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
For quarterly period ended March 31, 2001
[ ] 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)
(319)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 No
Indicate the number of shares outstanding of each of the
classes of Registrant's common stock as of the latest practicable
date: As of May 9, 2001, the Registrant had outstanding
9,597,776 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
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
Part II
Item 1. Legal Proceedings
Item 2. Changes in 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
Form 10-Q Signature Page
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
3/31/01 12/31/00
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 38,924 $ 38,387
Federal funds sold 44,400 46,300
----------- -----------
Cash and cash equivalents 83,324 84,687
Time deposits in other
financial institutions 1,121 1,504
Securities:
Trading 871 -
Available for sale-at fair value
(cost of $257,118 for 2001 and
$223,892 for 2000) 261,731 225,954
Held to maturity-at cost
(approximate fair value of
$2,154 for 2000) - 2,111
Loans and leases:
Held for sale 18,471 18,127
Held to maturity 1,039,317 1,023,969
Allowance for loan and lease losses (14,100) (13,592)
----------- -----------
Loans and leases, net 1,043,688 1,028,504
Assets under operating leases 34,680 35,285
Premises, furniture and equipment, net 29,895 30,155
Other real estate, net 402 583
Goodwill and core deposit premium, net 20,245 20,661
Other assets 36,093 36,943
----------- -----------
TOTAL ASSETS $1,512,050 $1,466,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 123,688 $ 136,066
Savings 389,682 406,712
Time 591,733 558,535
----------- -----------
Total deposits 1,105,103 1,101,313
Short-term borrowings 198,057 175,084
Other borrowings 82,357 67,681
Accrued expenses and other liabilities 27,189 26,163
----------- -----------
TOTAL LIABILITIES 1,412,706 1,370,241
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per
Share; authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 12,000,000 shares;
issued 9,905,783 shares at March 31,
2001, and December 31, 2000) 9,906 9,906
Capital surplus 18,812 18,812
Retained earnings 72,843 71,253
Accumulated other comprehensive income 2,909 1,301
Treasury stock at cost
(287,573 shares at March 31, 2001,
and December 31, 2000) (5,126) (5,126)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 99,344 96,146
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,512,050 $1,466,387
=========== ===========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
3/31/01 3/31/00
-------- --------
INTEREST INCOME:
Interest and fees on loans and leases $ 23,412 $ 20,184
Interest on securities:
Taxable 3,120 3,114
Nontaxable 471 425
Interest on federal funds sold 689 49
Interest on interest bearing deposits
in other financial institutions 48 101
-------- --------
TOTAL INTEREST INCOME 27,740 23,873
-------- --------
INTEREST EXPENSE:
Interest on deposits 12,476 9,565
Interest on short-term borrowings 2,552 2,138
Interest on other borrowings 1,450 1,461
-------- --------
TOTAL INTEREST EXPENSE 16,478 13,164
-------- --------
NET INTEREST INCOME 11,262 10,709
Provision for loan and lease losses 721 819
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 10,541 9,890
-------- --------
OTHER INCOME:
Service charges and fees 1,461 1,155
Trust fees 766 714
Brokerage commissions 126 245
Insurance commissions 251 192
Securities gains, net 572 243
Loss on trading account securities (225) -
Rental income on operating leases 3,854 3,652
Gain on sale of loans 393 40
Other noninterest income 228 212
-------- --------
TOTAL OTHER INCOME 7,426 6,453
-------- --------
OTHER EXPENSES:
Salaries and employee benefits 6,210 5,916
Occupancy 825 756
Furniture and equipment 806 726
Depreciation on equipment under
operating leases 2,918 2,738
Outside services 753 761
FDIC deposit insurance assessment 51 68
Advertising 379 359
Goodwill and core deposit intangibles
amortization 418 454
Other operating expenses 1,913 1,732
-------- --------
TOTAL OTHER EXPENSES 14,273 13,510
-------- --------
INCOME BEFORE INCOME TAXES 3,694 2,833
Income taxes 1,238 789
-------- --------
NET INCOME $ 2,456 $ 2,044
======== ========
EARNINGS PER COMMON SHARE-BASIC $ 0.26 $ 0.21
EARNINGS PER COMMON SHARE-DILUTED 0.25 0.21
CASH DIVIDENDS DECLARED
PER COMMON SHARE 0.09 0.09
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)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 2000 $ 9,707 $15,339 $65,132
Net Income - - 2,044
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.09 per share - - (868)
Issue of 198,531 shares of
common stock 199 3,396
Purchase of 278,318 shares
of common stock - - -
Sale of 120,478 shares
