UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For quarterly period ended June 30, 2004 | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | |
| THE SECURITIES EXCHANGE ACT OF 1934 | |
| For transition period to | |
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)
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 Noo
Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).Yes x Noo
Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of August 6, 2004, the Registrant had outstanding 16,367,385 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Part I |
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Item 1. | | Financial Statements |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 3. | | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | | Controls and Procedures |
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Part II |
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Item 1. | | Legal Proceedings |
Item 2. | | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
Item 3. | | Defaults Upon Senior Securities |
Item 4. | | Submission of Matters to a Vote of Security Holders |
Item 5. | | Other Information |
Item 6. | | Exhibits and Reports on Form 8-K |
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| | Form 10-Q Signature Page |
PART I
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) |
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| | 6/30/04 (Unaudited) | | 12/31/03 |
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ASSETS | | | | | | | | |
Cash and due from banks | | $ | 87,486 | | | $ | 68,424 | |
Federal funds sold and other short-term investments | | | 7,458 | | | | 3,445 | |
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Cash and cash equivalents | | | 94,944 | | | | 71,869 | |
Time deposits in other financial institutions | | | 1,154 | | | | 1,132 | |
Securities: | | | | | | | | |
Trading, at fair value | | | 104 | | | | 1,073 | |
Available for sale, at fair value (cost of $462,052 at June 30, 2004, and $441,606 at December 31, 2003) | | | 460,818 | | | | 450,680 | |
Loans held for sale | | | 42,198 | | | | 25,678 | |
Gross loans and leases: | | | | | | | | |
Loans and leases | | | 1,689,109 | | | | 1,322,549 | |
Allowance for loan and lease losses | | | (23,901 | ) | | | (18,490 | ) |
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Loans and leases, net | | | 1,665,208 | | | | 1,304,059 | |
Assets under operating leases | | | 33,285 | | | | 31,636 | |
Premises, furniture and equipment, net | | | 73,249 | | | | 49,842 | |
Other real estate, net | | | 433 | | | | 599 | |
Goodwill, net | | | 31,967 | | | | 20,167 | |
Core deposit premium and mortgage servicing rights, net | | | 9,690 | | | | 5,069 | |
Other assets | | | 63,786 | | | | 56,562 | |
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TOTAL ASSETS | | $ | 2,476,836 | | | $ | 2,018,366 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES: | | | | | | | | |
Deposits: | | | | | | | | |
Demand | | $ | 301,875 | | | $ | 246,282 | |
Savings | | | 685,014 | | | | 569,286 | |
Time | | | 842,989 | | | | 676,920 | |
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Total deposits | | | 1,829,878 | | | | 1,492,488 | |
Short-term borrowings | | | 225,284 | | | | 176,835 | |
Other borrowings | | | 219,056 | | | | 173,958 | |
Accrued expenses and other liabilities | | | 38,410 | | | | 34,162 | |
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TOTAL LIABILITIES | | | 2,312,628 | | | | 1,877,443 | |
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STOCKHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock (par value $1 per share; authorized, 184,000 shares; none issued or outstanding) | | | - | | | | - | |
Series A Junior Participating preferred stock (par value $1 per share; authorized, 16,000 shares; none issued or outstanding) | | | - | | | | - | |
Common stock (par value $1 per share; authorized, 20,000,000 shares at June 30, 2004, and 16,000,000 at December 31, 2003; issued 16,547,482 shares at June 30, 2004, and 15,261,714 shares at December 31, 2003) | | | 16,547 | | | | 15,262 | |
Capital surplus | | | 40,792 | | | | 20,065 | |
Retained earnings | | | 109,802 | | | | 102,584 | |
Accumulated other comprehensive income (loss) | | | (1,279 | ) | | | 4,794 | |
Treasury stock at cost (94,598 shares at June 30, 2004, and 98,211 shares at December 31, 2003, respectively) | | | (1,654 | ) | | | (1,782 | ) |
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TOTAL STOCKHOLDERS’ EQUITY | | | 164,208 | | | | 140,923 | |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,476,836 | | | $ | 2,018,366 | |
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See accompanying notes to consolidated financial statements |
HEARTLAND FINANCIAL USA, INC. |
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
(Dollars in thousands, except per share data) |
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| | Three Months Ended | | Six Months Ended |
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| | June 30, 2004 | | June 30, 2003 | | June 30, 2004 | | June 30, 2003 |
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INTEREST INCOME: | | | | | | | | | | | | | | | | |
Interest and fees on loans and leases | | $ | 23,897 | | | $ | 21,606 | | | $ | 45,657 | | | $ | 42,742 | |
Interest on securities: | | | | | | | | | | | | | | | | |
Taxable | | | 2,698 | | | | 2,064 | | | | 6,306 | | | | 5,231 | |
Nontaxable | | | 1,064 | | | | 986 | | | | 2,090 | | | | 1,911 | |
Interest on federal funds sold and other short-term investments | | | 9 | | | | 116 | | | | 14 | | | | 130 | |
Interest on interest bearing deposits in other financial institutions | | | 46 | | | | 48 | | | | 90 | | | | 97 | |
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TOTAL INTEREST INCOME | | | 27,714 | | | | 24,820 | | | | 54,157 | | | | 50,111 | |
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INTEREST EXPENSE: | | | | | | | | | | | | | | | | |
Interest on deposits | | | 6,987 | | | | 7,072 | | | | 13,556 | | | | 14,105 | |
Interest on short-term borrowings | | | 699 | | | | 545 | | | | 1,296 | | | | 1,178 | |
Interest on other borrowings | | | 2,741 | | | | 1,996 | | | | 5,175 | | | | 3,862 | |
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TOTAL INTEREST EXPENSE | | | 10,427 | | | | 9,613 | | | | 20,027 | | | | 19,145 | |
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NET INTEREST INCOME | | | 17,287 | | | | 15,207 | | | | 34,130 | | | | 30,966 | |
Provision for loan and lease losses | | | 991 | | | | 922 | | | | 2,347 | | | | 2,226 | |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES | | | 16,296 | | | | 14,285 | | | | 31,783 | | | | 28,740 | |
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NONINTEREST INCOME: | | | | | | | | | | | | | | | | |
Service charges and fees | | | 2,468 | | | | 1,449 | | | | 4,595 | | | | 2,756 | |
Trust fees | | | 1,121 | | | | 858 | | | | 2,141 | | | | 1,810 | |
Brokerage commissions | | | 350 | | | | 216 | | | | 628 | | | | 363 | |
Insurance commissions | | | 158 | | | | 166 | | | | 382 | | | | 416 | |
Securities gains, net | | | 327 | | | | 478 | | | | 1,867 | | | | 1,158 | |
Gain (loss) on trading account securities | | | (10 | ) | | | 277 | | | | 75 | | | | 249 | |
Impairment loss on equity securities | | | - | | | | (22 | ) | | | | | | | (170 | ) |
Rental income on operating leases | | | 3,461 | | | | 3,477 | | | | 6,923 | | | | 6,895 | |
Gain on sale of loans | | | 845 | | | | 1,689 | | | | 1,372 | | | | 3,221 | |
Valuation adjustment on mortgage servicing rights | | | 186 | | | | (694 | ) | | | 113 | | | | (992 | ) |
Other noninterest income | | | 682 | | | | 517 | | | | 1,213 | | | | 1,180 | |
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TOTAL NONINTEREST INCOME | | | 9,588 | | | | 8,411 | | | | 19,309 | | | | 16,886 | |
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NONINTEREST EXPENSES: | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 9,270 | | | | 8,075 | | | | 18,091 | | | | 15,835 | |
Occupancy | | | 1,215 | | | | 939 | | | | 2,278 | | | | 1,856 | |
Furniture and equipment | | | 1,325 | | | | 973 | | | | 2,452 | | | | 1,848 | |
Depreciation on equipment under operating leases | | | 2,869 | | | | 2,825 | | | | 5,730 | | | | 5,612 | |
Outside services | | | 1,471 | | | | 1,162 | | | | 2,972 | | | | 2,272 | |
FDIC deposit insurance assessment | | | 61 | | | | 54 | | | | 112 | | | | 107 | |
Advertising | | | 637 | | | | 613 | | | | 1,176 | | | | 1,086 | |
Core deposit premium amortization | | | 144 | | | | 101 | | | | 232 | | | | 202 | |
Other noninterest expenses | | | 2,220 | | | | 1,833 | | | | 4,185 | | | | 3,814 | |
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TOTAL NONINTEREST EXPENSES | | | 19,212 | | | | 16,575 | | | | 37,228 | | | | 32,632 | |
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INCOME BEFORE INCOME TAXES | | | 6,672 | | | | 6,121 | | | | 13,864 | | | | 12,994 | |
Income taxes | | | 2,097 | | | | 1,914 | | | | 4,223 | | | | 4,263 | |
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NET INCOME | | $ | 4,575 | | | $ | 4,207 | | | $ | 9,641 | | | $ | 8,731 | |
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EARNINGS PER COMMON SHARE-BASIC | | $ | 0.29 | | | $ | 0.28 | | | $ | 0.63 | | | $ | 0.59 | |
EARNINGS PER COMMON SHARE – DILUTED | | $ | 0.29 | | | $ | 0.28 | | | $ | 0.62 | | | $ | 0.58 | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.08 | | | $ | 0.07 | | | $ | 0.16 | | | $ | 0.14 | |
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See accompanying notes to consolidated financial statements |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share data) |
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| | Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
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Balance at January 1, 2003 | | $ | 9,906 | | | $ | 16,725 | | | $ | 94,048 | | | $ | 4,230 | | | $ | (868 | ) | | $ | 124,041 | |
Net income | | | | | | | | | | | 8,731 | | | | | | | | | | | | 8,731 | |
Unrealized gain (loss) on securities available for sale | | | | | | | | | | | | | | | 3,595 | | | | | | | | 3,595 | |
Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $117 | | | | | | | | | | | | | | | (198 | ) | | | | | | | (198 | ) |
Reclassification adjustment for net security gains realized in net income | | | | | | | | | | | | | | | (988 | ) | | | | | | | (988 | ) |
Income taxes | | | | | | | | | | | | | | | (819 | ) | | | | | | | (819 | ) |
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Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 10,321 | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | |
Common, $.14 per share | | | | | | | | | | | (1,976 | ) | | | | | | | | | | | (1,976 | ) |
Purchase of 293,116 shares of common stock | | | | | | | | | | | | | | | | | | | (5,469 | ) | | | (5,469 | ) |
Issuance of 607,102 shares of common stock | | | 268 | | | | 3,807 | | | | | | | | | | | | 5,960 | | | | 10,035 | |
