
Agricultural and
agricultural real
estate 1,016 11.08 583 13.03
Consumer 1,917 12.35 1,096 12.26
Lease financing 91 1.54 44 1.43
Unallocated 956 - 3,345 -
------- ------- ------ -------
$10,844 100.00% $7,945 100.00%
======= ======= ====== =======
ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in
thousands)
As of December 31, 1997
--------------------------
Loan/
Lease
Category
to Gross
Loans &
Amount Leases
------ -------
Commercial and commercial
real estate $1,889 43.46%
Residential mortgage 725 31.37
Agricultural and agricultural
real estate 577 12.40
Consumer 1,044 11.49
Lease financing(1) 30 1.28
Unallocated 3,097 -
------ -------
$7,362 100.00%
====== =======
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 20% of total assets at December 31,
2001, as compared to 16% at December 31, 2000. The amount of
securities held in Heartland's portfolio was increased during
2001 as deposit growth outpaced growth in the loan portfolio.
During 2000, management elected to replace paydowns received on
mortgage-backed securities with U.S. government agency securities
to lengthen the portfolio. U.S. government agency securities
offer a better total return in a declining interest rate
environment, which was Heartland's forecast at the time. The
state tax-exempt nature of selected U.S. government agency
securities also made them attractive purchases for Heartland's
Illinois bank subsidiaries. As Heartland's interest rate forecast
changed to one of rising rates, except for the short end of the
yield curve, management elected to shift a portion of its
securities portfolio into mortgage-backed securities from U.S.
government agencies during 2001. Tightly structured tranches in
well-seasoned mortgage-backed securities were purchased to
enhance the performance of the portfolio given a rise in interest
rates. Because of the well-seasoned nature of the mortgage-backed
securities purchased, management anticipates that risk of
prepayment within Heartland's securities portfolio has been
minimized.
Heartland implemented Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging
Activities, on January 1, 2001. At that date, all investments
previously included in Heartland's held to maturity investment
portfolio were reclassified to the available for sale investment
portfolio. The tables below present the composition and
maturities of the securities portfolio by major category.
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Total
% of
December 31, 2001 Amount Portfolio
-------------------
U.S. government corporations and
agencies and treasuries $ 79,234 24.48%
Mortgage-backed securities 183,661 56.74
States and political
subdivisions 30,948 9.56
Other securities 29,846 9.22
-------- -------
Total $323,689 100.00%
======== =======
SECURITIES PORTFOLIO COMPOSITION (Dollars in thousands)
Held to Maturity Available for Sale
% of % of
December 31, 2000 Amount Portfolio Amount Portfolio
---------------------------------------
U.S. government
corporations and
agencies and treasuries $ - -% $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. government corporations
and agencies and treasuries $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. government
corporations and
agencies and
treasuries $ - -% $ 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. government corporations
and agencies and treasuries $ 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 MATURITIES (Dollars in thousands)
After One But
Within One Year Within Five Years
--------------- -----------------
December 31, 2001 Amount Yield Amount Yield
------------------------------------
U.S. government
corporations and
agencies and
treasuries $11,182 4.60% $ 68,052 5.92%
Mortgage-backed
securities 46,112 4.46 121,586 5.75
States and political
subdivisions(1) 412 7.41 4,161 7.33
Other securities(2) 523 5.85 - -
------- --------
Total $58,229 4.52% $193,799 5.84%
======= ====== ======== =======
SECURITIES PORTFOLIO MATURITIES (Dollars in thousands)
After Five But
Within Ten Years After Ten Years
---------------- -----------------
Amount Yield Amount Yield
------------------------------------
U.S. government
corporations and
agencies and
treasuries - -% $ - -%
Mortgage-backed
securities 14,025 6.35 1,938 7.60
States and political
subdivisions(1) 11,338 7.51 15,037 8.11
Other securities(2) - - - -
------- -------
Total $25,363 6.87% $16,975 8.05%
======= ======= ======= ======
SECURITIES PORTFOLIO MATURITIES (Dollars in thousands)
Total
Amount Yield
-------------------
U.S. government corporations
and agencies and treasuries $ 79,234 5.73%
Mortgage-backed securities 183,661 5.49
States and political
subdivisions(1) 30,948 7.77
Other securities(2) 523 5.85
--------
Total $294,366 5.80%
======== ======
(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 $144.2 million
or 14% during 2001 compared to an increase of $230.7 million or
30% during 2000. Total average deposits were $1.153 billion
during 2001, $1.009 billion during 2000 and $777.9 million during
1999. The Clovis acquisition comprised $97.5 million or 42% of
the increase in 2000. Exclusive of this acquisition, growth was
$133.2 million or 17% during 2000. 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
$58.9 million or 59% of the 2001 growth and $46.4 million or 35%
of the 2000 growth, exclusive of the acquisition.
During 2001, the demand and savings deposit categories
experienced growth in excess of 10% and most of this growth was
reflective of increased marketing efforts and customers' election
to keep funds on deposit in a financial institution as the
volatility in the stock market continued. Half of the $15.8
million or 13% growth in average demand deposits occurred at New
Mexico Bank & Trust in Albuquerque, New Mexico. The $42.9 million
or 11% growth in average savings deposits resulted from growth in
all of the markets served by the Heartland banks. The money
market product line was enhanced last year and much of the growth
in savings was attributable to marketing efforts focused on
attracting new customers into this product line, as well as,
customers' election to keep funds on deposit in a financial
institution as the volatility in the stock market continued.
Average time deposits grew by $85.5 million or 17%. Again, all
the Heartland banks experienced growth in this deposit category.
As long-term rates moved downward during 2001, efforts were
focused on attracting customers into certificates of deposit with
a maturity exceeding two years.
Heartland focused efforts on shifting the mix of total deposits
from the time deposit category to the demand and savings deposit
categories during 2000. 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, 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, 2001
Percent
Average of
Balance Deposits Rate
--------------------------
Demand deposits $ 139,870 12.13% -%
Savings accounts 427,953 37.13 2.80
Time deposits less than $100 441,505 38.30 5.82
Time deposits of $100 or more 143,429 12.44 5.74
---------- -------
Total deposits $1,152,757 100.00%
========== =======
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 $100 400,096 39.67 5.82
Time deposits of $100 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 $100 312,051 40.12 5.50
Time deposits of $100 or more 59,822 7.69 5.39
---------- -------
Total deposits $ 777,860 100.00%
========== =======
The following table sets forth the amount and maturities of time
deposits of $100,000 or more at December 31, 2001.
Time Deposits $100,000 and Over (Dollars in thousands)
December 31,
2001
------------
3 months or less $ 41,237
Over 3 months through 6 months 23,711
Over 6 months through 12 months 23,752
Over 12 months 22,771
--------
$111,471
========
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability. At
year-end 2001, the amount of short-term borrowings was $160.7
million, an increase of $20.8 million or 15% over the $139.9
million short-term borrowings outstanding at year-end 2000.
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, and $108.6
million at December 31, 2001.
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, a $10.0 million increase over the
then existing line. This additional credit capacity was
established primarily to provide additional working capital to
the nonbanking subsidiaries and to meet general corporate
commitments. At December 31, 2001 and 2000, $29.2 million and
$39.3 million, respectively, was outstanding on the revolving
credit lines with the total classified as short-term borrowings.
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,
2001 2000 1999
----------------------------
Balance at end of period $160,703 $139,909 $103,219
Maximum month-end amount
outstanding 162,744 144,604 118,019
Average month-end amount
outstanding 151,139 122,777 91,613
Weighted average interest
rate at year-end 1.39% 5.60% 4.35%
Weighted average interest
rate for the year 3.93% 5.79% 4.63%
Other borrowings include all debt arrangements Heartland and its
subsidiaries have entered into with original maturities that
extend beyond one year. These borrowings were $143.8 million on
December 31, 2001, compared to $102.9 million on December 31,
2000. The change in these account balances primarily results from
activity in the bank subsidiaries' borrowings from the FHLB. All
of the Heartland banks own stock in the 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, 2001 and 2000,
were $86.5 million and $51.1 million, respectively. Substantially
all these borrowings are fixed-rate advances for terms between
three and five years. As advance rates moved downward during 2001
to historically low levels, Heartland elected to obtain
additional advances to lock in funding for anticipated fixed-rate
commercial loan growth and replace the maturity of advances
during the first half of 2002. During 2000, additional FHLB
advances were utilized at the bank subsidiaries to fund a portion
of the loan growth experienced.