of common stock - 84 -
------- ------- -------
Balance at March 31, 2000 $ 9,906 $18,819 $66,308
======= ======= =======
Balance at January 1, 2001 $ 9,906 $18,812 $71,253
Net Income - - 2,456
Unrealized gain on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.09 per share - - (866)
------- ------- -------
Balance at March 31, 2001 $ 9,906 $18,812 $72,843
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- -------- -----
Balance at January 1, 2000 $(1,511) $(2,094) $86,573
Net Income - - 2,044
Unrealized loss on securities
available for sale (711) - (711)
Reclassification adjustment for
gains realized in income (243) - (243)
Income taxes 324 - 324
-------
Comprehensive income 1,414
Cash dividends declared:
Common, $.09 per share - - (868)
Issue of 198,531 shares
of common stock - - 3,595
Purchase of 278,318 shares
of common stock - (5,002) (5,002)
Sale of 120,478 shares
of common stock - 2,094 2,178
------- ------- -------
Balance at March 31, 2000 $(2,141) $(5,002) $87,890
======= ======= =======
Balance at January 1, 2001 $ 1,301 $(5,126) $96,146
Net Income - - 2,456
Unrealized gain on securities
available for sale 1,864 - 1,864
Reclassification adjustment for
gains realized in income 572 - 572
Income taxes (828) - (828)
-------
Comprehensive income 4,064
Cash dividends declared:
Common, $.09 per share - - (866)
------- ------- -------
Balance at March 31, 2001 $ 2,909 $(5,126) $99,344
======= ======= =======
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
3/31/01 3/31/00
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,456 $ 2,044
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 4,131 4,034
Provision for loan and lease losses 721 819
Provision for income taxes 951 128
Net amortization/(accretion) of
premium/(discount) on securities (29) (10)
Securities gains, net (572) (243)
Loss on trading account securities 225 -
Loans originated for sale (27,352) (7,168)
Proceeds on sales of loans 22,599 3,369
Net gain on sales of loans (393) (40)
Decrease (increase) in accrued
interest receivable 883 (917)
Increase (decrease) in accrued
interest payable 45 (135)
Other, net 303 1,248
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,968 3,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on maturities of time
deposits in other financial
institutions 383 993
Proceeds from the sale of
securities available for sale 25,574 23,748
Proceeds from the maturity of and
principal paydowns on securities
held to maturity - 975
Proceeds from the maturity of and
principal paydowns on securities
available for sale 6,025 14,626
Purchase of securities available
for sale (62,114) (37,585)
Purchase of trading account securities (1,095) -
Net increase in loans and leases (10,651) (44,541)
Increase in assets under operating
leases (3,523) (3,188)
Capital expenditures (503) (1,150)
Net cash and cash equivalents
received in acquisition of
subsidiaries - 18,603
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (45,904) (27,519)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts (29,408) (11,306)
Net increase in time deposit accounts 33,198 26,625
Proceeds from other borrowings 20,532 4,906
Net increase in short-term borrowings 17,117 15,291
Purchase of treasury stock - (5,002)
Dividends (866) (868)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 40,573 29,646
--------- ---------
Net increase (decrease) in cash and
cash equivalents (1,363) 5,256
Cash and cash equivalents at
beginning of year 84,687 35,953
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 83,324 $ 41,209
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 199 $ 106
========= =========
Cash paid for interest $ 16,523 $ 12,963
========= =========
Securities held to maturity
transferred to securities available
for sale $ 2,111 $ -
========= =========
Other borrowings transferred to
short-term borrowings $ 5,856 $ 2,439
========= =========
Acquisitions:
Assets acquired $ - $119,858
========= =========
Cash paid for purchase of stock $ - $(14,364)
Cash acquired - 32,967
--------- ---------
Net cash received in acquisitions $ - $ 18,603
========= =========
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, 2000,
included in Heartland Financial USA, Inc.'s (the "Company") Form
10-K filed with the Securities and Exchange Commission on March
30, 2001. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the audited
consolidated financial statements has been omitted.
The financial information of the Company included herein is
prepared pursuant to the rules and regulations for reporting on
Form 10-Q. Such information reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. The results of the interim period ended March
31, 2001, are not necessarily indicative of the results expected
for the year ending December 31, 2001.
