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 June 30,2001
[ ] 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 August 13, 2001, the Registrant had outstanding
9,584,461 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)
6/30/01 12/31/00
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 44,991 $ 38,387
Federal funds sold 56,800 46,300
----------- -----------
Cash and cash equivalents 101,791 84,687
Time deposits in other
financial institutions 557 1,504
Securities:
Trading 1,475 -
Available for sale-at market
(cost of $271,375 for 2001 and
$223,892 for 2000) 276,566 225,954
Held to maturity-at cost
(approximate fair value of
$2,154 for 2000) - 2,111
Loans and leases:
Held for sale 44,751 18,127
Held to maturity 1,038,218 1,023,969
Allowance for loan and lease losses (14,675) (13,592)
----------- -----------
Loans and leases, net 1,068,294 1,028,504
Assets under operating leases 34,552 35,285
Premises, furniture and equipment, net 31,169 30,155
Other real estate, net 343 583
Goodwill and core deposit premium, net 19,828 20,661
Other assets 36,088 36,943
----------- -----------
TOTAL ASSETS $1,570,663 $1,466,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 144,289 $ 136,066
Savings 431,868 406,712
Time 592,503 558,535
----------- -----------
Total deposits 1,168,660 1,101,313
Short-term borrowings 186,947 175,084
Other borrowings 85,078 67,681
Accrued expenses and other liabilities 28,676 26,163
----------- -----------
TOTAL LIABILITIES 1,469,361 1,370,241
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per
share; authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 16,000,000 and 12,000,000
shares at June 30, 2001, and December
31, 2000, respectively; issued
9,905,783 shares at June 30, 2001,
and December 31, 2000) 9,906 9,906
Capital surplus 18,812 18,812
Retained earnings 74,794 71,253
Accumulated other comprehensive income 3,247 1,301
Treasury stock at cost (314,207 and
287,573 shares at June 30, 2001, and
December 31, 2000, respectively) (5,457) (5,126)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 101,302 96,146
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,570,663 $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 Six Months Ended
6/30/01 6/30/00 6/30/01 6/30/00
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 23,383 $ 21,961 $ 46,795 $ 42,145
Interest on securities:
Taxable 3,600 2,943 6,720 6,057
Nontaxable 473 462 944 887
Interest on federal
funds sold 568 99 1,257 148
Interest on interest
bearing deposits in
other financial
institutions 43 81 91 182
-------- -------- -------- --------
TOTAL INTEREST INCOME 28,067 25,546 55,807 49,419
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 12,159 10,328 24,635 19,893
Interest on short-term
borrowings 2,258 2,553 4,810 4,691
Interest on other
borrowings 1,519 1,525 2,969 2,986
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 15,936 14,406 32,414 27,570
-------- -------- -------- --------
NET INTEREST INCOME 12,131 11,140 23,393 21,849
Provision for loan and
lease losses 1,123 1,007 1,844 1,826
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE LOSSES 11,008 10,133 21,549 20,023
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 1,554 1,316 3,015 2,471
Trust fees 778 793 1,544 1,507
Brokerage commissions 167 246 293 491
Insurance commissions 178 194 429 386
Securities gains (losses),
net 352 (11) 924 232
Gain (loss) on trading
account securities 46 - (179) -
Rental income on
operating leases 3,795 3,702 7,649 7,354
Gains on sale of loans 523 104 916 144
Impairment loss on
equity securities - (233) - (233)
Other noninterest income 169 301 397 513
-------- -------- -------- --------
TOTAL OTHER INCOME 7,562 6,412 14,988 12,865
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 6,328 6,017 12,538 11,933
Occupancy 782 727 1,607 1,483
Furniture and equipment 778 732 1,584 1,458
Depreciation on equipment
under operating leases 2,874 2,770 5,792 5,508
Outside services 871 579 1,624 1,340
FDIC deposit insurance
assessment 52 60 103 128
Advertising 407 427 786 786
Goodwill and core deposit
intangibles amortization 418 453 836 907
Other operating expenses 2,003 1,711 3,916 3,443
-------- -------- -------- --------
TOTAL OTHER EXPENSES 14,513 13,476 28,786 26,986
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 4,057 3,069 7,751 5,902
Income taxes 1,243 880 2,481 1,669
-------- -------- -------- --------
NET INCOME $ 2,814 $ 2,189 $ 5,270 $ 4,233