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Balance at June 30, 2003 | | $ | 10,174 | | | $ | 20,532 | | | $ | 100,803 | | | $ | 5,820 | | | $ | (377 | ) | | $ | 136,952 | |
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Balance at January 1, 2004 | | $ | 15,262 | | | $ | 20,065 | | | $ | 102,584 | | | $ | 4,794 | | | $ | (1,782 | ) | | $ | 140,923 | |
Net income | | | | | | | | | | | 9,641 | | | | | | | | | | | | 9,641 | |
Unrealized gain (loss) on securities available for sale | | | | | | | | | | | | | | | (7,724 | ) | | | | | | | (7,724 | ) |
Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $63 | | | | | | | | | | | | | | | 389 | | | | | | | | 389 | |
Reclassification adjustment for net security gains realized in net income | | | | | | | | | | | | | | | (1,867 | ) | | | | | | | (1,867 | ) |
Income taxes | | | | | | | | | | | | | | | 3,129 | | | | | | | | 3,129 | |
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Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 3,568 | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | |
Common, $.16 per share | | | | | | | | | | | (2,423 | ) | | | | | | | | | | | (2,423 | ) |
Purchase of 151,023 shares of common stock | | | | | | | | | | | | | | | | | | | (2,762 | ) | | | (2,762 | ) |
Issuance of 1,440,404 shares of common stock | | | 1,285 | | | | 20,727 | | | | | | | | | | | | 2,890 | | | | 24,902 | |
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Balance at June 30, 2004 | | $ | 16,547 | | | $ | 40,792 | | | $ | 109,802 | | | $ | (1,279 | ) | | $ | (1,654 | ) | | $ | 164,208 | |
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See accompanying notes to consolidated financial statements |
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) |
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| | Six Months Ended |
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| | June 30, 2004 | | June 30, 2003 |
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CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 9,641 | | | $ | 8,731 | |
Adjustments to reconcile net income to net cash (used) provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 8,114 | | | | 7,550 | |
Provision for loan and lease losses | | | 2,347 | | | | 2,226 | |
Provision for income taxes less than payments | | | 1,017 | | | | 1,811 | |
Net amortization of premium on securities | | | 1,685 | | | | 3,480 | |
Net gains on sales of securities | | | (1,867 | ) | | | (1,158 | ) |
Net decrease (increase) in trading account securities | | | 969 | | | | (115 | ) |
Loss on impairment of equity securities | | | - | | | | 170 | |
Loans originated for sale | | | (116,454 | ) | | | (219,507 | ) |
Proceeds on sales of loans | | | 101,306 | | | | 214,392 | |
Net gain on sales of loans | | | (1,372 | ) | | | (3,221 | ) |
Decrease in accrued interest receivable | | | 153 | | | | 50 | |
Decrease in accrued interest payable | | | (68 | ) | | | (38 | ) |
Other, net | | | (1,168 | ) | | | (1,218 | ) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 4,803 | | | | 13,153 | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Proceeds from maturities of time deposits in other financial institutions | | | - | | | | 128 | |
Proceeds from the sale of securities available for sale | | | 100,968 | | | | 37,078 | |
Proceeds from the maturity of and principal paydowns on securities available for sale | | | 51,725 | | | | 96,409 | |
Purchase of securities available for sale | | | (122,838 | ) | | | (113,385 | ) |
Net increase in loans and leases | | | (85,740 | ) | | | (72,643 | ) |
Purchase of bank-owned life insurance policies | | | - | | | | (15,000 | ) |
Increase in assets under operating leases | | | (7,379 | ) | | | (6,417 | ) |
Capital expenditures | | | (13,375 | ) | | | (9,110 | ) |
Net cash and cash equivalents received in acquisition of subsidiaries, net of cash paid | | | 2,958 | | | | - | |
Proceeds on sale of foreclosed assets | | | 239 | | | | 899 | |
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NET CASH USED BY INVESTING ACTIVITIES | | | (73,442 | ) | | | (82,041 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Net increase in demand deposits and savings accounts | | | 23,845 | | | | 16,658 | |
Net increase in time deposit accounts | | | 27,548 | | | | 48,591 | |
Net increase (decrease) in short-term borrowings | | | 30,981 | | | | (24,507 | ) |
Proceeds from other borrowings | | | 35,576 | | | | 25,750 | |
Repayments of other borrowings | | | (21,783 | ) | | | (5,843 | ) |
Purchase of treasury stock | | | (2,762 | ) | | | (5,469 | ) |
Proceeds from sale of common stock | | | 732 | | | | 1,278 | |
Dividends paid | | | (2,423 | ) | | | (1,976 | ) |
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NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 91,714 | | | | 54,482 | |
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Net increase (decrease) in cash and cash equivalents | | | 22,575 | | | | (14,406 | ) |
Cash and cash equivalents at beginning of year | | | 71,869 | | | | 100,992 | |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 94,944 | | | $ | 86,586 | |
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Supplemental disclosures: | | | | | | | | |
Cash paid for income/franchise taxes | | $ | 1,419 | | | $ | 2,623 | |
Cash paid for interest | | $ | 19,339 | | | $ | 20,141 | |
Acquisitions: | | | | | | | | |
Assets acquired | | $ | 373,209 | | | $ | - | |
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Cash paid for purchase of stock | | $ | (9,632 | ) | | $ | - | |
Cash acquired | | | 12,590 | | | | - | |
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Net cash received in acquisition | | $ | 2,958 | | | $ | - | |
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Common stock issued for acquisition | | $ | 24,082 | | | $ | - | |
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See accompanying notes to consolidated financial statements |
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the financial statements for the fiscal year ended December 31, 2003, included in Heartland Financial USA, Inc.’s ("Heartland") Form 10-K filed with the Securities and Exchange Commission on March 15, 2004. Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.
The financial information of Heartland included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and have been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim periods ended June 30, 2004, are not necessarily indicative of the results expected for the year ending December 31, 2004.
Basic earnings per share is determined using net income and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and six-month periods ended June 30, 2004 and 2003, are shown in the tables below:
| | Three Months Ended |
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(Dollars in thousands) | | 6/30/04 | | 6/30/03 |
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Net income | | $ | 4,575 | | | $ | 4,207 | |
Weighted average common shares outstanding for basic earnings per share (000’s) | | | 15,597 | | | | 14,812 | |
Assumed incremental common shares issued upon exercise of stock options (000’s) | | | 239 | | | | 277 | |
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Weighted average common shares for diluted earnings per share (000’s) | | | 15,836 | | | | 15,089 | |
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Earnings per common share – basic | | $ | 0.29 | | | $ | 0.28 | |
Earnings per common share – diluted | | $ | 0.29 | | | $ | 0.28 | |
| | Six Months Ended |
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(Dollars in thousands) | | 6/30/04 | | 6/30/03 |
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Net income | | $ | 9,641 | | | $ | 8,731 | |
Weighted average common shares outstanding for basic earnings per share (000’s) | | | 15,382 | | | | 14,825 | |
Assumed incremental common shares issued upon exercise of stock options (000’s) | | | 243 | | | | 282 | |
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Weighted average common shares for diluted earnings per share (000’s) | | | 15,625 | | | | 15,107 | |
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| | |
|
| |
Earnings per common share – basic | | $ | 0.63 | | | $ | 0.59 | |
Earnings per common share – diluted | | $ | 0.62 | | | $ | 0.58 | |
Heartland applies APB Opinion No. 25 in accounting for its Stock Option 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. 148, Heartland’s net income would have been reduced to the pro forma amounts indicated below:
| | Three Months Ended | | Six Months Ended |
| |
|
(Dollars in thousands, except per share date) | | 6/30/04 | | 6/30/03 | | 6/30/04 | | 6/30/03 |
| |
|
Net income as reported | | $ | 4,575 | | $ | 4,207 | | $ | 9,641 | | $ | 8,731 |
Pro forma | | | 4,568 | | | 4,207 | | | 9,441 | | | 8,515 |
Earnings per share – basic as reported | | $ | 0.29 | | $ | 0.28 | | $ | .63 | | $ | .59 |
Pro forma | | | 0.29 | | | 0.28 | | | .61 | | | .57 |
Earnings per share – diluted as reported | | $ | 0.29 | | $ | 0.28 | | $ | .62 | | $ | .58 |
Pro forma | | | 0.29 | | | 0.28 | | | .60 | | | .56 |
Effect of New Financial Accounting Developments
On March 9, 2004, Securities and Exchange Commission Staff Accounting Bulletin 105 (SAB 105), “Application of Accounting Principles to Loan Commitments”, was issued. SAB 105 summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The adoption of the guidance in SAB 105 for all new loan commitments signed after April 1, 2004, did not have a material effect on Heartland’s financial statements.
NOTE 2: CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
The gross carrying amount of intangible assets and the associated accumulated amortization, in thousands, at June 30, 2004, and December 31, 2003, is presented in the table below:
| | June 30, 2004 | | December 31, 2003 |
| |
|
|
|
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| |
|
|
|
|
|
|
|
Intangible assets: | | | | | | | | | | | | | | | | |
Core deposit premium | | $ | 9,218 | | | $ | 2,692 | | | $ | 4,492 | | | $ | 2,460 | |
Mortgage servicing rights | | | 3,900 | | | | 736 | | | | 3,712 | | | | 675 | |
| |
|
| | |
|
| | |
|
| | |
|
| |
Total | | $ | 13,118 | | | $ | 3,428 | | | $ | 8,204 | | | $ | 3,135 | |
| |
|
| | |
|
| | |
|
| | |
|
| |
Unamortized intangible assets | | | | | | $ | 9,690 | | | | | | | $ | 5,069 | |
| | | | | |
|
| | | | | | |
|
| |
Core deposit premium amortization expense was $232 thousand for the six months ended June 30, 2004, and $404 thousand for the year ended December 31, 2003. Amortization expense on mortgage servicing rights was $599 thousand for the six months ended June 30, 2004, and $2.3 million for the year ended December 31, 2003.
Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 2004. What Heartland actually experiences may be significantly different depending upon changes in mortgage interest rates and market conditions. The valuation allowance on mortgage servicing rights was $18 thousand at June 30, 2004, and $131 thousand at December 31, 2003.