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 month periods ended March 31, 2001 and
2000, are shown in the tables below:
Three Months Ended
3/31/01 3/31/00
------- -------
Net Income (000's) $ 2,456 $ 2,044
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,618 9,634
Assumed incremental common shares issued
upon exercise of stock options (000's) 107 155
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,725 9,789
======= =======
Trading Account Securities - Trading securities represent those
securities Heartland intends to actively trade and are stated at
fair value with changes in market value reflected in other
income. During the first quarter of 2001, Heartland began
purchasing securities, on a limited basis, with the intent of
actively trading those securities.
Effect of New Financial Accounting Standards - In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. In July 1999, the
FASB issued FAS No. 137, Deferring Statement 133's Effective
Date, which defers the effective date for implementation of FAS
NO. 133 by one year, making FAS No. 133 effective no later than
January 1, 2001, for Heartland's financial statements. In June
2000, the FASB issued FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an
amendment of FAS No. 133. Heartland implemented FAS No. 133 on
January 1, 2001, and reclassified, at that date, all investments
previously included in its held to maturity investment portfolio
to the available for sale investment portfolio. There was no
material impact on the consolidated financial statements as a
result of the implementation.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Heartland intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies and
expectations of Heartland are generally identifiable by use of
the words "believe", "expect", "intend", "anticipate",
"estimate", "project" or similar expressions. Heartland's
ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Factors which could have
a material adverse affect on the operations and future prospects
of Heartland and the subsidiaries include, but are not limited
to, changes in: interest rates, general economic conditions,
legislative/regulatory laws, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, accounting principles, policies and
guidelines, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Heartland's market area,
Heartland's ability to develop and maintain secure and reliable
electronic systems and implement new technologies. These risks
and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on
such statements. Further information concerning Heartland and
its business, including additional factors that could materially
affect Heartland's financial results, is included in Heartland's
filings with the Securities and Exchange Commission.
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 includes service
charges, fees and gains on loans, rental income on operating
leases and trust income. Heartland's principal operating
expenses, aside from interest expense, consist of compensation
and employee benefits, occupancy and equipment costs,
depreciation on equipment under operating leases and provision
for loan and lease losses.
Earnings for the year were off to a good start as first quarter
net income increased $412 thousand or 20%. Net income totaled
$2.456 million, or $.26 on a basic per common share basis, for
the first quarter of 2001 compared to $2.044 million, or $.21 on
a basic per common share basis, during the same quarter in 2000.
Return on common equity was 10.24% and return on assets was .67%
for the first quarter of 2001. For the same period in 2000,
return on equity was 9.41% and return on assets was .63%. The
expansion of Heartland's franchise and the diversification of its
earnings stream continue to provide the payoffs anticipated as
reflected in the double-digit growth in earnings. Despite some
signs of a weakening economy, Heartland's management team remains
enthused about the future and focused on expanding the customer
base in all the markets it serves.
Contributing to the improved earnings during the first quarter of
2001 was the $973 thousand or 15% increase in other income while
the increase in other expense was held to $763 thousand or 6%.
The other income categories reflecting significant improvement
were service charges and fees, rental income on operating leases
and gains on sale of loans. Also contributing to the improved
earnings was the $553 thousand or 5% growth in net interest
income due primarily to growth in earning assets. Average
earning assets went from $1.150 billion during the first quarter
of 2000 to $1.321 billion during the same quarter in 2001, a
change of $171 million or 15%.
NET INTEREST INCOME
Net interest margin, expressed as a percentage of average earning
assets, was 3.54% during the first quarter of 2001 compared to
3.84% for the same period in 2000. During the first quarter of
2000, national prime increased from 8.50% to 9.00%. Conversely,
during the first quarter of 2001, national prime decreased from
9.50% to 8.00%. In spite of the rapid change in the rate
environment during the first quarter of 2001, the net interest
margin was held to a slight decline when compared to the 3.61%
recorded during the fourth quarter of 2000.
For the three month period ended March 31, 2001, interest income
increased $3.9 million or 16% when compared to the same period in
2000. This increase was primarily attributable to the growth in
earning assets.