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC $ 0.29 $ 0.23 $ 0.55 $ 0.44
EARNINGS PER COMMON
SHARE-DILUTED $ 0.29 $ 0.22 $ 0.54 $ 0.43
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.09 $ 0.09 $ 0.18 $ 0.18
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
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 - - 4,233
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.18 per share - - (1,734)
Issuance of 319,010 shares of
common stock 199 3,480
Purchase of 285,292 shares of
common stock - - -
------- ------- --------
Balance at June 30, 2000 $ 9,906 $18,819 $ 67,631
======= ======= ========
Balance at January 1, 2001 $ 9,906 $18,812 $ 71,253
Net Income - - 5,270
Unrealized gain on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.18 per share - - (1,729)
Purchase of 26,634 shares of
common stock - - -
------- ------- --------
Balance at June 30, 2001 $ 9,906 $18,812 $ 74,794
======= ======= ========
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- -------- --------
Balance at January 1, 2000 $(1,511) $(2,094) $ 86,573
Net Income - - 4,233
Unrealized loss on securities
available for sale (981) - (981)
Reclassification adjustment for
gains realized in income 12 - 12
Income taxes 329 - 329
--------
Comprehensive income 3,593
Cash dividends declared:
Common, $.18 per share - - (1,734)
Issuance of 319,010 shares of
common stock - 2,094 5,773
Purchase of 285,292 shares of
common stock - (5,107) (5,107)
------- ------- --------
Balance at June 30, 2000 $(2,151) $(5,107) $ 89,098
======= ======= ========
Balance at January 1, 2001 $ 1,301 $(5,126) $ 96,146
Net Income - - 5,270
Unrealized gain on securities
available for sale 2,025 - 2,025
Reclassification adjustment for
gains realized in income 924 - 924
Income taxes (1,003) - (1,003)
--------
Comprehensive income 7,216
Cash dividends declared:
Common, $.18 per share - - (1,729)
Purchase of 26,634 shares of
common stock - (331) (331)
------- ------- --------
Balance at June 30, 2001 $ 3,247 $(5,457) $101,302
======= ======= ========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
6/30/01 6/30/00
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,270 $ 4,233
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,214 8,023
Provision for loan and lease losses 1,844 1,826
Provision for income taxes 1,889 253
Net amortization (accretion) of
premium (discount) on investment
securities 87 (2)
Securities gains, net (924) (232)
Loss on trading account securities 179 -
Loss on impairment of equity
securities - 233
Loans originated for sale (78,126) (17,122)
Proceeds on sales of loans 52,418 10,755
Net gain on sales of loans (916) (144)
Decrease (increase) in accrued
interest receivable 414 (3,053)
Increase in accrued interest payable 570 897
Other, net (310) 760
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES (9,391) 6,427
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits - (600)
Proceeds on maturities of time
deposits 959 1,318
Proceeds from the sale of securities
available for sale 29,090 30,628
Proceeds from the maturity of and
principal paydowns on securities
held to maturity - 3,065
Proceeds from the maturity of and
principal paydowns on securities
available for sale 25,894 30,884
Purchase of securities available
for sale (99,382) (52,572)
Purchase of trading account securities (1,790) -
Net increase in loans and leases (14,447) (92,792)
Increase in assets under operating
leases (6,241) (5,972)
Capital expenditures (2,555) (1,920)
Net cash and cash equivalents received
in acquisition of subsidiaries - 18,603
Net cash received from minority
stockholders - 384
Proceeds on sale of other real estate
and other repossessed assets 420 542
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (68,052) (68,432)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts 33,379 (633)
Net increase in time deposit accounts 33,968 40,208
Net increase in other borrowings 30,253 10,176
Net increase (decrease) in short-term
borrowings (993) 31,861
Purchase of treasury stock (331) (5,107)
Dividends (1,729) (1,734)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 94,547 74,771
--------- ---------
Net increase in cash and cash
equivalents 17,104 12,766
Cash and cash equivalents at
beginning of year 84,687 35,953
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $101,791 $ 48,719
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 605 $ 1,212
========= =========
Cash paid for interest $ 31,844 $ 26,673
========= =========
Securities held to maturity
transferred to securities available