Additionally, balances outstanding on capital securities issued
by Heartland in 1999 and 2001 are included in total other
borrowings. The issuance in October of 1999 for $25.0 million
bears an annual rate of 9.60% and matures on September 30, 2029.
A private placement offering for $8.0 million was completed in
December of 2001. This variable rate issuance matures on December
18, 2031.
The following table summarizes significant contractual
obligations and other commitments:
Other Operating
Borrowings Leases Total
----------------------------
2002 $ 24,757 $ 408 $ 25,165
2003 12,781 411 13,192
2004 25,281 362 25,643
2005 16,887 289 17,176
2006 20,506 182 20,688
Thereafter 43,577 48 43,625
-------- -------- --------
Total $143,789 $ 1,700 $145,489
======== ======== ========
Other commitments:
Commitments to extend credit $325,282
Standby letter of credit 11,631
Commitments to sell residential real estate loans 30,849
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 9.71% and 10.89%,
respectively, on December 31, 2001, compared with 8.74% and
9.90%, respectively, on December 31, 2000, and 10.56% and 11.68%,
respectively, on December 31, 1999. At December 31, 2001,
Heartland's leverage ratio, the ratio of Tier 1 capital to total
average assets, was 7.53% compared to 7.25% and 8.85% at December
31, 2000 and 1999, 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
National Bancshares, Inc., the one-bank holding company of First
National Bank of Clovis, remaining requisite cash payments under
the notes payable total $855 thousand in 2002, and $637 thousand
in 2003 and 2004, plus interest at 7.00%. 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 offered a portion of its shares of New
Mexico Bank & Trust's common stock to interested investors. In no
case would Heartland's interest be allowed to fall below 80%. All
minority stockholders, including the initial investors, entered
into a stock transfer agreement before shares were 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, 2001, Heartland's
ownership in New Mexico Bank & Trust was 86%.
Heartland has an obligation to certain employees of one of the
bank subsidiaries to make a payment based upon certain
performance criteria. The obligation is being accrued over the
performance period.
On December 18, 2001, Heartland completed a private placement
offering of $8.0 million of variable rate cumulative capital
securities representing undivided beneficial interests in
Heartland Financial Statutory Trust II, 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 are
being used by Heartland for general corporate purposes. Interest
is payable quarterly on March 18, June 18, September 18 and
December 18 of each year. The debentures will mature and the
capital securities must be redeemed on December 18, 2031.
Heartland has the option to shorten the maturity date to a date
not earlier than December 18, 2006. 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. All of these
securities qualified as Tier 1 capital for regulatory purposes as
of December 31, 2001.
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 by Heartland for general corporate
purposes. All of these securities continued to qualify as Tier 1
capital for regulatory purposes as of December 31, 2001.
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,
2001 2000
Amount Ratio Amount Ratio
--------------------------------------
Capital Ratios:
Tier 1 capital $ 121,112 9.71% $ 102,443 8.74%
Tier 1 capital
minimum
requirement 49,891 4.00 46,878 4.00
---------- ------ ---------- ------
Excess $ 71,221 5.71% $ 55,565 4.74%
========== ====== ========== ======
Total capital $ 135,770 10.89% $ 116,034 9.90%
Total capital
minimum
requirement 99,782 8.00 93,756 8.00
---------- ------ ---------- ------
Excess $ 35,988 2.89% $ 22,278 1.90%
========== ====== ========== ======
Total risk-
adjusted
assets $1,247,274 $1,171,951
========== ==========
RISK-BASED CAPITAL RATIOS(1) (Dollars in thousands)
December
1999
Amount Ratio
------------------
Capital Ratios:
Tier 1 capital $ 101,665 10.56%
Tier 1 capital
minimum
requirement 38,517 4.00
---------- ------
Excess $ 63,148 6.56%
========== ======
Total capital $ 112,508 11.68%
Total capital
minimum
requirement 77,035 8.00
---------- ------
Excess $ 35,473 3.68%
========== ======
Total risk-
adjusted
assets $ 962,933
==========
(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
capital to risk-adjusted assets ratio of 8.00%.
LEVERAGE RATIOS(1) (Dollars in thousands)
December 31,
2001 2000
Amount Ratio Amount Ratio
--------------------------------------
Capital Ratios:
Tier 1 capital $ 121,112 7.53% $ 102,443 7.25%
Tier 1 capital
minimum
requirement(2) 64,336 4.00 56,492 4.00
---------- ----- ---------- ------
Excess $ 56,776 3.53% $ 45,951 3.25%
========== ===== ========== ======
Average adjusted
assets $1,608,402 $1,412,304
========== ==========
LEVERAGE RATIOS(1) (Dollars in thousands)
December
1999
Amount Ratio
------------------
Capital Ratios:
Tier 1 capital $ 101,665 8.85%
Tier 1 capital
minimum
requirement(2) 45,965 4.00
---------- ------
Excess $ 55,700 4.85%
========== ======
Average adjusted
assets $1,149,125
==========
(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
In June of 2001, Heartland was saddened by the sudden death of
long-time director, Evangeline K. Jansen. Ms. Jansen first joined
the board of directors of Dubuque Bank and Trust in 1974 and was
one of the initial directors of Heartland when it was formed in
1981.
At its regular board meeting held on January 15, 2002, Heartland
appointed Thomas L. Flynn a director. Mr. Flynn, who is president
of Flynn Ready-Mix Concrete and an Iowa state senator, is also a
member of the board of directors of Dubuque Bank and Trust
Company, Heartland's lead bank. Mr. Flynn's appointment fills the
vacancy created last June by the death of Ms. Jansen. At
Heartland's annual stockholders meeting in May, Mr. Flynn will
stand for election to a full term.
Additionally, at this same board meeting, Gregory R. Miller
resigned as a director of Heartland. Mr. Miller had served on the
board since 1987 and his term was due to expire in 2004.
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.
Net cash outflows from investing activities was $171.1 million
during 2001, an increase of $55.2 million when compared to 2000.
The net increase in loans and leases was $55.1 million during
2001, a $77.6 million decrease from 2000. During 2001, proceeds
from the sale and maturity of securities increased by $85.4
million and the purchases of securities increased by $185.4
million when compared to 2000. As loan growth was below the
levels experienced during 2000, additional securities purchases
were made to enhance the net interest margin. During 2000, the
net cash outflows from investing activities was $115.9 million, a
decrease of $35.0 million when compared to 1999. Acquisitions
provided net cash and cash equivalents of $18.6 million during
2000 and $43.7 million during 1999, a decrease of $25.1 million.
The net increase in loans and leases was $132.8 million during
2000 compared to $201.2 million during 1999, a decrease of $68.4
million. During 2000, proceeds from the sale and maturity of
securities decreased by $29.0 million and the purchases of
securities decreased by $10.7 million when compared to 1999.
Financing activities provided net cash of $162.7 million during
2001 compared to $148.6 million during 2000, an increase of $14.0
million. A net increase in demand and savings deposit accounts
provided cash of $111.3 million during 2001 compared to $26.1
million during 2000. Conversely, a net decrease in time deposit
accounts used cash of $7.5 million during 2001 whereas, a net
increase in time deposit accounts provided cash of $111.2 million
during 2000. The $42.9 million additional cash provided by a net
increase in other borrowings during 2001 was reflective of new FHLB
long-term advances. Financing activities provided net cash of
$148.6 million during 2000 compared to $131.1 million during 1999,
an increase of $17.5 million. A net increase in demand and savings
deposit accounts provided cash of $26.1 million during 2000
compared to $42.2 million during 1999, a $16.1 million decrease.
Conversely, a net increase in time deposit accounts provided cash
of $111.2 million during 2000 compared to $18.2 million during
1999. Short-term borrowings provided cash of $25.8 million in 2000
and $47.3 million in 1999, a decrease of $21.5 million. Cash used
for the repayment of other borrowings increased during 2000 to
$32.3 million compared to $11.1 million during 1999.
Total cash inflows from operating activities was $17.3 million
during 2001, $16.0 million during 2000 and $12.9 million during
1999, increases of $1.3 million for 2001 and $3.1 million for
2000. Management of investing and financing activities, and
market conditions, determine the level and the stability of net
interest cash flows. Management attempts to mitigate the impact
of changes in market interest rates to the extent possible, so
that balance sheet growth is the principal determinant of growth
in net interest cash flows.
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, 2001,
provided an additional borrowing capacity of $20.8 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, 2001, Heartland was in compliance
with all the covenants contained in this credit agreement.