For the three month period ended March 31, 2001, interest expense
increased $3.3 million or 25% when compared to the same period in
2000. The growth in interest expense outpaced the growth in
interest income as Heartland was not able to reprice its deposit
products as quickly as market rates declined. Management
continues to focus efforts on improving the mix of its funding
sources to minimize its interest costs.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan losses decreased $98 thousand or 12%
during the first quarter of 2001 when compared to the same period
in 2000. This decrease was primarily reflective of a change in
the amount of growth experienced in the loan portfolio during the
two quarters under comparison. During the first quarter of 2001,
loan growth was slower than the first quarter of the previous
year due to paydowns experienced in the mortgage portfolio and
reduced demand in the commercial portfolio. Management feels
that opportunities for growth within the commercial portfolio
will expand during the remaining months of 2001. The adequacy of
the allowance for loan and lease losses is determined by
management using factors that include the overall composition of
the loan portfolio, general economic conditions, types of loans,
past loss experience, loan delinquencies, and potential
substandard and doubtful credits. For additional details on the
specific factors considered during this quarter refer to the
loans and allowance for loan and lease losses section of this
report.
OTHER INCOME
Total other income increased $973 thousand or 15% during the
quarter ended on March 31, 2001, compared to the same period in
2000. The other income categories reflecting significant
improvement were service charges and fees, rental income on
operating leases and gains on sale of loans.
Service charges and fees increased $306 thousand or 26% during
the quarters under comparison. The $14.1 million or 13% growth
in checking accounts for the twelve-month period ended on March
31, 2001, resulted in the generation of additional service charge
revenue related to activity fees charged to these accounts. Also
contributing to the increase in service charges and fees was the
growth in fees collected for the processing of merchant credit
card activity.
Gains on sale of loans increased by $353 thousand or 882% for the
periods under comparison. The volume of mortgage loans sold into
the secondary market during the first quarter of 2001 was
significantly greater than those sold during the same period in
2000. As rates moved downward, customers frequently elected to
take fifteen- and thirty-year, fixed-rate mortgage loans, which
Heartland usually elects to sell into the secondary market.
Rental income on operating leases increased $202 thousand or 6%
during the first quarter of 2001. This increase resulted from
the normal replacement of vehicles under lease at our vehicle
leasing and fleet management subsidiary, ULTEA. As vehicles
within a fleet are replaced every three or four years, rent
levels rise correspondingly to the increase in the cost of new
vehicles.
During the first quarter of 2001, securities gains were $329
thousand or 135% above the amount recorded during the same period
in 2000. During the first quarter of 2000, gains on the equity
portfolio were partially offset by losses realized when short-
term agency securities were sold and replaced with longer-term
agency securities to enhance the future total return of the
portfolio. These trades were made because Heartland's interest
rate forecast called for declining rates during 2000. During the
first quarter of 2001, Heartland's interest rate forecast changed
to a rising rate bias on the long end of the yield curve, and
therefore, longer-term agency securities were sold at a gain to
shorten the portfolio. The proceeds were invested in well-
seasoned mortgage-backed securities that were projected to
outperform the agency securities in a rising rate environment.
A loss of $225 thousand on trading account securities was
recorded during the first quarter of 2001. To take advantage of
market opportunities, Heartland elected to begin classifying a
portion of its securities portfolio as trading during the first
quarter of 2001.
The only other income category to experience a decrease during
the quarters under comparison was brokerage commissions, which
declined $119 thousand or 49%. Due to volatility in the stock
market, brokerage transactions were significantly below those
normally occurring as customers elected to defer active trading.
OTHER EXPENSE
Total other expense was held to an increase of $763 thousand or
6% during the first quarter of 2001 when compared to the same
quarter in 2000. The categories making up $655 thousand or 86%
of this change were salaries and employee benefits, depreciation
on equipment under operating leases and other operating expenses.
Salaries and employee benefits, the largest component of other
expense, increased $294 thousand or 5% for the quarters under
comparison. In addition to normal merit increases, this increase
was also attributable to expansion efforts at New Mexico Bank &
Trust. The number of full-time equivalent employees employed by
Heartland increased from 535 at March 31, 2000, to 551 at March
31, 2001.
Consistent with the vehicle replacement activity occurring at
ULTEA, the depreciation on equipment under operating leases grew
$180 thousand or 7% for the first quarter of 2001.
Other operating expenses increased $181 thousand or 10% for the
quarters under comparison. Over half of this increase was the
result of additional processing fees related to the increased
activity in the merchant credit card processing area.