for sale $ 2,154 $ -
========= =========
Other borrowings transferred to
short-term borrowings $ 12,856 $ 3,439
========= =========
Acquisitions:
Assets acquired $ - $119,837
========= =========
Cash paid for purchase of stock $ - $(14,364)
Cash acquired - 32,967
--------- ---------
Net cash received in acquisitions $ - $ 18,603
========= =========
Notes issued for acquisitions $ - $ 3,820
========= =========
Common stock issued for acquisitions $ - $ 5,773
========= =========
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 June
30, 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 and six month periods ended June 30, 2001
and 2000, are shown in the tables below:
Three Months Ended
6/30/01 6/30/00
------- -------
Net Income (000's) $ 2,814 $ 2,189
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,601 9,626
Assumed incremental common shares issued
upon exercise of stock options (000's) 94 133
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,695 9,759
======= =======
Six Months Ended
6/30/01 6/30/00
------- -------
Net Income (000's) $ 5,270 $ 4,233
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,601 9,639
Assumed incremental common shares issued
upon exercise of stock options (000's) 99 144
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,700 9,783
======= =======
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.
In July 2001, the FASB issued FAS No. 141, Business Combinations,
and FAS No. 142, Goodwill and Other Intangible Assets. FAS No.
141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well
as all purchase method business combinations completed after June
30, 2001. FAS No. 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to
be recognized and reported apart from goodwill. FAS No. 142 will
require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
FAS No. 142. FAS No. 142 will also require that intangible
assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accoradance with FAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Heartland is required to
adopt the provisions of FAS No. 141 immediately, and FAS No. 142
effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001,
will continue to be amortized and tested for impairment in
accordance with the appropriate pre-FAS No. 142 accounting
requirements prior to adoption of FAS No. 142. As of June 30,
2001, Heartland had unamortized goodwill in the amount of $16.593
million and unamortized identifiable intangible assets in the
amount of $3.235 million, all of which will be subject to the
transition provisions of FAS No. 141 and 142. Amortization
expense related to goodwill was $1.063 million and $532 thousand
for the year ended December 31, 2000, and the six months ended
June 30, 2001, respectively. Amortization expense related to
identifiable intangible assets was $751 and $304 thousand for the
year ended December 31, 2000, and the six months ended June 30,
2001, respectively. All of Heartland's identifiable intangible
assets are core deposit premiums related to acquisitions.
Because of the extensive effort needed to comply with adopting
FAS No. 142 and 142, it is not practicable to reasonably estimate
the impact of adopting these statements on Heartland's financial
statements at the date of this report, including whether any
transitional impairment losses will be recognized as the
cumulative effect of a change in accounting principle.
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 second quarter of 2001 increased $625 thousand
or 29%. This was the second consecutive quarter that Heartland
was able to record double-digit growth in earnings, despite signs
of a weakening economy. Net income totaled $2.814 million, or
$.29 on a diluted per common share basis, compared to the $2.189
million, or $.22 on a diluted per common share basis, recorded
during the same quarter in 2000. Return on common equity was
11.32% and return on assets was .73%, compared to 10.01% and
.65%, respectively, for the same quarter of 2000.
For the six-month period ended on June 30, 2001, net income
increased $1.037 million or 24% when compared to the same period
in 2000. Net income totaled $5.270 million, or $.54 on a diluted
per common share basis, compared to $4.233 million, or $.43 on a
diluted per common share basis, during the same period in 2000.
Return on common equity was 10.79% and return on assets was .70%
for the first six months in 2001 compared to 9.71% and .64%,
respectively, for the same period in 2000.