The following table shows the estimated future amortization expense for amortized intangible assets, in thousands:
| | Core Deposit Premium | | Mortgage Servicing Rights | | Total |
| |
| |
| |
|
| | | | | | | | | | | | |
Six months ended December 31, 2004 | | $ | 513 | | | $ | 522 | | | $ | 1,035 | |
| | | | | | | | | | | | |
Year ended December 31, | | | | | | | | | | | | |
2005 | | | 959 | | | | 755 | | | | 1,713 | |
2006 | | | 856 | | | | 629 | | | | 1,485 | |
2007 | | | 787 | | | | 503 | | | | 1,291 | |
2008 | | | 787 | | | | 377 | | | | 1,165 | |
2009 | | | 704 | | | | 252 | | | | 955 | |
NOTE 3: ACQUISITIONS
In March 2004, Heartland announced that it had signed a definitive agreement to acquire the Wealth Management Group of Colonial Trust Company, a publicly held Arizona trust company based in Phoenix. The purchase price will be approximately $2.5 million, all in cash. The transaction is expected to close during the third quarter of 2004, subject to regulatory and stockholder approval. The Wealth Management Group, Colonial Trust Company’s personal trust division, had core assets under management of $193.0 million at December 31, 2003, and revenues of $1.1 million in the twelve-month period ended December 31, 2003.
On June 1, 2004, Heartland consumated its acquisition of 100% of the outstanding common stock of the Rocky Mountain Bancorporation, the one-bank holding company of Rocky Mountain Bank with eight locations in the Montana communities of Bigfork, Billings, Bozeman, Broadus, Plains, Plentywood, Stevensville and Whitehall. Consistent with its strategy, the Heartland board believed that this acquisition provided an opportunity to expand into the Rocky Mountain region and extend its presence into the western portion of the United States, an area that they believe has good growth potential. The board also believed that Rocky Mountain Bank’s dedication to customer relationship building at the community level is a strategic fit with Heartland’s culture. Rocky Mountain Bank had total assets of $353.5 million, total loans of $278.1 million and total deposits of $285.7 million immediately prior to close on May 31, 2004. The purchase price for Rocky Mountain Bancorporation of $34.5 million consisted of $10.4 million cash and 1,387,227 shares of Heartland common stock valued at $18.34 per share. The results of operations of Rocky Mountain Bank are included in the consolidated financial statements from the acquisition date. The resultant acquired deposit base intangible of $4.7 million is being amortized over a period of 10 years. The remaining excess purchase price over the fair value of tangible and identifiable intangible assets acquired of $11.8 million is classified as goodwill on Heartland’s consolidated financial statements.
NOTE 4: OTHER BORROWINGS
On March 17, 2004, Heartland completed an offering of $25.0 million of variable rate cumulative trust preferred securities representing undivided beneficial interests in Heartland Financial Statutory Trust IV. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds will be used for general corporate purposes, including future acquisitions or the retirement of debt. Interest is payable quarterly on March 17, June 17, September 17 and December 17 of each year. The debentures will mature and the trust preferred securities must be redeemed on March 17, 2034. Heartland has the option to shorten the maturity date to a date not earlier than March 17, 2009. 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 und er 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 $15 thousand as of March 31, 2004. These deferred costs are amortized on a straight-line basis over the life of the debentures.
Heartland has an irrevocable obligation to repurchase the common shares of Arizona Bank & Trust owned by minority shareholders on August 18, 2008. The minority shareholders are obligated to sell their shares to Heartland on that same date. The minimum amount payable is the amount originally paid by the minority shareholders plus a compounded annual return of 6%. The maximum amount payable will be based on the greater of the fair value of those shares based upon an appraisal performed by an independent third party or a predetermined range of multiples of the bank’s trailing twelve month earnings. Through June 30, 2004, Heartland accrued interest on the amount due to the minority shareholders at 6%. The obligation to repay the original investment is payable in cash or Heartland stock or a combination of cash and stock at the option of the minority shareholder. The remainder of t he obligation to the minority shareholders is payable in cash or Heartland stock or a combination of cash and stock at the option of Heartland. Additionally, the minority shareholders may put their shares to Heartland at any time through August 18, 2008, at an amount equal to the amount originally paid plus 6% compounded annually. The amount of the obligation as of June 30, 2004, included in other borrowings is $2.1 million.
NOTE 5: JUNIOR SUBORDINATED DEBENTURES
Heartland had five wholly-owned trust subsidiaries that were formed to issue trust preferred securities. At March 31, 2004, as a result of the adoption of Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003) (FIN 46R), “Consolidation of Variable Interest Entities”, we deconsolidated the trust subsidiaries. As a result of the deconsolidation, an additional $2.5 million of junior subordinated debentures previously issued by Heartland to the trust subsidiaries was included in other borrowings on the consolidated balance sheet at March 31, 2004. The acquisition of Rocky Mountain Bancorporation increased the amount of junior subordinated debentures included in other borrowings on the consolidated balance sheet at June 30, 2004, to $2.7 million. The common stock issued by the trust subsidiaries was recorded in securities available for sale in the conso lidated balance sheet effective March 31, 2004. Prior to March 31, 2004, the trust subsidiaries were consolidated subsidiaries and were included in other borrowings in the consolidated balance sheet. The common securities and debentures, along with the related income effects were eliminated in the consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report 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 past and any future terrorist threats and attacks, acts of war or threats thereof, 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.
GENERAL
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 salaries and employee benefits, occupancy and equipment costs, depreciation on equipment under operating leases and provision for loan and lease losses.
Net income for the second quarter of 2004 was $4.6 million, or $0.29 per diluted share, an increase of $368 thousand or 9%, over net income of $4.2 million, or $0.28 per diluted share, during the second quarter of 2003. On an annualized basis, return on average equity was 12.23% and return on average assets was 0.84% for the second quarter of 2004, compared to 13.15% and .92%, respectively, for the same quarter in 2003.
Heartland completed a number of its recent growth initiatives during the second quarter of 2004. Arizona Bank & Trust opened its second location in the Phoenix area. Another significant step to achieve critical mass in that important new market, the pending acquisition of the Wealth Management Group of Colonial Trust Company is anticipated to close during the third quarter of 2004. Effective June 1, 2004, Heartland expanded into the Rocky Mountain region through the acquisition of Rocky Mountain Bancorporation, a one-bank holding company headquartered in Billings, Montana. As a result of this acquisition, Rocky Mountain Bank joined the Heartland family of community banks, providing banking services in eight communities throughout the state of Montana. Additionally, in June 2004 a majority of Heartland’s operations resources moved into a new state-of-the-art operations center i n Dubuque, Iowa. While the startup costs incurred in expansion efforts can initially be a drag on current earnings, we are confident they will provide a firm foundation for future success.
Contributing to the improved earnings during the second quarter of 2004 was the $2.1 million or 14% expansion in net interest income. Also contributing, noninterest income increased $1.2 million or 14%. In addition to growth in service charges and fees, there was a reversal in the valuation allowance on mortgage servicing rights during the second quarter of 2004 compared to an increase in the valuation allowance during the same quarter of 2003. These improvements were partially offset by a reduction in gains on sale of loans. Noninterest expense increased $2.6 million or 16% due primarily to increased costs related to expansion efforts and the implementation of provisions of the Sarbanes-Oxley Act of 2002.
For the six-month period ended on June 30, 2004, net income improved by $910 thousand or 10%, growing to $9.6 million or $.62 per diluted share from the $8.7 million or $.58 per diluted share recorded during 2003. On an annualized basis, return on average equity was 13.22% and return on average assets was 0.92% for the first six months of 2004, compared to 13.84% and .98%, respectively, for the same period in 2003.
The improved earnings during the first six months of 2004 was partially due to the $3.2 million or 10% growth in net interest income. Also contributing was the $2.4 million or 14% improvement in noninterest income driven primarily by securities gains, service charges and fees and the reversal in the valuation allowance on mortgage servicing rights compared to a much larger increase in that valuation allowance during the same period in 2003. Again, these improvements were partially offset by a reduction in gains on sale of loans. Noninterest expense for the six-month period experienced an increase of $4.6 million or 14%, primarily due to costs associated with expansion efforts and the implementation of provisions of the Sarbanes-Oxley Act of 2002.
Total assets exceeded $2.47 billion at June 30, 2004, up $458 million since year-end 2003. Total loans and leases were $1.73 billion at June 30, 2004, an increase of $383.1 million since year-end 2003. Exclusive of the Rocky Mountain Bank acquisition, Dubuque Bank and Trust Company, Wisconsin Community Bank and Arizona Bank & Trust were major contributors to the $99.2 million or 7% growth in loans, primarily in the commercial and commercial real estate category. Wisconsin Community Bank continues to record strong gains in structuring financing under the USDA and SBA loan guaranty programs. Total deposits at June 30, 2004, were $1.83 billion, an increase of $337.4 million since year-end 2003. Exclusive of the Rocky Mountain Bank acquisition, the $42.4 million or 3% growth in deposits came primarily from Wisconsin Community Bank, Arizona Bank & Trust and Riverside Community Bank.
CRITICAL ACCOUNTING POLICIES
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 probable losses in the existing loan portfolio. Thus, the accuracy 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, loan collateral values, past loss experience, loan delinquencies, substandard credits, 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 banks’ boards of directors. Factors cons idered by the allowance committee included the following:
Heartland has continued to experience growth in more- complex commercial loans as compared to relatively lower-risk residential real estate loans.
Heartland has entered new markets in which it had little or no previous lending experience.
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 June 30, 2004.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. Even though there have been various signs of emerging strength in the economy, it is not certain that this strength will be sustainable. Should the economic climate further deteriorate, borrowers may experience difficulty, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require further increases in the provision for loan and lease losses. In addition, various regulatory ag encies, 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.
NET INTEREST INCOME
Net interest income totaled $17.9 million during the second quarter of 2004, an increase of $2.1 million or 14% from the $15.8 million recorded during the second quarter of 2003. Contributing to this increase was the 18% growth in average earning assets, which were $1.95 billion during the second quarter of 2004 compared to $1.65 billion during the second quarter of 2003. Interest income in the second quarter of 2004 totaled $28.3 million compared to $25.4 million in the second quarter of 2003, primarily as a result of growth in the loan portfolio. Interest expense for the second quarter of 2004 was $10.4 million compared to $9.6 million in the second quarter of 2003. A large portion of the growth in interest expense was a result ofthe issuance of $20.0 million of 8.25% cumulative trust preferred securities on October 20, 2003, and $25.0 million o f variable-rate cumulative trust preferred securities on March 17, 2004. Rocky Mountain Bank contributed $1.1 million to net interest income during its one month of operations under the Heartland umbrella. Of this, interest income totaled $1.6 million and interest expense totaled $484 thousand.
For the six-month period ended June 30, 2004, net interest income increased $3.3 million or 10%, going from $32.0 million in 2003 to $35.3 million in 2004. This improvement was due primarily to a $244.9 million or 15% growth in average earning assets, which were $1.86 billion during the first six months of 2004 compared to $1.62 billion during the same period in 2003. Interest income increased $4.2 million or 8%, due primarily to growth in the loan portfolio. Interest expense increased $882 thousand or 5% as a result of the recent issuances of trust preferred securities. This increase in interest expense would have been larger had it not been for the $549 thousand or 4% decline in interest paid on deposits during the six-month comparative period.