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 management team and
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 2001 have
materially changed when compared to 2000.
Derivative financial instruments include futures, forwards,
interest rate swaps, option contracts and other financial
instruments with similar characteristics. Heartland's use of
derivative financial instruments relates to the management of the
risk that changes in interest rates will affect its future
interest payments. Heartland utilizes an interest rate swap
contract to effectively convert a portion of its variable rate
interest rate debt to fixed interest rate debt. Under the
interest rate swap contract, Heartland agrees to pay an amount
equal to a fixed rate of interest times a notional principal
amount, and to receive in return an amount equal to a specified
variable rate of interest times the same notional principal
amount. The notional amounts are not exchanged and payments under
the interest rate swap contract are made monthly. Heartland is
exposed to credit-related losses in the event of nonperformance
by the counterparty to the swap contract, which has been
minimized by entering into the contract with a large, stable
financial institution. As of December 31, 2001, Heartland had an
interest rate swap contract to pay a fixed rate of interest and
receive a variable rate of interest on $25.0 million of
indebtedness. This contract expires on November 1, 2006. The fair
market value of the interest rate swap contract was $350 thousand
as of December 31, 2001.
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, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TABLE OF MARKET RISK-SENSITIVE INSTRUMENTS (Dollars in thousands)
December 31, 2001
MATURING IN: 2002 2003 2004 2005
--------------------------------------
ASSETS
Federal funds sold $ 24,200 $ - $ - $ -
Time deposits in other
financial institutions 3 561 - -
Securities:
Trading - - - -
Available for sale 58,229 119,774 46,845 12,926
Loans and leases:
Fixed rate loans 214,125 113,860 125,221 36,674
Variable rate loans 188,026 40,793 47,836 29,944
---------- -------- -------- --------
Loans and leases, net 402,151 154,653 173,057 66,618
---------- -------- -------- --------
Total Market Risk-
Sensitive Assets $ 484,583 $274,988 $219,902 $ 79,544
========== ======== ======== ========
LIABILITIES
Savings $ 493,374 $ - $ - $ -
Time deposits:
Fixed rate time
certificates less
than $100 274,585 82,211 33,980 15,209
Variable rate time
certificates less
than $100 1,850 9,558 43 -
---------- -------- -------- --------
Time deposits less
than $100 276,435 91,769 34,023 15,209
Time deposits of
$100 or more 88,700 15,798 5,219 617
Federal funds purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings 160,703 - - -
Other borrowings:
Fixed rate borrowings 24,757 12,781 25,281 16,887
Variable rate borrowings - - - -
---------- -------- -------- --------
Other borrowings 24,757 12,781 25,281 16,887
---------- -------- -------- --------
Total Market Risk-
Sensitive Liabilities $1,043,969 $120,348 $ 64,523 $ 32,713
========== ======== ======== ========
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TABLE OF MARKET RISK-SENSITIVE INSTRUMENTS (Dollars in thousands)
December 31, 2001
Average Estimated
Interest Fair
MATURING IN: 2006 Thereafter Total Rate Value
--------------------------------------------
ASSETS
Federal funds sold $ - $ - $ 24,200 1.57% $ 24,200
Time deposits in
other financial
institutions - - 564 5.16 564
Securities:
Trading - 1,528 1,528 0.99 1,528
Available for sale 14,254 71,661 323,689 5.80 323,689
Loans and leases:
Fixed rate loans 51,418 77,712 619,010 8.24 635,220
Variable rate
loans 27,417 152,179 486,195 6.57 491,292
------- -------- ---------- ----------
Loans and leases,
net 78,835 229,891 1,105,205 1,126,512
------- -------- ---------- ----------
Total Market Risk-
Sensitive Assets $93,089 $303,080 $1,455,186 $1,476,493
======= ======== ========== ==========
LIABILITIES
Savings $ - $ - $ 493,374 1.67% $ 493,374
Time deposits:
Fixed rate time
certificates less
than $100 21,821 315 428,121 5.00 439,526
Variable rate time
certificates less
than $100 - - 11,451 4.24 11,451
------- -------- ---------- ----------
Time deposits less
than $100 21,821 315 439,572 450,977
Time deposits of
$100 or more 1,137 - 111,471 4.40 113,066
Federal funds
purchased,
securities sold
under repurchase
agreements and
other short-term
borrowings - - 160,703 1.39 160,703
Other borrowings:
Fixed rate
borrowings 20,506 35,577 135,789 5.83 148,930
Variable rate
borrowings - 8,000 8,000 5.50 8,000
------- -------- ---------- ----------
Other borrowings 20,506 43,577 143,789 156,930
------- -------- ---------- ----------
Total Market Risk-
Sensitive
Liabilities $43,464 $ 43,892 $1,348,909 $1,375,050
======= ======== ========== ==========
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, except for available for sale securities, trading
securities and derivative instruments, which require reporting at
fair value. 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, 2001 and 2000
(Dollars in thousands, except per share data)
Notes 2001 2000
----- ---------- ----------
ASSETS
Cash and due from banks 3 $ 45,738 $ 38,387
Federal funds sold and other
short-term investments 47,812 46,300
---------- ----------
Cash and cash equivalents 93,550 84,687
Time deposits in other
financial institutions 564 1,504
Securities: 4
Trading, at fair value 1,528 -
Available for sale-at fair
value (cost of $318,342 for
2001 and $223,892 for 2000) 323,689 225,954
Held to maturity-at cost
(approximate fair value
of $2,154 for 2000) - 2,111
Loans and leases: 5
Held for sale 26,967 18,127
Held to maturity 1,078,238 1,023,969
Allowance for loan and
lease losses 6 (14,660) (13,592)
---------- ----------
Loans and leases, net 1,090,545 1,028,504
Assets under operating leases 35,427 35,285
Premises, furniture and
equipment, net 7 31,482 30,155
Other real estate, net 130 489
Goodwill and core deposit
premium, net 18,995 20,755
Other assets 48,154 36,943
---------- ----------
TOTAL ASSETS $1,644,064 $1,466,387
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits: 8
Demand $ 160,742 $ 136,066
Savings 493,374 406,712
Time 551,043 558,535
---------- ----------
Total deposits 1,205,159 1,101,313
Short-term borrowings 9 160,703 139,909
Other borrowings 10 143,789 102,856
Accrued expenses and other
liabilities 27,323 26,163
---------- ----------
TOTAL LIABILITIES 1,536,974 1,370,241
----------- ----------
STOCKHOLDERS' EQUITY: 14,15,17
Preferred stock
(par value $1 per
share; authorized,
200,000 shares) - -
Common stock
(par value $1 per share;
authorized, 16,000,000 and
12,000,000 shares at December
31, 2001, and December 31,
2000; issued, 9,905,783
shares at December 31,
2001, and at
December 31, 2000) 9,906 9,906
Capital surplus 18,116 18,812
Retained earnings 79,107 71,253
Accumulated other
comprehensive income 3,565 1,301
Treasury stock at cost
(226,031 and 287,573 shares
at December 31, 2001, and
December 31, 2000, respectively) (3,604) (5,126)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 107,090 96,146
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,644,064 $1,466,387
========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
Notes 2001 2000 1999
----- -------- -------- --------
INTEREST INCOME:
Interest and fees on
loans and leases 5 $ 91,931 $89,368 $60,947
Interest on securities:
Taxable 14,143 11,824 11,113
Nontaxable 1,790 1,814 1,216
Interest on federal funds sold 1,981 911
410
Interest on interest bearing
deposits in other financial
institutions 243 333 468
--------- -------- --------
TOTAL INTEREST INCOME 110,088 104,250 74,154
--------- -------- --------
INTEREST EXPENSE:
Interest on deposits 8 45,908 43,195 31,180
Interest on short-term
borrowings 5,963 6,993 4,046
Interest on other borrowings 8,322 9,521 5,623
--------- -------- --------
TOTAL INTEREST EXPENSE 60,193 59,709 40,849
--------- -------- --------
NET INTEREST INCOME 49,895 44,541 33,305
Provision for loan and
lease losses 6 4,283 3,301 2,626
--------- -------- --------
Net interest income after
provision for loan and
lease losses 45,612 41,240 30,679
--------- -------- --------
NONINTEREST INCOME:
Service charges and fees 6,381 5,386 3,906
Trust fees 3,148 3,088 2,662
Brokerage commissions 615 846 655
Insurance commissions 807 862 803
Securities gains, net 1,489 501 713
Loss on trading account
securities (417) - -
Impairment loss on equity
securities (773) (244) -
Rental income on operating
leases 15,446 14,918 14,718
Gains on sale of loans 2,738 521 1,028
Other noninterest income 900 1,130 939
--------- -------- --------
TOTAL NONINTEREST INCOME 30,334 27,008 25,424