Contributing to the improved earnings during the second quarter
of 2001 was the $1.150 million or 18% increase in other income
while the increase in other expense was held to $1.037 million or
8%. On a year-to-date comparative, the same held true, as other
income increased $2.123 million or 17% while other expenses were
held to a $1.800 million or 7% increase. The other income
categories reflecting significant improvement were service
charges and fees, securities gains and gains on sale of loans.
Also contributing to the improved earnings was the $991 thousand
or 9% growth in net interest income for the quarter and $1.544
million or 7% growth for the six-month period under comparison,
due primarily to growth in earning assets. Average earning
assets went from $1.213 billion during the second quarter of 2000
to $1.385 billion during the same quarter in 2001, an increase of
14%.
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. Further confirmation
of our expansion strategy was the 14% growth in average deposits,
which grew to $1.131 billion during the second quarter of this
year compared to $992 million during the same quarter last year.
NET INTEREST INCOME
Net interest margin, expressed as a percentage of average earning
assets, was 3.60% during the second quarter of 2001 compared to
3.79% for the same period in 2000. During the second quarter of
2000, national prime increased from 9.00% to 9.50%. Conversely,
during the second quarter of 2001, national prime decreased from
8.00% to 6.50%. The net interest margin improved when compared
to the 3.54% recorded during the first quarter of this year.
Heartland's negative gap position suggested a larger improvement
in the net interest margin during such a period of downward
movement in interest rates, but management elected to remain
competitive in the market areas it serves and not reprice its
deposit products as quickly.
For the six-month comparative period, market rates also changed
significantly. National prime rose from 8.50% to 9.50% during
the first half of 2000 compared to a decline from 9.50% to 6.50%
during the first half of 2001. In addition to the delay in
repricing of deposit products, also negatively impacting the net
interest margin was the change in the composition of the balance
sheet that occurred during the first half of 2001, as the
percentage of loans to total assets decreased from 73% at June
30, 2000, to 69% at June 30, 2001. Loan growth was slower during
the first six months of 2001 due to paydowns experienced in the
mortgage loan portfolio and reduced demand in the commercial loan
portfolio. As rates declined, the real estate loan portfolio
experienced refinancing activity into fifteen- and thirty-year
mortgages, which Heartland usually elects to sell into the
secondary market. Growth in the commercial loan portfolio
increased during the second quarter of 2001 and management
continues to feel that opportunities for growth within this
portfolio will expand during the remaining months of 2001.
For the three and six month periods ended June 30, 2001, interest
income increased $2.5 million or 10% and $6.4 million or 13%,
respectively, when compared to the same periods in 2000. These
increases were primarily attributable to the growth in earning
assets.
For the three and six month periods ended June 30, 2001, interest
expense increased $1.5 million or 11% and $4.8 million or 18%,
respectively, when compared to the same periods in 2000. The
percentage growth in interest expense outpaced the percentage
growth in interest income as Heartland did not 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 increased $116 thousand or 12%
during the second quarter of 2001 when compared to the same
period in 2000. This increase was recorded primarily in response
to a rise in nonperforming loans and growth experienced in the
commercial loan portfolio. On a six-month comparative basis, the
provision for loan losses remained constant with an increase of
$18 thousand or 1%. This slight increase was reflective of
slower loan growth during the first quarter of 2001 compared to
the same quarter in 2000, due to paydowns experienced in the
mortgage portfolio and reduced demand in the commercial
portfolio. During the second quarter of this year, additional
growth was experienced in the commercial loan portfolio and
management feels that opportunities for growth within this
portfolio will continue 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 $1.1 million or 18% during the
quarter ended on June 30, 2001, compared to the same period in
2000. On a year-to-date comparative, other income grew $2.1
million or 17%. During both periods, the other income categories
reflecting significant improvement were service charges and fees,
securities gains and gains on sale of loans.
For the three- and six-month periods ended on June 30, 2001,
service charges and fees increased $238 thousand or 18% and $544
thousand or 22%, respectively. The $20.4 million or 16% growth
in checking accounts for the twelve-month period ended on June
30, 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.