Net interest margin, expressed as a percentage of average earning assets, was 3.70% during the second quarter of 2004 compared to 3.82% for the same period in 2003 and 3.93% for the first quarter of 2004. For the first six months of 2004, net interest margin was 3.81%, compared to 3.99% in the same period one year ago. Net interest margin was negatively impacted by the carrying costs associated with the issuance of $20.0 million of 8.25% cumulative trust preferred securities on October 20, 2003, and $25.0 million of variable-rate cumulative trust preferred securities on March 17, 2004. The proceeds from these offerings will be used for general corporate purposes, including future acquisitions or the redemption of trust preferred securities. The reduction in the net interest margin percentage in the second quarter of 2004 compared to the first quarter of 2004 resulted primarily fro m a decrease in the return on the mortgage-backed securities held in the securities portfolio. During the first quarter of 2004, premium amortization on Heartland’s mortgage-backed securities portfolio decreased as prepayment activity slowed.
On June 30, 2004, the Federal Open Market Committee decided to raise its target for the federal funds rate by 25 basis points to 1.25%. Correspondingly, the national prime rate rose to 4.25%. Management has been successful in the utilization of floors on its commercial loan portfolio to minimize the affect downward rates have on Heartland’s interest income. As rates edge upward, Heartland will not see a corresponding increase in its interest income until rates have moved above the floors in place on these loans. On the liability side, management continues to focus efforts on improving the mix of its funding sources to minimize its interest costs. Heartland’s interest rate risk modeling indicates that a 200 basis point parallel shift upward in rates, assuming the balance sheet remains static, would potentially result in a 2% reduction in net interest margin over a 12 month per iod. Growth in Heartland’s balance sheet and improvement in the mix of its funding should help mitigate the pressure on net interest margin in a rising rate environment.
The table below 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 quarters and six-month periods indicated. Dividing income or expense by the average balance of assets or liabilities derives such yield and costs. Average balances are derived from daily balances. Nonaccrual loans and loans held for sale are included in each respective loan category.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES1 For the quarters ended June 30, 2004 and 2003 (Dollars in thousands) |
| | 2004 | | 2003 |
| |
|
|
|
| | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
| |
|
EARNING ASSETS | | | | | | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 355,576 | | | $ | 2,698 | | | 3.05 | % | | $ | 301,868 | | | $ | 2,064 | | | 2.74 | % |
Nontaxable1 | | | 90,279 | | | | 1,612 | | | 7.18 | | | | 79,852 | | | | 1,494 | | | 7.50 | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total securities | | | 445,855 | | | | 4,310 | | | 3.89 | | | | 381,720 | | | | 3,558 | | | 3.74 | |
Interest bearing deposits | | | 5,861 | | | | 46 | | | 3.16 | | | | 8,534 | | | | 48 | | | 2.26 | |
Federal funds sold | | | 3,296 | | | | 9 | | | 1.10 | | | | 37,618 | | | | 116 | | | 1.24 | |
Loans and leases: | | | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate1 | | | 986,723 | | | | 14,070 | | | 5.74 | | | | 784,246 | | | | 12,166 | | | 6.22 | |
Residential mortgage | | | 180,334 | | | | 2,642 | | | 5.89 | | | | 160,822 | | | | 2,557 | | | 6.38 | |
Agricultural and agricultural real estate1 | | | 187,422 | | | | 3,094 | | | 6.64 | | | | 166,327 | | | | 2,774 | | | 6.69 | |
Consumer | | | 143,619 | | | | 2,927 | | | 8.20 | | | | 120,129 | | | | 2,835 | | | 9.47 | |
Direct financing leases, net | | | 13,559 | | | | 208 | | | 6.17 | | | | 10,792 | | | | 197 | | | 7.32 | |
Fees on loans | | | - | | | | 1,020 | | | - | | | | - | | | | 1,113 | | | - | |
Less: allowance for loan and lease losses | | | (20,906 | ) | | | - | | | - | | | | (17,253 | ) | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Net loans and leases | | | 1,490,751 | | | | 23,961 | | | 6.46 | | | | 1,225,063 | | | | 21,642 | | | 7.09 | |
| |
|
| | |
|
| | |
| | |
|
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|
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Total earning assets | | | 1,945,763 | | | | 28,326 | | | 5.86 | | | | 1,652,935 | | | | 25,364 | | | 6.15 | |
NONEARNING ASSETS | | | 254,814 | | | | - | | | - | | | | 188,713 | | | | - | | | - | |
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|
| | |
| | |
|
| | |
|
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| |
TOTAL ASSETS | | $ | 2,200,577 | | | $ | 28,326 | | | 5.18 | % | | $ | 1,841,648 | | | $ | 25,364 | | | 5.52 | % |
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|
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|
| | |
| | |
|
| | |
|
| | |
| |
INTEREST BEARING LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 619,816 | | | $ | 1,266 | | | 0.82 | % | | $ | 517,855 | | | $ | 1,221 | | | 0.95 | |
Time, $100,000 and over | | | 147,569 | | | | 944 | | | 2.57 | | | | 147,624 | | | | 968 | | | 2.63 | |
Other time deposits | | | 590,045 | | | | 4,777 | | | 3.26 | | | | 530,619 | | | | 4,883 | | | 3.69 | |
Short-term borrowings | | | 201,690 | | | | 699 | | | 1.39 | | | | 155,231 | | | | 545 | | | 1.41 | |
Other borrowings | | | 193,563 | | | | 2,741 | | | 5.70 | | | | 131,213 | | | | 1,996 | | | 6.10 | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total interest bearing liabilities | | | 1,752,683 | | | | 10,427 | | | 2.39 | | | | 1,482,542 | | | | 9,613 | | | 2.60 | |
| |
|
| | |
|
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| | |
|
| | |
|
| | |
| |
NONINTEREST BEARING LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | | | 257,502 | | | | - | | | - | | | | 193,756 | | | | - | | | - | |
Accrued interest and other liabilities | | | 39,996 | | | | - | | | - | | | | 37,015 | | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total noninterest bearing liabilities | | | 297,498 | | | | - | | | - | | | | 230,771 | | | | - | | | - | |
STOCKHOLDERS’ EQUITY | | | 150,396 | | | | - | | | - | | | | 128,335 | | | | - | | | - | |
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|
| | |
|
| | |
| | |
|
| | |
|
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| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,200,577 | | | $ | 10,427 | | | 1.91 | % | | $ | 1,841,648 | | | $ | 9,613 | | | 2.09 | % |
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| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Net interest income1 | | | | | | $ | 17,899 | | | | | | | | | | $ | 15,751 | | | | |
| | | | | |
|
| | | | | | | | | |
|
| | | | |
Net interest income to total earning assets1 | | | | | | | | | | 3.70 | % | | | | | | | | | | 3.82 | % |
| | | | | | | | | |
| | | | | | | | | | |
| |
Interest bearing liabilities to earning assets | | | 90.08 | % | | | | | | | | | | 89.69 | % | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
1Tax equivalent basis is calculated using an effective tax rate of 34%. |
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES1 For the six months ended June 30, 2004 and 2003 (Dollars in thousands) |
| | 2004 | | 2003 |
| |
|
|
|
| | Average Balance | | Interest | | Rate | | Average Balance | | Interest | | Rate |
EARNING ASSETS | | | | | | | | | | | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | $ | 354,099 | | | $ | 6,306 | | | 3.58 | % | | $ | 309,092 | | | $ | 5,231 | | | 3.41 | % |
Nontaxable1 | | | 88,493 | | | | 3,166 | | | 7.19 | | | | 77,117 | | | | 2,895 | | | 7.57 | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total securities | | | 442,592 | | | | 9,472 | | | 4.30 | | | | 386,209 | | | | 8,126 | | | 4.24 | |
Interest bearing deposits | | | 5,452 | | | | 14 | | | .52 | | | | 8,510 | | | | 97 | | | 2.30 | |
Federal funds sold | | | 2,668 | | | | 90 | | | 6.78 | | | | 21,298 | | | | 130 | | | 1.23 | |
Loans and leases: | | | | | | | | | | | | | | | | | | | | | | |
Commercial and commercial real estate1 | | | 935,999 | | | | 26,902 | | | 5.78 | | | | 770,651 | | | | 24,129 | | | 6.31 | |
Residential mortgage | | | 167,250 | | | | 4,910 | | | 5.90 | | | | 155,095 | | | | 5,040 | | | 6.55 | |
Agricultural and agricultural real estate1 | | | 177,421 | | | | 5,819 | | | 6.60 | | | | 163,950 | | | | 5,455 | | | 6.71 | |
Consumer | | | 138,922 | | | | 5,768 | | | 8.35 | | | | 118,815 | | | | 5,636 | | | 9.57 | |
Direct financing leases, net | | | 13,485 | | | | 417 | | | 6.22 | | | | 11,340 | | | | 429 | | | 7.63 | |
Fees on loans | | | - | | | | 1,959 | | | - | | | | - | | | | 2,127 | | | - | |
Less: allowance for loan and lease losses | | | (19,881 | ) | | | - | | | - | | | | (16,842 | ) | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Net loans and leases | | | 1,413,196 | | | | 45,775 | | | 6.51 | | | | 1,203,009 | | | | 42,816 | | | 7.18 | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total earning assets | | | 1,863,908 | | | | 55,351 | | | 5.97 | | | | 1,619,026 | | | | 51,169 | | | 6.37 | |
NONEARNING ASSETS | | | 238,589 | | | | - | | | - | | | | 185,796 | | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
TOTAL ASSETS | | $ | 2,102,497 | | | $ | 55,351 | | | 5.29 | % | | $ | 1,804,822 | | | $ | 51,169 | | | 5.72 | % |
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|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
INTEREST BEARING LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits | | | | | | | | | | | | | | | | | | | | | | |
Savings | | $ | 594,220 | | | $ | 2,433 | | | .82 | | | $ | 510,923 | | | $ | 2,485 | | | .98 | |
Time, $100,000 and over | | | 142,183 | | | | 1,791 | | | 2.53 | | | | 140,783 | | | | 1,902 | | | 2.72 | |
Other time deposits | | | 566,361 | | | | 9,332 | | | 3.31 | | | | 519,009 | | | | 9,718 | | | 3.78 | |
Short-term borrowings | | | 185,528 | | | | 1,296 | | | 1.40 | | | | 146,441 | | | | 1,178 | | | 1.62 | |
Other borrowings | | | 188,536 | | | | 5,175 | | | 5.52 | | | | 136,387 | | | | 3,862 | | | 5.71 | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total interest bearing liabilities | | | 1,676,828 | | | | 20,027 | | | 2.40 | | | | 1,453,543 | | | | 19,145 | | | 2.66 | |
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|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
NONINTEREST BEARING LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Noninterest bearing deposits | | | 241,941 | | | | - | | | - | | | | 187,525 | | | | - | | | - | |
Accrued interest and other liabilities | | | 37,081 | | | | - | | | - | | | | 36,566 | | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Total noninterest bearing liabilities | | | 279,022 | | | | - | | | - | | | | 224,091 | | | | - | | | - | |
STOCKHOLDERS’ EQUITY | | | 146,647 | | | | - | | | - | | | | 127,188 | | | | - | | | - | |
| |
|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 2,102,497 | | | $ | 20,027 | | | 1.92 | % | | $ | 1,804,822 | | | $ | 19,145 | | | 2.14 | % |
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|
| | |
|
| | |
| | |
|
| | |
|
| | |
| |
Net interest income1 | | | | | | $ | 35,324 | | | | | | | | | | $ | 32,024 | | | | |
| | | | | |
|
| | | | | | | | | |
|
| | | | |
Net interest income to total earning assets1 | | | | | | | | | | 3.81 | % | | | | | | | | | | 3.99 | % |
| | | | | | | | | |
| | | | | | | | | | |
| |
Interest bearing liabilities to earning assets | | | 89.96 | % | | | | | | | | | | 89.78 | % | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
1Tax equivalent basis is calculated using an effective tax rate of 34%. |
PROVISION FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through a provision charged to expense to provide, in Heartland’s opinion, an adequate allowance for loan and lease losses. The provision for loan losses during the second quarter of 2004 was $991 thousand, an increase of $69 thousand or 7% when compared to the same quarter of 2003. During the first six months of 2004, the provision for loan losses was $2.3 million, an increase of $121 thousand or 5%.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, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. For additional details on the specific factors considered, refer to the critical accounting policies and allowance for loan and lease losses sections of this report.