INCOME TAX EXPENSE
Income tax expense for the first quarter of 2001 increased $449
thousand or 57% when compared to the same period in 2000. This
increase was primarily the result of a corresponding increase in
pre-tax earnings. Heartland's effective tax rate increased to
33.51% during the first quarter of 2001 compared to 27.85% for
the first quarter of 2000, in part, as a result of a decrease in
the amount of tax-exempt income recorded during 2001. Tax-exempt
income was 15% of pre-tax income during the first quarter of 2001
compared to 19% for the same quarter in 2000.
FINANCIAL CONDITION
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Total loans and leases increased slightly during the first three
months of 2001. Loan growth was slower than the first quarter of
2000 due to paydowns experienced in the mortgage loan portfolio
and reduced demand in the commercial loan portfolio. Management
feels that opportunities for growth within the commercial
portfolio will expand during the remaining months of 2001.
Commercial and commercial real estate loans increased by $28.3
million or 5% during the first three months of 2001. All the
bank subsidiaries, except for First Community Bank in Keokuk,
Iowa, experienced growth in this loan category as a result of
continued calling efforts. The Dubuque, Iowa and Albuquerque,
New Mexico markets were responsible for $17.6 million or 62% of
this growth.
During the first quarter of 2001, the residential mortgage loan
portfolio experienced a decline of $11.9 million or 5%. As long-
term rates decreased, customers decided to refinance their
mortgage loans into fifteen- and thirty-year fixed rate loans,
which Heartland usually sells into the secondary market.
Servicing is retained on a majority of these loans so that the
Heartland bank subsidiaries have an opportunity to continue
providing their customers the excellent service they expect.
The table below presents the composition of the loan portfolio as
of March 31, 2001, and December 31, 2000.
LOAN PORTFOLIO
(Dollars in thousands)
March 31, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $ 578,633 54.50% $ 550,366 52.62%
Residential mortgage 203,703 19.19 215,638 20.62
Agricultural and
agricultural real estate 135,034 12.72 133,614 12.78
Consumer 127,109 11.97 128,685 12.30
Lease financing, net 17,249 1.62 17,590 1.68
---------- ------- ---------- -------
Gross loans and leases $1,061,728 100.00% $1,045,893 100.00%
======= =======
Unearned discount (3,365)
(3,397)
Deferred loan fees (575)
(400)
---------- ----------
Total loans and leases 1,057,788 1,042,096
Allowance for loan and
lease losses (14,100) (13,592)
---------- ----------
Loans and leases, net $1,043,688 $1,028,504
========== ==========
The adequacy of the allowance for loan and lease losses is
determined by management using factors that include the overall
composition of the loan portfolio, general economic conditions,
types of loans, past loss experience, loan delinquencies, and
potential substandard and doubtful credits. The adequacy of the
allowance for loan and lease losses is monitored on an ongoing
basis by the loan review staff, senior management and the board
of directors. Factors considered by the loan review committee
included the following:
- Heartland has continued to experience 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.
- The amount of nonperforming loans has trended upward
during the past year.
- The nation appears to be entering a period of economic
slowdown.
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 March 31, 2001. While management uses available
information to provide for loan and lease losses, the ultimate
collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on
changes in economic conditions. Along with other financial
institutions, management shares a concern for the possible
continued softening of the economy in 2001. Should the economic
climate continue to deteriorate, borrowers may experience
difficulty, and the level of non-performing loans, charge-offs,
and delinquencies could rise and require further increases in the
provision.
The allowance for loan and lease losses increased by $508
thousand or 4% during the first three months of 2001. At March
31, 2001, the allowance for loan and lease losses was 1.33% of
loans and 249% of nonperforming loans, compared to 1.30% of loans
and 202% of nonperforming loans, at year-end 2000. Nonperforming
loans decreased to .54% of total loans and leases at March 31,
2001, compared to .65% of total loans and leases at December 31,
2000. This decrease was primarily the result of a pay down on
one large credit.
During the first quarter of 2001, Heartland recorded net charge
offs of $213 thousand compared to $310 thousand for the same
period in 2000. The acquisition of First National Bank of Clovis
in New Mexico was responsible for $299 thousand or 96% of the net
charge-offs during the first quarter of 2000. Heartland's loan
review area, along with management at New Mexico Bank & Trust,
have spent considerable time aggressively managing the exposure
within the loan portfolio in this newest market for Heartland.