--------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee
benefits 13 25,460 23,876 18,945
Occupancy 14 3,076 2,904 2,076
Furniture and equipment 3,193 3,015 2,416
Depreciation on equipment
under operating leases 11,805 11,199 10,844
Outside services 3,470 2,661 2,239
FDIC deposit insurance
assessment 208 228 121
Advertising 1,596 1,492 1,376
Goodwill and core deposit
intangibles amortization 1,672 1,814 682
Other noninterest expenses 8,338 7,257 6,023
--------- -------- --------
TOTAL NONINTEREST EXPENSES 58,818 54,446 44,722
--------- -------- --------
Income before income taxes 17,128 13,802 11,381
Income taxes 12 5,714 4,216 3,156
--------- -------- --------
NET INCOME $ 11,414 $ 9,586 $ 8,225
========= ======== ========
EARNINGS PER COMMON SHARE-BASIC $ 1.19 $ 1.00 $ 0.86
========= ======== ========
EARNINGS PER COMMON SHARE-
DILUTED 1 $ 1.18 $ 0.98 $ 0.84
========= ======== ========
CASH DIVIDENDS DECLARED PER
COMMON SHARE $ 0.37 $ 0.36 $ 0.34
========= ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 1999 $ 9,707 $14,984 $60,154
Net Income - 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, $0.34 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, $0.36 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
Net Income - 2001 11,414
Unrealized gain (loss) on
securities available for sale
Unrealized gain on derivatives
arising during the period,
net of reclassification
adjustment of $46
Reclassification adjustment for
security gains realized in
net income
Income taxes
Comprehensive income
Cash dividends declared:
Common, $0.37 per share (3,560)
Purchase of 79,256 shares
of common stock
Sale of 140,798 shares
of common stock (696)
------- ------- -------
BALANCE AT DECEMBER 31, 2001 $ 9,906 $18,116 $79,107
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- -------- -----
Balance at January 1, 1999 $ 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, $0.34 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, $0.36 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
Net Income - 2001 11,414
Unrealized gain (loss) on
securities available for sale 3,796 3,796
Unrealized gain on derivatives
arising during the period,
net of reclassification
adjustment of $46 350 350
Reclassification adjustment for
security gains realized in
net income (716) (716)
Income taxes (1,166) (1,166)
-------
Comprehensive income 13,678
Cash dividends declared:
Common, $0.37 per share (3,560)
Purchase of 79,256 shares
of common stock (1,026) (1,026)
Sale of 140,798 shares of
common stock 2,548 1,852
------- ------- -------
BALANCE AT DECEMBER 31, 2001 $ 3,565 $(3,604) $107,090
======= ======= ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data)
2001 2000 1999
---- ---- ----
Cash Flows from Operating
Activities:
Net income $ 11,414 $ 9,586 $ 8,225
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 16,616 16,167 14,294
Provision for loan and
lease losses 4,283 3,301 2,626
Provision for income taxes
less than (in excess of)
payments (635) 41 (348)
Net amortization (accretion)
of premium (discount)
on securities 1,285 (39) 1,417
Securities gains, net (1,489) (501) (713)
Increase in trading account
securities (1,528) - -
Loss on impairment of equity
securities 773 244 -
Loans originated for sale (207,332) (42,991) (80,804)
Proceeds on sales of loans 201,565 36,273 75,351
Net gain on sales of loans (2,738) (521) (1,028)
Decrease (increase) in accrued
interest receivable 1,603 (4,091) (826)
Increase (decrease) in accrued
interest payable (1,597) 2,641 353
Other, net (4,923) (4,119) (5,613)
-------- -------- --------
Net cash provided by operating
activities 17,297 15,991 12,934
-------- -------- --------
Cash Flows from Investing
Activities:
Purchase of time deposits - (600) -
Proceeds on maturities of time
deposits 959 5,180 43
Proceeds from the sale of
securities available for sale 65,010 34,442 22,454
Proceeds from the maturity of
and principal paydowns on
securities held to maturity - 6,353 520
Proceeds from the maturity of
and principal paydowns on
securities available for sale 109,436 48,260 95,070
Purchase of securities
available for sale (267,354) (81,918) (92,611)
Net increase in loans and
leases (55,118) (132,761) (201,186)
Purchase of bank-owned
life insurance policies (8,568) - -
Increase in assets under
operating leases (11,663) (11,409) (11,716)
Capital expenditures (4,602) (3,647) (7,802)
Net cash and cash equivalents
received in acquisition
of subsidiaries - 18,603 43,682
Net cash received from minority
interest stockholders - 780 58
Net cash and cash equivalents
paid in acquisition of trust
assets - - (528)
Proceeds on sale of OREO and
other repossessed assets 790 815 1,090
-------- -------- --------
Net cash used by investing
activities (171,110) (115,902) (150,926)
Cash Flows from Financing
Activities:
Net increase in demand
deposits and savings accounts 111,338 26,090 42,217
Net increase (decrease) in
time deposit accounts (7,492) 111,248 18,165
Net increase in
short-term borrowings 20,794 25,795 47,315
Proceeds from other
borrowings 69,381 26,463 36,800
Repayments of other
borrowings (28,448) (32,308) (11,079)
Purchase of treasury stock (1,026) (5,197) (837)
Proceeds from sale of
treasury stock 1,689 19 1,780
Dividends (3,560) (3,465) (3,247)
-------- -------- --------
Net cash provided by
financing activities 162,676 148,645 131,114
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 8,863 48,734 (6,878)
Cash and cash equivalents at
beginning of year 84,687 35,953 42,831
-------- -------- --------
Cash and cash equivalents at
end of period $ 93,550 $ 84,687 $ 35,953
======== ======== ========
Supplemental disclosures:
Cash paid for income/
franchise taxes $ 6,365 $ 3,890 $ 3,596
Cash paid for interest $ 61,790 $ 57,068 $ 40,496
Securities held to maturity
transferred to securities
available for sale $ 2,154 $ - $ -
Acquisitions:
Assets acquired $ - $119,837 $ 40,472
Cash paid for purchase of
stock $ - $(14,364) $ -
Cash acquired - 32,967 43,682
-------- -------- --------
Net cash received for
acquisitions $ - $ 18,603 $ 43,682
Notes issued for acquisition $ - $ 3,820 $ -
Common stock issued for
acquisition $ - $ 5,773 $ -
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; Keokuk Bancshares,
Inc. (dba KBS Investment Corp.); Heartland Capital Trust I
("Trust I"); and Heartland Financial Statutory Trust II ("Trust
II"). All of Heartland's subsidiaries are wholly-owned except for
NMB, of which Heartland was an 86.47% owner on December 31, 2001.
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.
Trading Account Securities - Trading securities represent those
securities Heartland intends to actively trade and are stated at
fair value with changes in fair value reflected in noninterest
income. During the first quarter of 2001, Heartland began
purchasing securities, on a limited basis, with the intent of
actively trading those securities.
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, 2001 and 2000.
The following table summarizes the changes in capitalized
mortgage loan servicing rights:
2001 2000
-------- --------
Balance, beginning of year $ 556 $ 498
Originations 1,626 166
Amortization (1,008) (108)
---------- ----------
Balance, end of year $ 1,174 $ 556
========== ==========
Mortgage loans serviced for others were $268,625 and $183,880 as
of December 31, 2001 and 2000, respectively. Custodial escrow
balances maintained in connection with the loan servicing
portfolio were approximately $1,217 and $1,126 as of December 31,
2001 and 2000, 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,
2001, 2000 and 1999 are shown in the table below:
2001 2000 1999
------- ------- -------
Net income $11,414 $ 9,586 $ 8,225
======= ======= =======
Weighted average common shares
outstanding for basic earnings
per share (1) 9,602 9,628 9,555
Assumed incremental common shares
issued upon exercise of stock
options (1) 103 130 196
------- ------- -------
Weighted average common shares
for diluted earnings per share (1) 9,705 9,758 9,751
======= ======= =======
(1) in thousands
Cash Flows - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, other
short-term investments 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 No. 137, Deferring Statement 133's Effective
Date, which defers the effective date for implementation of FAS
No. 133 by one year, making FAS No. 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 No. 133 on
January 1, 2001, and reclassified, at that date, all investments
previously included in its held to maturity investment portfolio
to the available for sale investment portfolio. There was no
material impact on the consolidated financial statements as a
result of the implementation.