NONINTEREST INCOME
| | Three Months Ended | | |
| |
|
|
|
| | June 30, 2004 | | June 30, 2003 | | Change | | % Change |
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|
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|
|
|
|
|
NONINTEREST INCOME: | | | | | | | | | | | | | | | | |
Service charges and fees | | $ | 2,468 | | | $ | 1,449 | | | $ | 1,019 | | | | 70.32 | % |
Trust fees | | | 1,121 | | | | 858 | | | | 263 | | | | 30.65 | |
Brokerage commissions | | | 350 | | | | 216 | | | | 134 | | | | 62.04 | |
Insurance commissions | | | 158 | | | | 166 | | | | (8 | ) | | | (4.82 | ) |
Securities gains, net | | | 327 | | | | 478 | | | | (151 | ) | | | (31.59 | ) |
Gain (loss) on trading account securities | | | (10 | ) | | | 277 | | | | (287 | ) | | | (103.61 | ) |
Impairment loss on equity securities | | | - | | | | (22 | ) | | | 22 | | | | 100.00 | |
Rental income on operating leases | | | 3,461 | | | | 3,477 | | | | (16 | ) | | | (0.46 | ) |
Gain on sale of loans | | | 845 | | | | 1,689 | | | | (844 | ) | | | (49.97 | ) |
Valuation adjustment on mortgage servicing rights | | | 186 | | | | (694 | ) | | | 880 | | | | 126.80 | |
Other noninterest income | | | 682 | | | | 517 | | | | 165 | | | | 31.91 | |
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|
| | |
|
| | |
|
| | | | | |
TOTAL NONINTEREST INCOME | | $ | 9,588 | | | $ | 8,411 | | | $ | 1,177 | | | | 13.99 | % |
| |
|
| | |
|
| | |
|
| | | | | |
| | Six Months Ended | | |
| |
|
|
|
| | June 30, 2004 | | June 30, 2003 | | Change | | % Change |
| |
|
|
|
|
|
|
|
NONINTEREST INCOME: | | | | | | | | | | | | | | | | |
Service charges and fees | | $ | 4,595 | | | $ | 2,756 | | | $ | 1,839 | | | | 66.73 | % |
Trust fees | | | 2,141 | | | | 1,810 | | | | 331 | | | | 18.29 | |
Brokerage commissions | | | 628 | | | | 363 | | | | 265 | | | | 73.00 | |
Insurance commissions | | | 382 | | | | 416 | | | | (34 | ) | | | (8.17 | ) |
Securities gains, net | | | 1,867 | | | | 1,158 | | | | 709 | | | | 61.23 | |
Gain (loss) on trading account securities | | | 75 | | | | 249 | | | | (174 | ) | | | (69.88 | ) |
Impairment loss on equity securities | | | - | | | | (170 | ) | | | 170 | | | | 100.00 | |
Rental income on operating leases | | | 6,923 | | | | 6,895 | | | | 28 | | | | 0.41 | |
Gain on sale of loans | | | 1,372 | | | | 3,221 | | | | (1,849 | ) | | | (57.40 | ) |
Valuation adjustment on mortgage servicing rights | | | 113 | | | | (992 | ) | | | 1,105 | | | | 111.39 | |
Other noninterest income | | | 1,213 | | | | 1,180 | | | | 33 | | | | 2.80 | |
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|
| | |
|
| | |
|
| | | | | |
TOTAL NONINTEREST INCOME | | $ | 19,309 | | | $ | 16,886 | | | $ | 2,423 | | | | 14.35 | % |
| |
|
| | |
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| | | | | |
Noninterest income increased $1.2 million or 14% during the second quarter of 2004 when compared to the same quarter in 2003. In addition to growth in service charges and fees, there was a reversal in the valuation allowance on mortgage servicing rights during the second quarter of 2004 compared to an increase in the valuation allowance during the same quarter of 2003. These improvements were partially offset by a reduction in gains on sale of loans.
On a year-to-date comparative basis, noninterest income increased $2.4 million or 14%. The noninterest income categories reflecting significant improvement during the six-month comparative period were service charges and fees, securities gains and valuation adjustments on mortgage servicing rights. These improvements were again offset by a reduction in the gains on sale of loans. Rocky Mountain Bank recorded $198 thousand in noninterest income during its first month of operations under the Heartland umbrella of community banks, which was 17% of the change for the quarter and 8% of the change for the six-month period.
Service charges and fees increased $1.0 million or 70% during the quarters under comparison. On a six-month comparative basis, service charges and fees increased $1.8 million or 67%. Included in this category are service fees collected on the mortgage loans Heartland sold into the secondary market, while retaining servicing. Heartland’s mortgage loan servicing portfolio grew from $464.0 million at June 30, 2003, to $554.0 million at June 30, 2004, generating additional mortgage loan servicing fees of $73 thousand for the quarter and $166 thousand for the six-month period, increases of 28% and 33%, respectively. The most significant impact to service charges and fees was the $343 thousand or 51% reduction for the quarter and $619 thousand or 51% reduction for the six-month period in the amortization on the mortgage servicing rights associated with the mortgage loan servicing portfo lio. During 2004, prepayment activity in the portfolio caused by refinancing activity had slowed. Service charges on deposit products are also included in this category. An overdraft privilege feature on our checking account product line resulted in the generation of additional service charge revenue of approximately $222 thousand for the quarter and $372 thousand for the six-month period, increases of 29% and 26%, respectively. Additionally, included in the service charges and fees category were fees generated by HTLF Capital Corp., our investment banking subsidiary formed in May of 2003, in the amount of $178 thousand during the second quarter of 2004 and $212 thousand during the first six months of 2004.
Gains on sale of loans experienced reductions of $844 thousand or 50% and $1.8 million or 57% during the quarter and six months under comparison, respectively, as refinancing activity on residential mortgage loans was at historically high levels during 2003. During low rate environments, customers frequently elect to take fifteen- and thirty-year, fixed-rate mortgage loans, which Heartland usually elects to sell into the secondary market.
During the first six months of 2004, securities gains were $1.9 million compared to $1.2 million during the first six months of 2003. Nearly $1.0 million of the gains recorded during the first quarter of 2004 were due to the active management of our bond portfolio. As the yield curve steepened during the first quarter of 2004, agency securities nearing maturity were sold at a gain and replaced with a combination of like-term and longer-term agency securities that provided enhanced yields.The partial liquidation of the available for sale equity securities portfolio resulted in $542 thousand of securities gains during the first quarter of 2004. Management has elected to liquidate a majority of this portfolio and redirect those funds to its expansion efforts.
During the second quarter of 2004, a $186 thousand reversal of the valuation allowance on mortgage servicing rights was recorded compared to an increase of $694 thousand during the second quarter of 2003. For the six-month period ended June 30, 2004, the total valuation adjustment on mortgage servicing rights resulted in a reversal totaling $113 thousand. For the same period in 2003, the allowance for valuation adjustment on mortgage servicing rights was increased by $992 thousand. Heartland utilizes the services of an independent third-party to perform a valuation analysis of its servicing portfolio each quarter. At June 30, 2004, the remaining valuation allowance totaled $18 thousand.