Comprising 79% of the net charge-offs during the first quarter of
2001 were losses at Citizens Finance, Heartland's consumer
finance subsidiary. Increased losses at Citizens Finance relate
directly to the rapid growth it experienced over the past two
years with expansion into the Appleton, Wisconsin and Rockford,
Illinois markets. Due to the newness of a large portion of the
portfolio, the identification of problem loans in the portfolio
had not occurred until the portfolio began to mature. Losses as a
percentage of gross loans at Citizens was 2.89% for the first
quarter of 2001 compared to 2.87% for the year ended on December
31, 2000. Loans with payments past due for more than thirty days
decreased from 4.67% of gross loans at December 31, 2000, to
3.94% at March 31, 2001. These ratios compare favorably to the
consumer finance industry.
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 17% of total assets at March 31,
2001, as compared to 16% at December 31, 2000.
During 2000, management elected to replace paydowns received on
mortgage-backed securities with U.S. government agency securities
to lengthen the portfolio. U.S. government agency securities
offer a better total return in a declining interest rate
environment, which was Heartland's forecast at the time. The
state tax-exempt nature of selected U.S. government agency
securities also made them attractive purchases for Heartland's
Illinois bank subsidiaries. As Heartland's interest rate
forecast changed to one of rising rates, except for the short end
of the yield curve, management elected to shift a portion of its
securities portfolio into mortgage-backed securities from U.S.
government agencies during the first quarter of 2001. Tightly
structured tranches in well-seasoned mortgage-backed securities
were purchased to enhance the performance of the portfolio given
a rise in interest rates. Because of the well-seasoned nature of
the mortgage-backed securities purchased, management anticipates
that risk of prepayment within Heartland's securities portfolio
has been minimized.
The table below presents the composition of the securities
portfolio by major category as of March 31, 2001, and December
31, 2000.
SECURITIES PORTFOLIO
(Dollars in thousands)
March 31, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 496 .19% $ - -%
U.S. government agencies 107,108 40.79 118,897 52.13
Mortgage-backed securities 108,245 41.22 53,407 23.42
States and political
subdivisions 34,917 13.29 34,044 14.93
Other securities 11,836 4.51 21,717 9.52
-------- ------- -------- -------
Total securities $262,602 100.00% $228,065 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits remained flat during the first three months of
2001. The demand and savings deposit categories experienced a
decrease during the quarter while certificate of deposit account
balances increased. The $12.3 million or 9% decline in demand
deposit balances was due primarily to normal seasonal
fluctuations that many banks experience during the first quarter
of the year. A shift from savings to certificate of deposit
accounts continued into the first quarter of 2001 as deposit
customers became more interested in certificate of deposit
products and less interested in savings products. Also, with the
volatility in the stock market, customers elected to keep a
larger portion of their funds invested in certificates of
deposit.
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 three month period ended March 31, 2001, the amount of
short-term borrowings had increased $23.0 million or 13%. Nearly
half this growth was the result of growth in repurchase agreement
balances. Also included in short-term borrowings are the credit
lines Heartland entered into with two unaffiliated banks. Under
the unsecured credit lines, Heartland may borrow up to $50.0
million. At March 31, 2001, $42.0 million was outstanding as
compared to $39.3 million at December 31, 2000.
Other borrowings increased $14.7 million or 22% during the first
three months of 2001. Included in these borrowings are long-term
FHLB advances, which totaled $40.6 million on March 31, 2001,
with a weighted average remaining term of 4.0 years and a
weighted average rate of 5.61%. As rates moved downward during
the first quarter of 2001, Heartland obtained additional long-
term FHLB advances. On December 31, 2000, long-term FHLB
advances totaled $25.1 million.
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 the
composition of assets and capital and the amount of off-balance
sheet commitments. Heartland's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
March 31, December 31,
2000 2000
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 104,268 8.84% $ 102,443 8.74%
Tier 1 capital minimum
requirement 47,155 4.00% 46,878 4.00%
---------- ------ ---------- ------
Excess $ 57,113 4.84% $ 55,565 4.74%
========== ====== ========== ======
Total capital $ 118,368 10.04% $ 116,034 9.90%
Total capital minimum
requirement 94,309 8.00% 93,756 8.00%
---------- ------ ---------- ------
Excess $ 24,059 2.04% $ 22,278 1.90%
========== ====== ========== ======
Total risk-adjusted
assets $1,178,863 $1,171,951
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 104,268 7.16% $ 102,443 7.25%
Tier 1 capital minimum
requirement(3) 58,256 4.00% 56,492 4.00%
---------- ------ ---------- ------
Excess $ 46,012 3.16% $ 45,951 3.25%
========== ====== ========== ======
Average adjusted assets
(less goodwill) $1,456,399 $1,412,301
========== ==========
(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%.