In July 2001, the FASB issued FAS No. 141, Business Combinations,
and FAS No. 142, Goodwill and Other Intangible Assets. FAS No.
141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well
as all purchase method business combinations completed after June
30, 2001. FAS No. 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. FAS No.
142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
FAS No. 142. FAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. Heartland adopted the provisions
of FAS No. 141 immediately, and FAS No. 142 effective January 1,
2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001, continued to be
amortized and tested for impairment in accordance with the
appropriate pre-FAS No. 142 accounting requirements prior to
adoption of FAS No. 142. As of December 31, 2001, Heartland had
unamortized goodwill in the amount of $16,064 and unamortized
identifiable intangible assets in the amount of $2,931.
Amortization expense related to goodwill was $1,064 and $1,063
for the years ended December 31, 2001, and December 31, 2000,
respectively. Amortization expense related to identifiable
intangible assets was $608 and $751 for the years ended December
31, 2001, and December 31, 2000, respectively. All of Heartland's
identifiable intangible assets are core deposit premiums related
to acquisitions. The estimated impact of adopting FAS No. 141 and
142 on January 1, 2002 will be the discontinuance of amortization
on $9,521 of Heartland's unamortized goodwill. The corresponding
amortization expense for the year ended December 31, 2001 was
$538. Goodwill in the amount of $6,543 will continue to be
amortized in accordance with the provisions of FAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift
Institutions. No transitional impairment charges are
anticipated.
In August 2001, the FASB issued FAS Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
supersedes both FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business (as previously defined in
that Opinion). FAS No. 144 retains the fundamental provisions in
FAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant
implementation issues associated with FAS No. 121. For example,
FAS No. 144 provides guidance on how a long-lived asset that is
used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for
sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. FAS No. 144 retains the
basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a
business). Unlike FAS No. 121, an impairment assessment under
FAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under FAS No. 142,
Goodwill and Other Intangible Assets. Heartland is required to
adopt FAS No. 144 no later than the year beginning after December
15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption
of FAS No. 144 for long-lived assets held for use to have a
material impact on Heartland's financial statements because the
impairment assessment under FAS No. 144 is largely unchanged from
FAS No. 121. The provisions of FAS No. 144 for assets held for
sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential
effects that adoption of FAS No. 144 will have on Heartland's
financial statements.
Reclassifications-Certain reclassifications have been made to
prior periods' consolidated financial statements to place them on
a basis comparable with the current period's 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.
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.
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, 2001 and 2000 were $3,272
and $2,627 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, 2001 and 2000, are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- -------- --------- --------
2001
Securities available
for sale:
U.S. government
corporations and
agencies and treasuries $ 76,797 $ 2,543 $ (106) $ 79,234
Mortgage-backed
securities 182,179 1,764 (282) 183,661
Obligations of states
and political
subdivisions 29,493 1,575 (120) 30,948
Corporate debt
securities 521 2 - 523
-------- -------- -------- --------
Total debt
securities 288,990 5,884 (508) 294,366
Equity securities 29,352 262 (291) 29,323
-------- -------- -------- --------
Total $318,342 $ 6,146 $ (799) $323,689
======== ======== ======== ========
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
======== ======== ======== ========
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
======== ======== ======== ========
The amortized cost and estimated fair value of debt securities
available for sale at December 31, 2001, 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 available for sale:
Due in 1 year or less $ 57,701 $ 58,229
Due in 1 to 5 years 190,365 193,799
Due in 5 to 10 years 24,746 25,363
Due after 10 years 16,178 16,975
-------- --------
Total $288,990 $294,366
======== ========
As of December 31, 2001, securities with a fair value of $189,394
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, 2001, 2000 and 1999, are summarized as
follows:
2001 2000 1999
-------- -------- --------
Securities sold:
Proceeds from sales $65,010 $34,442 $22,454
Gross security gains 2,233 1,084 1,007
Gross security losses 744 583 294
During the years ended December 31, 2001 and 2000, Heartland
incurred other than temporary impairment losses of $773 and $244
on equity securities available for sale.
FIVE
LOANS AND LEASES
Loans and leases as of December 31, 2001 and 2000, were as
follows:
2001 2000
-------- --------
Loans:
Commercial and commercial
real estate $ 651,479 $ 550,366
Residential mortgage 168,912 215,638
Agricultural and agricultural
real estate 145,460 133,614
Consumer 127,874 128,685
---------- ----------
Loans, gross 1,093,725 1,028,303
Unearned discount (3,457) (3,397)
Deferred loan fees (633) (400)
---------- ----------
Loans, net 1,089,635 1,024,506
---------- ----------
Direct financing leases:
Gross rents receivable 13,129 16,014
Estimated residual value 4,921 4,750
Unearned income (2,480) (3,174)
---------- ----------
Direct financing leases, net 15,570 17,590
---------- ----------
Allowance for loan and
lease losses (14,660) (13,592)
---------- ----------
Loans and leases, net $1,090,545 $1,028,504
========== ==========
Direct financing leases receivable are generally short-term
equipment leases. Future minimum lease payments as of December
31, 2001, were as follows: $5,577 for 2002, $4,227 for 2003,
$3,723 for 2004, $2,741 for 2005, $959 for 2006 and $823
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 $7,269 and
$5,860 at December 31, 2001 and 2000, respectively. The allowance
for loan and lease losses related to these nonaccrual loans was
$2,036 and $3,087, respectively. All loans were subject to a
related allowance at December 31, 2001, and December 31, 2000, as
Heartland's allowance adequacy methodology identifies a specific
allocation for each credit. The average balances of nonaccrual
loans for the years ended December 31, 2001, 2000 and 1999 were
$6,980, $3,209 and $1,367, respectively. For the years ended
December 31, 2001, 2000 and 1999, interest income which would
have been recorded under the original terms of these loans and
leases amounted to approximately $557, $323, and $63,
respectively, and interest income actually recorded amounted to
approximately $188, $107, and $16, respectively.
Loans and leases on a restructured status amounted to $354 and
$357 at December 31, 2001 and 2000, respectively. The allowance
for loan and lease losses related to these nonaccrual loans was
$150 and $100, respectively. All loans were subject to a related
allowance at December 31, 2001, and December 31, 2000, as
Heartland's allowance adequacy methodology identifies a specific
allocation for each credit. The average balances of restructured
loans for the years ended December 31, 2001, 2000 and 1999 were
$355, $367 and $303, respectively. For the years ended December
31, 2001, 2000 and 1999, interest income which would have been
recorded under the original terms of these loans and leases
amounted to approximately $32, $28, and $24, respectively, and
interest income actually recorded amounted to approximately $9,
$28, and $0, 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, 2001, were as follows:
2001
--------
Balance at beginning of year $ 24,433
Advances 46,935
Repayments (44,456)
--------
Balance at end of year $ 26,912
========
SIX
ALLOWANCE FOR
LOAN AND LEASE LOSSES
Changes in the allowance for loan and lease losses for the years
ended December 31, 2001, 2000 and 1999, were as follows:
2001 2000 1999
------- ------- -------
Balance at beginning of year $13,592 $10,844 $ 7,945
Provision for loan and
lease losses 4,283 3,301 2,626
Recoveries on loans and leases
previously charged off 542 585 243
Loans and leases charged off (3,757) (2,280) (635)
Additions related to acquisitions - 1,142 665
------- ------- -------
Balance at end of year $14,660 $13,592 $10,844
======= ======= =======
SEVEN
PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment as of December 31, 2001 and
2000, were as follows:
2001 2000
------- -------
Land and land improvements $ 5,279 $ 4,623
Buildings and building improvements 26,144 24,322
Furniture and equipment 19,428 18,383
------- -------
Total 50,851 47,328
Less accumulated depreciation (19,369) (17,173)
------- -------
Premises, furniture and equipment, net $31,482 $30,155
======= =======
Depreciation expense on premises, furniture and equipment was
$2,769 for 2001, $2,667 for 2000 and $2,095 for 1999.