NONINTEREST EXPENSE
| | Three Months Ended | | |
| |
|
|
|
| | June 30, 2004 | | June 30, 2003 | | Change | | % Change |
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|
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|
|
|
NONINTEREST EXPENSE: | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 9,270 | | | $ | 8,075 | | | $ | 1,195 | | | | 14.80 | % |
Occupancy | | | 1,215 | | | | 939 | | | | 276 | | | | 29.39 | |
Furniture and equipment | | | 1,325 | | | | 973 | | | | 352 | | | | 36.18 | |
Depreciation on equipment under operating leases | | | 2,869 | | | | 2,825 | | | | 44 | | | | 1.56 | |
Outside services | | | 1,471 | | | | 1,162 | | | | 309 | | | | 26.59 | |
FDIC deposit insurance assessment | | | 61 | | | | 54 | | | | 7 | | | | 12.96 | |
Advertising | | | 637 | | | | 613 | | | | 24 | | | | 3.92 | |
Core deposit premium amortization | | | 144 | | | | 101 | | | | 43 | | | | 42.57 | |
Other noninterest expenses | | | 2,220 | | | | 1,833 | | | | 387 | | | | 21.11 | |
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| | |
|
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| | | | | |
TOTAL NONINTEREST EXPENSE | | $ | 19,212 | | | $ | 16,575 | | | $ | 2,637 | | | | 15.91 | % |
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| | | | | |
| | Six Months Ended | | |
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|
|
| | June 30, 2004 | | June 30, 2003 | | Change | | % Change |
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|
NONINTEREST EXPENSE: | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 18,091 | | | $ | 15,835 | | | $ | 2,256 | | | | 14.25 | % |
Occupancy | | | 2,278 | | | | 1,856 | | | | 422 | | | | 22.74 | |
Furniture and equipment | | | 2,452 | | | | 1,848 | | | | 604 | | | | 32.68 | |
Depreciation on equipment under operating leases | | | 5,730 | | | | 5,612 | | | | 118 | | | | 2.10 | |
Outside services | | | 2,972 | | | | 2,272 | | | | 700 | | | | 30.81 | |
FDIC deposit insurance assessment | | | 112 | | | | 107 | | | | 5 | | | | 4.67 | |
Advertising | | | 1,176 | | | | 1,086 | | | | 90 | | | | 8.29 | |
Core deposit premium amortization | | | 232 | | | | 202 | | | | 30 | | | | 14.85 | |
Other noninterest expenses | | | 4,185 | | | | 3,814 | | | | 371 | | | | 9.73 | |
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|
| | |
|
| | |
|
| | | | | |
TOTAL NONINTEREST EXPENSE | | $ | 37,228 | | | $ | 32,632 | | | $ | 4,596 | | | | 14.08 | % |
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|
| | |
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| | | | | |
For the second quarter of 2004, noninterest expense increased $2.6 million or 16%, reflecting increased costs related to the August 2003 opening of Arizona Bank & Trust and its opening of a second branch in May 2004. Also contributing to the increased costs was the recently completed acquisition of Rocky Mountain Bank, which accounted for $905 thousand or 34% of the increase. For the first six months of 2004, noninterest expense increased $4.6 million or 14%. In addition to the initiatives mentioned above, Wisconsin Community Bank’s March 2003 opening of an additional branch in the Madison, Wisconsin market and the April 2003 formation of HTLF Capital Corp. contributed to this increase. For the six-month period, Rocky Mountain Bank accounted for 20% of the $4.6 million increase.
Salaries and employee benefits, the largest component of noninterest expense, increased $1.2 million or 15% for the quarters under comparison and $2.3 million or 14% for the six months under comparison. This category made up more than 45% of the total increase in noninterest expense. In addition to staffing increases at the holding company to provide support services to the growing number of bank subsidiaries, these increases were also attributable to the opening of Arizona Bank & Trust’s first branch location in Mesa, Arizona and its second branch location in Chandler, Arizona, Wisconsin Community Bank’s new branch location in Fitchburg, Wisconsin and the addition of Rocky Mountain Bank. Salaries and employee benefits expense at Rocky Mountain Bank totaled $441 thousand during its first full month as a subsidiary of Heartland. Total full-time equivalent employees increas ed from 642 at quarter-end 2003 to 828 at quarter-end 2004. Of that increase, 130 are full-time equivalent employees at Rocky Mountain Bank.
Occupancy and furniture and equipment expense, in aggregate, increased $628 thousand or 33% for the quarters under comparison and $1.0 million or 28% for the six-month period under comparison. These increases were primarily the result of the expansion efforts and the completion of Heartland’s state-of-the-art operations center in Dubuque, Iowa.
Fees for outside services increased by $309 thousand or 27% for the quarters under comparison and $700 thousand or 31% for the six-month periods under comparison. Contributing to these increases were the following:
Additional professional fees were incurred in 2004 for services related to the implementation and compliance with the Sarbanes-Oxley Act of 2002.
Early in 2004, Heartland embarked upon the implementation of Citrix technology across all its bank subsidiaries.
Legal and professional fees related to Heartland’s continuing expansion through branch and de novo bank formations, in addition to the exploration of potential acquisitions, continued to increase during 2004.
Rocky Mountain Bank recorded fees for outside services of $149 thousand for the month of June, 2004.
INCOME TAX EXPENSE
Income tax expense for the second quarter of 2004 increased $183 thousand or 10% when compared to the same period in 2003, resulting in an effective tax rate of 31.43% for 2004 compared to 31.27% for 2003. Income tax expense for the first six months of 2004 decreased $40 thousand or 1% when compared to the same period in 2003. Heartland’s effective tax rate for the six-month comparative period was 30.46% for 2004 compared to 32.81% for 2003. In March of 2004, Dubuque Bank and Trust, Heartland’s flagship bank, acquired a 99.9% ownership in a limited liability company that owns a certified historic structure for which historic rehabilitation tax credits of approximately $400 thousand apply to the 2004 tax year. Also affecting the effective tax rate was an increase in the amount of tax-exempt interest income recorded during the first six months of 2004.
FINANCIAL CONDITION
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Total loans and leases, including loans held for sale, increased $383.1 million or 28% since year-end 2003. Rocky Mountain Bank had total loans and leases of $283.9 million as of June 30, 2004. Internal growth, defined as total loans and leases exclusive of Rocky Mountain Bank, was $99.2 million or 7%. All the loan portfolios except agricultural and agricultural real estate and lease financing experienced growth.
Exclusive of $150.3 million at Rocky Mountain Bank, the commercial and commercial real estate loan portfolio grew $79.4 million or 9% internally during the first six months of 2004. Activity at Wisconsin Community Bank and Dubuque Bank and Trust Company was responsible for nearly $53.9 million or 68% of the growth. Wisconsin Community Bank has been successful in structuring financing under the USDA and SBA loan guaranty programs.
Agricultural and agricultural real estate loans decreased $4.6 million or 3% since year-end 2003 when excluding the $68.4 million of agricultural and agricultural real estate loans at Rocky Mountain Bank as of June 30, 2004. While growth occurred at Dubuque Bank and Trust Company and First Community Bank, a decline of $7.2 million was experienced at New Mexico Bank & Trust’s Clovis branch due to payoffs on a few large credits.
The residential mortgage loan portfolio experienced internal growth of $17.4 million or 11% when excluding the $50.3 million residential mortgage loan portfolio at Rocky Mountain Bank at June 30, 2004. A majority of this growth occurred at Arizona Bank & Trust, Wisconsin Community Bank and New Mexico Bank & Trust as they expanded their mortgage lending capabilities. We do not anticipate continued growth in our residential mortgage loan portfolio, as many of the loans made, especially the 15- and 30-year fixed loans, are usually sold into the secondary market. Servicing is retained on a portion of these loans so that the Heartland bank subsidiaries have an opportunity to continue providing their customers the excellent service they expect.
Exclusive of Rocky Mountain Bank’s consumer loan portfolio of $14.8 million at quarter-end, consumer loans increased $7.5 million or 5% during the first six months of 2004, primarily in home equity lines of credit at all of the Heartland bank subsidiaries except First Community Bank. This product line was enhanced to build new customer relationships. Also contributing to this growth was Citizens Finance Co., which experienced an increase of $1.3 million or 6%.
The table below presents the composition of the loan portfolio as of June 30, 2004, and December 31, 2003.
LOAN PORTFOLIO (Dollars in thousands) |
| | June 30, 2004 | | | December 31, 2003 |
| |
|
|
|
|
| | Amount | Percent | | Amount | Percent |
| |
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|
|
|
|
Commercial and commercial real estate | | $ | 1,079,115 | | | 63.77 | % | | $ | 860,552 | | | 64.93 | % |
Residential mortgage | | | 212,534 | | | 12.56 | | | | 148,376 | | | 11.19 | |
Agricultural and agricultural real estate | | | 229,963 | | | 13.59 | | | | 166,182 | | | 12.54 | |
Consumer | | | 157,139 | | | 9.29 | | | | 136,601 | | | 10.31 | |
Lease financing, net | | | 13,335 | | | .79 | | | | 13,621 | | | 1.03 | |
| |
|
| | |
| | |
|
| | |
| |
Gross loans and leases | | | 1,692,086 | | | 100.00 | % | | | 1,325,332 | | | 100.00 | % |
| |
|
| | |
| | |
|
| | |
| |
Unearned discount | | | (1,890 | ) | | | | | | (1,836 | ) | | | |
Deferred loan fees | | | (1,087 | ) | | | | | | (947 | ) | | | |
| |
|
| | | | | |
|
| | | | |
Total loans and leases | | | 1,689,109 | | | | | | | 1,322,549 | | | | |
Allowance for loan and lease losses | | | (23,901 | ) | | | | | | (18,490 | ) | | | |
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| | | | | |
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| | | | |
Loans and leases, net | | $ | 1,665,208 | | | | | | $ | 1,304,059 | | | | |
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|
| | | | | |
|
| | | | |
Loans held for sale increased $16.5 million or 64% since year-end 2003. Of this growth, $11.2 million was commercial and commercial real estate loans at Wisconsin Community Bank that were structured to meet the USDA loan guaranty program requirements. We continue to explore opportunities to expand this area of our business, as demonstrated by the opening of a loan production office, primarily focused on this type of specialty lending, by Wisconsin Community Bank in Minneapolis, Minnesota last fall. The remainder of the growth in loans held for sale was in 15- and 30-year fixed-rate mortgage loans, which are usually sold into the secondary market. Late in 2003, Wisconsin Community Bank entered into a partnership with two Wisconsin realtors to form WCB Mortgage LLC. This partnering of realtors with mortgage lenders has been instrumental to the growth experienced in the loans held fo r sale at Wisconsin Community Bank.
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 probable losses in the existing loan portfolio. For additional details on the specific factors considered, refer to the critical accounting policies section of this report.
The allowance for loan and lease losses increased by $5.4 million or 29% during the first six months of 2004, of which $4.2 million was a result of the Rocky Mountain Bank acquisition. The allowance for loan and lease losses at June 30, 2004, was 1.38% of loans and 316% of nonperforming loans, compared to 1.37% of loans and 333% of nonperforming loans at December 31, 2003. Nonperforming loans increased to $7.6 million or 0.44% of total loans and leases compared to $5.6 million or 0.41% of total loans and leases at December 31, 2003. Exclusive of the $3.3 million in total nonperforming loans at Rocky Mountain Bank, total nonperforming loans decreased $1.3 million, due primarily to the charge off of one credit in the Albuquerque market during the first quarter of 2004.
During the first six months of 2004, Heartland recorded net charge offs of $1.7 million compared to $717 thousand for the same period in 2003. The one nonperforming credit in the Albuquerque market discussed above was responsible for $642 thousand of the net charge-offs in 2004.