(2)The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(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. The acquisition and merger of Lease
Associates Group into ULTEA in July of 1998 included an agreement
to make three equal remaining cash payments to the previous
principal stockholder of $643 thousand, plus interest at 7.50%,
with the final payment due in 2001.
On January 1, 2000, Heartland completed its acquisition of
National Bancshares, Inc., the one-bank holding company of First
National Bank of Clovis. At the discretion of the stockholders,
a portion of the purchase price was made in notes payable over
three or five years, bearing interest at 7.00%. The remaining
requisite cash payments under these notes payable total $855
thousand in 2002, and $637 thousand in 2003 and 2004, plus
interest.
In October of 1999, Heartland completed an offering of $25
million of 9.60% cumulative capital securities. All of the
securities qualified as Tier 1 capital for regulatory purposes as
of March 31, 2001. Subsequent acquisitions accounted for under
the purchase method of accounting could cause a portion of these
securities to not qualify as Tier 1 capital, as regulations do
not allow the amount of these securities included in Tier 1
capital to exceed 25% of total Tier 1 capital. These securities
are classified as other borrowings on Heartland's financial
statements.
Heartland continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities. As
evidenced by the recent expansion into New Mexico, Heartland is
seeking to operate in high growth areas, even if they are outside
of its traditional Midwest market areas. Future expenditures
relating to these efforts are not estimable at this time.
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 increased $18.4
million during the first three months of 2001 compared to the
same period in 2000. The acquisition of First National Bank of
Clovis provided net cash and cash equivalents of $18.6 million
during the first quarter of 2000. The net increase in loans and
leases was $10.6 million during the first three months of 2000
compared to $44.5 million during the same period in 200, a $33.9
million change. During the first three months of 2001, proceeds
from the sale and maturity of securities decreased $7.8 million
compared to the same period in 2000. Conversely, the purchases
of securities increased $25.6 million for the periods under
comparison. As loan growth was below the levels experienced
during the first quarter of 2000, additional securities purchases
were made to enhance the net interest margin.
Financing activities provided net cash of $40.6 million during the
first three months of 2001 compared to $29.6 million during the
same period in 2000. A net increase in deposit accounts provided
cash of $3.8 million during the first three months of 2001 compared
to $15.3 million during the same period in 2000. Offsetting the
decline in growth in deposits for the periods under comparison,
other borrowings provided cash of $20.5 million in 2001 compared to
$4.9 million in 2000.
Total cash inflows from operating activities increased $839
thousand for the first three months of 2001 compared to the same
period in 2000. Management of investing and financing
activities, and market conditions, determine the level and the
stability of net interest cash flows. Management attempts to
mitigate the impact of changes in market interest rates to the
extent possible, so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
In the event of short-term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks and may also borrow from the Federal Reserve Bank.
Additionally, the subsidiary banks' FHLB memberships give them
the ability to borrow funds for short- and long-term purposes
under a variety of programs.
Heartland's revolving credit agreements, as of March 31, 2001,
provided an additional borrowing capacity of $8.0 million. These
agreements contain specific covenants which, among other things,
limit dividend payments and restrict the sale of assets by
Heartland under certain circumstances. Also contained within the
agreements are certain financial covenants, including the
maintenance by Heartland of a maximum nonperforming assets to
total loans ratio, minimum return on average assets ratio and
maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well
capitalized, as defined from time to time by the federal banking
regulators. At March 31, 2001, Heartland was in compliance with
the covenants contained in these credit agreements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollars in thousands)
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 those exposures have been managed to-date in
2001 changed significantly when compared to 2000.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None
Reports on Form 8-K
None
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.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
Principal Executive Officer
/s/ Lynn B. Fuller
-----------------------
By: Lynn B. Fuller
President
Principal Financial and
Accounting Officer
/s/ John K. Schmidt
-----------------------
By: John K. Schmidt
Executive Vice President
and Chief Financial Officer
Dated: May 14, 2001