EIGHT
DEPOSITS
The aggregate amount of time certificates of deposit in
denominations of one hundred thousand dollars or more as of
December 31, 2001 and 2000, were $111,471 and $134,468,
respectively. At December 31, 2001, the scheduled maturities of
time certificates of deposit were as follows:
2001
---------
2002 $ 365,135
2003 107,567
2004 39,242
2005 15,826
2006 22,958
Thereafter 315
---------
Total $ 551,043
=========
Interest expense on deposits for the years ended December 31,
2001, 2000 and 1999, was as follows:
2001 2000 1999
------- ------- -------
Savings and money
market accounts $11,967 $13,913 $10,789
Time certificates of deposit in
denominations of $100 or more 8,227 6,001 3,222
Other time deposits 25,714 23,281 17,169
------- ------- -------
Interest expense on deposits $45,908 $43,195 $31,180
======= ======= =======
NINE
SHORT-TERM BORROWINGS
Short-term borrowings as of December 31, 2001 and 2000, were as
follows:
2001 2000
-------- --------
Securities sold under
agreements to repurchase $108,592 $ 92,991
Federal funds purchased 10,175 4,150
U.S. Treasury demand note 10,211 3,468
Citizens short-term notes 2,500 -
Notes payable to unaffiliated banks 29,225 39,300
-------- --------
Total $160,703 $139,909
======== ========
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, 2001 and December 31, 2000, $29,225 and $39,300,
respectively, was outstanding on the revolving credit lines. The
additional credit line was established primarily to provide
additional working capital to the nonbanking subsidiaries and to
meet general corporate commitments.
All repurchase agreements as of December 31, 2001 and 2000, were
due within six months.
Average and maximum balances and rates on aggregate short-term
borrowings outstanding during the years ended December 31, 2001,
2000 and 1999, were as follows:
2001 2000 1999
-------- -------- --------
Maximum month-end balance $162,744 $144,604 $118,019
Average month-end balance 151,139 122,777 91,613
Weighted average interest
rate for the year 3.93% 5.79% 4.63%
Weighted average interest
rate at year-end 1.39 5.60 4.35
TEN
OTHER BORROWINGS
Other borrowings at December 31, 2001 and 2000, were
as follows:
2001 2000
------- -------
Advances from the FHLB;
weighted average maturity dates at
December 31, 2001 and 2000, were
May, 2004 and January, 2002,
respectively; and weighted average
interest rates were 5.37% and 6.57%,
respectively $ 86,486 $ 51,109
Notes payable on leased assets with
interest rates varying from 3.95 to
9.50% 22,193 22,556
Trust preferred securities 33,000 25,000
Contracts payable to previous stock-
holders of Lease Associates Group
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 - 594
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 2,954
-------- -------
Total $143,789 $102,856
======== ========
The Banks are members of the Federal Home Loan Bank ("FHLB") of
Des Moines, Chicago, or Dallas. The advances from the FHLB are
collateralized by the Banks' investment in FHLB stock of $25,552
and $6,097 at December 31, 2001 and 2000, respectively.
Additional collateral is provided by the Banks' one-to-four unit
residential mortgages, commercial and agricultural mortgages
totaling $123,756 at December 31, 2001, and $178,706 at December
31, 2000.
On December 18, 2001, Heartland completed an offering of $8,000
of variable rate cumulative capital securities representing
undivided beneficial interests in Trust II. The proceeds from
the offering were used by Trust II to purchase junior
subordinated debentures from Heartland. The proceeds are being
used for general corporate purposes, including the repayment of
$8,000 of indebtedness on the revolving credit lines. Interest is
payable quarterly on March 18, June 18, September 18 and December
18 of each year. The debentures will mature and the capital
securities must be redeemed on December 18, 2031. Heartland has
the option to shorten the maturity date to a date not earlier
than December 18, 2006. Heartland may 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
$241 as of December 31, 2001. These deferred costs are amortized
on a straight-line basis over the life of the debentures.
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. 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 may 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 $1,065 as of December 31, 2001. The deferred
costs are amortized on a straight-line basis over the life of the
debentures.
All of the capital securities qualified as Tier 1 capital for
regulatory purposes as of December 31, 2001 and 2000.
Future payments at December 31, 2001, for all other borrowings
were as follows:
2002 $ 24,757
2003 12,781
2004 25,281
2005 16,887
2006 20,506
Thereafter 43,577
--------
Total $143,789
========
ELEVEN
DERIVATIVE FINANCIAL INSTRUMENTS
Heartland's use of derivative financial instruments relates to
the management of the risk that changes in interest rates will
affect its future interest payments. Heartland utilizes an
interest rate swap contract to effectively convert a portion of
the variable rate interest rate debt to fixed interest rate debt.
Under the interest rate swap contract, Heartland agrees to pay an
amount equal to a fixed rate of interest times a notional
principal amount, and to receive in return an amount equal to a
specified variable rate of interest times the same notional
principal amount. The notional amounts are not exchanged and
payments under the interest rate swap contract are made monthly.
Heartland is exposed to credit-related losses in the event of
nonperformance by the counterparty to the swap contract. This
risk is minimized by entering into the contract with a large,
stable financial institution.
As of December 31, 2001, Heartland had an interest rate swap
contract to pay a fixed interest rate of 4.35% and receive a
variable interest rate of 1.52% based on $25 million of
indebtedness. This contract expires on November 1, 2006. The
fair market value of the interest rate swap contract was an asset
of $350 as of December 31, 2001 and is included in other assets.
There was no ineffectiveness recognized on this interest rate
swap during the year. All components of the derivative
instrument's gain or loss is included in the assessment of hedge
effectiveness. For the period ended December 31, 2001, there
were no cash flow hedges discontinued related to forecasted
transactions that are probable of not occurring.
As of December 31, 2001, $219 of deferred net gains on derivative
instruments included in other comprehensive income are expected
to be reclassified to net income during the next twelve months.
TWELVE
INCOME TAXES
Income taxes for the years ended December 31, 2001, 2000 and
1999, were as follows:
Current Deferred Total
------- -------- -----
2001:
Federal $5,310 $ (540) $4,770
State 1,037 (93) 944
------ ------ ------
Total $6,347 $ (633) $5,714
====== ====== ======
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
====== ====== ======
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 assets and liabilities for the years ended December
31, 2001 and 2000, were as follows:
2001 2000
-------- --------
Deferred tax assets:
Securities $ 240 $ 36
Allowance for loan and lease losses 5,635 5,008
Deferred compensation 789 518
Organization and acquisitions costs 244 182
Net operating loss carryforwards 708 670
Other 140 -
-------- --------
Gross deferred tax assets $ 7,756 $ 6,414
-------- --------
Deferred tax liabilities:
Tax effect of net unrealized gain on
securities available for sale reflected
in stockholders' equity $ (2,001) $ (761)
Tax effect of net unrealized gain on
derivatives reflected in stockholders'
equity (131) -
Premises, furniture and equipment (4,452) (4,432)
Lease financing (2,791) (2,482)
Tax bad debt reserves (580) (609)
Purchase accounting (895) (998)
Prepaid expenses (272) (214)
Mortgage servicing rights (643) (207)
Other (176) (158)
-------- --------
Gross deferred tax liabilities $(11,941) $ (9,861)
-------- --------
Net deferred tax asset(liability) $ (4,185) $ (3,447)
======== ========
The actual income tax expense differs from the expected amounts
(computed by applying the U.S. federal corporate tax rate of 35%
for 2001, 2000 and 1999, to income before income taxes) as
follows:
2001 2000 1999
--------------------------
Computed "expected" amount $5,995 $4,831 $3,983
Increase (decrease) resulting from:
Nontaxable interest income (610) (624) (515)
State income taxes, net of federal
tax benefit 614 520 230
Goodwill and other intangibles not
deductible 270 291 84
Graduated income tax rates (36) (100) (100)
Tax credits (440) (440) (440)
Other (79) (262) (86)
------ ------ ------
Income taxes $5,714 $4,216 $3,156
====== ====== ======
Effective tax rates 33.4% 30.5% 27.7%
====== ====== ======
Heartland has investments in certain low-income housing projects
totaling $4,735 and $4,894 as of December 31, 2001 and 2000,
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.
THIRTEEN
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 $761 for 2001, $692 for 2000
and $530 for 1999. 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 $275 for 2001, $262 for 2000
and $183 for 1999.
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 $761
for 2001, $692 for 2000 and $530 for 1999.
FOURTEEN
COMMITMENTS AND CONTINGENT LIABILITIES
Heartland leases certain land and facilities under operating
leases. Minimum future rental commitments at December 31, 2001,
for all non-cancelable leases were as follows:
2002 $ 408
2003 411
2004 362
2005 289
2006 182
Thereafter 48
------
Total $1,700
======
Rental expense for premises and equipment leased under operating
leases was $744 for 2001, $694 for 2000 and $521 for 1999.