The table below presents the changes in the allowance for loan and lease losses during the periods indicated:
ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands) |
| | Six Months Ended June 30, |
| | 2004 | | 2003 |
| |
|
|
|
Balance at beginning of period | | $ | 18,490 | | | $ | 16,091 | |
Provision for loan and lease losses | | | 2,347 | | | | 2,226 | |
Recoveries on loans and leases previously charged off | | | 543 | | | | 323 | |
Loans and leases charged off | | | (1,728 | ) | | | (1,040 | ) |
Additions related to acquisitions | | | 4,249 | | | | - | |
| |
|
| | |
|
| |
Balance at end of period | | $ | 23,901 | | | $ | 17,600 | |
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|
| | |
|
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Net charge offs to average loans and leases | | | 0.08 | % | | | 0.06 | % |
The table below presents the amounts of nonperforming loans and leases and other nonperforming assets on the dates indicated:
NONPERFORMING ASSETS (Dollars in thousands) |
| | As of June 30, | | As of December 31, |
| | 2004 | | 2003 | | 2003 | | 2002 |
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Nonaccrual loans and leases | | $ | 7,168 | | | $ | 4,727 | | | $ | 5,092 | | | $ | 3,944 | |
Loan and leases contractually past due 90 days or more | | | 392 | | | | 649 | | | | 458 | | | | 541 | |
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| | |
|
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Total nonperforming loans and leases | | | 7,560 | | | | 5,376 | | | | 5,550 | | | | 4,485 | |
Other real estate | | | 433 | | | | 488 | | | | 599 | | | | 452 | |
Other repossessed assets | | | 299 | | | | 287 | | | | 285 | | | | 279 | |
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| | |
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| | |
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| | |
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Total nonperforming assets | | $ | 8,292 | | | $ | 6,151 | | | $ | 6,434 | | | $ | 5,216 | |
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Nonperforming loans and leases to total loans and leases | | | 0.45 | % | | | 0.43 | % | | | 0.42 | % | | | 0.39 | % |
Nonperforming assets to total assets | | | 0.33 | % | | | 0.33 | % | | | 0.32 | % | | | 0.29 | % |
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 19% of total assets at June 30, 2004, and 22% of total assets at December 31, 2003.
During the first three months of 2004, management continued to actively manage the securities portfolio to enhance total return on the portfolio. As the yield curve steepened, agency securities nearing maturity were sold at a gain and replaced with a combination of like-term and longer-term agency securities that provided enhanced yields.Additionally, management purchased some longer-term municipal securities to take advantage of the unusually steep slope in the yield curve and the spread of the tax-equivalent yield on municipal securities over the yield on agency securities with the same maturities. A partial liquidation of the available for sale equity securities portfolio was initiated during the first quarter of 2004, as management elected to redirect those funds into its expansion efforts.
The table below presents the composition of the available for sale securities portfolio by major category as of June 30, 2004, and December 31, 2003.
AVAILABLE FOR SALE SECURITIES PORTFOLIO (Dollars in thousands) |
| | June 30, 2004 | | | December 31, 2003 |
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| | Amount | Percent | | Amount | Percent |
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U.S. Treasury securities | | $ | 499 | | | 0.11 | % | | $ | 499 | | | 0.11 | % |
U.S. government agencies | | | 192,225 | | | 41.71 | | | | 182,435 | | | 40.48 | |
Mortgage-backed securities | | | 143,358 | | | 31.11 | | | | 151,233 | | | 33.56 | |
States and political subdivisions | | | 96,012 | | | 20.84 | | | | 93,210 | | | 20.68 | |
Other securities | | | 28,724 | | | 6.23 | | | | 23,303 | | | 5.17 | |
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Total available for sale securities | | $ | 460,818 | | | 100.00 | % | | $ | 450,680 | | | 100.00 | % |
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DEPOSITS AND BORROWED FUNDS
Total deposits at June 30, 2004, were $1.83 billion, an increase of $337.4 million or 23% since year-end 2003. Rocky Mountain Bank had total deposits of $295.0 million at June 30, 2004. Internal growth, defined as total deposits exclusive of Rocky Mountain Bank, was $42.4 million or 3%. The deposit category to experience the least increase since year-end was demand, with an internal growth of $2.3 million or 1%, exclusive of the $53.3 million at Rocky Mountain Bank. Riverside Community Bank experienced the most significant growth in demand deposits during the first six months of 2004. Savings deposit account balances grew by $10.4 million or 2%, exclusive of the $105.3 million at Rocky Mountain Bank, primarily as a result of a new money market account promotion at Arizona Bank & Trust. Exclusive of $136.4 million of time deposits at Rocky Mountain Bank, certificate of deposit accou nt balances increased by $29.7 million or 4% during the first six months of 2004, primarily at Wisconsin Community Bank.
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. Over the six-month period ended June 30, 2004, the amount of short-term borrowings increased $48.4 million or 27%. Rocky Mountain Bank was responsible for $19.2 million or 40% of that growth. 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 v ariation, the account relationships represented by these balances are principally local. Repurchase agreement balances declined $8.9 million or 8% since year-end 2003, exclusive of the $18.7 million held by Rocky Mountain Bank at June 30, 2004.
Also included in short-term borrowings are Heartland’s credit lines with unaffiliated banks. On January 31, 2004, Heartland entered into a credit agreement with three unaffiliated banks to replace the existing revolving credit lines as well as to increase availability under a revolving credit line. Under the new revolving credit line, Heartland may borrow up to $70.0 million. The previous credit line provided up to $50.0 million. The additional $20.0 million credit line was established primarily to provide working capital to the nonbanking subsidiaries and replace similar-sized lines currently in place at those subsidiaries. At June 30, 2004, and December 31, 2003, a total of $25.0 million was outstanding on these credit lines.
Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year. These borrowings were $219.1 million on June 30, 2004, compared to $174.0 million on December 31, 2003. Balances outstanding on trust preferred capital securities issued by Heartland are included in total other borrowings. On March 17, 2004, Heartland completed an additional issuance of $25.0 million in variable rate cumulative capital securities.This variable rate issuance matures on March 17, 2034 and bears interest at the rate of 2.75% per annum over the three-month LIBOR rate, as calculated each quarter. This issuance accounted for $25.0 million of the $45.1 million or 26% change in other borrowings since year-end 2003. As a result of the Rocky Mountain Bancorporation acquisition, Heartland assumed the outstanding obligation on $5.0 million of trust preferred capital securities. A schedule of Heartland’s trust preferred offerings outstanding as of June 30, 2004, was as follows:
Amount Issued | Issuance Date | Interest Rate | Maturity Date | Callable Date |
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$25,000,000 | 10/18/99 | | 09/29/29 | 09/30/04 |
5,000,000 | 08/07/00 | 10.60% | 09/07/30 | 09/07/10 |
8,000,000 | 12/18/01 | Variable | 12/18/31 | 12/18/06 |
5,000,000 | 06/27/02 | Variable | 06/30/32 | 06/30/07 |
20,000,000 | 10/10/03 | 8.25% | 10/10/33 | 10/10/08 |
25,000,000 | 3/17/04 | Variable | 3/17/34 | 3/17/09 |
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$88,000,000 | | | | |
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Also in other borrowings are the bank subsidiaries’ borrowings from the FHLB. All of the Heartland banks, except for Arizona Bank & Trust, own stock in the FHLB of Des Moines, Chicago, Dallas or Seattle, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at June 30, 2004, increased to $137.6 million from $101.5 million at December 31, 2003. Of this increase, $19.3 million was attributable to Rocky Mountain Bank. A majority of these borrowings are fixed-rate advances for original terms between three and five years. To fund a portion of the fixed-rate commercial and residential loan growth experienced, Heartland entered into these FHLB advances.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which all bank holding companies will be evaluated. Under the risk-based method of measurement, the resulting ratio is dependent upon not only the level of capital and assets, but also the composition of assets and capital and the amount of off-balance sheet commitments. Heartland and its bank subsidiaries have been, and will continue to be, managed so they meet the well-capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized under the regulatory framework, bank holding companies and banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 10%, 6% and 4%, respectively. The most recent notification from the FDIC categorized Heartland and each of its bank subsidiaries as well capitalized under the regulatory framework for prom pt corrective action. There are no conditions or events since that notification that management believes have changed each institution’s category.
Heartland's capital ratios were as follows for the dates indicated:
CAPITAL RATIOS (Dollars in thousands) |
| | June 30, 2004 | | | December 31, 2003 |
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| | Amount | Ratio | | Amount | Ratio |
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Risk-Based Capital Ratios(1) | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 181,084 | | | 9.51 | % | | $ | 158,346 | | | 10.29 | % |
Tier 1 capital minimum requirement | | | 76,201 | | | 4.00 | % | | | 61,536 | | | 4.00 | % |
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Excess | | $ | 104,883 | | | 5.51 | % | | $ | 96,810 | | | 6.29 | % |
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Total capital | | $ | 240,698 | | | 12.63 | % | | $ | 191,060 | | | 12.42 | % |
Total capital minimum requirement | | | 152,403 | | | 8.00 | % | | | 123,072 | | | 8.00 | % |
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Excess | | $ | 88,295 | | | 4.63 | % | | $ | 67,988 | | | 4.42 | % |
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Total risk-adjusted assets | | $ | 1,905,034 | | | | | | $ | 1,538,406 | | | | |
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Leverage Capital Ratios(2) | | | | | | | | | | | | | | |
Tier 1 capital | | $ | 181,084 | | | 8.38 | % | | $ | 158,346 | | | 8.07 | % |
Tier 1 capital minimum requirement(3) | | | 86,471 | | | 4.00 | % | | | 78,464 | | | 4.00 | % |
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Excess | | $ | 94,613 | | | 4.38 | % | | $ | 79,882 | | | 4.07 | % |
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Average adjusted assets (less goodwill and other intangible assets) | | $ | 2,161,770 | | | | | | $ | 1,961,588 | | | | |
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(1) | | Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 capital to risk-adjusted assets ratio of 4.00% and total capital to risk-adjusted assets ratio of 8.00%. |
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(2) | | The leverage ratio is defined as the ratio of Tier 1 capital to average adjusted assets. |
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(3) | | 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 additional capital of at least 100 basis points. |
Commitments for capital expenditures are an important factor in evaluating capital adequacy. In March of 2004, Heartland announced that it had signed a definitive agreement to acquire the Wealth Management Group of Colonial Trust Company, a publicly held Arizona trust company based in Phoenix. The purchase price will be approximately $2.5 million, all in cash. The transaction is expected to close during the third quarter of 2004, subject to regulatory and stockholder approval. The Wealth Management Group, Colonial Trust Company’s personal trust division, had core assets under management of $193.0 million at December 31, 2003, and revenues of $1.1 million in the twelve-month period ended December 31, 2003.