During the second quarter of 2001, securities gains were $352
thousand, an increase of $363 thousand when compared to the $11
thousand loss recorded during the same period in 2000. These
gains primarily resulted from sales within the equity securities
portfolio. For the six-month period ended on June 30, 2001,
securities gains were $924 thousand, an increase of $692 thousand
when compared to the $232 thousand gains recorded during the same
period in 2000, driven partially by sales in the equity
securities portfolio. 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.
Gains on sale of loans for the three- and six-month periods ended
on June 30, 2001, were $523 and $916 thousand, respectively.
During the same three- and six-month periods in 2000, these gains
were $104 and $144 thousand, respectively. The volume of
mortgage loans sold into the secondary market during the first
half 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 $295 thousand or 4%
during the first half 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.
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. A loss of $225
thousand was recorded during the first quarter of 2001. During
the second quarter of 2001, a gain of $46 thousand was recorded
resulting in a loss of $179 thousand year-to-date on this
portfolio.
An impairment loss on equity securities totaling $233 thousand
was recorded during the second quarter of 2000. This loss
resulted from the announcement that Safety Kleen Corp. had filed
bankruptcy under chapter 11. Heartland's investment subsidiary
held 20,000 shares of Safety Kleen's common stock in its equity
securities portfolio. The carrying value of this stock on
Heartland's balance sheet as of June 30, 2000 and 2001, was $14
and $4 thousand, respectively.
OTHER EXPENSE
Total other expense was held to an increase of $1.0 million or 8%
during the second quarter of 2001 when compared to the same
quarter in 2000. For the six-month period, total other expense
was held to an $1.8 million or 7% increase. The categories
making up more than 90% of these changes were salaries and
employee benefits, depreciation on equipment under operating
leases, outside services and other operating expenses.
Salaries and employee benefits, the largest component of
noninterest expense, increased $311 thousand or 5% for the
quarter under comparison. On a year-to-date basis, salaries and
employee benefits grew $605 thousand or 5%. In addition to
normal merit increases, these increases were also attributable to
expansion efforts at New Mexico Bank & Trust. The number of full-
time equivalent employees employed by Heartland increased from
562 at June 30, 2000, to 571 at June 30, 2001.
Consistent with the vehicle replacement activity occurring at
ULTEA, the depreciation on equipment under operating leases grew
$104 thousand or 4% for the second quarter and $284 thousand or
5% for the first six months of 2001.
Fees for outside services increased by $292 thousand or 50% for
the quarter under comparison and $284 thousand or 21% for the six-
month period under comparison. Contributing to these increases
were the following:
- Beginning this year, Heartland elected to engage RSM
McGladrey, Inc. to provide internal audit services
instead of fully staffing an internal audit department.
- As on-line banking has grown in popularity, Heartland
has incurred additional costs to provide this service
to its customers.
- As a result of enhancing the fleet card program at
ULTEA, additional conversion costs were incurred during
the second quarter of this year.
- Legal and professional fees related to a potential
acquisition were paid during the first half of 2001.
Other operating expenses increased $292 thousand or 17% for the
quarter under comparison and $473 thousand or 14% for the six-
month period under comparison. Over half of these increases were
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 second quarter of 2001 increased $363
thousand or 41% when compared to the same period in 2000. On a
six-month comparative basis, income tax expense increased $812
thousand or 49%. These increases reflect the continued growth in
pre-tax earnings.
Heartland's effective tax rate increased to 30.64% during the
second quarter of 2001 compared to 28.67% for the second quarter
of 2000. For the six-month periods ended June 30, 2001 and 2000,
the effective tax rate was 32.01% and 28.28%, respectively.
These increases were, in part, a result of a decrease in the
amount of tax-exempt interest income recorded during 2001. Tax-
exempt interest income was 14% of pre-tax income during the first
six months of 2001 compared to 18% for the same period in 2000.