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, 2001 and 2000, commitments to extend credit
aggregated $325,282 and $371,654 and standby letters of credit
aggregated $11,631 and $9,312, respectively. Heartland enters
into commitments to sell mortgage loans to reduce interest rate
risk on certain mortgage loans held for sale and loan
commitments. At December 31, 2001 and 2000, Heartland had
commitments to sell residential real estate loans totaling
$30,849 and $2,194, respectively. Heartland does not anticipate
any material loss as a result of the commitments and contingent
liabilities.
FIFTEEN
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, 2001 and 2000 respectively, there were
201,717 and 245,467 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, 2001, 2000
and 1999, and changes during the years ended follows:
2001 2000 1999
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------ -------- ------ -------- ------ ---------
Outstanding
at beginning
of year 798 $12 760 $11 654 $10
Granted 45 13 40 18 274 18
Exercised - - 0 - (79) 19
Forfeited (1) - (2) 16 (89) 19
--- --- ---
Outstanding at
end of year 842 $12 798 $12 760 $11
=== === ===
Options
exercisable
at end of year 522 $ 9 389 $ 9 217 $ 9
Weighted-average
fair value of
options
granted during
the year $3.00 $4.41 $1.96
As of December 31, 2001 and 2000, options outstanding had
exercise prices ranging from $8 to $18 per share and a weighted-
average remaining contractual life of 4.28 and 5.48 years,
respectively.
The fair value of stock options granted was determined utilizing
the Black Scholes Valuation model. Significant assumptions
include:
2001 2000 1999
------ ------ ------
Risk-free interest rate 5.36% 5.00% 6.28%
Expected option life 10 Years 10 Years 10 Years
Expected volatility 16.03% 13.04% 13.04%
Expected dividends 2.77% 2.00% 1.94%
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:
2001 2000 1999
------- ------- -------
Net income as reported $11,414 $ 9,586 $ 8,225
Pro forma 11,112 9,231 7,890
Earnings per share-basic
as reported $ 1.19 $ 1.00 $ .86
Pro forma 1.16 .96 .83
Earnings per share-diluted
as reported $ 1.18 $ .98 $ .84
Pro forma 1.14 .95 .81
Pro forma net income reflects only options granted in 2001, 2000,
1999, 1998, 1997 and 1996. 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, 1996, is not considered.
In 2001, Heartland adopted a Director Short-Term Incentive Plan.
Under the Director Short-Term Incentive Plan, the aggregate
number of shares that could be obtained by the directors was set
at 150,000. The exercise price of stock options granted was
established by the Committee at the fair market value of the
shares on the date that the options were granted. Each director
was eligible to receive non-qualified options to acquire up to no
more than 7,500 shares. Under the Director Short-Term Incentive
Plan, 127,065 shares were issued, and under the terms of the
Director Short-Term Incentive Plan, all remaining shares were
considered to be forfeited at December 31, 2001.
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, 2001 and
2000, Heartland approved a price of 100% of fair market value at
December 31, 2000 and December 31, 1999, respectively. At
December 31, 2001 and 2000, respectively, 12,355 and 2,539 shares
were purchased under the ESPP at no charge to Heartland's
earnings.
During each of the years ended December 31, 2001, 2000 and 1999,
Heartland acquired shares for use in the Plan and the ESPP.
Shares acquired totaled 79,256, 291,501 and 44,907 for 2001, 2000
and 1999, respectively.
SIXTEEN
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,
2001
-------------------------
Carrying Fair
Amount Value
-------------------------
Financial Assets:
Cash and cash equivalents $ 93,550 $ 93,550
Time deposits in other financial
institutions 564 564
Trading securities 1,528 1,528
Securities available for sale 323,689 323,689
Loans and leases, net of
unearned 1,105,205 1,126,512
Financial Liabilities:
Demand deposits $ 160,742 $ 160,742
Savings deposits 493,374 493,374
Time deposits 551,043 564,043
Short-term borrowings 160,703 160,703
Other borrowings 143,789 156,930
December 31,
2000
-------------------------
Carrying Fair
Amount Value
-------------------------
Financial Assets:
Cash and cash equivalents $ 84,687 $ 84,687
Time deposits in other financial
institutions 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 139,909 139,909
Other borrowings 102,856 95,615
Cash and Cash Equivalents and Time Deposits in Other Financial
Institutions - The carrying amount is a reasonable estimate of
fair value.
Securities - For securities either held to maturity, available
for sale or trading, 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
Heartland 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.
SEVENTEEN
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, 2001 and 2000,
that the Banks met all capital adequacy requirements to which
they were subject.
As of December 31, 2001, 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, 2001
Total Capital
(to Risk-Weighted Assets)
Consolidated $135,770 10.89% $100,099 8.0% N/A -
DB&T 54,802 10.35 42,363 8.0 $ 52,954 10.0%
GSB 13,996 11.91 9,402 8.0 11,753 10.0
FCB 9,230 11.47 6,440 8.0 8,050 10.0
RCB 9,651 10.80 7,150 8.0 8,938 10.0
WCB 20,001 11.52 13,892 8.0 17,366 10.0
NMB 24,997 10.48 19,073 8.0 23,841 10.0
Tier 1 Capital
(to Risk-Weighted Assets)
Consolidated $121,112 9.71% $ 50,049 4.0% N/A -
DB&T 49,334 9.32 21,182 4.0 $ 31,773 6.0%
GSB 12,700 10.81 4,701 4.0 7,052 6.0
FCB 8,223 10.21 3,220 4.0 4,830 6.0
RCB 8,787 9.83 3,575 4.0 5,363 6.0
WCB 17,829 10.27 6,946 4.0 10,419 6.0
NMB 22,177 9.30 9,536 4.0 14,305 6.0
Tier 1 Capital
(to Average Assets)
Consolidated $121,112 7.53% $ 64,336 4.0% N/A -
DB&T 49,334 7.45 26,502 4.0 $ 33,128 5.0%
GSB 12,700 7.21 7,044 4.0 8,805 5.0
FCB 8,223 7.04 4,674 4.0 5,843 5.0
RCB 8,787 6.92 5,082 4.0 6,352 5.0
WCB 17,829 8.14 8,756 4.0 10.945 5.0
NMB 22,177 7.83 11,323 4.0 14,153 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, 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
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 $34,356 as of December 31, 2001,
under the most restrictive minimum capital requirements.
EIGHTEEN
PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Heartland Financial USA, Inc.