In February of 2003, Heartland entered into an agreement with a group of Arizona business leaders to establish a new bank in Mesa. The new bank began operations on August 18, 2003. Heartland’s investment in Arizona Bank & Trust was $12.0 million, which currently reflects an ownership percentage of 86%. A portion of Arizona Bank & Trust’s common stock is still available to interested local investors. In no case will Heartland’s ownership interest be allowed to fall below 80%. All minority stockholders, both initial and subsequent, have or will enter into a stock transfer agreement that imposes certain restrictions on the investor's sale, transfer or other disposition of their shares and obligates Heartland to repurchase the shares from the investor in 2008. See footnote four to the consolidated financial statements for additional information on this obligati on.
Heartland had an incentive compensation agreement with certain employees of one of the bank subsidiaries, none of whom is an executive officer of Heartland, that required a total payment of $3.5 million to be made no later than February 29, 2004, to those who remained employed with the subsidiary on December 31, 2003. On January 15, 2004, one-third of the payment was made in cash and the remaining two-thirds in stock options on Heartland’s common stock exercisable in 2005 and 2006. The obligation was accrued over the performance period from January 1, 2000, through December 31, 2003.
On March 17, 2004, Heartland completed an offering of $25.0 million of variable rate cumulative trust preferred securities representing undivided beneficial interests in Heartland Financial Statutory Trust IV. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds will be used for general corporate purposes, including future acquisitions or the retirement of debt. Interest is payable quarterly on March 17, June 17, September 17 and December 17 of each year. The debentures will mature and the trust preferred securities must be redeemed on March 17, 2034. Heartland has the option to shorten the maturity date to a date not earlier than March 17, 2009. For regulatory purposes, all $25.0 million qualified as Tier 2 capital on June 30, 2004.
Heartland continues to explore opportunities to expand its consortium of independent community banks through mergers and acquisitions as well as de novo and branching opportunities. The acquisition of Rocky Mountain Bank represents Heartland’s expansion into a new region of the United States and allows Heartland to expand its geographic footprint. An important factor in the decision to acquire Rocky Mountain Bank was its dedication to customer relationship building at the community level, which is deeply ingrained in Heartland’s culture and one of the major factors considered when pursuing expansion opportunities. Likewise, the acquisition of the Wealth Management Group of Colonial Trust Company provides the opportunity to grow our trust business within our key Southwestern marketplace. Future expenditures relating to expansion efforts are not estimable at this time.
LIQUIDITY
Liquidity measures the ability of Heartland to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets.
Net cash outflows from investing activities was $73.4 million during the first six months of 2004, compared to $82.0 million during the same six months of 2003. During 2003, there was an additional purchase of bank-owned life insurance in the amount of $15.0 million, which was subsequently reduced to $10.0 million.
Net cash provided by financing activities was $91.7 million during the first six months of 2004 compared to $54.5 million during same six months in 2003. The increase in net cash provided by financing activities during 2004 was partially a result of the March issuance of $25.0 million in trust preferred securities. Also, there was a shift in borrowings from long-term to short-term.
Total cash provided by operating activities was $4.8 million during the first six months of 2004 compared to $13.2 million during the same six months of 2003. The significant change occurred as a result of activity in loans originated for sale.
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.
At June 30, 2004, Heartland’s revolving credit agreement with third-party banks provided a maximum borrowing capacity of $70.0 million, of which $25.0 million had been borrowed. 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 June 30, 2004, Heartland was in compliance with the covenants contained in these credit agreements.
RECENT REGULATORY DEVELOPMENTS
Trust Preferred Securities
On May 6, 2004, the Board of Governors of the Federal Reserve System issued a Notice of Proposed Rulemaking in which it proposed to allow the continued inclusion of trust preferred securities in the tier 1 capital of bank holding companies, subject to stricter standards. The Federal Reserve is proposing to limit the aggregate amount of a bank holding company’s cumulative perpetual preferred stock, trust preferred securities and other minority interests to 25% of the company’s core capital elements, net of goodwill. Current regulations do not require the deduction of goodwill. The proposal also provides that amounts of qualifying trust preferred securities and certain minority interests in excess of the 25% limit may be included in tier 2 capital but would be limited, together with subordinated debt and limited-life preferred stock, to 50% of tier 1 ca pital. The proposal provides a three-year transition period for bank holding companies to meet these quantitative limitations. At this time, it is not possible to predict the impact that this proposal would have on Heartland.
Bank Sales of Securities
On June 17, 2004, the Securities and Exchange Commission (the “SEC”) issued a Proposed Rule in which it described the parameters under which banks may sell securities to their customers without having to register as broker-dealers with the SEC in accordance with Title II of the Gramm-Leach-Bliley Act of 1999. The proposal, which is designated as Regulation B, clarifies, among other things: (i) the limitations on the amount that unregistered bank employees may be compensated for making referrals in connection with a third-party brokerage arrangement; (ii) the manner by which banks may be compensated for effecting securities transactions for its customers in a fiduciary capacity; and (iii) the extent to which banks may engage in certain securities transactions as a custodian. At this time, it is not possible to predict the impact that this proposal would have on Heartland and its subsidiaries.
Illinois Department of Financial and Professional Regulation
On July 1, 2004, the Office of Banks and Real Estate (the “OBRE”), the Department of Financial Institutions, the Department of Insurance and the Department of Professional Regulation were consolidated into a new agency known as the Illinois Department of Financial and Professional Regulation (“IDFPR”). The OBRE is now designated as the Division of Banks and Real Estate within the IDFPR.
Expanded Branching Authority
Until 2001, an Iowa-chartered bank could only establish a branch 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. In 2001, the Iowa Banking Act was amended to allow Iowa-chartered banks to establish up to three 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-chartered banks are permitted to establish any number of branches at any location in Iowa, subject to regulatory approval.
OTHER DEVELOPMENTS
At its regular board meeting held on April 20, 2004, Heartland appointed current Chief Financial Officer and Executive Vice President John K. Schmidt to the additional post of Chief Operating Officer. Mr. Schmidt joined Lynn S. Fuller and Lynn B. Fuller in sharing the vice chairmanship of Dubuque Bank and Trust. Additionally, he replaced Lynn B. Fuller as Vice Chairman at three of Heartland’s subsidiary banks, Galena State Bank, Riverside Community Bank and First Community Bank. Mr. Schmidt also serves as a member of Heartland’s board of directors.
Mr. Schmidt was also the President and Chief Executive Officer of Dubuque Bank and Trust. He left this position after Dubuque Bank and Trust’s annual meeting on May 19, 2004, when Douglas J. Horstmann was elected to its board of directors and became its new President and Chief Executive Officer. Mr. Horstmann joined Dubuque Bank and Trust in 1980 as a commercial loan officer and has focused his career in lending since that time. He also continues on as Heartland’s Senior Vice President, Lending.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees at the banks and, on a consolidated basis, by the Heartland board of directors. Management does not believe that Heartland’s primary market risk exposures and how tho se exposures have been managed to-date in 2004 changed significantly when compared to 2003.
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 losse s 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 June 30, 2004, 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 recorded as a liability in the amount of $799 thousand on June 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of Heartland’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Heartland’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2004. Based on that evaluation, Heartland’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that Heartland’s disclosure controls and procedures were effective. There have been no significant changes in Heartland’s internal controls or in other factors that could significantly affect internal controls.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Heartland or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information about purchases by Heartland and its affiliated purchasers during the quarter ended June 30, 2004, of equity securities that are registered by Heartland pursuant to Section 12 of the Exchange Act:
| (a) | (b) | (c) | (d) |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
04/01/04- 04/30/04 | 0 | $00.00 | N/A | N/A |
05/01/04- 05/31/04 | 232 | $17.19 | N/A | N/A |
06/01/04- 06/30/04 | 105,949 | $17.86 | N/A | N/A |
Total: | 106,181(1) | $17.86 | N/A | N/A |
(1) | | Heartland purchased these shares in open market transactions. |
(2) | | Heartland’s board of directors has not adopted a formal stock repurchase program. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company’s annual meeting of stockholders was held on May 19, 2004. At the meeting, Mark C. Falb, John K. Schmidt and Ronald A. Larson were elected to serve as Class II directors (term expires in 2007). Continuing as Class I directors (term expires in 2006) are Lynn B. Fuller and John W. Cox, Jr. Continuing as Class III directors (term expires in 2005) are James F. Conlan and Thomas L. Flynn. The stockholders approved the amendment of Article IV of the Company’s certificate of incorporation to increase the number of authorized shares of common stock, $1.00 par value per share, from 16,000,000 to 20,000,000. Additionally, the stockholders approved the appointment of KPMG LLP as the Company's independent public accountants for the year ending December 31, 2004.
There were 15,160,767.647 issued and outstanding shares of common stock entitled to vote at the annual meeting. The voting results on the above described items were as follows:
Election of Directors |
| | | For | | Withheld |
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| Mark C. Falb | | 12,659,144.498 | | 81,174.269 |
| John K. Schmidt | | 12,654,360.498 | | 85,958.269 |
| Ronald A. Larson | | 12,660,747.498 | | 79,571.269 |
| | For | | Against | | Abstain | | Broker Non-Votes |
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Amendment to increase authorized number of shares | | 12,441,638.502 | | 149,451.718 | | 149,228.547 | | 2,420,448.880 |
Appointment of KPMG LLP | | 12,672,991.224 | | 900.000 | | 66,427.543 | | 2,420,448.880 |
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Reports on Form 8-K
On April 23, 2004, Heartland filed a report on Form 8-K stating under Item 5 that Heartland issued a press release announcing that its Board of Directors had appointed current chief financial officer and executive vice president John K. Schmidt to the additional post of chief operating officer, effective immediately.
On April 26, 2004, Heartland filed a report on Form 8-K stating under Item 12 that Heartland issued a press release announcing its earnings for the quarter ended March 31, 2004.
On May 28, 2004, Heartland filed a report on Form 8-K stating under Item 9 that Heartland mailed its 1st Quarter 2004 "Investment Profile," its quarterly newsletter to shareholders, on or about May 26, 2004.
On June 2, 2004, Heartland filed a report on Form 8-K stating under Item 5 that Heartland issued a press release announcing the completion of its acquisition of Rocky Mountain Bancorporation, the holding company for Rocky Mountain Bank, a financial institution providing retail and commercial banking services from eight locations throughout Montana.
On July 26, 2004, Heartland filed a report on Form 8-K stating under Item 12 that Heartland issued a press release announcing its earnings for the quarter ended June 30, 2004, as such 8-K was amended on July 28, 2004, and July 29, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
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| HEARTLAND FINANCIAL USA, INC. |
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Date: August 9, 2004 | By: | /s/ Lynn B. Fuller |
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| President and CEO |
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| | /s/ John K. Schmidt |
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| | Executive Vice President and Chief Financial Officer |