Exclusive of tax benefits recorded in conjunction with an
acquisition, Heartland's year-to-date adjusted effective tax rate
in 2000 was 30.82%.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Total loans and leases increased $40.9 million or 4% during the
first six months of 2001. This loan growth was slower than
during the first six months of 2000 due to paydowns experienced
in the mortgage loan portfolio and reduced demand in the
commercial loan portfolio, particularly during the first quarter.
Growth in the commercial loan portfolio increased during the
second quarter of 2001 and management continues to feel that
opportunities for growth within this portfolio will expand during
the remaining months of 2001.
Commercial and commercial real estate loans increased by $59.1
million or 11% during the first six months of 2001. All the bank
subsidiaries experienced growth in this loan category as a result
of continued calling efforts.
During the first half of 2001, the residential mortgage loan
portfolio experienced a decline of $25.0 million or 12%. 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 Heartland's loan
portfolio as of June 30, 2001, and December 31, 2000.
LOAN PORTFOLIO
(Dollars in thousands)
June 30, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $ 609,448 56.07% $ 550,366 52.62%
Residential mortgage 190,591 17.53 215,638 20.62
Agricultural and
agricultural real estate 140,195 12.90 133,614 12.78
Consumer 129,993 11.96 128,685 12.30
Lease financing, net 16,719 1.54 17,590 1.68
---------- ------- ---------- -------
Gross loans and leases $1,086,946 100.00% $1,045,893 100.00%
======= =======
Unearned discount (3,499 (3,397)
Deferred loan fees (478) (400)
---------- ----------
Total loans and leases 1,082,969 1,042,096
Allowance for loan and
lease losses (14,675) (13,592)
---------- ----------
Loans and leases, net $1,068,294 $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.
- The nation appears to be in 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 June 30, 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 $1.1 million
or 8% during the first six months of 2001. At June 30, 2001, the
allowance for loan and lease losses was 1.36% of loans and 129%
of nonperforming loans, compared to 1.30% of loans and 202% of
nonperforming loans, at year-end 2000. Nonperforming loans,
defined as nonaccrual loans, restructured loans and loans past
due ninety days or more, increased to 1.05% of total loans and
leases at June 30, 2001, compared to .65% of total loans and
leases at December 31, 2000. This increase was primarily the
result of two large credits, one in the Albuquerque, New Mexico
market and the other in the Sheboygan, Wisconsin market. The
Wisconsin credit has since been paid off in full. Workout plans
are in process on a majority of the remaining nonperforming loans
and, because of the net realizable value of collateral,
guarantees and other factors, anticipated losses on these credits
are expected to be minimal. A weakening economy will inevitably
result in increased problem loans, but Heartland expects the
problems to be manageable and of a lesser scope for Heartland
than for the industry as a whole.
During the first six months of 2001, Heartland recorded net
charge offs of $761 thousand compared to $900 thousand for the
same period in 2000. The acquisition of First National Bank of
Clovis in New Mexico was responsible for $682 thousand or 76% of
the net charge-offs during the first six months of 2000 and $202
thousand or 27% of the net charge-offs during the first half of
2001. Heartland's loan review area, along with management at New
Mexico Bank & Trust, have spent considerable time aggressively
managing the exposure within the loan portfolio in this newest
market for Heartland. Nearly half the net charge-offs during the
first six months 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 during the previous 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. Additionally, the weakening economy
has affected the ability of borrowers to repay their consumer
loans. Losses as a percentage of gross loans at Citizens was
2.89% for the first six months of 2001 compared to 2.87% for the
year ended on December 31, 2000. Loans with payments past due
for more than thirty days increased from 4.67% of gross loans at
December 31, 2000, to 4.84% at June 30, 2001. These ratios still
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 18% of total assets at June 30,
2001, as compared to 16% at December 31, 2000. The amount of
securities held in Heartland's portfolio was increased during the
first half of 2001 as deposit growth outpaced growth in the loan
portfolio.
During 2000, management elected to replace paydowns received on
mortgage-backed securities with U.S. government agency securities
to lengthen the portfolio. U.S. government agency securities
offer a better total return in a declining interest rate
environment, which was Heartland's forecast at the time. The
state tax-exempt nature of selected U.S. government agency
securities also made them attractive purchases for Heartland's
Illinois bank subsidiaries. As Heartland's interest rate
forecast changed to one of rising rates, except for the short end
of the yield curve, management elected to shift a portion of its
securities portfolio into mortgage-backed securities from U.S.
government agencies during the first six months 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 June 30, 2001, and December 31,
2000.
SECURITIES PORTFOLIO
(Dollars in thousands)
June 30, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 497 .18% $ - -%
U.S. government agencies 97,879 35.20 118,897 52.13
Mortgage-backed securities 134,071 48.22 53,407 23.42
States and political
subdivisions 33,133 11.92 34,044 14.93
Other securities 12,461 4.48 21,717 9.52
-------- ------- -------- -------
Total securities $278,041 100.00% $228,065 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $67.3 million or 6%
during the first six months of 2001. Each of the deposit
categories experienced growth in excess of 6% and most of this
growth was reflective of increased marketing efforts and
customers' election to keep funds on deposit in a financial
institution as the volatility in the stock market continued.
Over half of the $8.2 million growth in demand deposits occurred
at New Mexico Bank & Trust in the Albuquerque, New Mexico. The
$25.1 and $34.0 million growth in savings and time deposits,
respectively, resulted from growth in all of the markets served
by the Heartland banks. The money market product line was
enhanced last year and much of the growth in savings was
attributable to marketing efforts focused at attracting new
customers into this product line. As long-term rates moved
downward during the first half of this year, Heartland focused
efforts on attracting customers into certificates of deposit with
a maturity exceeding two years.
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, 2001, the amount of
short-term borrowings increased $11.9 million or 7%. This growth
primarily resulted from the transfer of long-term FHLB advances
into the short-term borrowings classification as these borrowings
neared their maturity dates. 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 June 30, 2001, $38.0 million
was outstanding as compared to $39.3 million at December 31,
2000.
Other borrowings increased $17.4 million or 26% during the first
six months of 2001. Included in these borrowings are long-term
FHLB advances, which totaled $44.0 million on June 30, 2001, with
a weighted average remaining term of 4.2 years and a weighted
average rate of 5.30%. As rates moved downward during the first
half 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)
June 30, December 31,
2001 2000
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 106,401 8.82% $ 102,443 8.74%
Tier 1 capital minimum
requirement 48,232 4.00% 46,878 4.00%
---------- ------ ---------- ------
Excess $ 58,169 4.82% $ 55,565 4.74%
========== ====== ========== ======
Total capital $ 121,075 10.04% $ 116,034 9.90%
Total capital minimum
requirement 96,465 8.00% 93,756 8.00%
---------- ------ ---------- ------
Excess $ 24,610 2.04% $ 22,278 1.90%
========== ====== ========== ======
Total risk-adjusted
assets $1,205,809 $1,171,951
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 106,401 7.00% $ 102,443 7.25%
Tier 1 capital minimum
requirement(3) 60,785 4.00% 56,492 4.00%
---------- ------ ---------- ------
Excess $ 45,616 3.00% $ 45,951 3.25%
========== ====== ========== ======
Average adjusted assets
(less goodwill) $1,519,613 $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 July of 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 June 30, 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.
Heartland will not allow its ownership in New Mexico Bank & Trust
to fall below 80% and all minority stockholders have entered into
a stock transfer agreement with Heartland. This stock transfer
agreement imposes certain restrictions on the investor's sale,
transfer or other disposition of their shares and requires
Heartland to repurchase the shares from the investor on April 9,
2003.
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 remained constant at
$68 million during the first six 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 $14.4 million during the first six months of 2001
compared to $92.8 million during the same period in 2000, a $78.4
million change. During the first six months of 2001, proceeds
from the sale and maturity of securities decreased $9.6 million
compared to the same period in 2000. Conversely, the purchases
of securities increased $48.6 million for the periods under
comparison. As loan growth was below the levels experienced
during the first half of 2000, additional securities purchases
were made to enhance the net interest margin.
Financing activities provided net cash of $94.5 million during the
first six months of 2001 compared to $74.8 million during the same
period in 2000. A net increase in deposit accounts provided cash
of $67.3 million during the first six months of 2001 compared to
$39.6 million during the same period in 2000. The $20.1 million
additional cash provided by a net increase in other borrowings
during the first six months of 2001 was reflective of $30.2 million
new FHLB long-term advances recorded. The net change in short-term
borrowings went from a $31.9 million provider of cash during the
first six months of 2000 to a $1.0 million user of cash during the
same period in 2001, primarily as a result of the growth in
deposits.
Total cash inflows from operating activities decreased $15.8
million for the first six months of 2001 compared to the same
period in 2000. The $61.0 million increase in cash used for
loans originated for sale and the offsetting $41.7 million
increase in cash provided by the sale of loans were the primary
factors contributing to the decrease in cash provided from
operating activities. 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 June 30, 2001,
provided an additional borrowing capacity of $12 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 June 30, 2001, Heartland was in compliance with
the covenants contained in these credit agreements.
RECENT DEVELOPMENTS
In June of this year, Heartland was saddened by the sudden death
of long-time director, Evangeline K. Jansen. Ms. Jansen first
joined the board of directors of Dubuque Bank and Trust in 1974
and was one of the initial directors of Heartland when it was
formed in 1981.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No.
141, Business Combinations, and FAS No. 142, Goodwill and Other
Intangible Assets. FAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. FAS No. 141 also
specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and
reported apart from goodwill. FAS No. 142 will require that
goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of FAS No. 142. FAS
No. 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for
impairment in accordance with FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
Heartland is required to adopt the provisions of FAS No. 141
immediately, and FAS No. 142 effective January 1, 2002. Goodwill
and intangible assets acquired in business combinations completed
before July 1, 2001, will continue to be amortized and tested for
impairment in accordance with the appropriate pre-FAS No. 142
accounting requirements prior to adoption of FAS No. 142.
As of June 30, 2001, Heartland had unamortized goodwill in the
amount of $16.6 million and unamortized identifiable intangible
assets in the amount of $3.2 million, all of which will be
subject to the transition provisions of FAS No. 141 and 142.
Amortization expense related to goodwill was $1.1 million and
$532 thousand for the year ended December 31, 2000, and the six
months ended June 30, 2001, respectively. Amortization expense
related to identifiable intangible assets was $751 and $304
thousand for the year ended December 31, 2000, and the six months
ended June 30, 2001, respectively. All of Heartland's
identifiable intangible assets are core deposit premiums related
to acquisitions. Because of the extensive effort needed to
comply with adopting FAS No. 142 and 142, it is not practicable
to reasonably estimate the impact of adopting these statements on
Heartland's financial statements at the date of this report,
including whether any transitional impairment losses will be
recognized as the cumulative effect of a change in accounting
principle.
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
The Company's annual meeting of stockholders was held on May 16,
2001. At the meeting, Mark C. Falb, John K. Schmidt and Robert
Woodward were elected to serve as Class II directors (term
expires in 2004). Continuing as Class I directors (term expires
in 2003) are Lynn B. Fuller and Gregory R. Miller. Continuing as
Class III directors (term expires in 2002) are James F. Conlan
and Evangeline K. Jansen. 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 12,000,000 to
16,000,000 shares. The stockholders also approved the
appointment of KPMG LLP as the Company's independent public
accountants for the year ending December 31, 2001.
There were 9,618,210 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:
For Withheld
--- --------
Election of Directors
Mark C. Falb 8,458,988 5,156
John K. Schmidt 8,444,704 19,440
Robert Woodward 8,454,220 9,924
Broker
For Against Abstain Non-Votes
- --- ------- ------- ---------
Amendment to increase
authorized number of
shares 8,304,614 97,178 62,352 0
Appointment of KPMG
LLP 8,384,484 23,388 56,272 0
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: August 14, 2001