is as follows:
Balance Sheets
December 31, 2001 2000
-------- --------
Assets:
Cash and interest bearing deposits $ 323 $ 642
Trading securities 1,528 -
Securities available for sale 3,666 -
Investment in subsidiaries 148,966 145,842
Other assets 4,375 2,844
Due from subsidiaries 15,500 16,750
-------- --------
Total $174,358 $166,078
======== ========
Liabilities
and stockholders' equity:
Liabilities:
Short-term borrowings $ 29,225 $ 39,300
Other borrowings 36,138 29,328
Accrued expenses and other liabilities 1,905 1,304
-------- --------
Total liabilities 67,268 69,932
-------- --------
Stockholders' equity:
Common stock 9,906 9,906
Capital surplus 18,116 18,812
Retained earnings 79,107 71,253
Accumulated other comprehensive
income 3,565 1,301
Treasury stock (3,604) (5,126)
-------- --------
Total stockholders' equity 107,090 96,146
-------- --------
Total $174,358 $166,078
======== ========
Income Statements for the
Years Ended December 31, 2001 2000 1999
------- ------ ------
Operating revenues:
Dividends from subsidiaries $15,452 $21,768 $ 8,515
Security losses, (net) (246) - -
Loss on trading account
Securities (192) - -
Impairment loss on equity
Securities (773) - -
Other 1,047 769 201
------- ------- -------
Total operating revenues 15,288 22,537 8,716
------- ------- -------
Operating expenses:
Interest 4,807 4,934 2,087
Outside services 456 198 172
Other operating expenses 1,508 1,441 450
------- ------- -------
Total operating expenses 6,771 6,573 2,709
------- ------- -------
Equity in undistributed earnings 659 (8,322) 1,430
------- ------- -------
Income before income tax benefit 9,176 7,642 7,437
Income tax benefit 2,238 1,944 788
------- ------- -------
Net income $11,414 $ 9,586 $ 8,225
======= ======= =======
Statements of Cash Flows For
the Years Ended December 31, 2001 2000 1999
------ ------ ------
Cash flows from operating
activities:
Net income $11,414 $ 9,586 $ 8,225
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (659) 8,322 (1,430)
(Increase) decrease in due
from subsidiaries 1,250 (9,200) (7,550)
Increase (decrease) in other
liabilities 601 1,183 (130)
Increase in other assets (1,531) (410) (992)
Increase in trading account
securities (657) - -
Noncash dividend from subsidiary (5,149) - -
Other 1,282 88 (5)
------- ------- -------
Net cash provided (used)
by operating activities 6,551 9,569 (1,882)
------- ------- -------
Cash flows from investing
activities:
Capital injections for
subsidiaries (1,248) (4,150) (26,580)
Receipts for sale of
minority interest - 780 58
Payments for purchase of
subsidiaries - (13,509) -
Purchases of available for sale
Securities (1,377) - -
Sales of available for sale
securities 1,917 - -
------- ------- -------
Net cash used by
investing activities (708) (16,879) (26,522)
------- ------- -------
Cash flows from financing
activities:
Net increase (decrease) in
short-term borrowings (10,075) 14,300 5,000
Proceeds from other borrowings 8,248 - 29,580
Payments on other borrowings (1,438) (1,449) (823)
Cash dividends paid (3,560) (3,465) (3,247)
Purchase of treasury stock (1,026) (5,197) (837)
Sale of treasury stock 1,689 19 1,780
------- ------- -------
Net cash provided (used) by
financing activities (6,162) 4,208 31,453
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (319) (3,102) 3,049
Cash and cash equivalents at
beginning of year 642 3,744 695
------- ------- -------
Cash and cash equivalents at
end of year $ 323 $ 642 $ 3,744
======= ======= =======
NINETEEN
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 December 31 September 30
----------- ------------
Net interest income $ 13,636 $ 12,866
Provision for loan and lease losses 1,242 1,197
Net interest income after provision
for loan and lease losses 12,394 11,669
Noninterest income 8,179 7,167
Noninterest expense 15,280 14,752
Provision for income taxes 1,811 1,422
Net income 3,482 2,662
Per share:
Basic earnings per share $ 0.36 $ 0.28
Diluted earnings per share 0.36 0.27
Cash dividends declared on
common stock 0.10 0.09
Book value per common share 11.06 10.82
Market price - high 13.50 13.80
low 12.78 13.15
Weighted average common shares
outstanding 9,581,389 9,584,400
Weighted average diluted common
shares outstanding 9,689,376 9,692,878
Ratios:
Return on average assets 0.85% 0.67%
Return on average equity 13.20 10.38
Net interest margin 3.79 3.67
Efficiency ratio 69.28 74.69
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 June 30 March 31
----------- ------------
Net interest income $ 12,131 $ 11,262
Provision for loan and lease losses 1,123 721
Net interest income after provision
for loan and lease losses 11,008 10,541
Noninterest income 7,562 7,426
Noninterest expense 14,513 14,273
Provision for income taxes 1,243 1,238
Net income 2,814 2,456
Per share:
Basic earnings per share $ 0.29 $ 0.26
Diluted earnings per share 0.29 0.25
Cash dividends declared on
common stock 0.09 0.09
Book value per common share 10.56 10.33
Market price - high 14.00 14.25
low 10.25 12.50
Weighted average common shares
outstanding 9,600,801 9,618,210
Weighted average diluted common
shares outstanding 9,695,351 9,724,761
Ratios:
Return on average assets 0.73% 0.67%
Return on average equity 11.32 10.24
Net interest margin 3.60 3.54
Efficiency ratio 73.95 77.58
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 December 31 September 30
----------- ------------
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
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,
2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations
and their cash flows for each the years in the three-year period
ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Des Moines, Iowa
January 18, 2002
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, 2001,
2000 and 1999, 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; Heartland Capital
Trust I; and Heartland Statutory Trust II 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 2002
annual meeting of stockholders dated April 10, 2002 (the "2002
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, 2001, 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 52 Chairman, President and Chief
Executive Officer of
Heartland; Vice Chairman of
Dubuque Bank and Trust;
Director of Galena State Bank,
First Community Bank,
Riverside Community Bank,
Wisconsin Community Bank, New
Mexico Bank & Trust, Keokuk
Bancshares, and Citizens
Finance; Director and
President of Citizens Finance;
Chairman and Director of
ULTEA.
John K. Schmidt 42 Executive Vice President,
Chief Financial Officer and
Treasurer of Heartland;
Director, President and Chief
Executive Officer of Dubuque
Bank and Trust; Treasurer of
Citizens Finance; Director of
Keokuk Bancshares; Treasurer
of ULTEA
Kenneth J. Erickson 50 Executive Vice President,
Credit Administration, of
Heartland; Executive Vice
President, Lending of Dubuque
Bank and Trust; Senior Vice
President of Citizens Finance;
Director of ULTEA
Edward H. Everts 50 Senior Vice President,
Heartland, Operations and
Retail Banking; Senior Vice
President of Operations and
Retail Banking of Dubuque Bank
and Trust
Douglas J. Horstmann 48 Senior Vice President, Lending
of Heartland; Executive Vice
President, Head of Lending of
Dubuque Bank and Trust
Paul J. Peckosh 56 Senior Vice President, Trust
of Heartland; Executive Vice
President, Trust, of Dubuque
Bank and Trust
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 Galena State Bank since its acquisition by
Heartland in 1992 and of Keokuk Bancshares and First Community
Bank since the merger in 1994. Mr. Fuller joined Dubuque Bank and
Trust in 1971 as a consumer loan officer and was named Dubuque
Bank and Trust's Executive Vice President and Chief Executive
Officer in 1985. He was named Director of Riverside Community
Bank in conjunction with the opening of the de novo operation in
1995, Director of Wisconsin Community Bank in conjunction with
the purchase of Cottage Grove State Bank in 1997 and Director of
New Mexico Bank & Trust 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
Dubuque Bank and Trust since September, 1984 and became Dubuque
Bank and Trust'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 has been a
director of Heartland since February, 2001.
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 Dubuque Bank and Trust 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 Dubuque Bank and Trust as
Senior Vice President, Operations and Retail Banking in 1992.
Prior to his service with Dubuque Bank and Trust, 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 Dubuque Bank
and Trust since 1989. Mr. Horstmann joined Dubuque Bank & Trust
in 1980 and was appointed Vice President, Commercial Loans in
1985. Prior to joining Dubuque Bank and Trust, 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 Dubuque Bank and Trust since
1991. Mr. Peckosh joined Dubuque Bank and Trust 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 2002 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 2002 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 2002 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 19, 2002.
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 19, 2002
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 19, 2002.
/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
- ----------------------------- -----------------------------
James F. Conlan Mark C. Falb
Director Director
/s/ Thomas L. Flynn /s/ Robert Woodward
- ----------------------------- -----------------------------
Thomas L. Flynn Robert Woodward
Director 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 Form of Split-Dollar Life Insurance Plan effective
November 13, 2001, between the Heartland subsidiaries and
their selected officers who have met the three years of
service requirement. These plans are in place at Dubuque
Bank and Trust Company, Galena State Bank and Trust
Company, First Community Bank, FSB, Riverside Community
Bank, Wisconsin Community Bank, New Mexico Bank & Trust
and ULTEA.
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 See Exhibit 10.10 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.)
10.12 Change of Control Agreements including Golden Parachute
Payment Adjustments and Restrictive Covenants between
Heartland Financial USA, Inc. and Executive Officers
dated January 1, 2002.
10.13 Change of Control Agreements between Heartland Financial
USA, Inc. and Executive Officers dated January 1, 2002.
10.14 Third Amendment to Second Amended and Restated Credit
Agreement between Heartland Financial USA, Inc. and The
Northern Trust Company dated as of December 13, 2001.
10.15 See Exhibit 10.14 for substantially the same form of a
Third Amendment to Credit Agreement between Heartland
Financial USA, Inc. and Harris Trust and Savings Bank
dated as of December 13, 2001, except that the lender is
Harris Trust and Savings Bank and the commitment is $20
million
10.16 Indenture between Heartland Financial USA, Inc. and First
Union Trust Company, National Association, dated as of
October 21, 1999 (filed as Exhibit 4.1 to Form S-3 dated
September 16, 1999, and incorporated by reference
herein.)
10.17 Indenture between Heartland Financial USA, Inc. and State
Street Bank and Trust Company of Connecticut, National
Association, dated as of December 18, 2001.
11. Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP