UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2007
Commission
File Number: 0-24724
HEARTLAND
FINANCIAL USA, INC.
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
42-1405748
|
|
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer identification number)
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1398
Central Avenue, Dubuque, Iowa 52001
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(563)
589-2100
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(Address
of principal executive offices) (Zip Code)
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(Registrant's
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of
Class
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Name of Each Exchange
on Which Registered
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Common
Stock $1.00 par value
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The
Nasdaq Stock Market LLC
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Preferred
Share Purchase Rights
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes No X
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes No X
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Act.
Large
accelerated
filer Accelerated
filer X Non-accelerated
filer Smaller
reporting company
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule
12b-2). Yes No X
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the last sales price quoted on the
Nasdaq National Market System on June 30, 2007, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$354,909,227.* Such figures include 1,683,795 shares of the
Registrant's Common Stock held in a fiduciary capacity by the trust department
of the Dubuque Bank and Trust Company, a wholly-owned subsidiary of the
Registrant.
* Based
on the last sales price of the Registrant's common stock on June 30, 2007, and
reports of beneficial ownership filed by directors and executive officers of
Registrant and by beneficial owners of more than 5% of the outstanding shares of
common stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Registrant's common stock.
As of
March 13, 2008, the Registrant had issued and outstanding 16,320,276 shares of
common stock, $1.00 per value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III.
HEARTLAND FINANCIAL USA,
INC.
Form 10-K Annual Report
Table of Contents
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Part
I
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Page
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Item
1.
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Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
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3
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A.
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General
Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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3
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B.
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Market
Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . .
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7
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C.
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Competition
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
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9
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D.
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Employees
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
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10
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E.
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Internet
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
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10
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F.
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Supervision
and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
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10
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G.
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Governmental
Monetary Policy and Economic Conditions . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
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15
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Item
1A.
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Risk
Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
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16
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Item
1B.
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Unresolved
Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
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20
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Item
2.
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Properties.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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21
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Item
3.
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Legal
Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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22
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Item
4.
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Submission
of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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22
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
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23
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Item
6.
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Selected
Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
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26
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
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27
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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52
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Item
8.
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Financial
Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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54
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
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93
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Item
9A.
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Controls
and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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93
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Item
9B.
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Other
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
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96
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Part
III
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||
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Item
10.
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Directors,
Executive Officers and Corporate Governance . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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96
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Item
11.
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Executive
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
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97
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
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98
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Item
13.
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Certain
Relationships and Related Transactions, and Director Independence . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . .
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98
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Item
14.
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Principal
Accountant Fees and Services . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
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98
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Part
IV
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||
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Item
15.
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Exhibits
and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
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99
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PART
I.
ITEM
1.
BUSINESS
A. GENERAL
DESCRIPTION
Heartland
Financial USA, Inc. ("Heartland"), reincorporated in the state of Delaware in
1993, is a multi-bank holding company registered under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Heartland has nine bank subsidiaries in
the states of Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana and
Colorado, (collectively, the "Bank Subsidiaries"). All nine Bank Subsidiaries
are members of the Federal Deposit Insurance Corporation ("FDIC"). The Bank
Subsidiaries listed below operate a total of 59 banking locations.
|
*
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Dubuque
Bank and Trust Company, Dubuque, Iowa, is chartered under the laws of the
State of Iowa. Dubuque Bank and Trust Company has two wholly-owned
subsidiaries: DB&T Insurance, Inc., a multi-line insurance agency and
DB&T Community Development Corp., a partner in low-income housing and
historic rehabilitation projects.
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*
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Galena
State Bank & Trust Co. , Galena, Illinois, is chartered under the laws
of the State of Illinois.
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*
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First
Community Bank, Keokuk, Iowa, is chartered under the laws of the State of
Iowa.
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*
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Riverside
Community Bank, Rockford, Illinois, is chartered under the laws of the
State of Illinois.
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|
*
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Wisconsin
Community Bank, Madison, Wisconsin, is chartered under the laws of the
State of Wisconsin.
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|
*
|
New
Mexico Bank & Trust, Albuquerque, New Mexico, is chartered under the
laws of the State of New Mexico.
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|
*
|
Rocky
Mountain Bank, Billings, Montana, is chartered under the laws of the State
of Montana.
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|
*
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Arizona
Bank & Trust, Phoenix, Arizona, is chartered under the laws of the
State of Arizona.
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|
*
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Summit
Bank & Trust, Broomfield, Colorado is chartered under the laws of the
State of Colorado.
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Heartland
has seven active non-bank subsidiaries as listed below.
|
*
|
Citizens
Finance Co. is a consumer finance company with offices in Iowa, Illinois
and Wisconsin.
|
|
*
|
Heartland
Financial Statutory Trust III, Heartland Financial Statutory Trust IV,
Heartland Financial Statutory Trust V, Heartland Financial Statutory Trust
VI, Heartland Financial Statutory Trust VII and Rocky Mountain Statutory
Trust I are special purpose trust subsidiaries of Heartland formed for the
purpose of the offering of cumulative capital
securities.
|
All of
Heartland’s subsidiaries are wholly-owned, except for Arizona Bank & Trust,
of which Heartland owned 90% of the capital stock on December 31, 2007, and
Summit Bank & Trust, of which Heartland owned 81% of the capital stock
on December 31, 2007.
The Bank
Subsidiaries provide full service retail banking in the communities in which
they are located. Deposit products offered by the Bank Subsidiaries include
checking and other demand deposit accounts, NOW accounts, savings accounts,
money market accounts, certificates of deposit, individual retirement accounts,
health savings accounts and other time deposits. The deposits in the Bank
Subsidiaries are insured by the FDIC to the full extent permitted by law. Loans
include commercial and industrial, agricultural, real estate mortgage, consumer,
home equity and lines of credit. Other products and services include VISA debit
cards, automated teller machines, on-line banking, safe deposit boxes and trust
services. The principal service of the Bank Subsidiaries consists of making
loans to and accepting deposits from businesses and individuals. These loans are
made at the offices of the Bank Subsidiaries. The Bank Subsidiaries also engage
in activities that are closely related to banking, including investment
brokerage.
Operating
Strategy
Heartland’s
operating strategy is based upon a community banking model with three major
components:
|
1.
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Develop
strong community banks:
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|
*
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Establish
community bank names and images
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*
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Encourage
community involvement and leadership
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*
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Maintain
active boards of directors chosen from the local
community
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|
*
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Retain
local presidents and
decision-making
|
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2.
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Provide
resources for revenue enhancement:
|
|
*
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Develop
and implement a wide array of financial products and services for all Bank
Subsidiaries
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|
*
|
Improve
Bank Subsidiary funding costs by reducing higher-cost certificates of
deposit; increasing the percentage of lower-cost transaction accounts such
as checking, savings and money market accounts; emphasizing relationship
banking and capitalizing on cross-selling opportunities
|
|
*
|
Emphasize
greater use of non-traditional sources of income, including trust and
investment services, insurance and consumer finance
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|
*
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Evaluate
and acquire state-of-the-art technology when the expected return justifies
the cost
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|
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3.
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Provide
customer-transparent cost savings:
|
|
*
|
Centralize
back office support functions so Bank Subsidiaries operate as efficiently
as possible
|
Management
believes the personal and professional service offered to customers provides an
appealing alternative to the "megabanks" resulting from mergers and acquisitions
in the financial services industry. While Heartland employs a community banking
philosophy, management believes Heartland’s size, combined with its complete
line of financial products and services, is sufficient to effectively compete in
the respective market areas. To remain price competitive, management also
believes Heartland must manage expenses and gain economies of scale by
centralizing back office support functions. Although each of Heartland’s
subsidiaries operates under the direction of its own board of directors,
Heartland has standard operating policies regarding asset/liability management,
liquidity management, investment management, lending and deposit structure
management.
Another
component of the operating strategy is to encourage all directors, officers and
employees to maintain a strong ownership interest in Heartland. Since 1996,
Heartland has provided an employee stock purchase plan. As of December 31,
2007, employees, officers, and directors owned approximately 35% of Heartland’s
outstanding common stock.
Acquisition
and Expansion Strategy
Heartland’s
strategy is to increase profitability and diversify its market area and asset
base by expanding existing subsidiaries, by establishing de novo banks and through
acquisitions. Heartland continually seeks and evaluates opportunities to
establish branches, loan production offices, or other business facilities as a
means of expanding its presence in current or new market areas. Heartland
acquires established financial services organizations, primarily commercial
banks or thrifts, when suitable candidates are identified and acceptable
business terms can be negotiated. Heartland has also formed de novo banking
institutions in locations determined to have market potential and suitable
management candidates with banking expertise and a philosophy similar to
Heartland’s.
Heartland
has focused on markets with growth potential in the Midwestern and Western
regions of the United States as it evaluates expansion and acquisition
opportunities. In August 2003, Heartland and a group of investors opened Arizona
Bank & Trust, a de
novo banking operation, followed with a second location in 2004 and a
third location in 2005. In 2006, Arizona Bank & Trust expanded by acquiring
Bank of the Southwest, a financial institution providing retail and commercial
banking services in Phoenix and Tempe, Arizona. Heartland combined the acquired
assets and deposit accounts of Bank of the Southwest into Arizona Bank &
Trust in May of 2006. A sixth location was opened in 2007.
Heartland
took another step in the expansion of its Western presence in June of 2004 when
it acquired Rocky Mountain Bancorporation, Inc., the one-bank holding company of
Rocky Mountain Bank. Headquartered in Billings, Montana, Rocky
Mountain Bank had assets of $427 million at December 31, 2007, with nine branch
locations throughout the state.
In
November of 2006, Heartland and a group of investors opened Summit Bank &
Trust, a de novo
banking operation in Broomfield, Colorado. The capital structure of
Heartland’s ninth state-chartered bank was very similar to that used when
Arizona Bank & Trust was formed. Heartland’s initial investment was $12.0
million, or 80% of the targeted $15.0 million initial capital. In 2007, Summit
Bank & Trust opened two additional locations. One of Heartland’s strategic
goals is to expand its presence in the Western markets to 50% of its total
assets, thereby balancing the growth in its Western markets with the stability
of the Midwestern markets.
In
February of 2008, Heartland received regulatory approvals for the opening of its
tenth de novo banking
operation, Minnesota Bank & Trust. The capital structure of Minnesota Bank
& Trust is very similar to that used when Arizona Bank & Trust and
Summit Bank & Trust were formed, including 20% ownership by a group of local
investors. Opening of the bank is scheduled for April 2008 with a banking office
in Edina, Minnesota, one of the cities located in the Minneapolis-St. Paul
metropolitan area.
Lending
Activities
General
The Bank
Subsidiaries provide a range of commercial and retail lending services to
businesses and individuals. These credit activities include agricultural,
commercial, residential real estate and consumer loans.
The Bank
Subsidiaries market their services to qualified lending customers. Lending
officers actively solicit the business of new companies entering their market
areas as well as long-standing members of the Bank Subsidiaries' respective
business communities. Through professional service, competitive pricing, and
innovative structure, the Bank Subsidiaries have been successful in attracting
new lending customers. Heartland also actively pursues consumer lending
opportunities. With convenient locations, advertising and customer
communications, the Bank Subsidiaries have been successful in capitalizing on
the credit needs of their market areas.
Commercial
Loans
The Bank
Subsidiaries have a strong commercial loan base, with significant growth coming
from Dubuque Bank and Trust Company, New Mexico Bank & Trust, Rocky Mountain
Bank, and Summit Bank & Trust. Dubuque Bank and Trust Company, in
particular, continues to be a premier commercial lender in the tri-state area of
northeast Iowa, northwest Illinois and southwest Wisconsin. The Bank
Subsidiaries' current portfolios include, but are not limited to, loans to
wholesalers, hospitality industry, real estate developers, manufacturers,
building contractors, business services companies and retailers. The Bank
Subsidiaries provide a wide range of business loans, including lines of credit
for working capital and operational purposes and term loans for the acquisition
of equipment and real estate. Although most loans are made on a secured basis,
loans may be made on an unsecured basis where warranted by the overall financial
condition of the borrower. Terms of commercial business loans generally range
from one to five years.
Bank
Subsidiaries continue to seek opportunities to expand the production of loans
guaranteed by U.S. government agencies. Wisconsin Community Bank is designated
as a Preferred Lender by the U.S. Small Business Administration (SBA). Wisconsin
Community Bank is also the only lender in Wisconsin to be granted USDA Certified
Lender status for the USDA Rural Development Business and Industry loan program
and was one of the top ten lenders in the nation in this program for the past
three years. Management believes that making these guaranteed loans helps the
communities where it operates and provides Heartland with a source of income and
solid future lending relationships with local businesses as they grow and
prosper.
The Bank
Subsidiaries’ commercial loans and leases are primarily made based on the
identified cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. The collateral support provided by the
borrower for most of these loans and leases and the probability of repayment is
based on the liquidation of the pledged collateral and enforcement of a personal
guarantee, if any exists. The primary repayment risks of commercial loans and
leases are that the cash flows of the borrower may be unpredictable, and the
collateral securing these loans may fluctuate in value.
Heartland
understands the roles that sound credit skills and a common credit culture play
in maintaining quality loan portfolios. As the credit portfolios of
the Bank Subsidiaries have continued to grow, several changes have been made in
their lending departments resulting in an overall increase in these departments'
skill levels. Heartland utilizes the RMA Diagnostic Assessment for assessing the
credit skills and training needs for its credit personnel and develops specific
individualized training. All new lending personnel are expected to complete a
similar diagnostic training program. Heartland also assists all of
the commercial and agricultural lenders of the Bank Subsidiaries in the analysis
and underwriting of credit through its staff in the credit administration
department. This staff continues to expand as the total loans under management
continue to grow.
Commercial
lenders interact with their respective boards of directors each month. Heartland
also utilizes an internal loan review function to analyze credits of the Bank
Subsidiaries and to provide periodic reports to the respective boards of
directors. Management has attempted to identify problem loans at an early date
and to aggressively seek resolution of these situations.
Agricultural
Loans
Agricultural
loans are emphasized by Dubuque Bank and Trust Company, Rocky Mountain Bank,
Wisconsin Community Bank’s Monroe banking center and New Mexico Bank &
Trust’s Clovis banking offices. The Bank Subsidiaries that emphasize
agricultural loans do so because of their location in or around rural markets.
Dubuque Bank and Trust Company maintains its status as one of the largest
agricultural lenders in the State of Iowa. Agricultural loans remain balanced in
proportion to the rest of Heartland's loan portfolio, constituting approximately
10% of the total loan portfolio at December 31, 2007. Heartland’s policies
designate a primary and secondary lending area for each bank with the majority
of outstanding agricultural operating and real estate loans to customers located
within the primary lending area. Term loans secured by real estate are allowed
within the secondary lending area.
Agricultural
loans, many of which are secured by crops, machinery and real estate, are
provided to finance capital improvements and farm operations as well as
acquisitions of livestock and machinery. The ability of the borrower to repay
may be affected by many factors outside of the borrower’s control including
adverse weather conditions, loss of livestock due to disease or other factors,
declines in market prices for agricultural products and the impact of government
regulations. The ultimate repayment of agricultural loans is dependent upon the
profitable operation or management of the agricultural entity.
The
agricultural loan departments work closely with all of their customers,
including companies and individual farmers, and review the preparation of
budgets and cash flow projections for the ensuing crop year. These budgets and
cash flow projections are monitored closely during the year and reviewed with
the customers at least annually. The Bank Subsidiaries also work closely with
governmental agencies, including the Farm Services Agency, to help agricultural
customers obtain credit enhancement products such as loan guarantees or interest
assistance.
Residential
Real Estate Mortgage Loans
Mortgage
lending remains a focal point for the Bank Subsidiaries as each of them
continues to build real estate lending business. As long-term interest rates
remained at relatively low levels during 2007 and 2006, many customers elected
mortgage loans that are fixed rate with fifteen or thirty year maturities.
Heartland usually sells these loans into the secondary market and retains
servicing on the loans sold to Fannie Mae. Management believes that mortgage
servicing on sold loans provides the Bank Subsidiaries with a relatively steady
source of fee income compared to fees generated solely from mortgage origination
operations. Moreover, the retention of servicing gives the Bank Subsidiaries the
opportunity to maintain regular contact with mortgage loan
customers.
As with
agricultural and commercial loans, Heartland encourages the Bank Subsidiaries to
participate in lending programs sponsored by U.S. government agencies when
justified by market conditions. Veterans Administration and Federal Home
Administration loans are offered at all of the Bank
Subsidiaries.
Consumer
Lending
The Bank
Subsidiaries' consumer lending departments provide all types of consumer loans
including motor vehicle, home improvement, home equity and small personal credit
lines. Consumer loans typically have shorter terms, lower balances, higher
yields and higher risks of default than one- to four-family residential mortgage
loans. Consumer loan collections are dependent on the borrower’s continuing
financial stability, and are therefore more likely to be affected by adverse
personal circumstances.
Citizens
Finance Co. specializes in consumer lending and currently serves the consumer
credit needs of approximately 7,100 customers in Iowa, Illinois and Wisconsin
from its Dubuque, Davenport and Cedar Rapids, Iowa; Madison and Appleton,
Wisconsin; and Loves Park, Crystal Lake and Tinley Park, Illinois offices.
Citizens Finance Co. typically lends to borrowers with past credit problems or
limited credit histories. Heartland expects to incur a higher level of credit
losses on Citizens Finance Co. loans compared to consumer loans originated by
the Bank Subsidiaries. Correspondingly, returns on these loans are anticipated
to be higher than those at the Bank Subsidiaries.
Trust
and Investment Services
Dubuque
Bank and Trust Company, Galena State Bank & Trust Co., Wisconsin Community
Bank, New Mexico Bank & Trust and Arizona Bank & Trust offer trust and
investment services in their respective communities. In those markets which do
not yet warrant a full trust department, the sales and administration is
performed by Dubuque Bank and Trust Company personnel. As of December 31, 2007,
total Heartland trust assets were $1.7 billion, the vast majority of which were
assets under management. Collectively, the Bank Subsidiaries provide a full
complement of trust and investment services for individuals and corporations.
All of the Bank Subsidiaries have targeted their trust departments as primary
areas for future growth.
Dubuque
Bank and Trust Company is nationally recognized as a leading provider of
socially responsible investment services, and it manages investment portfolios
for religious and other non-profit organizations located throughout the United
States. Dubuque Bank and Trust Company is also Heartland’s lead bank in
providing daily valuation 401(k) plans and other retirement services, including
Heartland’s retirement plan for its employees.
Heartland
has formed a strategic alliance with LPL Financial Institution Services, a
division of LPL Financial, to operate independent securities offices at all of
the Bank Subsidiaries. Through LPL Financial, Heartland offers a full array of
investment services including mutual funds, annuities, retirement products,
education savings products, brokerage services, employer sponsored plans and
insurance products. A complete line of vehicle, property and casualty, life and
disability insurance and tax-free annuities are also offered by Heartland
through DB&T Insurance.
B. MARKET
AREAS
Dubuque
Bank and Trust Company
Dubuque
Bank and Trust Company and Heartland are located in Dubuque County, Iowa, which
encompasses the city of Dubuque and a number of surrounding rural
communities. Citizens Finance Co. also operates within this market
area, in addition to operating offices in Davenport, Iowa; Cedar Rapids, Iowa;
Madison, Wisconsin; Appleton, Wisconsin; Loves Park, Illinois; Tinley Park,
Illinois and Crystal Lake, Illinois.
The city
of Dubuque is located in northeastern Iowa, on the Mississippi River,
approximately 175 miles west of Chicago, Illinois, and approximately 200 miles
northeast of Des Moines, Iowa. It is strategically situated at the intersection
of the state borders of Iowa, Illinois and Wisconsin. Based upon the results of
the 2000 census, the city of Dubuque had a total population of approximately
58,000.
The
principal offices of Heartland and Dubuque Bank and Trust Company’s main bank
currently occupy the same building. Heartland’s operation center is located
directly across the street from Dubuque Bank and Trust Company’s main
office.
In
addition to its main banking office, Dubuque Bank and Trust Company operates
seven branch offices, all of which are located in Dubuque County. As a
subsidiary of Dubuque Bank and Trust Company, DB&T Insurance has
substantially the same market area as the parent organization.
Galena
State Bank & Trust Co.
Galena
State Bank & Trust Co. is located in Galena, Illinois, which is less than
five miles from the Mississippi River, approximately 20 miles east of Dubuque
and 155 miles west of Chicago. Galena operates a second office in Stockton,
Illinois. Both offices are located in Jo Daviess County, which has a
population of approximately 22,000, according to the 2000 census.
First
Community Bank
First
Community Bank’s main office is in Keokuk, Iowa, which is located in the
southeast corner of Iowa near the borders of Iowa, Missouri and Illinois. Due to
its location, First Community Bank serves customers in the tri-county region of
Lee County, Iowa; Hancock County, Illinois; and Clark County, Missouri. First
Community Bank has one branch office in Keokuk and another branch in the city of
Carthage in Hancock County, Illinois. Keokuk is an industrial community with a
population of approximately 11,000, and the population of Lee County is
approximately 38,000.
Riverside
Community Bank
Riverside
Community Bank is located on the northeast edge of Rockford, Illinois, which is
approximately 75 miles west of Chicago in Winnebago County. In addition to its
main banking office, Riverside Community Bank has three branch offices, all of
which are located in the Winnebago County area. Based on the 2000
census, the county had a population of 278,000, and the city of Rockford had a
population of 150,000.
Wisconsin
Community Bank
Wisconsin
Community Bank’s main office is located in Madison, Wisconsin, in Dane County.
Wisconsin Community Bank operates three branch offices in Madison suburbs. The
main office was constructed in 2007. According to the 2000 census, Dane County
had a population of 427,000. Wisconsin Community Bank also has a location in
Monroe, Wisconsin. The city of Monroe, which is approximately 50 miles southwest
of Madison, is located in Green County in south central Wisconsin. Wisconsin
Community Bank has two offices in Sheboygan and DePere, Wisconsin that operate
under the name of Heartland Business Bank. The Sheboygan and DePere facilities
are located in the northeastern Wisconsin counties of Sheboygan and
Brown.
New
Mexico Bank & Trust
New
Mexico Bank & Trust operates eight offices in or around Albuquerque, New
Mexico, in Bernalillo County. Based upon the 2000 census, the county had a
population of 557,000, and the city had a population of 449,000. New Mexico Bank
& Trust also operates five locations in the New Mexico communities of
Clovis, Portales, and Melrose located in east central New Mexico. Clovis, the
county seat for Curry County is located approximately 220 miles east of
Albuquerque, 100 miles northwest of Lubbock, Texas and 105 miles southwest of
Amarillo, Texas. Portales, also located in Curry County, is approximately 20
miles west of Clovis. Melrose, the county seat for Roosevelt County is located
approximately 175 miles east of Albuquerque and 115 miles southwest of Amarillo,
Texas. In addition, New Mexico Bank & Trust operates three branch offices in
Santa Fe, in Santa Fe County.
Arizona
Bank & Trust
Arizona
Bank & Trust currently operates six offices in Arizona; including the main
office in Phoenix, one in Mesa, one in Tempe, one in Gilbert and two
in Chandler. These cities are all located in the Phoenix metropolitan area
within Maricopa County. The 2000 census reported the population of the Phoenix
metro area to be 3,252,000. According to the ranking tables prepared by the U.S.
Census Bureau, the population of the Phoenix metro area increased by 45% from
1990 through 2000, helping make Arizona the second fastest growing state in the
nation in the 1990s. The cities of Phoenix, Mesa, Tempe, Gilbert and Chandler
are among the eight cities in the Phoenix metro area with a population of
100,000 or more,
Rocky
Mountain Bank
Rocky
Mountain Bank operates from nine locations throughout the state of Montana.
Rocky Mountain Bank’s main office is in Billings which is the state’s largest
city and an agricultural, retail and business center. Billings is also the
county seat of Yellowstone County within south-central Montana along
Interstate-90. Based upon the 2000 census, the county had a population of
129,000 and the city had a population of 126,000. Six of the locations are
spread primarily along the western corridor of the state of
Montana.
Summit
Bank & Trust
The main
facility for Summit Bank & Trust is in Broomfield, Colorado. The city and
county of Broomfield lies in the northwestern tier of the Denver-Aurora
Metropolitan Area. The population of Broomfield was estimated at 43,000 in 2005
by the U.S. Census Bureau. Broomfield is the sixteenth most populous city in the
state of Colorado. A second location was opened in 2007 in Thornton, just north
of the Denver International Airport and a third location was added in October of
2007 in the town of Erie, Colorado which is approximately 25 miles north of
Denver.
The
following table sets forth certain information concerning the Bank Subsidiaries
as of December 31, 2007.
|
Heartland
Bank Subsidiaries
(Dollars
in thousands)
|
|||||
|
Bank
Subsidiaries
|
Charter
Location
|
Year
Acquired
or
Opened
|
Number
Of
Locations
|
Total
Portfolio
Loans
|
Total
Deposits
|
|
Dubuque
Bank and Trust Company
|
Dubuque,
IA
|
1935
|
8
|
$ 637,782
|
$ 670,257
|
|
Galena
State Bank & Trust Co.
|
Galena,
IL
|
1992
|
3
|
$ 144,152
|
$ 177,040
|
|
First
Community Bank
|
Keokuk,
IA
|
1994
|
3
|
$ 84,475
|
$ 103,602
|
|
Riverside
Community Bank
|
Rockford,
IL
|
1995
|
4
|
$ 146,925
|
$ 187,052
|
|
Wisconsin
Community Bank
|
Madison,
WI
|
1997
|
7
|
$ 285,010
|
$ 321,647
|
|
New
Mexico Bank & Trust
|
Albuquerque,
NM
|
1998
|
16
|
$ 455,383
|
$ 459,530
|
|
Arizona
Bank & Trust
|
Phoenix,
AZ
|
2003
|
6
|
$ 160,309
|
$ 155,093
|
|
Rocky
Mountain Bank
|
Billings,
MT
|
2004
|
9
|
$ 316,776
|
$ 305,933
|
|
Summit
Bank and Trust
|
Broomfield,
CO
|
2006
|
3
|
$ 27,493
|
$ 30,860
|
C. COMPETITION
Heartland
encounters competition in all areas of its business pursuits. To compete
effectively, develop its market base, maintain flexibility, and keep pace with
changing economic and social conditions, Heartland continuously refines and
develops its products and services. The principal methods of competing in the
financial services industry are through product selection, personal service and
convenience.
The Bank
Subsidiaries' market areas are highly competitive. Many financial institutions
based in the communities surrounding the Bank Subsidiaries actively compete for
customers within Heartland's market area. The Bank Subsidiaries also face
competition from finance companies, insurance companies, mortgage companies,
securities brokerage firms, money market funds, loan production offices and
other providers of financial services. Under the Gramm-Leach-Bliley Act,
effective in 2000, securities firms and insurance companies that elect to become
financial holding companies may acquire banks and other financial institutions.
The Gramm-Leach-Bliley Act significantly changed the competitive environment in
which Heartland and the Bank Subsidiaries conduct business. The financial
services industry is also likely to become more competitive as technological
advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds between
parties.
Heartland
competes for loans principally through the range and quality of the services it
provides, with an emphasis on building long-lasting relationships. Our strategy
is to delight our customers through excellence in customer service and
needs-based selling. We become their trusted financial advisor. Heartland
believes that its long-standing presence in the community and personal service
philosophy enhance its ability to compete favorably in attracting and retaining
individual and business customers. Heartland actively solicits deposit-oriented
clients and competes for deposits by offering its customers personal attention,
professional service and competitive interest rates.
D. EMPLOYEES
At
December 31, 2007, Heartland employed 982 full-time equivalent employees.
Heartland places a high priority on staff development, which involves extensive
training in a variety of areas, including customer service training. New
employees are selected based upon their technical skills and customer service
capabilities. None of Heartland's employees are covered by a collective
bargaining agreement. Heartland offers a variety of employee benefits, and
management considers its employee relations to be excellent. Heartland utilizes
Predictive Index software to assist with placing potential employees in new
positions within Heartland and with evaluating current positions.
E. INTERNET
ACCESS
Heartland
maintains an Internet site at www.htlf.com. Heartland offers its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act free of charge from its web site as soon as
reasonably practical after meeting the electronic filing requirements of the
Securities and Exchange Commission.
F. SUPERVISION
AND REGULATION
General
Financial
institutions, their holding companies and their affiliates are extensively
regulated under federal and state law. As a result, the growth and
earnings performance of Heartland may be affected not only by management
decisions and general economic conditions, but also by the requirements of
federal and state statutes and by the regulations and policies of various bank
regulatory authorities, including the Iowa Superintendent of Banking
(the “Iowa Superintendent”), the Illinois Department of Financial and
Professional Regulation (the “Illinois DFPR”), the New Mexico
Financial Institutions Division (the “New Mexico FID”), the Montana
Financial Institution Division (the “Montana Division”), the Division of Banking
of the Wisconsin Department of Financial Institutions (the “Wisconsin DFI”), the
Arizona State Banking Department (the “Arizona Department”), the Colorado
Department of Regulatory Agencies, Division of Banking (the “Colorado
Division”), the Board of Governors of the Federal Reserve System
(the “Federal Reserve”) and the FDIC. Furthermore, taxation
laws administered by the Internal Revenue Service and state taxing authorities
and securities laws administered by the Securities and Exchange Commission
(the “SEC”) and state securities authorities have an impact on the business
of Heartland. The effect of these statutes, regulations and regulatory
policies may be significant, and cannot be predicted with a high degree of
certainty.
Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts of
investments, reserve requirements, capital levels relative to operations, the
nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system of
supervision and regulation establishes a comprehensive framework for the
respective operations of Heartland and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors of the
Bank Subsidiaries, rather than shareholders.
The
following is a summary of the material elements of the regulatory framework that
applies to Heartland and its subsidiaries. It does not describe all
of the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. As such, the
following is qualified in its entirety by reference to applicable
law. Any change in statutes, regulations or regulatory policies
may have a material effect on the business of Heartland and its
subsidiaries.
The
Company
General
Heartland,
as the sole shareholder of Dubuque Bank and Trust Company, New Mexico Bank &
Trust, Rocky Mountain Bank, Wisconsin Community Bank, Galena State Bank &
Trust Co., Riverside Community Bank and First Community Bank and the controlling
shareholder of Arizona Bank & Trust and Summit Bank & Trust, is a bank
holding company. As a bank holding company, Heartland is registered
with, and is subject to regulation by, the Federal Reserve under the
BHCA. In accordance with Federal Reserve policy, Heartland is
expected to act as a source of financial strength to the Bank Subsidiaries and
to commit resources to support the Bank Subsidiaries in circumstances where
Heartland might not otherwise do so. Under the BHCA, Heartland is
subject to periodic examination by the Federal Reserve. Heartland is
also required to file with the Federal Reserve periodic reports of Heartland’s
operations and such additional information regarding Heartland and its
subsidiaries as the Federal Reserve may require.
Acquisitions,
Activities and Change in Control
The
primary purpose of a bank holding company is to control and manage banks. The BHCA generally
requires the prior approval of the Federal Reserve for any merger involving a
bank holding company or any acquisition by a bank holding company of another
bank or bank holding company. Subject to certain conditions
(including certain deposit concentration limits established by the BHCA), the
Federal Reserve may allow a bank holding company to acquire banks located in any
state of the United States. In approving interstate acquisitions, the
Federal Reserve is required to give effect to applicable state law limitations
on the aggregate amount of deposits that may be held by the acquiring bank
holding company and its insured depository institution affiliates in the state
in which the target bank is located (provided that those limits do not
discriminate against out-of-state depository institutions or their holding
companies) and state laws that require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA
generally prohibits Heartland from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be “so closely related to banking ... as to be a proper
incident thereto.” This authority would permit Heartland to engage in
a variety of banking-related businesses, including the operation of a thrift,
consumer finance, equipment leasing, the operation of a computer service bureau
(including software development), and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Additionally,
bank holding companies that meet certain eligibility requirements prescribed by
the BHCA and elect to operate as financial holding companies may engage in, or
own shares in companies engaged in, a wider range of nonbanking activities,
including securities and insurance underwriting and sales, merchant banking and
any other activity that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in
nature, incidental to any such financial activity or complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system
generally. As of the date of this filing, Heartland has not applied
for approval to operate as a financial holding company.
Federal
law also prohibits any person or company from acquiring “control” of an
FDIC-insured depository institution or its holding company without prior notice
to the appropriate federal bank regulator. “Control” is conclusively
presumed to exist upon the acquisition of 25% or more of the outstanding voting
securities of a bank or bank holding company, but may arise under certain
circumstances at 10% ownership.
Capital
Requirements
Bank
holding companies are required to maintain minimum levels of capital in
accordance with Federal Reserve capital adequacy guidelines. If
capital levels fall below the minimum required levels, a bank holding company,
among other things, may be denied approval to acquire or establish additional
banks or non-bank businesses.
The
Federal Reserve’s capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: (i) a risk-based requirement
expressed as a percentage of total assets weighted according to risk; and (ii) a
leverage requirement expressed as a percentage of total assets. The
risk-based requirement consists of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with a minimum requirement of 4% for all others. For
purposes of these capital standards, Tier 1 capital consists primarily of
permanent stockholders’ equity less intangible assets (other than certain loan
servicing rights and purchased credit card relationships). Total capital
consists primarily of Tier 1 capital plus certain other debt and equity
instruments that do not qualify as Tier 1 capital and a portion of Heartland’s
allowance for loan and lease losses.
The
risk-based and leverage standards described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve’s capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities. Further, any banking organization
experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (i.e., Tier 1 capital less all
intangible assets), well above the minimum levels. As of December 31,
2007, Heartland had regulatory capital in excess of the Federal Reserve’s
minimum requirements.
Dividend
Payments
Heartland’s
ability to pay dividends to its shareholders may be affected by both general
corporate law considerations and policies of the Federal Reserve applicable to
bank holding companies. As a Delaware
corporation, Heartland is subject to the limitations of the Delaware General
Corporation Law (the “DGCL”), which allows Heartland to pay dividends only
out of its surplus (as defined and computed in accordance with the provisions of
the DGCL) or if Heartland has no such surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends unless its net income available to common
shareholders over the past year has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears consistent with its
capital needs, asset quality, and overall financial condition. The Federal
Reserve also possesses enforcement powers over bank holding companies and their
non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
Federal
Securities Regulation
Heartland’s
common stock is registered with the SEC under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Consequently, Heartland is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act.
The
Bank Subsidiaries
General
Dubuque
Bank and Trust Company and First Community Bank are Iowa-chartered
banks. As Iowa-chartered banks, Dubuque Bank and Trust Company and
First Community Bank are subject to the examination, supervision, reporting and
enforcement requirements of the Iowa Superintendent, the chartering authority
for Iowa banks.
Galena
State Bank & Trust Co. and Riverside Community Bank are Illinois-chartered
banks. As Illinois-chartered banks, Galena State Bank & Trust Co.
and Riverside Community Bank are subject to the examination, supervision,
reporting and enforcement requirements of the Illinois DFPR, the chartering
authority for Illinois banks.
New
Mexico Bank & Trust is a New Mexico-chartered bank. As a New
Mexico-chartered bank, New Mexico Bank & Trust is subject to the
examination, supervision, reporting and enforcement requirements of the New
Mexico FID, the chartering authority for New Mexico banks.
Rocky
Mountain Bank is a Montana-chartered bank. As a Montana-chartered bank, Rocky
Mountain Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Montana Division, the chartering authority for
Montana banks.
Wisconsin
Community Bank is a Wisconsin-chartered bank. As a
Wisconsin-chartered bank, Wisconsin Community Bank is subject to the
examination, supervision, reporting and enforcement requirements of the
Wisconsin DFI, the chartering authority for Wisconsin banks.
Summit
Bank & Trust is a Colorado-chartered bank. As a
Colorado-chartered bank, Summit Bank & Trust is subject to the examination,
supervision, reporting and enforcement requirements of the Colorado Division,
the chartering authority for Colorado banks.
Arizona
Bank & Trust is an Arizona-chartered bank. As an
Arizona-chartered bank, Arizona Bank & Trust is subject to the examination,
supervision, reporting and enforcement requirements of the Arizona Department,
the chartering authority for Arizona banks.
The
deposit accounts of the Bank Subsidiaries are insured by the FDIC to the maximum
extent provided under federal law and FDIC regulations. As
FDIC-insured institutions, each of the Bank Subsidiaries also is subject to the
examination, supervision, reporting and enforcement requirements of the FDIC,
designated by federal law as the primary federal regulator of state-chartered
FDIC-insured banks that, like the Bank Subsidiaries, are not members of the
Federal Reserve System.
Deposit
Insurance
As
FDIC-insured institutions, the Bank Subsidiaries are required to pay deposit
insurance premium assessments to the FDIC. The FDIC has adopted a risk-based
assessment system under which whereby FDIC-insured depository institutions pay
insurance premiums at rates based on their risk classification. An
institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the
regulators. Under the regulations of the FDIC, as presently in
effect, insurance assessments range from 0.05% to 0.43% of total deposits
(subject to adjustment by the FDIC and the application of assessment credits, if
any, issued by the FDIC in 2007).
FICO
Assessments
The
Financing Corporation (“FICO”) is a mixed-ownership governmental corporation
chartered by the former Federal Home Loan Bank Board pursuant to the Federal
Savings and Loan Insurance Corporation Recapitalization Act of 1987 to function
as a financing vehicle for the recapitalization of the former Federal Savings
and Loan Insurance Corporation. FICO issued 30-year non-callable
bonds of approximately $8.2 billion that mature by 2019. Since 1996,
federal legislation has required that all FDIC-insured depository institutions
pay assessments to cover interest payments on FICO’s outstanding
obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. During the year ended
December 31, 2007, the FICO assessment rate was approximately 0.01% of
deposits.
Supervisory
Assessments
Each of
the Bank Subsidiaries is required to pay supervisory assessments to its
respective state banking regulator to fund the operations of that
agency. In general, the amount of the assessment is calculated on the
basis of each institution’s total assets. During the year ended
December 31, 2007, the Bank Subsidiaries paid supervisory assessments totaling
$425 thousand.
Capital
Requirements
Banks are
generally required to maintain capital levels in excess of other
businesses. Under federal regulations, the Bank Subsidiaries are
subject to the following minimum capital standards: (i) a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with a minimum requirement of at least 4% for all
others; and (ii) a risk-based capital requirement consisting of a minimum ratio
of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier
1 capital to total risk-weighted assets of 4%. In general, the components of
Tier 1 capital and total capital are the same as those for bank holding
companies discussed above.
The
capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, federal
regulations provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. The FDIC’s approval of deposit insurance for Summit Bank & Trust
is conditioned upon Summit Bank & Trust maintaining a Tier 1 capital to
assets ratio of not less than 8% for the first three years of
operation.
Further,
federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
“well-capitalized” may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company’s
eligibility to operate as a financial holding company is a requirement that all
of its financial institution subsidiaries be “well-capitalized.” Under federal
regulations, in order to be “well-capitalized” a financial institution must
maintain a ratio of total capital to total risk-weighted assets of 10% or
greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or
greater and a ratio of Tier 1 capital to total assets of 5% or
greater.
Federal
law also provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators’ powers depends on whether
the institution in question is “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to
which an institution is assigned, the regulators’ corrective powers include: (i)
requiring the institution to submit a capital restoration plan;
(ii) limiting the institution’s asset growth and restricting its
activities; (iii) requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; (iv) restricting
transactions between the institution and its affiliates; (v) restricting
the interest rate the institution may pay on deposits; (vi) ordering a new
election of directors of the institution; (vii) requiring that senior executive
officers or directors be dismissed; (viii) prohibiting the institution from
accepting deposits from correspondent banks; (ix) requiring the institution to
divest certain subsidiaries; (x) prohibiting the payment of principal or
interest on subordinated debt; and (xi) ultimately, appointing a receiver for
the institution.
As of
December 31, 2007: (i) none of the Bank Subsidiaries was subject to a directive
from its primary federal regulator to increase its capital to an amount in
excess of the minimum regulatory capital requirements; (ii) each of the Bank
Subsidiaries exceeded its minimum regulatory capital requirements under
applicable capital adequacy guidelines; and (iii) each of the Bank Subsidiaries
was “well-capitalized,” as defined by applicable regulations. As of
December 31, 2007, Summit Bank & Trust (i) met the 8% capital to assets
ratio established by the FDIC as a condition to Summit Bank & Trust’s
deposit insurance; and (ii) was “well-capitalized,” as defined by applicable
regulations.
Liability
of Commonly Controlled Institutions
Under
federal law, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC-insured depository institutions or
any assistance provided by the FDIC to commonly controlled FDIC-insured
depository institutions in danger of default. Because Heartland controls each of
the Bank Subsidiaries, the Bank Subsidiaries are commonly controlled for
purposes of these provisions of federal law.
Dividend
Payments
The
primary source of funds for Heartland is dividends from the Bank
Subsidiaries. In general, the Bank Subsidiaries may only pay
dividends either out of their historical net income after any required transfers
to surplus or reserves have been made or out of their retained
earnings.
The
payment of dividends by any financial institution is affected by the requirement
to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying
any dividends if, following payment thereof, the institution would be
undercapitalized. As described above, each of the Bank Subsidiaries
exceeded its minimum capital requirements under applicable guidelines as of
December 31, 2007. Further, First Community Bank may not pay
dividends in an amount that would reduce its capital below the amount required
for the liquidation account established in connection with First Community
Bank’s conversion from the mutual to the stock form of ownership in
1991. As of December 31, 2007, approximately $98.7 million was
available to be paid as dividends by the Bank
Subsidiaries. Notwithstanding the availability of funds for
dividends, however, the FDIC may prohibit the payment of any dividends by the
Bank Subsidiaries. In addition, Summit Bank & Trust is subject to
the FDIC’s prohibition on the payment of dividends during the first three years
of a bank’s operations, allowing cash dividends to be paid only from net
operating income, and prohibiting the payment of dividends until an appropriate
allowance for loan and lease losses has been established and overall capital is
adequate.
Insider
Transactions
The Bank
Subsidiaries are subject to certain restrictions imposed by federal law on
extensions of credit to Heartland and its subsidiaries, on investments in the
stock or other securities of Heartland and its subsidiaries and the acceptance
of the stock or other securities of Heartland or its subsidiaries as collateral
for loans made by the Bank Subsidiaries. Certain limitations and
reporting requirements are also placed on extensions of credit by each of the
Bank Subsidiaries to its directors and officers, to directors and officers of
Heartland and its subsidiaries, to principal shareholders of Heartland and to
“related interests” of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the
terms upon which any person who is a director or officer of Heartland or any of
its subsidiaries or a principal shareholder of Heartland may obtain credit from
banks with which the Bank Subsidiaries maintain correspondent
relationships.
Safety
and Soundness Standards
The
federal banking agencies have adopted guidelines that establish operational and
managerial standards to promote the safety and soundness of federally insured
depository institutions. The guidelines set forth standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
safety and soundness guidelines prescribe the goals to be achieved in each area,
and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of
the standards set forth in the guidelines, the institution’s primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator may
restrict the institution’s rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching
Authority
Each of
the Bank Subsidiaries has the authority, pursuant to the laws under which it is
chartered, to establish branches anywhere in the state in which its main office
is located, subject to the receipt of all required regulatory
approvals.
Federal
law permits state and national banks to merge with banks in other states subject
to: (i) regulatory approval; (ii) federal and state deposit concentration
limits; and (iii) state law limitations requiring the merging bank to have been
in existence for a minimum period of time (not to exceed five years) prior to
the merger. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state (rather than the
acquisition of an out-of-state bank in its entirety) is permitted only in those
states the laws of which expressly authorize such expansion.
State
Bank Investments and Activities
Each of
the Bank Subsidiaries generally is permitted to make investments and engage in
activities directly or through subsidiaries as authorized by the laws of the
state under which it is chartered. However, under federal law and
FDIC regulations, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. Federal law and
FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. These restrictions have not had, and are
not currently expected to have, a material impact on the operations of the Bank
Subsidiaries.
Federal
Reserve
Federal
Reserve regulations, as presently in effect, require depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), as follows: for transaction
accounts aggregating $43.9 million or less, the reserve requirement
is 3% of total transaction accounts; and for transaction accounts aggregating in
excess of $43.9 million, the reserve requirement is $1.038 million plus 10% of
the aggregate amount of total transaction accounts in excess of $43.9
million. The first $9.3 million of otherwise reservable balances are
exempted from the reserve requirements. These reserve requirements
are subject to annual adjustment by the Federal Reserve. The Bank
Subsidiaries are in compliance with the foregoing requirements.
G. GOVERNMENTAL
MONETARY POLICY AND ECONOMIC CONDITIONS
Heartland’s
earnings are affected by the policies of regulatory authorities, including the
Federal Reserve. The Federal Reserve’s monetary policies have significantly
affected the operating results of commercial banks in the past and are expected
to continue doing so in the future. Changing economic and money market
conditions prompted by the actions of monetary and fiscal authorities may cause
changes in interest rates, credit availability, and deposit levels that are
beyond Heartland’s control. Future policies of the Federal Reserve and other
authorities cannot be predicted, nor can their effect on future
earnings.
ITEM
1A.
RISK
FACTORS
In
addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
Our
business is concentrated in and dependent upon the continued growth and welfare
of the various markets that we serve.
We
operate over a wide area, including markets in Iowa, Illinois, Wisconsin,
Arizona, New Mexico, Montana and Colorado and our financial condition, results
of operations and cash flows are subject to changes in the economic conditions
in those areas. Our success depends upon the business activity,
population, income levels, deposits and real estate activity in those areas.
Although our customers’ business and financial interests may extend well beyond
our market areas, adverse economic conditions that affect our specific market
area could reduce our growth rate, affect the ability of our customers to repay
their loans to us and generally affect our financial condition and results of
operations.
We
may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income.
As part
of our general growth strategy, we may acquire banks and related businesses that
we believe provide a strategic and geographic fit with our
business. To the extent that we grow through acquisitions, we cannot
assure you that we will be able to adequately and profitably manage this growth.
Acquiring other banks and businesses will involve risks commonly associated with
acquisitions, including:
|
|
·
|
potential
exposure to unknown or contingent liabilities of banks and businesses we
acquire;
|
|
|
·
|
exposure
to potential asset quality issues of the acquired bank or related
business;
|
|
|
·
|
difficulty
and expense of integrating the operations and personnel of banks and
businesses we acquire;
|
|
|
·
|
potential
disruption to our business;
|
|
|
·
|
potential
diversion of our management’s time and attention;
and
|
|
|
·
|
the
possible loss of key employees and customers of the banks and businesses
we acquire.
|
In
addition to acquisitions, we may expand into additional communities or attempt
to strengthen our position in our current markets by undertaking additional
de novo bank formations
or branch openings. Based on our experience, we believe that it
generally takes up to three years for new banking facilities to first achieve
operational profitability, due to the impact of organization and overhead
expenses and the start-up phase of generating loans and deposits. To
the extent that we undertake additional branching and de novo bank and business
formations, we are likely to continue to experience the effects of higher
operating expenses relative to operating income from the new operations, which
may have an adverse effect on our levels of reported net income, return on
average equity and return on average assets.
Our
market and growth strategy relies heavily on our management team, and the
unexpected loss of key managers may adversely affect our
operations.
Much of
our success to date has been influenced strongly by our ability to attract and
to retain senior management experienced in banking and financial services and
familiar with the communities in our different market areas. Because
our service areas are spread over such a wide geographical area, our management
headquartered in Dubuque, Iowa, is dependent on the effective leadership and
capabilities of the management in our local markets for the continued success of
Heartland. Our ability to retain executive officers, the current
management teams and loan officers of our operating subsidiaries will continue
to be important to the successful implementation of our strategy. It
is also critical, as we grow, to be able to attract and retain qualified
additional management and loan officers with the appropriate level of experience
and knowledge about our market area to implement our community-based operating
strategy. The unexpected loss of services of any key management
personnel, or the inability to recruit and retain qualified personnel in the
future, could have an adverse effect on our business, financial condition and
results of operations.
We
face intense competition in all phases of our business.
The
banking and financial services business in our markets is highly
competitive. Our competitors include large regional banks, local
community banks, thrifts, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market mutual funds,
credit unions and other non-bank financial service
providers. Increased competition in our markets may result in a
decrease in the amounts of our loans and deposits, reduced spreads between loan
rates and deposit rates or loan terms that are more favorable to the
borrower. Any of these results could have a material adverse effect
on our ability to grow and remain profitable.
Interest
rates and other conditions impact our results of operations.
Our
profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. Like most banking institutions,
our net interest spread and margin will be affected by general economic
conditions and other factors, including fiscal and monetary policies of the
federal government, that influence market interest rates and our ability to
respond to changes in such rates. At any given time, our assets and
liabilities will be such that they are affected differently by a given change in
interest rates. As a result, an increase or decrease in rates, the
length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. We measure interest rate risk under various rate
scenarios and using specific criteria and assumptions. A summary of
this process, along with the results of our net interest income simulations is
presented at “Quantitative and Qualitative Disclosures About Market Risk”
included under Item 7A of Part II of this Form 10-K. Although we
believe our current level of interest rate sensitivity is reasonable and
effectively managed, significant fluctuations in interest rates may have an
adverse effect on our business, financial condition and results of
operations.
We
must effectively manage our credit risk.
There are
risks inherent in making any loan, including risks inherent in dealing with
individual borrowers, risks of nonpayment, risks resulting from uncertainties as
to the future value of collateral and risks resulting from changes in economic
and industry conditions. We attempt to minimize our credit risk
through prudent loan application approval procedures, careful monitoring of the
concentration of our loans within specific industries and periodic independent
reviews of outstanding loans by our credit review
department. However, we cannot assure you that such approval and
monitoring procedures will reduce these credit risks.
Commercial
loans make up a significant portion of our loan portfolio.
Commercial
loans were $1.63 billion (including $1.23 billion of commercial real estate
loans), or approximately 71% of our total loan portfolio as of December 31,
2007. Our commercial loans are primarily made based on the identified
cash flow of the borrower and secondarily on the underlying collateral provided
by the borrower. Most often, this collateral is accounts receivable,
inventory, machinery or real estate. In the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due
from its customers. The other types of collateral securing these
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
Our
loan portfolio has a large concentration of commercial real estate loans, which
involve risks specific to real estate value.
Commercial
real estate lending is a large portion of our commercial loan portfolio. These
loans were $1.23 billion, or approximately 76%, of our total commercial loan
portfolio as of December 31, 2007. The market value of real estate can fluctuate
significantly in a short period of time as a result of market conditions in the
geographic area in which the real estate is located. A significant portion of
these loans are owner occupied, which reduces the risk typically associated with
commercial real estate lending since the primary source of repayment comes from
the successful operation of a business instead of the cash flow generated from
the rental of the property. Adverse developments affecting real estate values in
one or more of our markets could increase the credit risk associated with our
loan portfolio. Non owner occupied commercial real estate loans typically are
dependent, in large part, on sufficient income from the properties securing the
loans to cover operating expenses and debt service. A weaker economy has an
impact on the absorption period associated with lot and land developments
loans. When the source of repayment is reliant on the successful and
timely sale of lots or land held for resale, a default on these loans becomes a
greater risk. Economic events or governmental regulations outside of
the control of the borrower or lender could negatively impact the future cash
flow and market values of the affected properties.
If the
problems that have occurred in the residential real estate and mortgage markets
were to spread to the commercial real estate market, particularly within our
market areas, the value of collateral securing our commercial real estate loans
may decline and the demand for our commercial real estate loans could decrease.
If the loans that are collateralized by real estate become troubled during a
time when market conditions are declining or have declined, then we may not be
able to realize the collateral value that we anticipated at the time of
originating the loan, which could cause us to increase our provision for loan
losses and adversely affect our operating results and financial condition. We
generally have not experienced a downturn in credit performance by our
commercial real estate loan customers, but in light of the uncertainty that
exists in the economy and credit markets nationally, there can be no guarantee
that we will not experience any deterioration in such performance.
Our
commercial real estate loans also include commercial construction loans,
including land acquisition and development. Construction, land acquisition and
development lending involve additional risks because funds are advanced based
upon estimates of costs and the estimated value of the completed project.
Because of the uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of governmental
regulation on real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value
ratio. As a result, commercial construction loans often involve the disbursement
of substantial funds with repayment dependent, in part, on the success of the
ultimate project and the ability of the borrower to sell or lease the property,
rather than the ability of the borrower or guarantor to repay principal and
interest. If our appraisal of the value of the completed project proves to be
overstated, we may have inadequate security for the repayment of the loan upon
completion of construction of the project. Additionally, with the ongoing
economic environment and the correction in housing prices that is occurring in
many of our market areas, a decrease in demand for the properties constructed by
home builders and developers could result in higher delinquencies and greater
charge-offs in future periods on loans made to such borrowers.
Our
one- to four-family residential mortgage loans may result in lower yields and
profitability.
One- to
four-family residential mortgage loans comprised $217.0 million, or 10%, of our
loan and lease portfolio at December 31, 2007, and are secured primarily by
properties located in the Midwest. These loans generally result in lower yields
and lower profitability for us than other loans in Heartland’s portfolio and are
generally made on the basis of the borrower’s ability to make repayments from
his or her employment and the value of the property securing the loan. The
effects of ongoing mortgage market challenges, combined with the ongoing
correction in residential real estate market prices and reduced levels of home
sales, may result in a continued decrease in mortgage loan volume and increased
charge-offs if are not able to realize the amount of security that we
anticipated at the time of originating the loan.
Our
consumer loans generally have a higher degree of risk of default than our other
loans.
At
December 31, 2007, consumer loans totaled $199.5 million, or 9%, of our total
loan and lease portfolio. Consumer loans typically have shorter terms and lower
balances with higher yields as compared to one- to four-family residential
loans, but generally carry higher risks of default. Consumer loan collections
are dependent on the borrower’s continuing financial stability, and thus are
more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount which
can be recovered on these loans. Citizens Finance loans, net of
unearned, totaled $39.7 million at December 31, 2007, or 20% of
Heartland’s total consumer loan portfolio, net of unearned.
Our
agricultural loans may involve a greater degree of risk than other loans, and
the ability of the borrower to repay may be affected by many factors outside of
the borrower’s control.
At
December 31, 2007, agricultural real estate loans totaled $153.1 million, or 7%,
of our total loan and lease portfolio. Payments on agricultural real estate
loans are dependent on the profitable operation or management of the farm
property securing the loan. The success of the farm may be affected by many
factors outside the control of the borrower, including adverse weather
conditions that prevent the planting of a crop or limit crop yields (such as
hail, drought and floods), loss of livestock due to disease or other factors,
declines in market prices for agricultural products (both domestically and
internationally) and the impact of government regulations (including changes in
price supports, subsidies and environmental regulations). In addition, many
farms are dependent on a limited number of key individuals whose injury or death
may significantly affect the successful operation of the farm. If the cash flow
from a farming operation is diminished, the borrower’s ability to repay the loan
may be impaired. The primary crops in our market areas are corn, soybeans,
peanuts and wheat. Accordingly, adverse circumstances affecting these
crops could have an adverse effect on our agricultural real estate loan
portfolio.
We also
originate agricultural operating loans. At December 31, 2007, these loans
totaled $72.5 million, or 3%, of our total loan and lease portfolio. As with
agricultural real estate loans, the repayment of operating loans is dependent on
the successful operation or management of the farm property. Likewise,
agricultural operating loans involve a greater degree of risk than lending on
residential properties, particularly in the case of loans that are unsecured or
secured by rapidly depreciating assets such as farm equipment or assets such as
livestock or crops. The primary livestock in our market areas include dairy
cows, hogs and feeder cattle. In these cases, any repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation.
Our
allowance for loan losses may prove to be insufficient to absorb probable losses
in our loan portfolio.
We
established our allowance for loan losses in consultation with management of the
Bank Subsidiaries and maintain it at a level considered adequate by management
to absorb probable loan losses that are inherent in the
portfolio. The amount of future loan losses is susceptible to changes
in economic, operating and other conditions, including changes in interest
rates, which may be beyond our control, and such losses may exceed current
estimates. At December 31, 2007, our allowance for loan losses
as a percentage of total loans was 1.45% and as a percentage of total
non-performing loans was approximately 104%. Although management
believes that the allowance for loan losses is adequate to absorb losses on any
existing loans that may become uncollectible, we cannot predict loan losses with
certainty, and we cannot assure you that our allowance for loan losses will
prove sufficient to cover actual loan losses in the future. Loan
losses in excess of our reserves may adversely affect our business, financial
condition and results of operations.
Our
continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is needed.
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. We anticipate that our existing
capital resources will satisfy our capital requirements for the foreseeable
future. However, we may at some point need to raise additional
capital to support continued growth, both internally and through acquisitions.
Our ability to raise additional capital, if needed, will depend on conditions in
the capital markets at that time, which are outside of our control, and on our
financial performance. Accordingly, we cannot assure you of our
ability to raise additional capital if needed on terms acceptable to
us. If we cannot raise additional capital when needed, our ability to
further expand our operations through internal growth and acquisitions could be
materially impaired.
Government
regulation can result in limitations on our operations.
We
operate in a highly regulated environment and are subject to supervision and
regulation by a number of governmental regulatory agencies, including the
Federal Reserve, the FDIC, and the various state agencies where we have a bank
presence. Regulations adopted by these agencies, which are generally
intended to provide protection for depositors and customers rather than for the
benefit of stockholders, govern a comprehensive range of matters relating to
ownership and control of our shares, our acquisition of other companies and
businesses, permissible activities for us to engage in, maintenance of adequate
capital levels and other aspects of our operations. These bank regulators
possess broad authority to prevent or remedy unsafe or unsound practices or
violations of law. The laws and regulations applicable to the banking industry
could change at any time and we cannot predict the effects of these changes on
our business and profitability. Increased regulation could increase our cost of
compliance and adversely affect profitability. For example, new
legislation or regulation may limit the manner in which we may conduct our
business, including our ability to offer new products, obtain financing, attract
deposits, make loans and achieve satisfactory interest spreads.
We
have a continuing need for technological change and we may not have the
resources to effectively implement new technology.
The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and
services. In addition to being able to better serve customers, the
effective use of technology increases efficiency and enables financial
institutions to reduce costs. Our future success will depend in part upon our
ability to address the needs of our customers by using technology to provide
products and services that will satisfy customer demands for convenience as well
as to create additional efficiencies in our operations as we continue to grow
and expand our market areas. Many of our larger competitors have
substantially greater resources to invest in technological
improvements. As a result, they may be able to offer additional or
superior products to those that we will be able to offer, which would put us at
a competitive disadvantage.
System
failure or breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities.
The
computer systems and network infrastructure we use could be vulnerable to
unforeseen problems. Our operations are dependent upon our ability to
protect our computer equipment against damage from physical theft, fire, power
loss, telecommunications failure or a similar catastrophic event, as well as
from security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that
causes an interruption in our operations could have a material adverse effect on
our financial condition and results of operations. Computer
break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through our computer systems and network
infrastructure, which may result in significant liability to us and may cause
existing and potential customers to refrain from doing business with
us. Although we, with the help of third-party service providers, intend
to continue to implement security technology and establish operational
procedures to prevent such damage, there can be no assurance that these security
measures will be successful. In addition, advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms we and our third-party service providers
use to encrypt and protect customer transaction data. A failure of
such security measures could have a material adverse effect on our financial
condition and results of operations.
We
are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and
errors.
Employee
errors and employee or customer misconduct could subject us to financial losses
or regulatory sanctions and seriously harm our reputation. Misconduct by our
employees could include hiding unauthorized activities from us, improper or
unauthorized activities on behalf of our customers or improper use of
confidential information. It is not always possible to prevent employee errors
and misconduct, and the precautions we take to prevent and detect this activity
may not be effective in all cases. Employee errors could also subject us to
financial claims for negligence.
We
maintain a system of internal controls and insurance coverage to mitigate
against operational risks, including data processing system failures and errors
and customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
As of
December 31, 2007, Heartland had no unresolved staff comments.
ITEM 2.
PROPERTIES
The
following table is a listing of Heartland’s principal operating
facilities:
|
Name
and Main Facility Address
|
Main
Facility
Square
Footage
|
Main
Facility
Owned
or Leased
|
Number
of Locations
|
|
Banking
Subsidiaries
|
|||
|
Dubuque
Bank and Trust Company
1398 Central Avenue
Dubuque,
IA 52001
|
59,500
|
Owned
|
8
|
|
Galena
State Bank & Trust Co.
971 Gear Street
Galena,
IL 61036
|
18,000
|
Owned
|
3
|
|
Riverside
Community Bank
6855 E. Riverside
Blvd.
Rockford,
IL 60114
|
8,000
|
Owned
|
4
|
|
First
Community Bank
320 Concert Street
Keokuk,
IA 52632
|
6,000
|
Owned
|
3
|
|
Wisconsin
Community Bank
8240 Mineral Point
Rd.
Madison,
WI 53719
|
19,000
|
Owned
|
7
|
|
New
Mexico Bank & Trust
320 Gold NW
Albuquerque,
NM 87102
|
11,400
|
Lease
term
through
2011
|
16
|
|
Arizona
Bank & Trust
2036 E. Camelback
Rd.
Phoenix,
AZ 85016
|
14,000
|
Owned
|
6
|
|
Rocky
Mountain Bank
2615 King Avenue
West
Billings, MT
59102
|
16,600
|
Owned
|
9
|
|
Summit
Bank & Trust
2002
E. Coalton Road
Broomfield,
CO 80027
|
14,000
|
Owned
|
3
|
|
Non-Bank
Subsidiaries
|
|||
|
Citizens
Finance Co.
1275 Main Street
Dubuque,
IA 52001
|
Leased
from
DB&T
|
8
|
|
The
principal office of Heartland is located in Dubuque Bank and Trust Company's
main office.
ITEM
3.
LEGAL
PROCEEDINGS
There are
certain legal proceedings pending against Heartland and its subsidiaries at
December 31, 2007, that are ordinary routine litigation incidental to our
business. While the ultimate outcome of current legal proceedings cannot be
predicted with certainty, it is the opinion of management that the resolution of
these legal actions should not have a material effect on Heartland's
consolidated financial position or results of operations.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted during the fourth quarter of 2007 to a vote of security
holders.
PART
II
ITEM
5.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Heartland's
common stock was held by approximately 1,500 stockholders of record as of March
9, 2008, and approximately 1,600 additional stockholders held shares in street
name. The common stock of Heartland has been quoted on the Nasdaq
National Market System since May 2003 under the symbol “HTLF”. Prior to
quotation on the Nasdaq National Market System, the common stock of Heartland
was traded on the over-the-counter market.
For the
periods indicated, the following table shows the range of reported prices per
share of Heartland's common stock in the Nasdaq National Market System. These
quotations represent inter-dealer prices without retail markups, markdowns, or
commissions and do not necessarily represent actual transactions.
|
Heartland
Common Stock
|
||
|
Calendar
Quarter
|
High
|
Low
|
|
2007:
|
||
|
First
|
$28.80
|
$25.75
|
|
Second
|
27.20
|
23.07
|
|
Third
|
23.67
|
17.04
|
|
Fourth
|
22.25
|
18.08
|
|
2006:
|
||
|
First
|
$23.60
|
$20.11
|
|
Second
|
26.67
|
22.55
|
|
Third
|
27.86
|
24.16
|
|
Fourth
|
31.08
|
25.10
|
Cash
dividends have been declared by Heartland quarterly during the past two years
ending December 31, 2007. The following table sets forth the cash
dividends per share paid on Heartland's common stock for the past two
years:
|
Calendar
Quarter
|
2007
|
2006
|
|
First
|
$.09
|
$.09
|
|
Second
|
.09
|
.09
|
|
Third
|
.09
|
.09
|
|
Fourth
|
.10
|
.09
|
Heartland's
ability to pay dividends to stockholders is largely dependent upon the dividends
it receives from the Bank Subsidiaries, and the Bank Subsidiaries are subject to
regulatory limitations on the amount of cash dividends they may
pay. See "Business – Supervision and Regulation – Heartland –
Dividend Payments" and "Business – Supervision and Regulation - The Bank
Subsidiaries – Dividend Payments" for a more detailed description of these
limitations.
Heartland
has issued junior subordinated debentures in several private placements. Under
the terms of the debentures, Heartland may be prohibited, under certain
circumstances, from paying dividends on shares of its common stock. Heartland’s
revolving credit agreement also contains specific covenants which, among other
things, limit dividend payments by Heartland under certain circumstances. None
of these circumstances currently exist.
The
following table provides information about purchases by Heartland and its
affiliated purchasers during the quarter ended December 31, 2007, of equity
securities that are registered by Heartland pursuant to Section 12 of the
Exchange Act:
| Period |
(a)
Total Number of Shares Purchase
|
(b) Average Price Paid per Share |
(c)
Total Number of Shares
Purchased as Part of Publicly Announced Plans or Programs(1)
|
(d)
Approximate Dollar Value of Shares that May Yet Be
Purchased Under the Plans or Programs(1)
|
|
10/01/07-
10/31/07
|
20,166
|
$20.06
|
20,166
|
$1,937,758
|
|
11/01/07-
11/30/07
|
67,501
|
$19.10
|
67,501
|
$1,091,753
|
|
12/01/07-
12/31/07
|
15,792
|
$18.73
|
15,792
|
$1,316,384
|
|
Total:
|
103,459
|
$19.23
|
103,459
|
N/A
|
|
(1)
|
Effective
April 17, 2007, Heartland’s board of directors authorized management to
acquire and hold up to 250,000 shares of common stock as treasury shares
at any one time. Effective January 24, 2008, Heartland’s board of
directors authorized an expansion of the number of treasury shares at any
one time to 500,000.
|
There
were no registered sales of equity securities made during the fourth quarter of
Heartland’s fiscal year 2007.
The
following table and graph show a five-year comparison of cumulative total
returns for Heartland Financial USA, Inc., the Nasdaq Composite Index and the
Nasdaq Bank Stock Index. Figures for our common stock represent inter-dealer
quotations, without retail markups, markdowns or commissions and do not
necessarily represent actual transactions. Heartland became listed on Nasdaq in
May, 2003. The table and graph were prepared at our request by Research Data
Group, Inc.
|
Cumulative
Total Return Performance
|
||||||
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
|
|
Heartland
Financial USA, Inc.
|
$100.00
|
$164.25
|
$180.66
|
$198.18
|
$267.28
|
$174.87
|
|
Nasdaq
Composite
|
$100.00
|
$149.75
|
$164.64
|
$168.60
|
$187.83
|
$205.22
|
|
Nasdaq
Bank
|
$100.00
|
$130.51
|
$144.96
|
$141.92
|
$159.42
|
$125.80
|
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN*
ASSUMES
$100 INVESTED ON DECEMBER 31, 2002
*Total
return assumes reinvestment of dividends
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||||
|
For
the years ended December 31, 2007, 2006, 2005, 2004 and
2003
|
||||||||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||
|
STATEMENT
OF INCOME DATA
|
||||||||||||||||||||||
|
Interest
income
|
$
|
215,231
|
$
|
190,150
|
$
|
151,489
|
$
|
120,374
|
$
|
99,517
|
||||||||||||
|
Interest
expense
|
105,891
|
85,409
|
58,916
|
43,073
|
37,312
|
|||||||||||||||||
|
Net
interest income
|
109,340
|
104,741
|
92,573
|
77,301
|
62,205
|
|||||||||||||||||
|
Provision
for loan and lease losses
|
10,073
|
3,883
|
6,533
|
4,846
|
4,183
|
|||||||||||||||||
|
Net
interest income after provision for loan and lease losses
|
99,267
|
100,858
|
86,040
|
72,455
|
58,022
|
|||||||||||||||||
|
Noninterest
income
|
31,961
|
29,444
|
25,457
|
23,135
|
22,167
|
|||||||||||||||||
|
Noninterest
expenses
|
97,857
|
94,449
|
80,285
|
68,425
|
54,704
|
|||||||||||||||||
|
Income
taxes
|
9,409
|
11,578
|
9,561
|
7,556
|
7,990
|
|||||||||||||||||
|
Income
from continuing operations
|
23,962
|
24,275
|
21,651
|
19,609
|
17,495
|
|||||||||||||||||
|
Discontinued
operations:
|
||||||||||||||||||||||
|
Income
from discontinued operations (including gain on sale of
$2,242 in 2007 and $20 in 2006)
|
2,756
|
1,758
|
1,664
|
1,024
|
371
|
|||||||||||||||||
|
Income
taxes
|
1,085
|
931
|
589
|
381
|
147
|
|||||||||||||||||
|
Income
from discontinued operations
|
1,671
|
827
|
1,075
|
643
|
224
|
|||||||||||||||||
|
Net
income
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
$
|
17,719
|
||||||||||||
|
PER
COMMON SHARE DATA
|
||||||||||||||||||||||
|
Net
income – diluted
|
$
|
1.54
|
$
|
1.50
|
$
|
1.36
|
$
|
1.26
|
$
|
1.16
|
||||||||||||
|
Income
from continuing operations – diluted1
|
1.44
|
1.45
|
1.30
|
1.22
|
1.15
|
|||||||||||||||||
|
Cash
dividends
|
0.37
|
0.36
|
0.33
|
0.32
|
0.27
|
|||||||||||||||||
|
Dividend
payout ratio
|
23.60
|
%
|
23.53
|
%
|
23.82
|
%
|
24.87
|
%
|
23.09
|
%
|
||||||||||||
|
Book
value
|
$
|
14.04
|
$
|
12.65
|
$
|
11.46
|
$
|
10.69
|
$
|
9.29
|
||||||||||||
|
Weighted
average shares outstanding-diluted
|
16,596,806
|
16,734,989
|
16,702,146
|
16,084,557
|
15,258,440
|
|||||||||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||||
|
Investments
and federal funds sold
|
$
|
689,949
|
$
|
617,119
|
$
|
567,002
|
$
|
553,284
|
$
|
451,753
|
||||||||||||
|
Loans
held for sale
|
12,679
|
50,381
|
40,745
|
32,161
|
25,678
|
|||||||||||||||||
|
Total
loans and leases, net of unearned
|
2,280,167
|
2,147,845
|
1,953,066
|
1,772,954
|
1,322,549
|
|||||||||||||||||
|
Allowance
for loan and lease losses
|
32,993
|
29,981
|
27,791
|
24,973
|
18,490
|
|||||||||||||||||
|
Total
assets
|
3,264,126
|
3,058,242
|
2,818,332
|
2,629,055
|
2,018,366
|
|||||||||||||||||
|
Total
deposits
|
2,376,299
|
2,311,657
|
2,118,178
|
1,983,846
|
1,492,488
|
|||||||||||||||||
|
Long-term
obligations
|
263,607
|
224,523
|
220,871
|
196,193
|
173,958
|
|||||||||||||||||
|
Stockholders’
equity
|
230,600
|
209,711
|
187,812
|
175,782
|
140,923
|
|||||||||||||||||
|
EARNINGS
PERFORMANCE DATA
|
||||||||||||||||||||||
|
Return
on average total assets
|
0.81
|
%
|
0.86
|
%
|
0.84
|
%
|
0.87
|
%
|
0.95
|
%
|
||||||||||||
|
Return
on average stockholders’ equity
|
11.88
|
12.86
|
12.55
|
12.82
|
13.46
|
|||||||||||||||||
|
Net
interest margin ratio1,2
|
3.95
|
4.17
|
4.03
|
3.90
|
3.86
|
|||||||||||||||||
|
Earnings
to fixed charges:
|
||||||||||||||||||||||
|
Excluding interest on
deposits
|
2.26
|
x
|
2.61
|
x
|
2.97
|
x
|
3.19
|
x
|
3.61
|
x
|
||||||||||||
|
Including interest on
deposits
|
1.34
|
1.44
|
1.55
|
1.65
|
1.69
|
|||||||||||||||||
|
ASSET
QUALITY RATIOS
|
||||||||||||||||||||||
|
Nonperforming
assets to total assets
|
1.06
|
%
|
0.34
|
%
|
0.60
|
%
|
0.41
|
%
|
0.32
|
%
|
||||||||||||
|
Nonperforming
loans and leases to total loans and leases
|
1.40
|
0.39
|
0.77
|
0.56
|
0.42
|
|||||||||||||||||
|
Net
loan and lease charge-offs to average loans and leases
|
0.30
|
0.11
|
0.18
|
0.16
|
0.14
|
|||||||||||||||||
|
Allowance
for loan and lease losses to total loans and leases
|
1.45
|
1.40
|
1.42
|
1.41
|
1.40
|
|||||||||||||||||
|
Allowance
for loan and lease losses to nonperforming loans and
leases
|
103.66
|
356.11
|
185.37
|
251.62
|
333.11
|
|||||||||||||||||
|
CONSOLIDATED
CAPITAL RATIOS
|
||||||||||||||||||||||
|
Average
equity to average assets
|
6.84
|
%
|
6.66
|
%
|
6.68
|
%
|
6.77
|
%
|
7.03
|
%
|
||||||||||||
|
Total
capital to risk-adjusted assets
|
12.48
|
11.18
|
10.61
|
10.82
|
12.42
|
|||||||||||||||||
|
Tier
1 leverage
|
8.01
|
7.74
|
7.66
|
7.26
|
8.07
|
|||||||||||||||||
|
*
|
The
selected historical consolidated financial information set forth above is
qualified in its entirety by reference to, and should be read in
conjunction with, Heartland’s consolidated financial statements and notes
thereto, included elsewhere in this report and Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
|
|||||||||||||||||||||
|
1
|
Excludes
the discontinued operations of our Broadus branch and the related gain on
sale in 2007 and ULTEA and the related gain on sale in
2006.
|
|||||||||||||||||||||
|
2
|
Tax
equivalent using a 35% tax rate.
|
|||||||||||||||||||||
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following presents management’s discussion and analysis of the consolidated
financial condition and results of operations of Heartland Financial USA, Inc.
("Heartland") as of the dates and for the periods indicated. This discussion
should be read in conjunction with the Selected Financial Data, Heartland’s
Consolidated Financial Statements and the Notes thereto and other financial data
appearing elsewhere in this report. The Consolidated Financial Statements
include the accounts of Heartland and its subsidiaries. All of Heartland’s
subsidiaries are wholly-owned except for Arizona Bank & Trust, of which
Heartland was a 90% owner on December 31, 2007, and December 31, 2006, and
an 86% owner on December 31, 2005; Summit Bank & Trust, of which Heartland
was an 81% owner on December 31, 2007, and an 80% owner on December 31, 2006;
and Summit Acquisition Corporation of which Heartland was a 99% owner on
December 31, 2006.
SAFE
HARBOR STATEMENT
This
document (including information incorporated by reference) contains, and future
oral and written statements of Heartland and its management may contain,
forward-looking statements, within the meaning of such term in the Private
Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of Heartland. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of Heartland’s management and on
information currently available to management, are generally identifiable by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and
Heartland undertakes no obligation to update any statement in light of new
information or future events.
Heartland’s
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. The factors which could have a material adverse effect on
the operations and future prospects of Heartland and its subsidiaries are
detailed in the “Risk Factors” section included under Item 1A. of Part I of this
Form 10-K. In addition to the risk factors described in that section, there are
other factors that may impact any public company, including Heartland, which
could have a material adverse effect on the operations and future prospects of
Heartland and its subsidiaries. These additional factors include, but are not
limited to, the following:
|
*
|
The
economic impact of past and any future terrorist attacks, acts of war or
threats thereof, and the response of the United States to any such threats
and attacks.
|
|
*
|
Changes
in accounting policies and practices, as may be adopted by state and
federal regulatory agencies, the Financial Accounting Standards Board, the
Securities and Exchange Commission and the Public Company Accounting
Oversight Board.
|
|
*
|
The
ability of Heartland to manage the risks associated with the foregoing as
well as anticipated.
|
These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.
OVERVIEW
Heartland
is a diversified financial services holding company providing full-service
community banking through nine banking subsidiaries with a total of 59 banking
locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana and
Colorado. Heartland’s tenth banking subsidiary will open in April of
2008, taking the total locations to 60. In addition, Heartland has separate
subsidiaries in the consumer finance, insurance and investment management
businesses. Heartland's primary strategy is to balance its focus on increasing
profitability with asset growth and diversification through acquisitions, de novo bank formations and
branch openings.
Heartland’s
results of operations depend primarily on net interest income, which is the
difference between interest income from interest earning assets and interest
expense on interest bearing liabilities. Noninterest income, which includes
service charges, fees and gains on loans and trust income, also affects
Heartland’s results of operations. Heartland’s principal operating expenses,
aside from interest expense, consist of compensation and employee benefits,
occupancy and equipment costs and provision for loan and lease
losses.
Net
income for the year ended December 31, 2007, was $25.6 million, or $1.54 per
diluted share, an increase of $531,000 or 2% over net income of $25.1 million,
or $1.50 per diluted share, recorded during 2006. Return on average equity was
11.88% and return on average assets was 0.81% for 2007, compared to 12.86% and
0.86%, respectively, for 2006. During the first quarter of 2006, a pre-tax
judgment of $2.4 million was recorded as noninterest expense, while a $286,000
award under a counterclaim was recorded as a loan loss recovery. The net
after-tax effect to net income for this one-time event was $1.3 million.
Exclusive of this expense, Heartland’s net income for 2006 was $26.4 million, or
$1.58 per diluted share. Because of the non-recurring nature of this expense,
management believes that this pro-forma presentation can help investors
understand Heartland’s financial performance for 2006.
The sale
of Rocky Mountain Bank’s branch banking office in Broadus, Montana, was
completed on June 22, 2007. Included in the sale were $20.9 million
of loans and $30.2 million of deposits. The results of operations of the branch
are reflected on the income statement as income from discontinued operations for
the prior periods reported. During 2007, income from the discontinued operations
of the Broadus branch included a $2.4 million pre-tax gain recorded as a result
of the sale.
For the
year 2007, income from continuing operations was $24.0 million, or $1.44 per
diluted share, compared to $24.3 million, or $1.45 per diluted share, during
2006. Exclusive of the $1.3 million one-time expense associated with the court
case mentioned earlier, Heartland’s net income from continuing operations for
2006 was $25.6 million, or $1.53 per diluted share. Income during 2007 fell
short of the income recorded during 2006 primarily as a result of increased
provision for loan and lease losses, which was $10.1 million during 2007
compared to $3.9 million during 2006, an increase of $6.2 million or 159%. The
impact of this additional expense on earnings was partially mitigated by growth
in net interest income and noninterest income. Net interest income increased
$4.6 million or 4% over the prior year, primarily as a result of a $266.3
million or 10% growth in average earning assets and was partially offset as the
amount of nonperforming loans increased throughout the year. For the year 2007,
noninterest income increased $2.5 million or 9% over 2006, primarily from
increased trust fees, brokerage and insurance commissions, gains on sale of
loans and income on bank-owned life insurance. During the fourth quarter of
2007, Heartland sold its credit card portfolio, resulting in a gain of $1.0
million. The increases in the aforementioned noninterest income categories were
partially offset by $1.2 million in amortization of investments made during 2007
in limited liability companies that own certified historic structures for which
historic rehabilitation tax credits apply. For the year 2007, noninterest
expense increased $3.4 million or 4%. Exclusive of the $2.4 million judgment
recorded during 2006, noninterest expense increased $5.8 million or 6%. The
largest contributor to this increase was salaries and employee benefits which
grew by $3.6 million or 7% during 2007, primarily due to branch expansions,
including the formation of Summit Bank & Trust and Minnesota Bank &
Trust, and additional staffing at Heartland’s operations center to provide
support services to the growing number of bank subsidiaries. Total full-time
equivalent employees increased to 982 at December 31, 2007, from 959 at December
31, 2006. Heartland’s expansion efforts during 2007 included the opening of five
new branch offices, the relocation of one branch office and the formation of its
newest de novo bank
charter, Minnesota Bank & Trust. Looking into 2008, Heartland plans to
continue to make strategic investments in future growth by expanding its banking
franchise in existing markets, albeit at a somewhat slower pace.
Net
income for the year ended December 31, 2006, was $25.1 million, or $1.50 per
diluted share, an increase of $2.4 million or 10% from the net income of $22.7
million, or $1.36 per diluted share, recorded for 2005. Return on average equity
was 12.86% and return on average assets was 0.86% for 2006, compared to 12.55%
and 0.84%, respectively, for 2005. Exclusive of the $1.3 million one-time
expense associated with the court case mentioned earlier, Heartland’s net income
for 2006 was $26.4 million, or $1.58 per diluted share, an increase of $3.7
million or 16% over 2005.
On May
15, 2006, the acquisition of Bank of the Southwest was completed and the bank
became a part of Arizona Bank & Trust, Heartland’s de novo bank chartered in
2003 and located in Phoenix, Arizona. As of the acquisition date, total assets
at Bank of the Southwest were $63.2 million, total loans were $52.4 million and
total deposits were $44.4 million. The purchase price was $18.1 million, all in
cash. The resultant acquired core deposit intangible of $540 thousand is being
amortized over a period of eight years. The remaining excess purchase price over
the fair value of tangible and identifiable intangible assets acquired of $5.1
million was recorded as goodwill.
On May 3,
2006, Heartland was notified by the court that a verdict was entered awarding
the plaintiff $2.4 million for its original claim and awarding Heartland
$286,000 for its counterclaim against the plaintiff in a lawsuit regarding a
breach of contract claim relating to the 2002 sale of Wisconsin Community Bank’s
Eau Claire branch. Heartland recorded the judgments in the quarter ended March
31, 2006. Heartland has filed an appeal to the court ruling and the plaintiff
subsequently filed a cross-appeal. In February 2008, Heartland received word
that the Wisconsin Court of Appeals for District III upheld the lower court
damage award and dismissed the plaintiff’s cross-appeal. Heartland has filed for
certiorari to the Wisconsin Supreme Court for a review of the Appellate Court
Decision.
The sale
of ULTEA Inc., Heartland’s fleet leasing subsidiary, to ALD Automotive was
completed on December 22, 2006. Total assets of ULTEA at the date of sale were
$50.3 million. The financial statements reflect the results of operations of
ULTEA on the consolidated statements of income as income from discontinued
operations for the prior periods. During 2006, income from operations of this
discontinued subsidiary included the $20,000 pre-tax gain recorded as a result
of the sale. During 2006, Heartland also closed the office of HTLF Capital
Corp., its investment banking subsidiary, as its two officers left employment
with Heartland to join another investment bank. These strategic divestitures
represented Heartland’s commitment to focus resources on its core banking and
consumer finance businesses.
The
improved earnings during 2006 compared to 2005 were primarily due to the $12.2
million or 13% growth in net interest income. Average earning assets increased
$217.8 million or 9% from $2.38 billion during 2005 to $2.60 billion during
2006. Noninterest income increased $4.0 million or 16% during 2006 compared to
2005. The categories experiencing the largest increases were service charges and
fees, loan servicing income, trust fees, brokerage and insurance commissions and
securities gains. Also contributing to the increased earnings during 2006 was a
$2.7 million or 41% reduction in the provision for loan and lease losses
resulting from the positive resolution of a significant portion of nonperforming
and nonaccrual loans, along with a $1.2 million or 34% decline in net
charge-offs. For 2006, noninterest expense increased $14.2 million or 18% when
compared to 2005. The largest contributor to this increase was salaries and
employee benefits, which grew by $6.1 million or 13% during this one-year
comparative period. This growth in salaries and employee benefits expense was
primarily the result of additional staffing at Heartland’s operations center to
provide support services to the growing number of bank subsidiaries, the
addition of branches at New Mexico Bank & Trust and Arizona Bank &
Trust, the acquisition of the Bank of the Southwest, and the formation of Summit
Bank & Trust, which began operations in October 2005 as a loan production
office under the Rocky Mountain Bank umbrella. Costs associated with the
expansion efforts also contributed to increases in occupancy, advertising and
other noninterest expense during 2006. The $2.4 million judgment recorded during
the first quarter of 2006 was also a major factor in the increase in noninterest
expense during 2006. Exclusive of the judgment, noninterest expense increased
$11.8 million or 15% in comparison to 2005.
At
December 31, 2007, total assets reached $3.26 billion, an increase of $205.9
million or 7% since year-end 2006, primarily because of loan growth. Despite the
loss of $20.9 million in loans as a result of the sale of the Broadus branch of
Rocky Mountain Bank in the second quarter of 2007, total loans and leases grew
to $2.28 billion at December 31, 2007, an increase of $132.3 million or 6% since
year-end 2006. The growth in loans was balanced between Heartland’s Midwestern
and Western markets. The Heartland subsidiary banks experiencing notable loan
growth during 2007 were Dubuque Bank and Trust Company, New Mexico Bank &
Trust, Rocky Mountain Bank and Summit Bank & Trust. The commercial and
commercial real estate loan category grew by $148.9 million or 10%. Included in
this change was the reclassification of $28.3 million of commercial real estate
loans at Wisconsin Community Bank from the loans held for sale portfolio to the
loans held to maturity portfolio as management intends to hold those loans in
its portfolio. Despite the loss of $30.2 million in deposits as
a result of the Broadus branch sale, total deposits grew to $2.38 billion at
December 31, 2007, an increase of $64.6 million or 3% since year-end 2006.
Growth in deposits was weighted more heavily in Heartland’s Midwestern markets.
Demand deposits experienced a $10.0 million or 3% increase and savings deposit
balances experienced a $32.1 million or 4% increase despite the $3.4 million in
demand deposits and $10.6 million in savings deposits lost as part of the
Broadus branch sale. The increase in savings deposits primarily resulted from
the promotion of a new money market product. Time deposits, excluding brokered
time deposits, increased $54.1 million or 5% with a majority of the growth at
the Midwestern banks where depositors tend to favor the term deposit product.
Included in the Broadus branch sale were $16.2 million in time deposits.
Brokered time deposit balances decreased $31.6 million or 31% during the year.
At December 31, 2007, brokered time deposits totaled $69.0 million or 3% of
total deposits compared to $100.6 million or 4% of total deposits at year-end
2006.
At
December 31, 2006, total assets were $3.06 billion, an increase of $239.9
million or 9% since year-end 2005. Total loans and leases were $2.1 billion at
December 31, 2006, an increase of $194.8 million or 10% since year-end 2005. The
May 15, 2006, acquisition of Bank of the Southwest by Arizona Bank & Trust
accounted for $50.9 million or 26% of this growth. The Heartland subsidiary
banks experiencing notable loan growth during 2006 were New Mexico Bank &
Trust, Arizona Bank & Trust and Rocky Mountain Bank. The commercial and
commercial real estate loan category grew by $179.7 million or 14%. Exclusive of
the $21.0 million in commercial and commercial real estate loans acquired in the
Bank of the Southwest acquisition, this loan category increased by $158.7
million or 12%. Total deposits at December 31, 2006, were $2.3 billion, an
increase of $193.5 million or 9% during 2006. The acquisition of Bank of the
Southwest accounted for $44.4 million or 23% of this growth. All of Heartland’s
subsidiary banks except for First Community Bank and Galena State Bank &
Trust Co. experienced growth in deposits during 2006 with 70% of the growth
occurring in our banks located in Heartland’s Western markets. Demand deposits
experienced an $18.8 million or 5% increase with the Bank of the Southwest
acquisition contributing $17.0 million in demand deposit balances at closing.
Savings deposit balances increased by $68.6 million or 9%. At closing, the Bank
of the Southwest accounted for $17.4 million in savings deposit balances.
Brokered time deposits decreased $45.0 million or 31% while other time deposit
balances increased $151.1 million or 17% during 2006. The Bank of the Southwest
acquisition contributed $10.0 million in other time deposit balances. Of
particular note is that the Heartland banks were able to replace a large portion
of the maturing brokered time deposits with deposits from our local markets. As
interest rates moved upward during the first half of the year and remained at
those levels, many deposit customers shifted a portion of their lower yielding
deposit balances into higher yielding money market and certificate of deposit
accounts. The Heartland bank subsidiaries have priced these products
competitively to retain existing deposit customers, as well as to attract new
customers.
CRITICAL
ACCOUNTING POLICIES
The
process utilized by Heartland to estimate the adequacy of the allowance for loan
and lease losses is considered a critical accounting policy for Heartland. The
allowance for loan and lease losses represents management’s estimate of
identified and unidentified probable losses in the existing loan portfolio.
Thus, the accuracy of this estimate could have a material impact on Heartland’s
earnings. The adequacy of the allowance for loan and lease losses is determined
using factors that include the overall composition of the loan portfolio,
general economic conditions, types of loans, loan collateral values, past loss
experience, loan delinquencies, and potential losses from identified substandard
and doubtful credits. Nonperforming loans and large non-homogeneous loans are
specifically reviewed for impairment and the allowance is allocated on a loan by
loan basis as deemed necessary. Homogeneous loans and loans not specifically
evaluated are grouped into pools to which a loss percentage, based on historical
experience, is allocated. The adequacy of the allowance for loan and lease
losses is monitored on an ongoing basis by the loan review staff, senior
management and the banks’ boards of directors. Specific factors considered by
management in establishing the allowance included the following:
|
*
|
Heartland
has continued to experience growth in more complex commercial loans as
compared to relatively lower-risk residential real estate
loans.
|
|
|
|
|
*
|
During
the last several years, Heartland has entered new geographical markets in
which it had little or no previous lending experience.
|
|
*
|
Heartland
has experienced an increase in net charge-offs and nonperforming loans
during the current year.
|
There can
be no assurances that the allowance for loan and lease losses will be adequate
to cover all loan losses, but management believes that the allowance for loan
and lease losses was adequate at December 31, 2007. 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. Should the economic climate continue to deteriorate, borrowers may
experience difficulty, and the level of nonperforming loans, charge-offs, and
delinquencies could rise and require further increases in the provision for loan
and lease losses. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the allowance for loan and
lease losses carried by the Heartland subsidiaries. Such agencies may require
Heartland to make additional provisions to the allowance based upon their
judgment about information available to them at the time of their
examinations.
The table
below estimates the theoretical range of the 2007 allowance outcomes and related
changes in provision expense assuming either a reasonably possible deterioration
in loan credit quality or a reasonably possible improvement in loan credit
quality.
|
THEORETICAL
RANGE OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
|||
|
(Dollars
in thousands)
|
|||
|
Allowance
for loan and lease losses at December 31, 2007
|
$
|
32,993
|
|
|
Assuming
deterioration in credit quality:
|
|||
|
Addition
to provision
|
4,023
|
||
|
Resultant
allowance for loan and lease losses
|
$
|
37,016
|
|
|
Assuming
improvement in credit quality:
|
|||
|
Reduction
in provision
|
(1,403
|
)
|
|
|
Resultant
allowance for loan and lease losses
|
$
|
31,590
|
|
The
assumptions underlying this sensitivity analysis represent an attempt to
quantify theoretical changes that could occur in the total allowance for loan
and lease losses given various economic assumptions that could impact inherent
loss in the current loan and lease portfolio. It further assumes that the
general composition of the allowance for loans and lease losses determined
through Heartland’s existing process and methodology remains relatively
unchanged. It does not attempt to encompass extreme and/or prolonged economic
downturns, systemic contractions to specific industries, or systemic shocks to
the financial services sector. The addition to provision was calculated based
upon the assumption that, under an economic downturn, a certain percentage of
loan balances in each rating pool would migrate from its current loan grade to
the next lower loan grade. The reduction in provision was calculated based upon
the assumption that, under an economic upturn, a certain percentage of loan
balances in each rating pool would migrate from its current loan grade to the
next higher loan grade. The estimation of the percentage of loan balances that
would migrate from its current rating pool to the next was based upon
Heartland’s experiences during previous periods of economic
movement.
RESULTS
OF OPERATIONS
NET
INTEREST INCOME
Net
interest income is the difference between interest income earned on earning
assets and interest expense paid on interest bearing liabilities. As such, net
interest income is affected by changes in the volume and yields on earning
assets and the volume and rates paid on interest bearing liabilities. Net
interest margin is the ratio of tax equivalent net interest income to average
earning assets.
Net
interest margin, expressed as a percentage of average earning assets, was 3.95%
during 2007 compared to 4.17% for 2006. Affecting the net interest
margin throughout 2007 was the impact of foregone interest on Heartland’s
nonperforming loans which had increased to $31.8 million by
year-end. Additionally, early in the third quarter of 2007, a $20.5
million investment was made in bank-owned life insurance upon which interest
expense associated with the funding of this investment affects net interest
margin while the corresponding earnings on this investment is recorded as
noninterest income.
Net
interest margin, expressed as a percentage of average earning assets, was 4.17%
during 2006 compared to 4.03% for 2005. Heartland’s continued
expansion into the Western states of New Mexico, Montana, Arizona and Colorado,
where net interest margins were higher than those earned in the Midwestern
states, was a contributing factor to the improvement of the net interest margin
during that same time period. During 2006, 40% of Heartland’s average earning
assets were situated in the West compared to 37% during 2005.
Net
interest income, on a tax-equivalent basis, increased $4.7 million or 4% during
2007 and $12.4 million or 13% during 2006. Fluctuations in net interest income
between years is related to changes in the volume of average earning assets and
interest bearing liabilities, combined with changes in average yields and rates
of the corresponding assets and liabilities as demonstrated in the tables at the
end of this section. The percentage of average loans to total average assets was
71% during 2007, 70% during 2006 and 68% during 2005.
On a
tax-equivalent basis, interest income totaled $218.9 million during 2007
compared to $193.7 million during 2006, an increase of $25.2 million or 13%.
This increase was primarily a result of growth in average earning assets which
grew $266.3 million or 10% from $2.60 billion in 2006 to $2.86 billion in 2007.
Nearly half of the loans in Heartland’s commercial and agricultural loan
portfolios are floating rate loans that reprice immediately upon a change in the
national prime interest rate, thus changes in the national prime rate impact
interest income more quickly than if there were more fixed rate loans. In a
downward rate environment, like what has been experienced lately, continued
increases in interest income will be more heavily dependent upon the amount of
loan growth experienced. The national prime interest rate was 8.25% for the
first eight months of 2007 until the Federal Reserve began reducing the targeted
fed funds rate later in the year. By year-end the national prime interest rate
had declined to 7.25%.
On a
tax-equivalent basis, interest income was $193.7 million during 2006 compared to
$154.8 million during 2005, an increase of $38.9 million or 25%. This increase
was primarily caused by the increase in interest rates during the first six
months of 2006. The national prime interest rate increased at 25 basis point
increments throughout the first six months of the year going from 7.25% on
January 1, 2006, to 8.25% on July 1, 2006.
Interest
expense for 2007 was $105.9 million compared to $85.4 million during 2006, an
increase of $20.5 million or 24%. The rates on many of the time deposit accounts
maturing during the first half of 2007 were lower than the current rates as more
than half of those maturing time deposits had been issued during the last half
of 2005 and first half of 2006 when rates were lower. Additionally, Heartland
continued to experience movement in deposit balances from noninterest bearing
deposit accounts to interest bearing deposit accounts. Approximately 77% of
Heartland’s certificate of deposit accounts will mature within the next twelve
months at a weighted average rate of 4.73%.
Interest
expense for 2006 was $85.4 million compared to $58.9 million during 2005, an
increase of $26.5 million or 45%. As rates moved upward during the first half of
2006 and continued at those levels during the remainder of the year, Heartland
experienced some movement in deposit balances from lower yielding accounts into
higher yielding money market and certificate of deposit accounts. The targeted
federal funds rate increased in 25 basis point increments going from 4.25% at
the beginning of the year to 5.25% on June 29, 2006, and remained at the 5.25%
level for the remainder of the year.
Heartland
manages its balance sheet to minimize the effect that a change in interest rates
has on its net interest margin. During 2008, Heartland will continue to work
toward improving both its earning asset and funding mix through targeted organic
growth strategies, which management believes will result in additional net
interest income. Heartland’s net interest income simulations reflect an asset
sensitive posture leading to stronger earnings performance in a rising interest
rate environment. The expected benefits associated with an inherently asset
sensitive balance sheet will be delayed if rates rise as a highly competitive
environment is expected to place pressure on deposit costs. Eventually, in a
rapidly rising interest rate environment, funding costs should stabilize while
asset yields continue to improve. Alternatively, Heartland’s net interest income
would likely decline in a falling rate environment. Given the asset sensitive
posture of Heartland’s balance sheet and the 125 basis point rate cut by the
Federal Reserve in January 2008, Heartland will be challenged to maintain its
net interest margin at the current level. Management continues to support a
pricing discipline in which the focus is less on price and more on the unique
value provided to business and retail clients.
In order
to reduce the potentially negative impact a downward movement in interest rates
would have on net interest income on the loan portfolio, Heartland has two
derivative transactions currently open: a five-year collar transaction on a
notional $50.0 million entered into in September 2005 and a three-year collar
transaction on a notional $50.0 million entered into in April 2006.
Additionally, in August 2006, Heartland entered into a leverage structured
wholesale repurchase agreement transaction. This wholesale repurchase agreement
in the amount of $50.0 million initially had a variable interest rate that reset
quarterly to the 3-month LIBOR rate plus 29.375 basis points. Within this
contract was an interest floor option that resulted when the 3-month LIBOR rate
fell to 4.40% or lower. If that situation occurred, the rate paid would have
been decreased by two times the difference between the 3-month LIBOR rate and
4.40%. In order to effectuate this wholesale repurchase agreement, a $55.0
million government agency bond was acquired. On the date of the contract, the
interest rate on the securities was nearly equivalent to the interest rate being
paid on the repurchase agreement contract. As the general level of interest
rates declined during 2007, this transaction was restructured to reduce the risk
of rising rates in the future. The unrealized gains were used to buy down the
maximum rate to 3.06% until August 28, 2009, when it is callable. If not called,
the funding will remain in place until November 28, 2010. Within this contract
is an interest cap option that will reduce the interest rate being paid as the
3-month LIBOR rate exceeds 5.15%.
On
February 1, 2007, Heartland entered into two interest rate cap transactions on a
total notional amount of $45.0 million to reduce the potentially negative impact
an upward rate environment would have on net interest income. These two-year
contracts were acquired with the counterparty as the payer on 3-month LIBOR at a
cap strike rate of 5.50% and were designated as a cash flow hedge against the
LIBOR based variable-rate interest payments on Heartland’s subordinated
debentures associated with two of its trust preferred capital securities. The
cost of these derivative transactions was $90 thousand.
|
ANALYSIS
OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
1
|
|||||||||||||||||||||||||||||||
|
For
the years ended December 31, 2007, 2006 and 2005
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||
|
EARNING
ASSETS
|
|||||||||||||||||||||||||||||||
|
Securities:
|
|||||||||||||||||||||||||||||||
|
Taxable
|
$
|
477,338
|
$
|
21,937
|
4.60
|
%
|
$
|
419,625
|
$
|
17,593
|
4.19
|
%
|
$
|
400,993
|
$
|
13,896
|
3.47
|
%
|
|||||||||||||
|
Nontaxable
1
|
136,552
|
9,077
|
6.65
|
131,149
|
8,843
|
6.74
|
121,227
|
8,481
|
7.00
|
||||||||||||||||||||||
|
Total
securities
|
613,890
|
31,014
|
5.05
|
550,774
|
26,436
|
4.80
|
522,220
|
22,377
|
4.28
|
||||||||||||||||||||||
|
Interest
bearing deposits
|
700
|
33
|
4.71
|
555
|
22
|
3.96
|
6,994
|
277
|
3.96
|
||||||||||||||||||||||
|
Federal
funds sold
|
7,295
|
387
|
5.31
|
2,522
|
164
|
6.50
|
5,103
|
175
|
3.43
|
||||||||||||||||||||||
|
Loans
and leases:
|
|||||||||||||||||||||||||||||||
|
Commercial
and commercial real estate 1
|
1,597,247
|
125,916
|
7.88
|
1,427,989
|
109,495
|
7.67
|
1,233,663
|
81,208
|
6.58
|
||||||||||||||||||||||
|
Residential
mortgage
|
240,932
|
16,303
|
6.77
|
228,954
|
14,964
|
6.54
|
232,481
|
14,132
|
6.08
|
||||||||||||||||||||||
|
Agricultural
and agricultural real estate 1
|
225,471
|
18,209
|
8.08
|
212,992
|
17,077
|
8.02
|
212,548
|
14,672
|
6.90
|
||||||||||||||||||||||
|
Consumer
|
196,432
|
20,655
|
10.52
|
187,814
|
18,684
|
9.95
|
177,264
|
15,658
|
8.83
|
||||||||||||||||||||||
|
Direct
financing leases, net
|
11,939
|
714
|
5.98
|
13,913
|
839
|
6.03
|
14,250
|
790
|
5.54
|
||||||||||||||||||||||
|
Fees
on loans
|
-
|
5,696
|
-
|
-
|
6,054
|
-
|
-
|
5,535
|
-
|
||||||||||||||||||||||
|
Less:
allowance for loan and lease losses
|
(31,870
|
)
|
-
|
-
|
(29,801
|
)
|
-
|
-
|
(26,659
|
)
|
-
|
-
|
|||||||||||||||||||
|
Net
loans and leases
|
2,240,151
|
187,493
|
8.37
|
2,041,861
|
167,113
|
8.18
|
1,843,547
|
131,995
|
7.16
|
||||||||||||||||||||||
|
Total
earning assets
|
2,862,036
|
$
|
218,927
|
7.65
|
%
|
2,595,712
|
$
|
193,735
|
7.46
|
%
|
2,377,864
|
$
|
154,824
|
6.51
|
%
|
||||||||||||||||
|
NONEARNING
ASSETS
|
|||||||||||||||||||||||||||||||
|
Total
nonearning assets
|
292,788
|
333,990
|
330,632
|
||||||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
3,154,824
|
$
|
2,929,702
|
$
|
2,708,496
|
|||||||||||||||||||||||||
|
INTEREST
BEARING LIABILITIES
|
|||||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
|||||||||||||||||||||||||||||||
|
Savings
|
$
|
831,675
|
$
|
22,404
|
2.69
|
%
|
$
|
781,636
|
$
|
18,993
|
2.43
|
%
|
$
|
741,814
|
$
|
10,889
|
1.47
|
%
|
|||||||||||||
|
Time,
$100,000 and over
|
291,073
|
14,307
|
4.92
|
220,736
|
9,287
|
4.21
|
197,127
|
6,343
|
3.22
|
||||||||||||||||||||||
|
Other
time deposits
|
876,146
|
41,154
|
4.70
|
826,610
|
34,250
|
4.14
|
750,353
|
25,643
|
3.42
|
||||||||||||||||||||||
|
Short-term
borrowings
|
287,428
|
13,293
|
4.62
|
225,500
|
9,827
|
4.36
|
199,529
|
5,335
|
2.67
|
||||||||||||||||||||||
|
Other
borrowings
|
241,517
|
14,733
|
6.10
|
229,020
|
13,051
|
5.70
|
211,558
|
10,706
|
5.06
|
||||||||||||||||||||||
|
Total
interest bearing liabilities
|
2,527,839
|
105,891
|
4.19
|
2,283,502
|
85,408
|
3.74
|
2,100,381
|
58,916
|
2.81
|
||||||||||||||||||||||
|
NONINTEREST
BEARING LIABILITIES
|
|||||||||||||||||||||||||||||||
|
Noninterest
bearing deposits
|
362,109
|
347,041
|
326,203
|
||||||||||||||||||||||||||||
|
Accrued
interest and other liabilities
|
49,136
|
104,035
|
100,876
|
||||||||||||||||||||||||||||
|
Total
noninterest bearing liabilities
|
411,245
|
451,076
|
427,079
|
||||||||||||||||||||||||||||
|
STOCKHOLDERS’
EQUITY
|
215,740
|
195,124
|
181,036
|
||||||||||||||||||||||||||||
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
$
|
3,154,824
|
$
|
2,929,702
|
$
|
2,708,496
|
|||||||||||||||||||||||||
|
Net
interest income
1
|
$
|
113,036
|
$
|
108,327
|
$
|
95,908
|
|||||||||||||||||||||||||
|
Net
interest spread
|
3.46
|
%
|
3.72
|
%
|
3.71
|
%
|
|||||||||||||||||||||||||
|
Net
interest income to total earning assets
1
|
3.95
|
%
|
4.17
|
%
|
4.03
|
%
|
|||||||||||||||||||||||||
|
Interest
bearing liabilities to earning assets
|
88.32
|
%
|
87.97
|
%
|
88.33
|
%
|
|||||||||||||||||||||||||
|
1 Tax
equivalent basis is calculated using an effective tax rate of
35%.
|
|||||||||||||||||||||||||||||||
The table
above sets forth certain information relating to Heartland’s average
consolidated balance sheets and reflects the yield on average earning assets and
the cost of average interest bearing liabilities for the years indicated.
Dividing income or expense by the average balance of assets or liabilities
derives such yields and costs. Average balances are derived from daily balances,
and nonaccrual loans are included in each respective loan category.
The
following table allocates the changes in net interest income to differences in
either average balances or average rates for earning assets and interest bearing
liabilities. The changes have been allocated proportionately to the change due
to volume and change due to rate. Interest income is measured on a tax
equivalent basis using a 35% tax rate.
|
ANALYSIS
OF CHANGES IN NET INTEREST INCOME
|
||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
Compared to 2006
|
2006
Compared to 2005
|
2005
Compared to 2004
|
||||||||||||||||||||||||||||||||||
|
Change
Due to
|
Change
Due to
|
Change
Due to
|
||||||||||||||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||||||||||||
|
EARNING
ASSETS / INTEREST INCOME
|
||||||||||||||||||||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
$
|
2,420
|
$
|
1,924
|
$
|
4,344
|
$
|
646
|
$
|
3,051
|
$
|
3,697
|
$
|
978
|
$
|
(483
|
)
|
$
|
495
|
|||||||||||||||||
|
Tax-exempt
|
364
|
(130
|
)
|
234
|
694
|
(332
|
)
|
362
|
1,651
|
(207
|
)
|
1,444
|
||||||||||||||||||||||||
|
Interest
bearing deposits
|
6
|
5
|
11
|
(255
|
)
|
-
|
(255
|
)
|
12
|
38
|
50
|
|||||||||||||||||||||||||
|
Federal
funds sold
|
310
|
(87
|
)
|
223
|
(89
|
)
|
78
|
(11
|
)
|
(44
|
)
|
89
|
45
|
|||||||||||||||||||||||
|
Loans
and leases
|
16,229
|
4,151
|
20,380
|
14,199
|
20,919
|
35,118
|
18,273
|
11,387
|
29,660
|
|||||||||||||||||||||||||||
|
TOTAL
EARNING ASSETS
|
19,329
|
5,863
|
25,192
|
15,195
|
23,716
|
38,911
|
20,870
|
10,824
|
31,694
|
|||||||||||||||||||||||||||
|
LIABILITIES
/ INTEREST EXPENSE
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
1,216
|
2,195
|
3,411
|
585
|
7,519
|
8,104
|
684
|
4,361
|
5,045
|
|||||||||||||||||||||||||||
|
Time,
$100,000 and over
|
2,959
|
2,061
|
5,020
|
760
|
2,184
|
2,944
|
1,194
|
1,254
|
2,448
|
|||||||||||||||||||||||||||
|
Other
time deposits
|
2,052
|
4,852
|
6,904
|
2,606
|
6,001
|
8,607
|
3,319
|
1,416
|
4,735
|
|||||||||||||||||||||||||||
|
Short-term
borrowings
|
2,699
|
767
|
3,466
|
694
|
3,798
|
4,492
|
472
|
2,473
|
2,945
|
|||||||||||||||||||||||||||
|
Other
borrowings
|
712
|
970
|
1,682
|
884
|
1,461
|
2,345
|
1,127
|
(457
|
)
|
670
|
||||||||||||||||||||||||||
|
TOTAL
INTEREST BEARING LIABILITIES
|
9,638
|
10,845
|
20,483
|
5,529
|
20,963
|
26,492
|
6,796
|
9,047
|
15,843
|
|||||||||||||||||||||||||||
|
NET
INTEREST INCOME
|
$
|
9,691
|
$
|
(4,982
|
)
|
$
|
4,709
|
$
|
9,666
|
$
|
2,753
|
$
|
12,419
|
$
|
14,074
|
$
|
1,777
|
$
|
15,851
|
|||||||||||||||||
PROVISION
FOR LOAN AND LEASE LOSSES
The
allowance for loan and lease losses is established through a provision charged
to expense to provide, in Heartland management’s opinion, an adequate allowance
for loan and lease losses. The adequacy of the allowance for loan and lease
losses is determined by management using factors that include the overall
composition of the loan portfolio, general economic conditions, types of loans,
loan collateral values, past loss experience, loan delinquencies, substandard
credits and doubtful credits. For additional details on the specific factors
considered, refer to the critical accounting policies and allowance for loan and
lease losses sections of this report.
The
provision for loan losses was $10.1 million during 2007 compared to $3.9 million
in 2006, an increase of $6.2 million or 159%. The provision for loan losses
increased during 2007 as a result of loan growth, an increase in nonperforming
loans and the impact historical losses have on the calculation of the adequacy
of Heartland’s allowance for loan and lease losses. The provision for loan
losses also increased as a result of the downgrading of credits as the economy
softened and real estate values declined, particularly in the Phoenix market.
The provision for loan losses during 2006 was $3.9 million compared to $6.5
million in 2005, a decrease of $2.6 million or 41%. The positive resolution of a
significant portion of Heartland’s nonperforming and nonaccrual loans, along
with a $1.2 million or 34% decline in net charge-offs during 2006 compared to
2005, contributed to the reduction in the provision for loan losses during
2006.
|
NONINTEREST
INCOME
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2007
|
2006
|
2005
|
2007/
2006
|
2006/
2005
|
||||||||||||||
|
Service
charges and fees, net
|
$
|
11,108
|
$
|
11,058
|
$
|
9,211
|
-
|
%
|
20
|
%
|
||||||||
|
Loan
servicing income
|
4,376
|
4,279
|
3,093
|
2
|
38
|
|||||||||||||
|
Trust
fees
|
8,053
|
7,258
|
6,530
|
11
|
11
|
|||||||||||||
|
Brokerage
and insurance commissions
|
3,097
|
1,871
|
1,401
|
66
|
34
|
|||||||||||||
|
Securities
gains, net
|
341
|
553
|
198
|
(38
|
)
|
179
|
||||||||||||
|
Gain
(loss) on trading account securities
|
(105
|
)
|
141
|
(11
|
)
|
174
|
1,382
|
|||||||||||
|
Impairment
loss on equity securities
|
-
|
(76
|
)
|
-
|
100
|
-
|
||||||||||||
|
Gains
on sale of loans
|
3,578
|
2,289
|
2,572
|
56
|
(11
|
)
|
||||||||||||
|
Valuation
adjustment on mortgage servicing rights
|
-
|
-
|
39
|
-
|
(100
|
)
|
||||||||||||
|
Income
on bank-owned life insurance
|
1,777
|
1,151
|
1,022
|
54
|
13
|
|||||||||||||
|
Other
noninterest income
|
(264
|
)
|
920
|
1,402
|
(129
|
)
|
(34
|
)
|
||||||||||
|
Total
noninterest income
|
$
|
31,961
|
$
|
29,444
|
$
|
25,457
|
9
|
%
|
16
|
%
|
||||||||
The table
above shows Heartland’s noninterest income for the years indicated. Total
noninterest income increased $2.5 million or 9% during 2007 and $4.0 million or
16% during 2006. The noninterest income categories contributing significantly to
the improvement during 2007 were trust fees, brokerage and insurance
commissions, gains on sale of loans and income on bank-owned life insurance. The
noninterest income categories reflecting significant improvement during 2006
were service charges and fees, loan servicing income and trust fees. Recorded in
other noninterest income during the third quarter of 2005 was the forgiveness of
$500,000 in debt as Heartland fulfilled the job creation requirements of its
Community Development Block Grant Loan Agreement with the City of Dubuque.
Exclusive of this one-time income item, noninterest income increased $4.5
million or 18% during 2006.
During
2007, service charges and fees increased $50 thousand or less than 1% whereas,
during 2006, service charges and fees increased $1.8 million or 20%. Included in
service charges and fees were the fees recorded at HTLF Capital Corp., which
were $30 thousand during 2007, $502 thousand during 2006 and $181 thousand
during 2005. In the second quarter of 2006, the officers of HTLF Capital Corp.
left employment with Heartland to join an investment bank. Subsequently,
management decided to close the operations of this subsidiary. Fees recorded by
HTLF Capital Corp. on any transactions financed by the Heartland subsidiary
banks were deferred and recognized as income over the period of the loan.
Exclusive of the fees at HTLF Capital Corp., service charges and fees increased
$521 thousand or 5% during 2007 and $1.5 million or 17% during 2006, primarily
as a result of additional overdraft fees and growth in fees collected for the
processing of activity on Heartland’s automated teller machines and debit cards.
Early in 2006, an overdraft privilege feature that had been added to our retail
checking account product line in 2004 was added to our business checking account
product line. The expansion of this feature into the business product line,
along with growth in the number of checking accounts, resulted in the increase
of overdraft fees. Overdraft fees were $5.5 million during 2007 compared to $5.1
million during 2006 and $4.3 million during 2005.
Loan
servicing income increased $97 thousand or 2% during 2007 and $1.2 million or
38% during 2006. Servicing fees on commercial loans totaled $2.5 million during
2007 and 2006 compared to $1.7 million during 2005. Also included in this
category are service fees collected on the mortgage loans Heartland sold into
the secondary market, while retaining servicing. Heartland’s mortgage loan
servicing portfolio grew from $582.7 million at December 31, 2005 to $602.7
million at December 31, 2006, and $636.0 million at December 31, 2007,
generating mortgage loan servicing fees of $1.6 million for 2007 and $1.5
million for 2006 and 2005.
Trust
fees increased $795 thousand or 11% during 2007 and $728 thousand or 11% during
2006. During the second quarter of 2006, the fee schedule for trust services was
adjusted upward. Additionally, the market value of trust assets, upon which a
large portion of trust fees are based, increased from $1.4 billion at year-end
2005 to $1.6 billion at year-end 2006 and $1.7 billion at year-end
2007.
Brokerage
and insurance commissions increased $1.2 million or 66% during 2007 and $470
thousand or 34% during 2006. In March 2007, Summit Bank & Trust completed
the acquisition of brokerage personnel and a book of business. The experienced
brokers and support staff serve their 8,800 investment clients from Summit Bank
& Trust’s Broomfield office. Also contributing to the additional commissions
during both years was Heartland’s change in the fall of 2005 to a new third
party marketer of alternative investment products. This change to IFMG
Securities, Inc. greatly enhanced the product offerings Heartland is able to
provide its customers. In 2008, IFMG Securities, Inc. was acquired by LPL
Financial, one of the largest and best known independent brokerage firms in the
United States. Many of Heartland’s subsidiary banks have begun to more actively
promote brokerage and insurance services.
Impairment
losses on equity securities deemed to be other than temporary totaled $76
thousand during 2006. This loss was related to the decline in market value of
one of the issues of common stock held in Heartland’s available for sale equity
securities portfolio. During 2007, this particular issue of common stock was
sold.
Gains on
sale of loans were $3.6 million during 2007, $2.3 million during 2006 and $2.6
million during 2005. Included in these gains during 2007 was the sale of
Heartland’s credit card portfolio at a gain of $1.0 million. Exclusive of this
one-time event, Heartland’s gains on sale of loans generally results from the
sale of fifteen- and thirty-year, fixed-rate mortgage loans into the secondary
market. During low rate environments and flat yield curve environments,
customers are more apt to take these long-term mortgage loans, which Heartland
usually elects to sell.
Income on
bank-owned life insurance increased $626 thousand or 54% during 2007 and $129
thousand or 13% during 2006. The increase during 2007 is reflective of improved
performance on a newly purchased policy which included a new premium of $20.5
million and $30.5 million in exchanged policies.
Other
noninterest income decreased $1.2 million or 129% during 2007 and $482 thousand
or 34% during 2006. During the third quarter of 2007, Dubuque Bank and Trust
Company acquired a 99.9% ownership interest in two different limited liability
companies that own certified historic structures for which historic
rehabilitation tax credits apply. Amortization of the investments in these
limited liability companies was recorded in the amount of $1.2 million during
2007. Excluding this amortization, other noninterest income during 2007 remained
consistent with the $920 thousand recorded during 2006. Other noninterest income
during 2005 included the forgiveness of $500 thousand in debt as Heartland
fulfilled the job creation requirements of its Community Development Block Grant
Loan Agreement with the City of Dubuque.
|
NONINTEREST
EXPENSE
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2007
|
2006
|
2005
|
2007/
2006
|
2006/
2005
|
||||||||||||||
|
Salaries
and employee benefits
|
$
|
54,568
|
$
|
50,975
|
$
|
44,913
|
7
|
%
|
13
|
%
|
||||||||
|
Occupancy
|
7,902
|
7,291
|
5,893
|
8
|
24
|
|||||||||||||
|
Furniture
and equipment
|
6,972
|
6,724
|
6,132
|
4
|
10
|
|||||||||||||
|
Outside
services
|
9,555
|
9,404
|
8,275
|
2
|
14
|
|||||||||||||
|
Advertising
|
3,642
|
3,893
|
3,217
|
(6
|
)
|
21
|
||||||||||||
|
Intangible
assets amortization
|
892
|
942
|
961
|
(5
|
)
|
(2
|
)
|
|||||||||||
|
Other
noninterest expenses
|
14,326
|
15,220
|
10,894
|
(6
|
)
|
40
|
||||||||||||
|
Total
noninterest expense
|
$
|
97,857
|
$
|
94,449
|
$
|
80,285
|
4%
|
18
|
%
|
|||||||||
|
Efficiency
ratio1
|
67.65
|
%
|
68.83
|
%
|
66.26
|
%
|
||||||||||||
|
1 Noninterest
expense divided by the sum of net interest income and noninterest income
less security gains.
|
||||||||||||||||||
The table
above shows Heartland’s noninterest expense for the years indicated. Noninterest
expense increased $3.4 million or 4% in 2007 and $14.2 million or 18% in
2006. Contributing to the increases in these costs during both years were
expenses associated with expansion efforts. Additionally, the $2.4 million
judgment against Heartland and a bank subsidiary recorded during the first
quarter of 2006 was a factor in the increase in noninterest expense for 2006.
Exclusive of the judgment, noninterest expense increased $5.8 million or 6%
during 2007 and $11.8 million or 15% in 2006.
Salaries
and employee benefits, the largest component of noninterest expense, increased
$3.6 million or 7% during 2007 and $6.1 million or 13% during 2006. The smaller
increase during 2007 was primarily related to a $2.3 million adjustment recorded
during the fourth quarter of 2007 for lower employer incentive payouts and
employer contributions to Heartland’s retirement plan. Growth in salaries and
employee benefits expense during both years was primarily due to branch
expansions, including the formation of Summit Bank & Trust and Minnesota
Bank & Trust and additional staffing at Heartland’s operations center to
provide support services to the growing number of bank subsidiaries. Total
full-time equivalent employees increased to 982 at year-end 2007 from 959 at
year-end 2006 and 909 at year-end 2005.
Occupancy
and furniture and equipment expense, in aggregate, increased $859 thousand or 6%
during 2007 and $2.0 million or 16% during 2006. During these two years,
Heartland continued to focus efforts on growth opportunities. Wisconsin
Community Bank celebrated the opening of its Madison, Wisconsin office in March
2007. New Mexico Bank & Trust opened its third branch office in Santa Fe in
April 2007 and two offices in the Albuquerque metropolitan area during 2006, one
in Los Lunas in January and the other in Rio Rancho in March. Summit Bank &
Trust began operations in its Broomfield, Colorado office in November 2006,
opened its second branch office in Thornton, Colorado in May 2007 and acquired
its third branch office in Erie, Colorado in October 2007. Rocky Mountain Bank
opened its second branch office in Billings, Montana, in September 2007. Arizona
Bank & Trust opened its fourth branch in Chandler, Arizona in May 2006,
acquired a branch in Tempe, Arizona as a result of its acquisition of Bank of
the Southwest in May 2006 and opened its sixth branch office in Gilbert, Arizona
in October 2007. Even though expansion efforts adversely affect short-term
profitability, management feels these investments offer great potential for
Heartland’s future profitability. Of Heartland’s 59 banking offices, six have
been open for less than one year, an additional six have been open for less than
two years and two more have been open for less than three years. Management
believes that it generally takes approximately three years for new branch
offices to become profitable. Including the three additional offices under
construction, Heartland has roughly 25% of its distribution network yet to make
a meaningful contribution to earnings.
Outside
services expense increased $151 thousand or 2% during 2007 and $1.1 million or
14% during 2006. These expenses included FDIC assessments totaling $762 thousand
during 2007 compared to $271 thousand during 2006 and $272 thousand during 2005.
Credits applied towards FDIC assessments during 2007 totaled $868 thousand.
Credits remaining for use in 2008 total $269 thousand. Also included in outside
services expense were fees paid for legal and consulting services, which had
increased during 2006 as a result of the Bank of the Southwest acquisition, the
ULTEA, Inc. sale transaction and the formation of Summit Bank &
Trust.
Advertising
costs decreased $251 thousand or 6% during 2007 compared to an increase of $676
thousand or 21% during 2006. Included in advertising costs during 2006 was
approximately $750 thousand paid to a third party provider for a demand deposit
acquisition program that was implemented during the first quarter of 2006 and
discontinued during the fourth quarter of 2006.
Other
noninterest expenses decreased $894 thousand or 6% during 2007 and increased
$4.3 million during 2006. Both of the years under comparison included expenses
of a nonrecurring nature. The year 2007 included $339 thousand of remaining
unamortized issuance costs expensed due to the redemption of $13.0 million of
floating rate trust preferred securities. The year 2006 included the $2.4
million judgment mentioned previously. Exclusive of these two items, other
noninterest expenses increased $1.1 million or 9% during 2007 and $1.9 million
or 18% during 2006, primarily as a result of the expansion efforts. The
following types of expenses are classified in the other noninterest expenses
category: supplies, telephone, software maintenance, software amortization,
seminars and other staff expense.
INCOME
TAXES
Income
tax expense from continuing operations during 2007 decreased $2.2 million or 19%
when compared to 2006, resulting in an effective tax rate of 28.2% for 2007
compared to 32.3% for 2006. The decrease in Heartland’s effective tax rate
during 2007 resulted from the recording of a tax benefit totaling $1.4 million
in projected federal rehabilitation tax credits associated with Dubuque Bank and
Trust Company’s newly acquired 99.9% ownership interest in two limited liability
companies that own certified historic structures. Heartland’s effective tax rate
is also affected by the level of tax-exempt interest income which, as a
percentage of pre-tax income, was 19.0% during 2007 and 17.7% during 2006. The
tax-equivalent adjustment for this tax-exempt interest income was $3.7 million
during 2007 compared to $3.6 million during 2006.
Income
tax expense from continuing operations during 2006 increased $2.0 million or 21%
when compared to 2005, resulting in an effective tax rate of 32.3% for 2006
compared to 30.6% for 2005. The higher effective tax rate during 2006 was
attributable to a reduction in the amount of tax-exempt interest income as a
percentage of pre-tax income and a reduction in the amount of low-income housing
credits. The tax-equivalent adjustment for tax-exempt interest income was $3.6
million during 2006 compared to $3.3 million during 2005. Tax-exempt interest
income as a percentage of pre-tax income from continuing operations was 17.7%
during 2006 compared to 19.3% during 2005. Income taxes recorded during 2005
included low-income housing tax credits totaling $412 thousand. During 2006,
these credits decreased to $218 thousand for the year.
During
2006, income taxes from discontinued operations included a $282 thousand tax
provision to reflect taxes associated with the disposition of goodwill and life
insurance policies at ULTEA that had not been previously recorded, as these
items were appropriately treated as permanent tax differences in prior
periods.
FINANCIAL
CONDITION
LENDING
ACTIVITIES
Heartland’s
major source of income is interest on loans and leases. The table below presents
the composition of Heartland’s loan portfolio at the end of the years
indicated.
|
LOAN
AND LEASE PORTFOLIO
|
|||||||||||||||||||||||||||||||||||
|
December
31, 2007, 2006, 2005, 2004 and 2003
|
|||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||
|
Commercial
and commercial real estate
|
$
|
1,632,597
|
71.48
|
%
|
$
|
1,483,738
|
68.95
|
%
|
$
|
1,304,080
|
66.65
|
%
|
$
|
1,162,103
|
65.42
|
%
|
$
|
860,552
|
64.93
|
%
|
|||||||||||||||
|
Residential
mortgage
|
217,044
|
9.50
|
225,343
|
10.47
|
219,671
|
11.23
|
212,842
|
11.98
|
148,376
|
11.19
|
|||||||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
225,663
|
9.88
|
233,748
|
10.86
|
230,357
|
11.77
|
217,860
|
12.27
|
166,182
|
12.54
|
|||||||||||||||||||||||||
|
Consumer
|
199,518
|
8.74
|
194,652
|
9.05
|
181,019
|
9.25
|
167,109
|
9.41
|
136,601
|
10.31
|
|||||||||||||||||||||||||
|
Lease
financing, net
|
9,158
|
0.40
|
14,359
|
0.67
|
21,586
|
1.10
|
16,284
|
0.92
|
13,621
|
1.03
|
|||||||||||||||||||||||||
|
Gross
loans and leases
|
2,283,980
|
100.00
|
%
|
2,151,840
|
100.00
|
%
|
1,956,713
|
100.00
|
%
|
1,776,198
|
100.00
|
%
|
1,325,332
|
100.00
|
%
|
||||||||||||||||||||
|
Unearned
discount
|
(2,107
|
)
|
(1,875
|
)
|
(1,870
|
)
|
(1,920
|
)
|
(1,836
|
)
|
|||||||||||||||||||||||||
|
Deferred
loan fees
|
(1,706
|
)
|
(2,120
|
)
|
(1,777
|
)
|
(1,324
|
)
|
(947
|
)
|
|||||||||||||||||||||||||
|
Total
loans and leases
|
2,280,167
|
2,147,845
|
1,953,066
|
1,772,954
|
1,322,549
|
||||||||||||||||||||||||||||||
|
Allowance
for loan and lease losses
|
(32,993
|
)
|
(29,981
|
)
|
(27,791
|
)
|
(24,973
|
)
|
(18,490
|
)
|
|||||||||||||||||||||||||
|
Loans
and leases, net
|
$
|
2,247,174
|
$
|
2,117,864
|
$
|
1,925,275
|
$
|
1,747,981
|
$
|
1,304,059
|
|||||||||||||||||||||||||
The table
below sets forth the remaining maturities by loan and lease category, including
loans held for sale.
|
MATURITY
AND RATE SENSITIVITY OF LOANS AND LEASES
1
|
||||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
Over
1 Year
|
||||||||||||||||||
|
Through
5 Years
|
Over
5 Years
|
|||||||||||||||||
|
One
Year
or
Less
|
Fixed
Rate
|
Floating
Rate
|
Fixed
Rate
|
Floating
Rate
|
Total
|
|||||||||||||
|
Commercial
and commercial real estate
|
$
|
802,542
|
$
|
438,312
|
$
|
202,977
|
$
|
82,685
|
$
|
106,081
|
$
|
1,632,597
|
||||||
|
Residential
mortgage
|
88,706
|
26,962
|
22,042
|
39,180
|
52,778
|
229,668
|
||||||||||||
|
Agricultural
and agricultural real estate
|
113,920
|
51,031
|
27,857
|
7,762
|
25,093
|
225,663
|
||||||||||||
|
Consumer
|
42,947
|
67,572
|
10,846
|
15,753
|
62,455
|
199,573
|
||||||||||||
|
Lease
financing, net
|
3,421
|
5,569
|
-
|
168
|
-
|
9,158
|
||||||||||||
|
Total
|
$
|
1,051,536
|
$
|
589,446
|
$
|
263,722
|
$
|
145,548
|
$
|
246,407
|
$
|
2,296,659
|
||||||
|
1
Maturities based upon contractual
dates
|
||||||||||||||||||
Heartland
experienced growth in total loans and leases of $132.3 million or 6% in
2007 and $194.8 million or 10% in 2006. The June 22, 2007, sale of the Broadus
branch of Rocky Mountain Bank included loans of $20.9 million and the May 15,
2006, acquisition of Bank of the Southwest by Arizona Bank & Trust included
loans of $50.9 million. Exclusive of these two events, total loans and leases
increased by $204.2 million or 10% in 2007 and $143.8 million or 7% in 2006. The
Heartland subsidiary banks experiencing notable loan growth during 2007 were
Dubuque Bank and Trust Company, New Mexico Bank & Trust, Rocky Mountain Bank
and Summit Bank & Trust. During 2006, major contributors to loan growth were
New Mexico Bank & Trust, Arizona Bank & Trust and Rocky Mountain Bank.
The Heartland subsidiary banks have seen loan demand slow during the last half
of 2007 and have been focusing much more attention on credit
quality.
The
commercial and commercial real estate loan category continues to be the primary
focus for all the Heartland subsidiary banks. These loans comprised 71% of the
loan portfolio at year-end 2007, 69% at year-end 2006 and 67% at year-end 2005.
These loans increased $148.9 million or 10% during 2007 and $179.7 million or
14% during 2006. Included in the change for 2007 was the reclassification of
$28.3 million of commercial real estate loans at Wisconsin Community Bank from
the loans held for sale portfolio to the loans held to maturity portfolio as
management intends to hold those loans in its portfolio. The sale of the Broadus
branch of Rocky Mountain Bank included commercial and commercial real estate
loans of $3.1 million. The 2007 growth in commercial and commercial real estate
loans was greater in Heartland’s Western banks, with New Mexico Bank & Trust
being the largest contributor. In the Midwest, Dubuque Bank and Trust Company
experienced the largest share of the growth at $51.8
million. Exclusive of the $21.0 million in commercial and commercial
real estate loans acquired in the Bank of the Southwest acquisition, this loan
category increased by $158.7 million or 12% during 2006. Nearly all the 2006
growth occurred in Heartland’s Western banks with the largest contributor being
New Mexico Bank & Trust.
Agricultural
and agricultural real estate loans outstanding decreased $8.1 million or 3%
during 2007. The sale of the Broadus branch of Rocky Mountain Bank included
$16.2 million of agricultural and agricultural real estate loans. Exclusive of
these loans, Heartland’s agricultural loans increased $8.1 million or 4% during
2007, with nearly all this growth occurring at Dubuque Bank and Trust Company.
During 2006, agricultural and agricultural real estate loans increased $3.4
million or 1%. Growth at Dubuque Bank and Trust Company, Galena State Bank &
Trust Co. and Wisconsin Community Bank was partially offset by payoffs on a few
large credits at the New Mexico Bank & Trust office in Clovis, New
Mexico.
Residential
mortgage loans experienced a decrease of $8.3 million or 4% during 2007 compared
to an increase of $5.7 million or 3% during 2006. The sale of the Broadus branch
of Rocky Mountain Bank included $978 thousand of residential mortgage loans.
Management anticipates that growth in our residential mortgage loan portfolio
will be slower in low interest environments when consumers are more apt to
choose 15- and 30-year fixed-rate mortgage loans which are usually sold into the
secondary market. Servicing is retained on a portion of these loans so that the
Heartland bank subsidiaries have an opportunity to continue providing their
customers the excellent service they expect.
Consumer
loans increased $4.9 million or 2% during 2007 and $13.6 million or 8% during
2006. Exclusive of the fourth quarter 2007 sale of Heartland’s credit card
portfolio totaling $6.0 million, consumer loans increased $10.9 million or 6%
during 2007. During both years, growth at Citizens Finance Co. was a major
contributing factor as it experienced an increase of $4.3 million or 11% during
2007 and $3.7 million or 11% during 2006. Citizens Finance Co.’s total loans
comprised 21% of Heartland’s total consumer loan portfolio as of December 31,
2007, and 19% as of December 31, 2006. Heartland has continued to pursue
opportunities to expand its Citizens Finance Co. subsidiary, as evidenced by the
December 2004 opening of an office in Crystal Lake, Illinois; May 2006 opening
of an office in Tinley Park, Illinois; October 2006 opening of an office in
Cedar Rapids, Iowa and the January 2007 opening of an office in Davenport, Iowa.
Also contributing to the growth in consumer loans during both years was the
successful sale of home equity lines of credit, primarily in Heartland’s Western
banks.
Loans
held for sale decreased $37.7 million or 75% during 2007, primarily as a result
of the reclassification of $28.3 million of commercial real estate loans at
Wisconsin Community Bank from the loans held for sale portfolio to the loans
held to maturity portfolio as management intends to hold those loans in its
portfolio. Loans held for sale increased $9.6 million or 24% during 2006,
as a result of activity in 15- and 30-year fixed-rate mortgage loans, which are
usually sold into the secondary market, and commercial and commercial real
estate loans at Wisconsin Community Bank that were structured to meet the USDA
and SBA loan guaranty program requirements.
Although
the risk of nonpayment for any reason exists with respect to all loans, specific
risks are associated with each type of loan. The primary risks associated with
commercial and agricultural loans are the quality of the borrower’s management
and the impact of national and regional economic factors. Additionally, risks
associated with commercial and agricultural real estate loans include
fluctuating property values and concentrations of loans in a specific type of
real estate. Repayment on loans to individuals, including those on residential
real estate, are dependent on the borrower’s continuing financial stability as
well as the value of the collateral underlying these credits, and thus are more
likely to be affected by adverse personal circumstances and deteriorating
economic conditions. These risks are described in more detail in Item 1.A. “Risk
Factors” of this Form 10-K. Heartland monitors its loan concentrations and does
not believe it has excessive concentrations in any specific
industry.
Heartland’s
strategy with respect to the management of these types of risks, whether loan
demand is weak or strong, is to encourage the Heartland banks to follow tested
and prudent loan policies and underwriting practices which include: (i) granting
loans on a sound and collectible basis; (ii) ensuring that primary and secondary
sources of repayment are adequate in relation to the amount of the loan; (iii)
administering loan policies through a board of directors; (iv) developing and
maintaining adequate diversification of the loan portfolio as a whole and of the
loans within each loan category; and (v) ensuring that each loan is properly
documented and, if appropriate, guaranteed by government agencies and that
insurance coverage is adequate.
NONPERFORMING
LOANS AND LEASES AND
OTHER
NONPERFORMING ASSETS
The table
below sets forth the amounts of nonperforming loans and leases and other
nonperforming assets on the dates indicated.
|
NONPERFORMING
ASSETS
|
|||||||||||||||||||||
|
December
31, 2007, 2006, 2005, 2004 and 2003
|
|||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Nonaccrual
loans and leases
|
$
|
30,694
|
$
|
8,104
|
$
|
14,877
|
$
|
9,837
|
$
|
5,092
|
|||||||||||
|
Loans
and leases contractually past due 90 days or more
|
1,134
|
315
|
115
|
88
|
458
|
||||||||||||||||
|
Total
nonperforming loans and leases
|
31,828
|
8,419
|
14,992
|
9,925
|
5,550
|
||||||||||||||||
|
Other
real estate
|
2,195
|
1,575
|
1,586
|
425
|
599
|
||||||||||||||||
|
Other
repossessed assets
|
438
|
349
|
471
|
313
|
285
|
||||||||||||||||
|
Total
nonperforming assets
|
$
|
34,461
|
$
|
10,343
|
$
|
17,049
|
$
|
10,663
|
$
|
6,434
|
|||||||||||
|
Nonperforming
loans and leases to total loans and leases
|
1.40
|
%
|
0.39
|
%
|
0.77
|
%
|
0.56
|
%
|
0.42
|
%
|
|||||||||||
|
Nonperforming
assets to total loans and leases plus repossessed property
|
1.51
|
%
|
0.48
|
%
|
0.87
|
%
|
0.60
|
%
|
0.48
|
%
|
|||||||||||
|
Nonperforming
assets to total assets
|
1.06
|
%
|
0.34
|
%
|
0.60
|
%
|
0.41
|
%
|
0.32
|
%
|
|||||||||||
Heartland
regularly monitors and continues to develop systems to oversee the quality of
its loan portfolio. Under Heartland’s internal loan review program, loan review
officers are responsible for reviewing existing loans and leases, testing
loan ratings assigned by loan officers, identifying potential problem loans and
leases and monitoring the adequacy of the allowance for loan and lease losses at
the Heartland banks. An integral part of our loan review program is a loan
rating system, under which a rating is assigned to each loan and lease within
the portfolio based on the borrower’s financial position, repayment ability,
collateral position and repayment history.
Nonperforming
loans, defined as nonaccrual loans, restructured loans and loans past due ninety
days or more, were $31.8 million or 1.40% of total loans and leases at December
31, 2007, compared to $8.4 million or 0.39% of total loans and leases at
December 31, 2006. The majority of the $23.4 million increase in nonperforming
loans during 2007 was attributable to nonperforming loans at Wisconsin Community
Bank totaling $10.2 million, of which $2.5 million in outstanding balances at
December 31, 2007, is covered by government guarantees, and nonperforming loans
at Arizona Bank & Trust totaling $5.3 million. The remaining increase was
distributed among the other bank subsidiaries and related to a few loan
customers. The decrease in nonperforming loans during 2006 was primarily
attributable to the completion of workout plans on a few of the large credits,
the majority of which were repaid and resulted in no charge-offs.
Management
monitors the loan portfolio of each subsidiary bank and, at this point, does not
feel that the increase in nonperforming loans during 2007 is any indication of a
systemic problem but is more likely a result of the continuing shift in the
economy in some of Heartland’s markets. With all the recent attention given to
subprime lending, Heartland feels it is important to inform investors that its
Bank Subsidiaries have not been active in the origination of subprime loans. The
allowance for loan and lease losses related to total nonperforming loans and
leases was $1.8 million and $301,000 at December 31, 2007 and 2006,
respectively.
ALLOWANCE
FOR LOAN AND LEASE LOSSES
The
process utilized by Heartland to determine the adequacy of the allowance for
loan and lease losses is considered a critical accounting practice for
Heartland. The allowance for loan and lease losses represents management’s
estimate of identified and unidentified probable losses in the existing loan
portfolio. For additional details on the specific factors considered, refer to
the critical accounting policies section of this report.
The
allowance for loan and lease losses at December 31, 2007, was 1.45% of loans and
104% of nonperforming loans and leases, compared to 1.40% of loans and 356% of
nonperforming loans at December 31, 2006. Additions to the allowance for loan
and lease losses during 2007 were primarily a result of the downgrading of
credits as the economy softened and real estate values declined, particularly in
the Phoenix market, and an increase in nonperforming loans and the impact
historical losses have on the calculation of the adequacy of Heartland’s
allowance for loan and lease losses. Also contributing to the growth in the
allowance for loan and lease losses was the expansion of the loan portfolio
during both years, particularly in the more complex commercial loan category and
in the new markets Heartland has entered in which Heartland had little or no
previous lending experience.
The
amount of net charge-offs recorded by Heartland was $6.9 million during 2007 and
$2.3 million during 2006. As a percentage of average loans and leases, net
charge-offs were 0.30% during 2007 and 0.11% during 2006. The increased
charge-offs during 2007 were largely attributable to one credit at Galena State
Bank & Trust Co. and two credits at Wisconsin Community Bank. Citizens
Finance Co., Heartland's consumer finance subsidiary, experienced net
charge-offs of $1.6 million during 2007 and $1.2 million during 2006. Net losses
as a percentage of average loans, net of unearned, at Citizens was 4.31% for
2007 compared to 3.61% for 2006 and 3.94% for 2005. Loans with payments past due
for more than thirty days at Citizens was 7.06% of gross loans at year-end 2007
compared to 4.92% of gross loans at year-end 2006 and 5.32% of gross loans at
year-end 2005. The change in bankruptcy laws in 2005 adversely impacted Citizens
Finance Co. as more customers elected to declare bankruptcy prior to year-end
2005. Although Heartland may periodically experience a charge-off of more
significance on an individual credit, management feels the credit culture at
Heartland and its subsidiary banks remains solid.
|
ANALYSIS
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||
|
December
31, 2007, 2006, 2005, 2004 and 2003
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||
|
Allowance
at beginning of year
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
$
|
16,091
|
||||||||||||
|
Charge-offs:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
5,226
|
1,494
|
2,203
|
1,736
|
499
|
|||||||||||||||||
|
Residential
mortgage
|
237
|
227
|
75
|
104
|
108
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
-
|
148
|
160
|
78
|
6
|
|||||||||||||||||
|
Consumer
|
3,101
|
2,120
|
2,141
|
1,699
|
1,779
|
|||||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
charge-offs
|
8,564
|
3,989
|
4,579
|
3,617
|
2,392
|
|||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
983
|
1,031
|
544
|
345
|
112
|
|||||||||||||||||
|
Residential
mortgage
|
4
|
95
|
1
|
35
|
2
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
-
|
62
|
141
|
188
|
29
|
|||||||||||||||||
|
Consumer
|
654
|
545
|
466
|
437
|
465
|
|||||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
recoveries
|
1,641
|
1,733
|
1,152
|
1,005
|
608
|
|||||||||||||||||
|
Net
charge-offs 1
|
6,923
|
2,256
|
3,427
|
2,612
|
1,784
|
|||||||||||||||||
|
Provision
for loan and lease losses from continuing operations
|
10,073
|
3,883
|
6,533
|
4,846
|
4,183
|
|||||||||||||||||
|
Provision
for loan and lease losses from discontinued operations
|
-
|
(5
|
)
|
31
|
-
|
-
|
||||||||||||||||
|
Additions
related to acquisitions
|
-
|
591
|
-
|
4,249
|
-
|
|||||||||||||||||
|
Reduction
related to discontinued operations
|
(138
|
)
|
(23
|
)
|
-
|
-
|
-
|
|||||||||||||||
|
Adjustment
for transfer to other liabilities for unfunded commitments
|
-
|
-
|
(319
|
)
|
-
|
-
|
||||||||||||||||
|
Allowance
at end of year
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
||||||||||||
|
Net
charge-offs to average loans and leases
|
0.30
|
%
|
0.11
|
%
|
0.18
|
%
|
0.16
|
%
|
0.14
|
%
|
||||||||||||
|
1
|
Includes
net charge-offs at Citizens Finance, Heartland’s consumer finance company,
of $1,646 for 2007; $1,215 for 2006; $1,185 for 2005; $789 for 2004 and
$808 for 2003.
|
|||||||||||||||||||||
The table
above summarizes activity in the allowance for loan and lease losses for the
years indicated, including amounts of loans and leases charged off, amounts of
recoveries, additions to the allowance charged to income, additions related to
acquisitions and the ratio of net charge-offs to average loans and leases
outstanding.
The table
below shows Heartland’s allocation of the allowance for loan and lease losses by
types of loans and leases and the amount of unallocated reserves.
|
ALLOCATION
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||||||||||
|
December
31, 2007, 2006, 2005, 2004 and 2003
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
Amount
|
Loan
/ Lease Category to Gross Loans & Leases
|
Amount
|
Loan
/ Lease Category to Gross Loans & Leases
|
Amount
|
Loan
/ Lease Category to Gross Loans & Leases
|
Amount
|
Loan
/ Lease Category to Gross Loans & Leases
|
Amount
|
Loan
/ Lease Category to Gross Loans & Leases
|
|||||||||||||||||||||
|
Commercial
and commercial real estate
|
$
|
22,564
|
71.48
|
%
|
$
|
18,612
|
68.95
|
%
|
$
|
17,478
|
66.65
|
%
|
$
|
15,463
|
65.42
|
%
|
$
|
9,776
|
64.93
|
%
|
||||||||||
|
Residential
mortgage
|
2,345
|
9.50
|
1,688
|
10.47
|
1,593
|
11.23
|
1,357
|
11.98
|
1,224
|
11.19
|
||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
1,868
|
9.88
|
2,075
|
10.86
|
2,526
|
11.77
|
2,857
|
12.27
|
2,926
|
12.54
|
||||||||||||||||||||
|
Consumer
|
2,954
|
8.74
|
3,008
|
9.05
|
2,893
|
9.25
|
2,190
|
9.41
|
2,351
|
10.31
|
||||||||||||||||||||
|
Lease
financing
|
128
|
0.40
|
192
|
0.67
|
149
|
1.10
|
103
|
0.92
|
121
|
1.03
|
||||||||||||||||||||
|
Unallocated
|
3,134
|
4,406
|
3,152
|
3,003
|
2,092
|
|||||||||||||||||||||||||
|
Total
allowance for loan and lease losses
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
||||||||||||||||||||
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 21% and 20%
of total assets at December 31, 2007 and 2006, respectively. Total
available for sale securities as of December 31, 2007, were $682.4 million, an
increase of $68.4 million or 11% since year-end 2006. Additional securities were
purchased during the later half of 2007 as loan growth slowed. Total available
for sale securities as of December 31, 2006, were $614.0 million, an increase of
$86.7 million or 16% from December 31, 2005. The majority of the increase in
2006 was the result of the purchase of $55.0 million in agency securities in the
third quarter of 2006 for the sole purpose of entering into the leveraged
structured wholesale repurchase agreement discussed in the net interest income
section of this report.
The
composition of the securities portfolio was shifted from an emphasis in U.S.
government corporations and agencies to mortgage-backed securities during 2007
as the spread on mortgage-backed securities had widened in comparison to
government agency securities. The percentage of U.S. government corporations and
agencies securities was 48% at year-end 2006 compared to 37% at December
31, 2007. The percentage of mortgage-backed securities was 22% at year-end 2006
compared to 36% at December 31, 2007. Approximately 25% of Heartland’s
mortgage-backed securities were in private-label collateralized mortgage
obligations at December 31, 2007.
Because
the majority of the decline in market value on Heartland’s debt securities
portfolio are attributable to changes in interest rates and not credit quality,
and because Heartland has the ability and intent to hold those investments until
a recovery of fair value, which may be maturity, Heartland did not consider
those investments to be other-than-temporarily impaired at December 31,
2007.
The
tables below present the composition and maturities of the securities portfolio,
excluding the trading portfolio, by major category. All of our U.S. government
corporations and agencies securities and a majority of our mortgage-backed
securities are issuances of government-sponsored enterprises.
|
SECURITIES
PORTFOLIO COMPOSITION
|
||||||||||||||||||
|
December
31, 2007, 2006 and 2005
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
|||||||||||||
|
U.S.
government corporations and agencies
|
$
|
255,257
|
37.10
|
%
|
$
|
296,823
|
48.23
|
%
|
$
|
234,021
|
44.38
|
%
|
||||||
|
Mortgage-backed
securities
|
244,934
|
35.60
|
134,057
|
21.78
|
130,334
|
24.73
|
||||||||||||
|
Obligations
of states and political subdivisions
|
147,398
|
21.42
|
137,203
|
22.29
|
132,958
|
25.21
|
||||||||||||
|
Other
securities
|
40,472
|
5.88
|
47,389
|
7.70
|
29,939
|
5.68
|
||||||||||||
|
Total
|
$
|
688,061
|
100.00
|
%
|
$
|
615,472
|
100.00
|
%
|
$
|
527,252
|
100.00
|
%
|
||||||
|
SECURITIES
AVAILABLE FOR SALE PORTFOLIO MATURITIES
|
||||||||||||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
Within
One Year
|
After
One But Within Five Years
|
After
Five But Within Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
142,084
|
4.00
|
%
|
$
|
113,173
|
4.93
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
$
|
255,257
|
4.41
|
%
|
||||||||||
|
Mortgage-backed
securities
|
13,638
|
4.93
|
176,227
|
5.23
|
46,559
|
5.39
|
7,400
|
5.79
|
243,824
|
5.26
|
||||||||||||||||||||
|
Obligations
of states and political subdivisions 1
|
4,715
|
5.21
|
32,427
|
5.87
|
68,826
|
6.13
|
36,862
|
7.21
|
142,830
|
6.32
|
||||||||||||||||||||
|
Corporate
debt securities
|
5,047
|
10.03
|
8,291
|
8.67
|
-
|
-
|
-
|
-
|
13,338
|
9.18
|
||||||||||||||||||||
|
Total
|
$
|
165,484
|
4.29
|
%
|
$
|
330,118
|
5.06
|
%
|
$
|
115,385
|
5.83
|
%
|
$
|
44,262
|
6.97
|
%
|
$
|
655,249
|
5.24
|
%
|
||||||||||
|
1
|
Rates
on obligations of states and political subdivisions have been adjusted to
tax equivalent yields using a 34%
tax.
|
|
SECURITIES
HELD TO MATURITY PORTFOLIO MATURITIES
|
||||||||||||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
Within
One Year
|
After
One But Within Five Years
|
After
Five But Within Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||
|
Mortgage-backed
securities
|
$
|
-
|
%
|
-
|
%
|
$
|
1,110
|
4.33
|
%
|
-
|
-
|
%
|
-
|
-
|
%
|
1,110
|
4.33
|
%
|
||||||||||||
|
Obligations
of states and political subdivisions 1
|
-
|
-
|
-
|
-
|
520
|
5.50
|
$
|
4,048
|
6.80
|
4,568
|
6.65
|
|||||||||||||||||||
|
Total
|
$
|
-
|
-
|
%
|
$
|
1,110
|
4.33
|
%
|
$
|
520
|
5.50
|
%
|
$
|
4,048
|
6.80
|
%
|
$
|
5,678
|
6.18
|
%
|
||||||||||
|
1
|
Rates
on obligations of states and political subdivisions have been adjusted to
tax equivalent yields using a 34%
tax.
|
DEPOSITS
AND BORROWED FUNDS
The table
below sets forth the distribution of Heartland’s average deposit account
balances and the average interest rates paid on each category of deposits for
the years indicated. These balances do not include the deposits included in the
sale of the Broadus branch which totaled $30.2 million on the sale date.
The distribution of these deposits was $3.4 million in demand deposits, $10.6
million in savings deposits and $16.2 million in time deposits.
|
AVERAGE
DEPOSITS
|
|||||||||||||||||||||||||||
|
For
the years ended December 31, 2007, 2006 and 2005
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||
|
Average
Deposits
|
Percent
of
Deposits
|
Average
Interest
Rate
|
Average
Deposits
|
Percent
of
Deposits
|
Average
Interest
Rate
|
Average
Deposits
|
Percent
of
Deposits
|
Average
Interest
Rate
|
|||||||||||||||||||
|
Demand
deposits
|
$
|
362,109
|
15.34
|
%
|
0.00
|
%
|
$
|
347,041
|
15.95
|
%
|
0.00
|
%
|
$
|
326,203
|
16.18
|
%
|
0.00
|
%
|
|||||||||
|
Savings
|
831,675
|
35.22
|
2.69
|
781,636
|
35.92
|
2.43
|
741,814
|
36.81
|
1.47
|
||||||||||||||||||
|
Time
deposits less than $100,000
|
876,146
|
37.11
|
4.70
|
826,610
|
37.99
|
4.14
|
750,353
|
37.23
|
3.42
|
||||||||||||||||||
|
Time
deposits of $100,000 or more
|
291,073
|
12.33
|
4.92
|
220,736
|
10.14
|
4.21
|
197,127
|
9.78
|
3.22
|
||||||||||||||||||
|
Total
deposits
|
$
|
2,361,003
|
100.00
|
%
|
$
|
2,176,023
|
100.00
|
%
|
$
|
2,015,497
|
100.00
|
%
|
|||||||||||||||
Total
average deposits experienced an increase of $185.0 million or 9% during 2007 and
$160.5 million or 8% during 2006. Exclusive of $27.8 million attributable to
deposits at Bank of the Southwest, growth in average deposits during 2006 was
$132.7 million or 7%. Exclusive of brokered deposits, total average deposits
increased $209.5 million or 10% during 2007 and $165.0 million or 9% during
2006. All of the Bank Subsidiaries experienced growth in nonbrokered deposits
during both years. The addition of new banking locations in both the West and
Midwest have contributed to the growth in deposits, as well as, the increased
focus on attracting new deposit customers in all of the markets served by the
Bank Subsidiaries. During its first full year of operations, Summit Bank
& Trust attracted $20.0 million in nonbrokered deposits. The percentage of
total average deposits in the West was 36% during 2005, 38% during 2006 and 41%
during 2007.
Average
demand deposits increased $15.1 million or 4% during 2007and $20.8 million or 6%
during 2006, with the Bank of the Southwest acquisition responsible for $10.6
million of this increase. The number of demand deposit accounts has grown,
primarily as a result of a continued focus on growth in these deposits.
Management will continue to focus efforts on growing demand deposit account
balances with internally-developed, companywide acquisition programs. Late in
2006, Heartland introduced a remote deposit capture service targeted at
attracting business demand deposit accounts. This new desktop service converts
checks to electronic images and transmits the images directly to the bank for
deposit, thus providing our business customers with greater convenience and cost
savings. The percentage of average demand deposit balances in the West increased
from 54% in 2005 to 57% in 2006 and 58% in 2007.
Average
savings deposit balances increased by $50.0 million or 6% during 2007 and $39.8
million or 5% during 2006, with the Bank of the Southwest acquisition
responsible for $10.9 million of this increase. The increase in
savings deposits primarily resulted from the promotion of new money market
products. Slightly over 50% of the growth during 2007 occurred at New Mexico
Bank & Trust. During 2006, the banks experiencing more significant growth in
these deposits were Arizona Bank & Trust, Galena State Bank & Trust Co.
and Wisconsin Community Bank. The percentage of average savings deposits
balances in the West increased from 35% in 2005 to 38% in 2006 and 40% in
2007.
Average
time deposits, excluding brokered time deposits, increased $144.4 million or 16%
during 2007 and $101.9 million or 13% during 2006. The Bank of the Southwest
acquisition was responsible for $6.3 million of the growth in these deposits
during 2006. Many deposit customers have shifted a portion of their lower
yielding deposit balances into higher yielding money market and certificate of
deposit accounts. The Heartland bank subsidiaries have priced these products
competitively to retain existing deposit customers, as well as to attract new
customers. During 2007, the banks experiencing the most significant amount of
growth in time deposits were Dubuque Bank and Trust Company, New Mexico Bank
& Trust, Arizona Bank & Trust, Riverside Community Bank, Rocky Mountain
Bank and Summit Bank & Trust. During 2006, the majority of the growth in
time deposits occurred at Dubuque Bank and Trust Company, New Mexico Bank &
Trust, Rocky Mountain Bank and Arizona Bank & Trust. The percentage of
average time deposits in the West increased from 28% in 2005 to 31% in 2006 and
35% in 2007.
Average
brokered time deposits as a percentage of total average deposits were 5% during
2007 compared to 6% during 2006 and 7% during 2005. The reliance on brokered
time deposits has decreased during 2007 and 2006 as the Heartland banks were
able to grow deposits in their own markets at comparable rates.
The
following table sets forth the amount and maturities of time deposits of
$100,000 or more at December 31, 2007.
|
TIME
DEPOSITS $100,000 AND OVER
|
|||
|
(Dollars
in thousands)
|
|||
|
December
31, 2007
|
|||
|
3
months or less
|
$
|
98,173
|
|
|
Over
3 months through 6 months
|
88,846
|
||
|
Over
6 months through 12 months
|
65,896
|
||
|
Over
12 months
|
55,587
|
||
|
$
|
308,502
|
||
Short-term
borrowings generally include federal funds purchased, treasury tax and loan note
options, securities sold under agreement to repurchase and short-term FHLB
advances. These funding alternatives are utilized in varying degrees depending
on their pricing and availability. At year-end 2007, short-term borrowings were
$354.1 million compared to $275.7 million at year-end 2006.
All of
the Bank Subsidiaries provide repurchase agreements to their customers as a cash
management tool, sweeping excess funds from demand deposit accounts into these
agreements. This source of funding does not increase the individual bank’s
reserve requirements, nor does it create an expense relating to FDIC premiums on
deposits. Although the aggregate balance of repurchase agreements is subject to
variation, the account relationships represented by these balances are
principally local. During 2007, these balances increased $12.0 million or 5%
from $225.9 million to $237.9 million, due primarily to account balances at
Dubuque Bank and Trust Company. During 2006, these balances increased $43.9
million or 24% from $182.0 million to $225.9 million, with a majority of the
growth occurring at Dubuque Bank and Trust Company and New Mexico Bank &
Trust. The activity at Dubuque Bank and Trust Company was the result of a few
accounts that had purposefully accumulated balances for distribution during the
first quarter of 2007. The growth at New Mexico Bank & Trust resulted from
one large municipal account. Typically, the balances in this account increase
during the last quarter of the year and then decline during the first quarter of
the next year as tax proceeds are dispersed.
Also
included in short-term borrowings is the revolving credit line Heartland has
with four unaffiliated banks. Under this unsecured revolving credit line,
Heartland may borrow up to $60.0 million at any one time. This credit
line was established primarily to provide working capital to Heartland and
Citizens Finance Co. At December 31, 2007, a total of $15.0 million was
outstanding on this credit line compared to $35.0 million at December 31, 2006.
A portion of the proceeds from the completion of two trust preferred securities
offerings completed during the second quarter of 2007 was used to reduce the
amount outstanding on this line of credit.
The
following table reflects short-term borrowings, which in the aggregate have
average balances during the period greater than 30% of stockholders' equity at
the end of the period.
|
SHORT-TERM
BORROWINGS
|
|||||||||
|
(Dollars
in thousands)
|
|||||||||
|
As
of or for the years ended
December
31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Balance
at end of period
|
$
|
354,146
|
$
|
275,694
|
$
|
255,623
|
|||
|
Maximum
month-end amount outstanding
|
354,146
|
277,604
|
266,194
|
||||||
|
Average
month-end amount outstanding
|
291,289
|
258,844
|
233,051
|
||||||
|
Weighted
average interest rate at year-end
|
2.90%
|
4.71%
|
3.68%
|
||||||
|
Weighted
average interest rate for the year
|
4.62%
|
4.36%
|
2.67%
|
||||||
Other
borrowings include all debt arrangements Heartland and its subsidiaries have
entered into with original maturities that extend beyond one year. These
borrowings were $263.6 million at December 31, 2007, compared to $224.5 million
at December 31, 2006. Other borrowings include the $50.0 million structured
wholesale repurchase agreement entered into in August of 2006 and the balances
outstanding on trust preferred capital securities issued by Heartland. On March
19, 2007, Heartland redeemed $8.0 million of variable rate cumulative trust
preferred securities representing undivided beneficial interests in Heartland
Statutory Trust II. On June 21, 2007, Heartland completed an offering of $20.0
million fixed/variable rate trust preferred securities. On June 26, 2007,
Heartland completed a second offering of $20.0 million variable rate trust
preferred securities. On October 1, 2007, Heartland redeemed $5.0 million of
variable rate cumulative trust preferred securities representing undivided
beneficial interests in Heartland Financial Capital Trust II.
A
schedule of Heartland’s trust preferred offerings outstanding as of December 31,
2007, is as follows:
(Dollars
in thousands)
|
Amount
Issued
|
Issuance
Date
|
Interest
Rate
|
Interest Rate as of 12/31/07
|
Maturity
Date
|
Callable
Date
|
|
|
$
|
5,000
|
08/07/00
|
10.60%
|
10.60%
|
09/07/30
|
09/07/10
|
|
20,000
|
10/10/03
|
8.25%
|
8.25%
|
10/10/33
|
10/10/08
|
|
|
25,000
|
03/17/04
|
2.75%
over Libor
|
7.74%
|
03/17/34
|
03/17/09
|
|
|
20,000
|
01/31/06
|
1.33%
over Libor
|
6.57%
|
04/07/36
|
04/07/11
|
|
|
20,000
|
06/21/07
|
6.75%
|
6.75%
|
09/15/37
|
06/15/12
|
|
|
20,000
|
06/26/07
|
1.48%
over Libor
|
6.60%
|
09/01/37
|
09/01/12
|
|
|
$
|
110,000
|
|||||
Also in
other borrowings are the Bank Subsidiaries’ borrowings from the FHLB. All of the
Bank Subsidiaries own FHLB stock in either Chicago, Dallas, Des Moines,
Seattle or San Francisco, enabling them to borrow funds from their respective
FHLB for short- or long-term purposes under a variety of programs. Total FHLB
borrowings at December 31, 2007, totaled $93.5 million, an increase of $12.2
million or 15% from the December 31, 2006, FHLB borrowings of $81.3 million by
the Bank Subsidiaries. These advances were used to fund a portion of the
fixed-rate commercial and residential loan growth experienced. By year-end 2006,
total FHLB borrowings had decreased $69.7 million or 46% from the December 31,
2005, FHLB borrowings of $151.0 million. As FHLB advances matured during the
year, replacement advances were not needed as deposit growth outpaced loan
growth for a good portion of the year.
The
following table summarizes significant contractual obligations and other
commitments as of December 31, 2007:
|
(Dollars
in thousands)
|
|||||||||||||||
|
Payments
Due By Period
|
|||||||||||||||
|
Total
|
Less
than One Year
|
One
to Three Years
|
Three
to Five Years
|
More
than Five Years
|
|||||||||||
|
Contractual
obligations:
|
|||||||||||||||
|
Time
certificates of deposit
|
$
|
1,139,764
|
$
|
877,249
|
$
|
197,376
|
$
|
58,303
|
$
|
6,836
|
|||||
|
Long-term
debt obligations
|
263,607
|
35,142
|
84,152
|
7,466
|
136,847
|
||||||||||
|
Operating
lease obligations
|
6,095
|
901
|
1,336
|
641
|
3,217
|
||||||||||
|
Purchase
obligations
|
6,957
|
5,144
|
1,466
|
347
|
-
|
||||||||||
|
Other
long-term liabilities
|
2,217
|
109
|
218
|
250
|
1,640
|
||||||||||
|
Total
contractual obligations
|
$
|
1,419,640
|
$
|
918,545
|
$
|
284,548
|
$
|
67,007
|
$
|
148,540
|
|||||
|
Other
commitments:
|
|||||||||||||||
|
Lines
of credit
|
$
|
588,727
|
$
|
491,812
|
$
|
63,097
|
$
|
21,030
|
$
|
12,788
|
|||||
|
Standby
letters of credit
|
36,042
|
30,552
|
3,588
|
11
|
1,891
|
||||||||||
|
Total
other commitments
|
$
|
624,769
|
$
|
522,364
|
$
|
66,685
|
$
|
21,041
|
$
|
14,679
|
|||||
CAPITAL
RESOURCES
Heartland’s
risk-based capital ratios, which take into account the different credit risks
among banks’ assets, met all capital adequacy requirements over the past three
years. Tier 1 and total risk-based capital ratios were 9.74% and 12.48%,
respectively, on December 31, 2007, compared to 9.32% and 11.18%, respectively,
on December 31, 2006, and 9.28% and 10.61%, respectively, on December 31,
2005. At December 31, 2007, Heartland’s leverage ratio, the ratio of Tier 1
capital to total average assets, was 8.01% compared to 7.74% and 7.66% at
December 31, 2006 and 2005, respectively. Heartland and its Bank Subsidiaries
have been, and will continue to be, managed so they meet the well-capitalized
requirements under the regulatory framework for prompt corrective action. To be
categorized as well capitalized under the regulatory framework, bank holding
companies and banks must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios of 10%, 6% and 5%, respectively. The most recent
notification from the FDIC categorized Heartland and each of its Bank
Subsidiaries as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed each institution’s category.
Heartland’s
capital ratios are detailed in the table below.
|
RISK-BASED
CAPITAL RATIOS 1
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
December
31,
|
||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
253,675
|
9.74
|
%
|
$
|
232,702
|
9.32
|
%
|
$
|
209,968
|
9.28
|
%
|
||||||
|
Tier
1 capital minimum requirement
|
104,191
|
4.00
|
%
|
99,878
|
4.00
|
%
|
90,514
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
149,484
|
5.74
|
%
|
$
|
132,824
|
5.32
|
%
|
$
|
119,454
|
5.28
|
%
|
||||||
|
Total
capital
|
$
|
325,016
|
12.48
|
%
|
$
|
279,112
|
11.18
|
%
|
$
|
240,152
|
10.61
|
%
|
||||||
|
Total
capital minimum requirement
|
208,382
|
8.00
|
%
|
199,757
|
8.00
|
%
|
181,028
|
8.00
|
%
|
|||||||||
|
Excess
|
$
|
116,634
|
4.48
|
%
|
$
|
79,355
|
3.18
|
%
|
$
|
59,124
|
2.61
|
%
|
||||||
|
Total
risk-adjusted assets
|
$
|
2,604,771
|
$
|
2,496,960
|
$
|
2,262,854
|
||||||||||||
|
1
|
Based
on the risk-based capital guidelines of the Federal Reserve, a bank
holding company is required to maintain a Tier 1 to risk-adjusted assets
ratio of 4.00% and total capital to risk-adjusted assets ratio of
8.00%
|
|
LEVERAGE
RATIOS 1
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
December
31,
|
||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
253,675
|
8.01
|
%
|
$
|
232,702
|
7.74
|
%
|
$
|
209,968
|
7.66
|
%
|
||||||
|
Tier
1 capital minimum requirement 2
|
126,644
|
4.00
|
%
|
120,255
|
4.00
|
%
|
109,637
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
127,031
|
4.01
|
%
|
$
|
112,447
|
3.74
|
%
|
$
|
100,331
|
3.66
|
%
|
||||||
|
Average
adjusted assets
|
$
|
3,166,102
|
$
|
3,006,374
|
$
|
2,740,922
|
||||||||||||
|
1
|
The
leverage ratio is defined as the ratio of Tier 1 capital to average total
assets.
|
|
|
2
|
Management
of Heartland has established a minimum target leverage ratio of 4.00%.
Based on Federal Reserve guidelines, a bank holding company generally is
required to maintain a leverage ratio of 3.00% plus an additional cushion
of at least 100 basis points.
|
Commitments
for capital expenditures are an important factor in evaluating capital
adequacy. During the third quarter of 2007, Heartland announced its
intention to enter the Minneapolis, Minnesota market through the formation of a
new bank to be known as Minnesota Bank & Trust. While the new bank is being
organized, a loan production office through Dubuque Bank and Trust Company has
begun operations at a location in Edina, Minnesota. The capital structure of
this new bank will be very similar to that used when Heartland formed its more
recent de novo banks in
the West. Heartland’s initial investment will be $12.8 million, or 80%, of the
targeted $16.0 million initial capital. At December 31, 2007, 10% of Heartland’s
investment, along with 10% of the subscribing minority shareholders, had been
deposited into an escrow account. All minority stockholders entered into a stock
transfer agreement that imposes certain restrictions on the sale, transfer or
other disposition of their shares in Minnesota Bank & Trust and allows, but
does not require, Heartland to repurchase the shares from investors five years
from the date of opening. Late in February 2008, Heartland received approval
from both the federal and state regulators to move forward with the formation of
Minnesota Bank & Trust. Opening has been targeted for the second quarter of
2008.
On June
26, 2007, Heartland completed an offering of $20.0 million of variable rate
cumulative trust preferred securities representing undivided beneficial
interests in Heartland Financial Statutory Trust VII. The proceeds from the
offering were used by the trust to purchase junior subordinated debentures from
Heartland. Interest is payable quarterly on March 1, June 1, September 1 and
December 1 of each year. The debentures will mature and the trust preferred
securities must be redeemed on September 1, 2037. On or after September 1, 2012,
the debentures are redeemable at par. For regulatory purposes, all $20.0 million
qualified as Tier 2 capital.
On June
21, 2007, Heartland completed an offering of $20.0 million of fixed/variable
rate cumulative trust preferred securities representing undivided beneficial
interests in Heartland Financial Statutory Trust VI. The proceeds from the
offering were used by the trust to purchase junior subordinated debentures from
Heartland. Interest is payable quarterly on March 15, June 15, September 15 and
December 15 of each year. The debentures will mature and the trust preferred
securities must be redeemed on September 15, 2037. Heartland has the option to
shorten the maturity date to a date not earlier than June 15, 2012. If the
debentures are redeemed between June 15, 2012, and June 15, 2017, Heartland may
be required to pay a “make-whole” premium. On or after June 15, 2017, the
debentures are redeemable at par. For regulatory purposes, all $20.0 million
qualified as Tier 2 capital. The proceeds on both these new trust preferred
securities issuances have been used as a permanent source of funding for general
corporate purposes, including replacement for the redemption of $8.0 million of
higher priced trust preferred securities in March 2007 and the redemption of
another $5.0 million of trust preferred securities on October 1, 2007, and
future acquisitions.
Summit
Bank & Trust began operations on November 1, 2006, in the Denver, Colorado
collar community of Broomfield. The capital structure of this new bank is very
similar to that used when New Mexico Bank & Trust and Arizona Bank &
Trust were formed. Heartland’s initial investment was $12.0 million, or 80%, of
the $15.0 million initial capital. All minority stockholders entered into a
stock transfer agreement that imposes certain restrictions on the sale, transfer
or other disposition of their shares in Summit Bank & Trust and requires
Heartland to repurchase the shares from investors five years from the date of
opening. The stock will be valued by an independent third party appraiser with
the required purchase by Heartland at the appraised value, not to exceed 18x
earnings, or a minimum return of 6% on the original investment amount, whichever
is greater. Through December 31, 2007, Heartland accrued the amount due to the
minority shareholders at 6%. The obligation to repay the original investment is
payable in cash or Heartland stock or a combination of cash and stock at the
option of the minority shareholder. The remainder of the obligation to the
minority shareholders is payable in cash or Heartland stock or a combination of
cash and stock at the option of Heartland.
In
February of 2003, Heartland entered into an agreement with a group of Arizona
business leaders to establish a new bank in Mesa. The new bank began operations
on August 18, 2003, as Arizona Bank & Trust. Heartland’s initial investment
in Arizona Bank & Trust was $12.0 million, which reflected an ownership
percentage of 86%. After completion of the Bank of the Southwest acquisition,
Heartland’s ownership percentage had increased to 90%. All minority stockholders
have entered into a stock transfer agreement that imposes certain restrictions
on the sale, transfer or other disposition of their shares and requires
Heartland to repurchase the shares from the investors five years from the date
of opening, which will be in August of 2008. The stock will be valued by an
independent third party appraiser with the required purchase by Heartland at the
appraised value, not to exceed 18x earnings, or a minimum return of 6% on the
original investment amount, whichever is greater. Through December 31, 2007,
Heartland accrued the amount due to the minority shareholders at 6%. The
obligation to repay the original investment is payable in cash or Heartland
stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders is
payable in cash or Heartland stock or a combination of cash and stock at the
option of Heartland.
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. Although the vast majority of its expansion has been in the West,
Heartland continues to pursue attractive growth markets wherever it can identify
professional and experienced banking talent. Future expenditures relating to
expansion efforts, in addition to those identified above, are not estimable at
this time.
LIQUIDITY
Liquidity
refers to Heartland’s ability to maintain a cash flow, which is adequate to meet
maturing obligations and existing commitments, to withstand fluctuations in
deposit levels, to fund operations and to provide for customers’ credit needs.
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.
Investing
activities from continuing operations used cash of $229.1 million during 2007
compared to $255.7 million during 2006 and $175.8 million during 2005. The
proceeds from securities sales, paydowns and maturities were $244.2 million
during 2007 compared to $106.6 million during 2006 and $156.2 million during
2005. Purchases of securities used cash of $307.8 million during 2007 while
$184.5 million was used for securities purchases during 2006 and $139.8 million
during 2005. A large portion of the change in 2006 was the purchase of $55.0
million in agency securities to facilitate the structured wholesale repurchase
agreement entered into in August of 2006. The net increase in loans and leases
was $128.2 million during 2007 compared to $151.4 million during 2006 and $175.8
million during 2005. Also contributing to cash outflows from
investing activities during 2007 was the $20.5 million purchase of bank-owned
life insurance policies. During 2006, cash outflows from investing activities
was greater than during 2007 and 2005 in part due to the $15.0 million net cash
and cash equivalents paid in the acquisition of Bank of the
Southwest.
Financing
activities from continuing operations provided cash of $202.6 million during
2007 compared to $200.5 million during 2006 and $158.8 million during 2005.
During 2007, there was a net increase in deposit accounts of $95.4 million
compared to $149.3 million during 2006 and $134.3 million during 2005. Activity
in short-term borrowings provided cash of $80.3 million during 2007 compared to
$54.2 million during 2006 and $5.6 million during 2005. Cash proceeds from other
borrowings were $62.5 million during 2007 compared to $74.8 million during 2006
and $60.0 million during 2005. A portion of the change during 2006 was
attributable to the $50.0 million wholesale repurchase agreement entered into in
August of 2006. Repayments on other borrowings used cash of $23.4 million during
2007 compared to $69.9 million during 2006 and $31.9 million during
2005.
Total
cash provided by operating activities from continuing operations was $34.1
million during 2007 compared to $18.1 million during 2006 and $22.2 million
during 2005. A portion of this change was the result of proceeds on sales of
loans in excess of cash used for the origination of loans for sale. Cash used
for the payment of income taxes was $17.3 million during 2007 compared to $10.9
million during 2006 and $11.3 million during 2005. The larger payment in 2007
resulted from the sale of ULTEA during the fourth quarter of 2006.
The
totals previously discussed did not include the cash flows related to the
discontinued operations at the Broadus branch and ULTEA. Net cash provided from
investing activities of discontinued operations of the Broadus branch was $22.6
million during 2007. The investing activities from discontinued operations
provided cash of $34.2 million during 2006 and used cash of $25.8 million during
2005. During 2006 and 2005, these amounts include the Broadus branch and ULTEA.
During 2007, financing activities from the discontinued operations of the
Broadus branch used cash of $32.5 million. The discontinued operations of both
the Broadus branch and ULTEA used cash from financing activities of $40.9
million during 2006 and provided cash of $15.1 million during 2005. Relative to
operating activities, cash provided from the discontinued operations of the
Broadus branch was $10 thousand during 2007. For 2006 and 2005, the discontinued
operations of both Broadus and ULTEA provided cash from operating activities of
$11.9 million and $12.7 million, respectively.
Management
of investing and financing activities, and market conditions, determine the
level and the stability of net interest cash flows. Management attempts to
mitigate the impact of changes in market interest rates to the extent possible,
so that balance sheet growth is the principal determinant of growth in net
interest cash flows.
Heartland’s
short-term borrowing balances are dependent on commercial cash management and
smaller correspondent bank relationships and, as such, will normally fluctuate.
Heartland believes these balances, on average, to be stable sources of funds;
however, it intends to rely on deposit growth and additional FHLB borrowings in
the future.
In the
event of short-term liquidity needs, the Bank Subsidiaries may purchase federal
funds from each other or from correspondent banks and may also borrow from the
Federal Reserve Bank. Additionally, the subsidiary banks' FHLB memberships give
them the ability to borrow funds for short- and long-term purposes under a
variety of programs.
At
December 31, 2007, Heartland’s revolving credit agreement with third-party banks
provided a maximum borrowing capacity of $60.0 million, of which $15.0 million
had been borrowed. A portion of this line provides funding for the operations of
Citizens. At December 31, 2007, the borrowings on this line for Citizens were
$15.0 million. The revolving credit agreement contains specific covenants which,
among other things, limit dividend payments and restrict the sale of assets by
Heartland under certain circumstances. Also contained within the agreement 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 the Bank Subsidiaries must remain well capitalized, as
defined from time to time by the federal banking regulators. At December 31,
2007, Heartland was in compliance with the covenants contained in the credit
agreement.
The
ability of Heartland to pay dividends to its stockholders is partially dependent
upon dividends paid by its subsidiaries. The Heartland banks are subject to
certain statutory and regulatory restrictions on the amount they may pay in
dividends. To maintain acceptable capital ratios in the Heartland banks, certain
portions of their retained earnings are not available for the payment of
dividends. Additionally, as described above, Heartland’s revolving credit
agreement requires our Bank Subsidiaries to remain well capitalized. Retained
earnings that could be available for the payment of dividends to Heartland
totaled approximately $47.0 million as of December 31, 2007, under the capital
requirements to remain well capitalized.
EFFECTS
OF INFLATION
Consolidated
financial data included in this report has been prepared in accordance with
accounting principles generally accepted in the United States of America.
Presently, these principles require reporting of financial position and
operating results in terms of historical dollars, except for available for sale
securities, trading securities and derivative instruments, which require
reporting at fair value. Changes in the relative value of money due to inflation
or recession are generally not considered.
In
management’s opinion, changes in interest rates affect the financial condition
of a financial institution to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies. A financial institution’s ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform in
today’s volatile economic environment. Heartland seeks to insulate itself from
interest rate volatility by ensuring that rate-sensitive assets and
rate-sensitive liabilities respond to changes in interest rates in a similar
time frame and to a similar degree.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk is the risk of loss arising from adverse changes in market prices and
rates. Heartland’s market risk is comprised primarily of interest rate risk
resulting from its core banking activities of lending and deposit gathering.
Interest rate risk measures the impact on earnings from changes in interest
rates and the effect on current fair market values of Heartland’s assets,
liabilities and off-balance sheet contracts. The objective is to measure this
risk and manage the balance sheet to avoid unacceptable potential for economic
loss.
Management
continually develops and applies strategies to mitigate market risk. Exposure to
market risk is reviewed on a regular basis by the asset/liability committees at
the Bank Subsidiaries and, on a consolidated basis, by the Heartland board of
directors. Darling Consulting Group, Inc. has been engaged to provide
asset/liability management position assessment and strategy formulation services
to Heartland and the Bank Subsidiaries. At least quarterly, a detailed review of
Heartland’s and each of the Bank Subsidiaries’ balance sheet risk profile is
performed. Included in these reviews are interest rate sensitivity analyses,
which simulate changes in net interest income in response to various interest
rate scenarios. This analysis considers current portfolio rates, existing
maturities, repricing opportunities and market interest rates, in addition to
prepayments and growth under different interest rate assumptions. Selected
strategies are modeled prior to implementation to determine their effect on
Heartland’s interest rate risk profile and net interest income. Although
management has entered into derivative financial instruments to mitigate the
exposure of Heartland’s net interest margin in a downward rate environment, it
does not believe that Heartland’s primary market risk exposures and how those
exposures were managed in 2007 have changed significantly when compared to
2006.
The core
interest rate risk analysis utilized by Heartland examines the balance sheet
under rates up/down scenarios that are neither too modest nor too extreme. All
rate changes are ramped over a 12-month horizon based upon a parallel yield
curve shift and then maintained at those levels over the remainder of the
simulation horizon. Using this approach, management is able to see the effect
that both a gradual change of rates (year 1) and a rate shock (year 2 and
beyond) could have on Heartland’s net interest margin. Starting balances in the
model reflect actual balances on the “as of” date, adjusted for material and
significant transactions. Pro-forma balances remain static. This enables
interest rate risk embedded within the existing balance sheet structure to be
isolated as growth assumptions can make interest rate risk. The most recent
reviews at year-end 2007 and 2006 provided the following results:
|
2007
|
2006
|
||||||||||||
|
Net
Interest
Margin
(in thousands)
|
%
Change
From
Base
|
Net
Interest
Margin
(in thousands)
|
%
Change
From
Base
|
||||||||||
|
Year
1
|
|||||||||||||
|
Down
200 Basis Points
|
$
|
101,054
|
(1.9
|
)
|
%
|
$
|
101,323
|
(3.20
|
)
|
%
|
|||
|
Base
|
$
|
102,986
|
|
$
|
104,673
|
||||||||
|
Up
200 Basis Points
|
$
|
102,343
|
(.6
|
)
|
%
|
$
|
103,443
|
(1.17
|
)
|
%
|
|||
|
Year
2
|
|||||||||||||
|
Down
200 Basis Points
|
$
|
97,720
|
(5.1
|
)
|
%
|
$
|
97,887
|
(6.48
|
)
|
%
|
|||
|
Base
|
$
|
104,928
|
1.9
|
%
|
$
|
106,617
|
1.86
|
%
|
|||||
|
Up
200 Basis Points
|
$
|
103,532
|
.5
|
%
|
$
|
104,471
|
(0.19
|
)
|
%
|
||||
Heartland’s
use of derivative financial instruments in managing the risks associated with
changes in interest rates will affect its future interest income or interest
expense. Heartland is exposed to credit-related losses in the event of
nonperformance by the counterparties to its derivative instruments, which has
been minimized by entering into the contracts with large, stable financial
institutions. The estimated fair market values of these derivative instruments
are presented in Note 13 to the consolidated financial statements.
Heartland
does enter into financial instruments with off balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from the
borrower. Standby letters of credit are conditional commitments issued by
Heartland to guarantee the performance of a customer to a third party up to a
stated amount and with specified terms and conditions. These commitments to
extend credit and standby letters of credit are not recorded on the balance
sheet until the instrument is exercised.
ITEM
8.
|
HEARTLAND
FINANCIAL USA, INC.
|
||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||
|
December
31,
|
December
31,
|
|||||||||
|
Notes
|
2007
|
2006
|
||||||||
|
ASSETS
|
||||||||||
|
Cash
and due from banks
|
4
|
$
|
46,468
|
$
|
47,753
|
|||||
|
Federal
funds sold and other short-term investments
|
364
|
1,390
|
||||||||
|
Cash
and cash equivalents
|
46,832
|
49,143
|
||||||||
|
Securities:
|
5
|
|||||||||
|
Trading,
at fair value
|
1,888
|
1,568
|
||||||||
|
Available
for sale, at fair value (cost of $672,499 for 2007 and $612,440 for
2006)
|
682,383
|
613,950
|
||||||||
|
Held
to maturity-at cost (fair value of $5,754 for 2007 and $1,513 for
2006)
|
5,678
|
1,522
|
||||||||
|
Loans
held for sale
|
12,679
|
50,381
|
||||||||
|
Gross
loans and leases:
|
6
|
|||||||||
|
Held
to maturity
|
2,280,167
|
2,147,845
|
||||||||
|
Allowance
for loan and lease losses
|
7
|
(32,993
|
)
|
(29,981
|
)
|
|||||
|
Loans
and leases, net
|
2,247,174
|
2,117,864
|
||||||||
|
Premises,
furniture and equipment, net
|
8
|
120,285
|
108,567
|
|||||||
|
Other
real estate, net
|
2,195
|
1,575
|
||||||||
|
Goodwill
|
40,207
|
39,817
|
||||||||
|
Other
intangible assets, net
|
9
|
8,369
|
9,010
|
|||||||
|
Cash
surrender value on life insurance
|
55,532
|
33,371
|
||||||||
|
Other
assets
|
40,904
|
31,474
|
||||||||
|
TOTAL
ASSETS
|
$
|
3,264,126
|
$
|
3,058,242
|
||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
LIABILITIES:
|
||||||||||
|
Deposits:
|
10
|
|||||||||
|
Demand
|
$
|
381,499
|
$
|
371,465
|
||||||
|
Savings
|
855,036
|
822,915
|
||||||||
|
Time
|
1,139,764
|
1,117,277
|
||||||||
|
Total
deposits
|
2,376,299
|
2,311,657
|
||||||||
|
Short-term
borrowings
|
11
|
354,146
|
275,694
|
|||||||
|
Other
borrowings
|
12
|
263,607
|
224,523
|
|||||||
|
Accrued
expenses and other liabilities
|
39,474
|
36,657
|
||||||||
|
TOTAL
LIABILITIES
|
3,033,526
|
2,848,531
|
||||||||
|
STOCKHOLDERS’
EQUITY:
|
16,
17, 18, 19
|
|||||||||
|
Preferred
stock (par value $1 per share; authorized, 184,000 shares, none issued or
outstanding)
|
-
|
-
|
||||||||
|
Series
A Junior Participating preferred stock (par value $1 per share;
authorized, 16,000 shares, none issued or outstanding)
|
-
|
-
|
||||||||
|
Common
stock (par value $1 per share; authorized, 20,000,000 shares at December
31, 2007 and at December 31, 2006; issued 16,611,671 shares at December
31, 2007 and 16,572,080 at December 31, 2006)
|
16,612
|
16,572
|
||||||||
|
Capital
surplus
|
37,269
|
37,963
|
||||||||
|
Retained
earnings
|
173,891
|
154,308
|
||||||||
|
Accumulated
other comprehensive income
|
6,506
|
868
|
||||||||
|
Treasury
stock at cost (184,655 shares at December 31, 2007 and 0 shares at
December 31, 2006, respectively)
|
(3,678
|
)
|
-
|
|||||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
230,600
|
209,711
|
||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
3,264,126
|
$
|
3,058,242
|
||||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
||||||||||
|
HEARTLAND
FINANCIAL USA, INC.
|
||||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||||||
|
For
the Years Ended December 31,
|
||||||||||||||
|
Notes
|
2007
|
2006
|
2005
|
|||||||||||
|
INTEREST
INCOME:
|
||||||||||||||
|
Interest
and fees on loans and leases
|
6
|
$
|
186,795
|
$
|
166,588
|
$
|
131,629
|
|||||||
|
Interest
on securities:
|
||||||||||||||
|
Taxable
|
21,937
|
17,593
|
13,896
|
|||||||||||
|
Nontaxable
|
6,079
|
5,783
|
5,512
|
|||||||||||
|
Interest
on federal funds sold
|
387
|
164
|
175
|
|||||||||||
|
Interest
on interest bearing deposits in other financial
institutions
|
33
|
22
|
277
|
|||||||||||
|
TOTAL
INTEREST INCOME
|
215,231
|
190,150
|
151,489
|
|||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||
|
Interest
on deposits
|
10
|
77,865
|
62,530
|
42,875
|
||||||||||
|
Interest
on short-term borrowings
|
13,293
|
9,828
|
5,335
|
|||||||||||
|
Interest
on other borrowings
|
14,733
|
13,051
|
10,706
|
|||||||||||
|
TOTAL
INTEREST EXPENSE
|
105,891
|
85,409
|
58,916
|
|||||||||||
|
NET
INTEREST INCOME
|
109,340
|
104,741
|
92,573
|
|||||||||||
|
Provision
for loan and lease losses
|
7
|
10,073
|
3,883
|
6,533
|
||||||||||
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
|
99,267
|
100,858
|
86,040
|
|||||||||||
|
NONINTEREST
INCOME:
|
||||||||||||||
|
Service
charges and fees, net
|
11,108
|
11,058
|
9,211
|
|||||||||||
|
Loan
servicing income
|
4,376
|
4,279
|
3,093
|
|||||||||||
|
Trust
fees
|
8,053
|
7,258
|
6,530
|
|||||||||||
|
Brokerage
and insurance commissions
|
3,097
|
1,871
|
1,401
|
|||||||||||
|
Securities
gains, net
|
341
|
553
|
198
|
|||||||||||
|
Gain
(loss) on trading account securities
|
(105
|
)
|
141
|
(11
|
)
|
|||||||||
|
Impairment
loss on equity securities
|
-
|
(76
|
)
|
-
|
||||||||||
|
Gains
on sale of loans
|
3,578
|
2,289
|
2,572
|
|||||||||||
|
Valuation
adjustment on mortgage servicing rights
|
-
|
-
|
39
|
|||||||||||
|
Income
on bank-owned life insurance
|
1,777
|
1,151
|
1,022
|
|||||||||||
|
Other
noninterest income
|
(264
|
)
|
920
|
1,402
|
||||||||||
|
TOTAL
NONINTEREST INCOME
|
31,961
|
29,444
|
25,457
|
|||||||||||
|
NONINTEREST
EXPENSES:
|
||||||||||||||
|
Salaries
and employee benefits
|
15,
17
|
54,568
|
50,975
|
44,913
|
||||||||||
|
Occupancy
|
16
|
7,902
|
7,291
|
5,893
|
||||||||||
|
Furniture
and equipment
|
8
|
6,972
|
6,724
|
6,132
|
||||||||||
|
Outside
services
|
9,555
|
9,404
|
8,275
|
|||||||||||
|
Advertising
|
3,642
|
3,893
|
3,217
|
|||||||||||
|
Intangible
assets amortization
|
9
|
892
|
942
|
961
|
||||||||||
|
Other
noninterest expenses
|
14,326
|
15,220
|
10,894
|
|||||||||||
|
TOTAL
NONINTEREST EXPENSES
|
97,857
|
94,449
|
80,285
|
|||||||||||
|
INCOME
BEFORE INCOME TAXES
|
33,371
|
35,853
|
31,212
|
|||||||||||
|
Income
taxes
|
14
|
9,409
|
11,578
|
9,561
|
||||||||||
|
INCOME
FROM CONTINUING OPERATIONS
|
23,962
|
24,275
|
21,651
|
|||||||||||
|
Discontinued
operations:
|
||||||||||||||
|
Income
from discontinued operations before income taxes
|
2,756
|
1,758
|
1,664
|
|||||||||||
|
Income
taxes
|
1,085
|
931
|
589
|
|||||||||||
|
INCOME
FROM DISCONTINUED OPERATIONS
|
1,671
|
827
|
1,075
|
|||||||||||
|
NET
INCOME
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
||||||||
|
EARNINGS
PER COMMON SHARE – BASIC
|
$
|
1.56
|
$
|
1.52
|
$
|
1.38
|
||||||||
|
EARNINGS
PER COMMON SHARE – DILUTED
|
$
|
1.54
|
$
|
1.50
|
$
|
1.36
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING OPERATIONS-BASIC
|
$
|
1.45
|
$
|
1.47
|
$
|
1.32
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING OPERATIONS-DILUTED
|
$
|
1.44
|
$
|
1.45
|
$
|
1.30
|
||||||||
|
CASH
DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.37
|
$
|
0.36
|
$
|
0.33
|
||||||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
||||||||||||||
|
HEARTLAND
FINANCIAL USA, INC.
|
|||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
|||||||||||
|
For
the Years Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows From Operating Activities:
|
|||||||||||
|
Net
income
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
8,938
|
8,249
|
7,311
|
||||||||
|
Provision
for loan and lease losses
|
10,073
|
3,883
|
6,533
|
||||||||
|
Provision
for deferred taxes
|
(1,564
|
)
|
(5,676
|
)
|
(327
|
)
|
|||||
|
Net
amortization (accretion) of premium/discount on securities
|
(318
|
)
|
868
|
2,950
|
|||||||
|
Securities
gains, net
|
(341
|
)
|
(553
|
)
|
(198
|
)
|
|||||
|
(Increase)
decrease in trading account securities
|
(320
|
)
|
(1,053
|
)
|
6
|
||||||
|
Loss
on impairment of equity securities
|
-
|
76
|
-
|
||||||||
|
Stock
based compensation
|
1,459
|
925
|
-
|
||||||||
|
Loans
originated for sale
|
(305,391
|
)
|
(311,068
|
)
|
(273,750
|
)
|
|||||
|
Proceeds
on sales of loans
|
318,340
|
303,721
|
267,738
|
||||||||
|
Net
gain on sales of loans
|
(3,578
|
)
|
(2,289
|
)
|
(2,572
|
)
|
|||||
|
(Increase)
decrease in accrued interest receivable
|
221
|
(5,245
|
)
|
(2,507
|
)
|
||||||
|
Increase
(decrease) in accrued interest payable
|
(941
|
)
|
3,730
|
1,474
|
|||||||
|
Other,
net
|
(18,117
|
)
|
(2,539
|
)
|
(7,176
|
)
|
|||||
|
Net
cash provided by operating activities from continuing
operations
|
34,094
|
18,131
|
22,208
|
||||||||
|
Net
cash provided by operating activities from discontinued
operations
|
10
|
11,921
|
12,740
|
||||||||
|
Net
cash provided by operating activities
|
34,104
|
30,052
|
34,948
|
||||||||
|
Cash
Flows From Investing Activities:
|
|||||||||||
|
Proceeds
on maturities of time deposits
|
-
|
-
|
1,178
|
||||||||
|
Proceeds
from the sale of securities available for sale
|
35,801
|
22,498
|
25,662
|
||||||||
|
Proceeds
from the maturity of and principal paydowns on securities available for
sale
|
208,411
|
84,055
|
130,524
|
||||||||
|
Proceeds
from the maturity of and principal paydowns on securities held to
maturity
|
33
|
-
|
-
|
||||||||
|
Purchase
of securities available for sale
|
(303,596
|
)
|
(182,954
|
)
|
(139,797
|
)
|
|||||
|
Purchase
of securities held to maturity
|
(4,205
|
)
|
(1,522
|
)
|
-
|
||||||
|
Net
increase in loans and leases
|
(128,244
|
)
|
(151,417
|
)
|
(175,800
|
)
|
|||||
|
Purchase
of bank-owned life insurance policies
|
(20,500
|
)
|
-
|
-
|
|||||||
|
Capital
expenditures
|
(20,033
|
)
|
(22,624
|
)
|
(19,726
|
)
|
|||||
|
Net
cash and cash equivalents received in acquisition of subsidiaries, net of
cash paid
|
-
|
(15,015
|
)
|
-
|
|||||||
|
Net
cash and cash equivalents received from sale of discontinued
operations
|
2,416
|
9,194
|
-
|
||||||||
|
Proceeds
on sale of OREO and other repossessed assets
|
840
|
2,060
|
2,141
|
||||||||
|
Net
cash used by investing activities from continuing
operations
|
(229,077
|
)
|
(255,725
|
)
|
(175,818
|
)
|
|||||
|
Net
cash provided (used) by discontinued operations
|
22,631
|
34,206
|
(25,825
|
)
|
|||||||
|
Net
cash used by investing activities
|
(206,446
|
)
|
(221,519
|
)
|
(201,643
|
)
|
|||||
|
Cash
Flows From Financing Activities:
|
|||||||||||
|
Net
increase in demand deposits and savings accounts
|
56,897
|
55,554
|
33,183
|
||||||||
|
Net
increase in time deposit accounts
|
38,459
|
93,742
|
101,149
|
||||||||
|
Net
increase in short-term borrowings
|
80,263
|
54,171
|
5,648
|
||||||||
|
Proceeds
from other borrowings
|
62,502
|
74,827
|
59,974
|
||||||||
|
Repayments
of other borrowings
|
(23,418
|
)
|
(69,945
|
)
|
(31,931
|
)
|
|||||
|
Purchase
of treasury stock
|
(9,821
|
)
|
(4,022
|
)
|
(5,784
|
)
|
|||||
|
Proceeds
from issuance of common stock
|
2,828
|
1,516
|
2,007
|
||||||||
|
Excess
tax benefits on exercised stock options
|
896
|
559
|
-
|
||||||||
|
Dividends
paid
|
(6,050
|
)
|
(5,906
|
)
|
(5,414
|
)
|
|||||
|
Net
cash provided by financing activities from continuing
operations
|
202,556
|
200,496
|
158,832
|
||||||||
|
Net
cash provided (used) by financing activities from discontinued
operations
|
(32,525
|
)
|
(40,907
|
)
|
15,135
|
||||||
|
Net
cash provided by financing activities
|
170,031
|
159,589
|
173,967
|
||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(2,311
|
)
|
(31,878
|
)
|
7,272
|
||||||
|
Cash
and cash equivalents at beginning of year
|
49,143
|
81,021
|
73,749
|
||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$
|
46,832
|
$
|
49,143
|
$
|
81,021
|
|||||
|
Supplemental
disclosure:
|
|||||||||||
|
Cash
paid for income/franchise taxes
|
$
|
17,322
|
$
|
10,921
|
$
|
11,298
|
|||||
|
Cash
paid for interest
|
$
|
106,832
|
$
|
82,480
|
$
|
59,661
|
|||||
|
Acquisitions:
|
|||||||||||
|
Net
assets acquired
|
$
|
650
|
$
|
13,061
|
$
|
-
|
|||||
|
Cash
paid for acquisition
|
$
|
(50
|
)
|
$
|
(18,081
|
)
|
$
|
-
|
|||
|
Cash
acquired from acquisition
|
$
|
-
|
$
|
3,066
|
$
|
-
|
|||||
|
Net
cash paid for acquisition
|
$
|
(50
|
)
|
$
|
(15,015
|
)
|
$
|
-
|
|||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
|||||||||||
|
HEARTLAND
FINANCIAL USA, INC.
|
||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||||||
|
Common
Stock
|
Capital
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock
|
Total
|
|||||||||||||||||||
|
Balance
at January 1, 2005
|
$
|
16,547
|
$
|
40,446
|
$
|
117,800
|
$
|
2,889
|
$
|
(1,900
|
)
|
$
|
175,782
|
|||||||||||
|
Net
Income
|
22,726
|
22,726
|
||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
(6,374
|
)
|
(6,374
|
)
|
||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period, net of realized
losses of $289
|
337
|
337
|
||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(198
|
)
|
(198
|
)
|
||||||||||||||||||||
|
Income
taxes
|
2,335
|
2,335
|
||||||||||||||||||||||
|
Comprehensive
income
|
18,826
|
|||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||
|
Common,
$.33 per share
|
(5,414
|
)
|
(5,414
|
)
|
||||||||||||||||||||
|
Purchase
of 290,651 shares of common stock
|
(5,784
|
)
|
(5,784
|
)
|
||||||||||||||||||||
|
Issuance
of 240,009 shares of common stock
|
(683
|
)
|
4,592
|
3,909
|
||||||||||||||||||||
|
Commitments
to issue common stock
|
493
|
493
|
||||||||||||||||||||||
|
Balance
at December 31, 2005
|
$
|
16,547
|
$
|
40,256
|
$
|
135,112
|
$
|
(1,011
|
)
|
$
|
(3,092
|
)
|
$
|
187,812
|
||||||||||
|
Net
Income
|
25,102
|
25,102
|
||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
3,382
|
3,382
|
||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period, net of realized
gains of $118
|
104
|
104
|
||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(477
|
)
|
(477
|
)
|
||||||||||||||||||||
|
Income
taxes
|
(1,130
|
)
|
(1,130
|
)
|
||||||||||||||||||||
|
Comprehensive
income
|
26,981
|
|||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||
|
Common,
$.36 per share
|
(5,906
|
)
|
(5,906
|
)
|
||||||||||||||||||||
|
Purchase
of 166,259 shares of common stock
|
(4,022
|
)
|
(4,022
|
)
|
||||||||||||||||||||
|
Issuance
of 347,924 shares of common stock
|
25
|
(3,218
|
)
|
7,114
|
3,921
|
|||||||||||||||||||
|
Commitments
to issue common stock
|
925
|
925
|
||||||||||||||||||||||
|
Balance
at December 31, 2006
|
$
|
16,572
|
$
|
37,963
|
$
|
154,308
|
$
|
868
|
$
|
-
|
$
|
209,711
|
||||||||||||
|
Net
Income
|
25,633
|
25,633
|
||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
8,715
|
8,715
|
||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period, net of realized
gains of $6
|
672
|
672
|
||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(341
|
)
|
(341
|
)
|
||||||||||||||||||||
|
Income
taxes
|
(3,408
|
)
|
(3,408
|
)
|
||||||||||||||||||||
|
Comprehensive
income
|
31,271
|
|||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||
|
Common,
$.37 per share
|
(6,050
|
)
|
(6,050
|
)
|
||||||||||||||||||||
|
Purchase
of 407,245 shares of common stock
|
(9,821
|
)
|
(9,821
|
)
|
||||||||||||||||||||
|
Issuance
of 262,181 shares of common stock
|
40
|
(2,153
|
)
|
6,143
|
4,030
|
|||||||||||||||||||
|
Commitments
to issue common stock
|
1,459
|
1,459
|
||||||||||||||||||||||
|
Balance
at December 31, 2007
|
$
|
16,612
|
$
|
37,269
|
$
|
173,891
|
$
|
6,506
|
$
|
(3,678
|
)
|
$
|
230,600
|
|||||||||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
||||||||||||||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations -
Heartland Financial USA, Inc. ("Heartland") is a multi-bank holding
company primarily operating full-service retail banking offices serving
communities in and around Dubuque and Lee Counties in Iowa; Jo Daviess, Hancock
and Winnebago Counties in Illinois; Dane, Green, Sheboygan and Brown Counties in
Wisconsin; Bernalillo, Curry and Santa Fe Counties in New Mexico; Maricopa
County in Arizona; Flathead, Gallatin, Jefferson, Ravalli, Sanders,
Sheridan and Yellowstone Counties in Montana; and Broomfield County in
Colorado. The principal services of Heartland, through its
subsidiaries, are FDIC-insured deposit accounts and related services, and loans
to businesses and individuals. The loans consist primarily of
commercial and commercial real estate, agricultural and agricultural real estate
and residential real estate.
Principles of
Presentation -
The consolidated financial statements include the accounts of Heartland
and its subsidiaries: Dubuque Bank and Trust Company; Galena State Bank &
Trust Co.; First Community Bank; Riverside Community Bank; Wisconsin Community
Bank; New Mexico Bank & Trust; Arizona Bank & Trust; Rocky Mountain
Bank; Summit Bank & Trust; Citizens Finance Co.; DB&T Insurance, Inc.;
DB&T Community Development Corp.; Heartland Community Development, Inc.;
Heartland Financial Statutory Trust III; Heartland Financial Statutory Trust IV;
Heartland Financial Statutory Trust V; Heartland Financial Statutory Trust VI;
Heartland Financial Statutory Trust VII; and Rocky Mountain Statutory Trust I.
All of Heartland’s subsidiaries are wholly-owned except for Arizona Bank &
Trust, of which Heartland was a 90% owner on December 31, 2007 and Summit Bank
& Trust, of which Heartland was an 81% owner on December 31, 2007. All
significant intercompany balances and transactions have been eliminated in
consolidation. The minority interest in the majority-owned subsidiaries is
immaterial and included in other liabilities on the consolidated balance sheets
and in other noninterest income on the consolidated statements of income. Rocky
Mountain Bank’s Broadus branch was sold in 2007, and the consolidated statements
of income include the results of the Broadus branch as discontinued operations
for all periods presented. Heartland’s fleet leasing subsidiary ULTEA, Inc. was
sold in 2006, and the consolidated statements of income include the results of
ULTEA, Inc. as discontinued operations for all periods presented. The operations
of HTLF Capital Corp., Heartland’s investment banking firm specializing in
municipal financing, were closed in the third quarter of 2006.
The
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and prevailing practices within the
banking industry. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates. A material estimate that is
particularly susceptible to significant change relates to the determination of
the allowance for loan and lease losses.
Heartland
and its subsidiaries operate primarily in one segment, banking, which
constitutes most of its consolidated results of operations and assets.
Accordingly, the results of operations and assets for separate business segments
are not presented.
Cash and Cash
Equivalents -
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and other short-term
investments. Generally, federal funds are purchased and sold for one-day
periods.
Trading
Securities – Trading securities represent those securities Heartland
intends to actively trade and are stated at fair value with changes in fair
value reflected in noninterest income.
Securities
Available for Sale –
Available for sale securities consist of those securities not classified as held
to maturity or trading, which management intends to hold for indefinite periods
of time or that may be sold in response to changes in interest rates,
prepayments or other similar factors. Such securities are stated at fair value
with any unrealized gain or loss, net of applicable income tax, reported as a
separate component of stockholders’ equity. Security premiums and
discounts are amortized/accreted using the interest method over the period from
the purchase date to the expected maturity or call date of the related
security. Gains or losses from the sale of available for sale
securities are determined based upon the adjusted cost of the specific security
sold. Unrealized losses determined to be other than temporary are
charged to noninterest income.
Securities Held
to Maturity – Securities which Heartland has the ability and
positive intent to hold to maturity are classified as held to maturity. Such
securities are stated at amortized cost, adjusted for premiums and discounts
that are amortized/accreted using the interest method over the period from the
purchase date to the maturity date of the related security. Unrealized losses
determined to be other than temporary are charged to noninterest
income.
Loans and
Leases - Interest
on loans is accrued and credited to income based primarily on the principal
balance outstanding. Income from leases is recorded in decreasing amounts over
the term of the contract resulting in a level rate of return on the lease
investment. Heartland’s policy is to discontinue the accrual of interest income
on any loan or lease when, in the opinion of management, there is a reasonable
doubt as to the timely collection of the interest and principal, normally when a
loan is 90 days past due. When interest accruals are deemed
uncollectible, interest credited to income in the current year is reversed and
interest accrued in prior years is charged to the allowance for loan and lease
losses. Nonaccrual loans and leases are returned to an accrual status when, in
the opinion of management, the financial position of the borrower indicates that
there is no longer any reasonable doubt as to the timely payment of interest and
principal.
Under
Heartland’s credit policies, all nonaccrual and restructured loans are defined
as impaired loans. Loan impairment is measured based on the present
value of expected future cash flows discounted at the loan’s effective interest
rate, except where more practical, at the observable market price of
the loan or the fair value of the collateral if the loan is collateral
dependent.
Net
nonrefundable loan and lease origination fees and certain direct costs
associated with the lending process are deferred and recognized as a yield
adjustment over the life of the related loan or lease.
Loans Held for
Sale - Loans held for sale
are stated at the lower of cost or market on an aggregate basis. Gains or losses
on sales are recorded in noninterest income. Direct loan origination costs and
fees are deferred at origination of the loan. These deferred costs and fees are
recognized in noninterest income as part of the gain or loss on sales of loans
upon sale of the loan.
Mortgage
Servicing and Transfers of Financial Assets – Heartland regularly
sells residential mortgage loans to others on a non-recourse basis. Sold loans
are not included in the accompanying consolidated financial statements.
Heartland generally retains the right to service the sold loans for a fee. At
December 31, 2007 and 2006, Heartland was servicing loans for others with
aggregate unpaid principal balances of $636.0 million and $602.7 million,
respectively.
Allowance for
Loan and Lease Losses - The allowance for loan and
lease losses is maintained at a level estimated by management to provide for
known and inherent risks in the loan and lease portfolios. The allowance is
based upon a continuing review of past loan and lease loss experience, current
economic conditions, volume growth, the underlying collateral value of the loans
and leases and other relevant factors. Loans and leases which are deemed
uncollectible are charged off and deducted from the allowance. Provisions for
loan and lease losses and recoveries on previously charged-off loans and leases
are added to the allowance.
Reserve for
Unfunded
Commitments—This reserve is maintained at a level that, in the opinion of
management, is adequate to absorb probable losses associated with Heartland’s
commitment to lend funds under existing agreements such as letters or lines of
credit. Management determines the adequacy of the reserve for unfunded
commitments based upon reviews of individual credit facilities, current economic
conditions, the risk characteristics of the various categories of commitments
and other relevant factors. The reserve is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are evaluated on a
regular basis and, as adjustments become necessary, they are reported in
earnings in the periods in which they become known. Draws on unfunded
commitments that are considered uncollectible at the time funds are advanced are
charged to the allowance. Provisions for unfunded commitment losses, and
recoveries on loans previously charged off, are added to the reserve for
unfunded commitments, which is included in the Other Liabilities section of the
consolidated balance sheets.
Premises,
Furniture and Equipment - Premises, furniture and
equipment are stated at cost less accumulated depreciation. The provision for
depreciation of premises, furniture and equipment is determined by straight-line
and accelerated methods over the estimated useful lives of 18 to 39 years for
buildings, 15 years for land improvements and 3 to 7 years for furniture and
equipment.
Other Real
Estate -
Other real estate represents property acquired through foreclosures and
settlements of loans. Property acquired is carried at the lower of the principal
amount of the loan outstanding at the time of acquisition, plus any acquisition
costs, or the estimated fair value of the property, less disposal costs. The
excess, if any, of such costs at the time acquired over the fair value is
charged against the allowance for loan and lease losses. Subsequent write downs
estimated on the basis of later valuations, gains or losses on sales and net
expenses incurred in maintaining such properties are charged to other
noninterest expense.
Intangible
Assets – Intangible assets consist of goodwill, core deposit premiums,
customer relationship intangibles and mortgage servicing rights. Goodwill
represents the excess of the purchase price of acquired subsidiaries’ net assets
over their fair value. Heartland assesses goodwill for impairment annually, and
more frequently in the presence of certain circumstances. Impairment exists when
the carrying amount of the goodwill exceeds its implied fair value. No
impairment was recorded for the years ended December 31, 2007, 2006 or
2005.
Core
deposit premiums are amortized over eight to ten years on an accelerated basis.
Customer relationship intangibles are amortized over 22 years on an accelerated
basis. Periodically, Heartland reviews the intangible assets for events or
circumstances that may indicate a change in the recoverability of the underlying
basis, except mortgage servicing rights which are reviewed
quarterly.
Mortgage
servicing rights associated with loans originated and sold, where servicing is
retained, are initially capitalized at fair value and recorded on the income
statement as loan servicing income. The values of these capitalized servicing
rights are amortized in relation to the servicing revenue expected to be earned.
The carrying values of these rights are reviewed quarterly for impairment based
on the calculation of their fair value as performed by an outside third party.
For purposes of measuring impairment, the rights are stratified into certain
risk characteristics including loan type, note rate, prepayment trends and
external market factors. No valuation allowance was required as of December 31,
2007 and 2006.
Bank-Owned Life
Insurance – Heartland and its subsidiaries have purchased life
insurance policies on the life of certain officers. The one-time premiums paid
for the policies, which coincide with the initial cash surrender value, are
recorded as an asset. Increases or decreases in the cash surrender value, other
than proceeds from death benefits, are recorded as noninterest income. Proceeds
from death benefits first reduce the cash surrender value attributable to the
individual policy and then any additional proceeds are recorded as noninterest
income.
Income
Taxes -
Heartland and its subsidiaries file a consolidated federal income tax
return and separate income or franchise tax returns as required by the various
states. Heartland has a tax allocation agreement which provides that each
subsidiary of the consolidated group pays a tax liability to, or receives a tax
refund from Heartland, computed as if the subsidiary had filed a separate
return.
Heartland
recognizes certain income and expenses in different time periods for financial
reporting and income tax purposes. The provision for deferred income taxes is
based on an asset and liability approach and represents the change in deferred
income tax accounts during the year, including the effect of enacted tax rate
changes. A valuation allowance is provided to reduce deferred tax assets if
their expected realization is deemed not to be more likely than
not.
Heartland
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), as of January 1, 2007. Heartland recognizes a tax
position as a benefit only if it is more likely than not that the tax position
would be sustained in a tax examination, with a tax examination being presumed
to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized upon examination. For tax positions
not meeting the more likely than not test, no tax benefit is recorded. Heartland
recognizes interest and/or penalties related to income tax matters in income tax
expense.
Derivative
Financial Instruments
- Heartland
uses derivative financial instruments as part of its interest rate risk
management including interest rate swaps, caps, floors and collars. Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (“SFAS 133”), as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As required by SFAS 133, Heartland
records all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the
derivative and the resulting designation. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. To qualify for hedge
accounting, Heartland must comply with the detailed rules and documentation
requirements at the inception of the hedge, and hedge effectiveness is assessed
at inception and periodically throughout the life of each hedging relationship.
Hedge ineffectiveness, if any, is measured periodically throughout the life of
the hedging relationship.
For
derivatives designated as cash flow hedges, the effective portion of changes in
the fair value of the derivative is initially reported in other comprehensive
income and subsequently reclassified to interest income or expense when the
hedged transaction affects earnings, while the ineffective portion of changes in
the fair value of the derivative, if any, is recognized immediately in other
noninterest income. Heartland assesses the effectiveness of each
hedging relationship by comparing the cumulative changes in cash flows of the
derivative hedging instrument with the cumulative changes in cash flows of the
designated hedged item or transaction. No component of the change in the fair
value of the hedging instrument is excluded from the assessment of hedge
effectiveness.
Heartland
had no fair value hedging relationships at December 31, 2007 or 2006.
Derivatives not qualifying for hedge accounting, classified as free-standing
derivatives, have all changes in the fair value recorded on the income statement
through noninterest income.
Heartland
does not use derivatives for trading or speculative
purposes. Derivatives not designated as hedges are not speculative
and are used to manage Heartland’s exposure to interest rate movements and other
identified risks, but do not meet the strict hedge accounting requirements of
Statement 133.
Treasury
Stock -
Treasury stock is accounted for by the cost method, whereby shares of
common stock reacquired are recorded at their purchase price. When treasury
stock is reissued, any difference between the sales proceeds, or fair value when
issued for business combinations, and the cost is recognized as a charge or
credit to capital surplus.
Trust Department
Assets -
Property held for customers in fiduciary or agency capacities is not
included in the accompanying consolidated balance sheets, as such items are not
assets of the Heartland banks.
Earnings Per
Share - Amounts used in the determination of basic and diluted earnings
per share for the years ended December 31, 2007, 2006 and 2005 are shown in the
table below:
|
(Dollars
and number of shares in thousands)
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Income
from continuing operations
|
$
|
23,962
|
$
|
24,275
|
$
|
21,651
|
|||
|
Discontinued
operations:
|
|||||||||
|
Income
from discontinued operations before income taxes
|
2,756
|
1,758
|
1,664
|
||||||
|
Income
taxes
|
1,085
|
931
|
589
|
||||||
|
Income
from discontinued operations
|
1,671
|
827
|
1,075
|
||||||
|
Net
income
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
|||
|
Weighted
average common shares outstanding for basic earnings per
share
|
16,478
|
16,508
|
16,415
|
||||||
|
Assumed
incremental common shares issued upon exercise of stock options
|
119
|
227
|
287
|
||||||
|
Weighted
average common shares for diluted earnings per share
|
16,597
|
16,735
|
16,702
|
||||||
|
Earnings
per common share-basic
|
$
|
1.56
|
$
|
1.52
|
$
|
1.38
|
|||
|
Earnings
per common share-diluted
|
1.54
|
1.50
|
1.36
|
||||||
|
Earnings
per share from continuing operations-basic
|
1.45
|
1.47
|
1.32
|
||||||
|
Earnings
per share from continuing operations-diluted
|
1.44
|
1.45
|
1.30
|
||||||
|
Number
of antidilutive stock options excluded from diluted earnings per share
computation
|
140
|
-
|
-
|
||||||
Stock-Based
Compensation - Effective January 1, 2006, Heartland adopted the
provisions of Statement of Financial Accounting Standards No. 123 (revised 2004)
(“FAS 123R”), Share-Based
Payment, using the “modified prospective” transition method. FAS 123R
requires the measurement of the cost of employee services received in exchange
for an award of equity instruments based upon the fair value of the award on the
grant date. The cost of the award is recognized in the income statement over the
vesting period of the award. Under the “modified prospective” transition method,
awards that are granted, modified or settled beginning at the date of adoption
are measured and accounted for in accordance with FAS 123R. In addition, expense
must be recognized in the income statement for unvested awards that were granted
prior to the date of adoption. The expense is based on the fair value determined
at the grant date. The impact of the adoption of FAS 123R on Heartland’s
consolidated financial statements for the years ending December 31, 2007 and
2006, was a reduction in net income of $686 thousand or diluted earnings per
share of $.04 and $351 thousand or diluted earnings per share of $0.02,
respectively. Additional information is provided in footnote 17.
Prior to
January 1, 2006, Heartland applied APB Opinion No. 25 in accounting for its
stock options and, accordingly, no compensation cost for its stock options was
recognized in the financial statements prior to 2006. Had Heartland
determined compensation cost based on the fair value at the grant date for its
stock options under FAS No. 123, Heartland’s net income would have been reduced
to the pro forma amounts indicated below:
|
2005
|
||
|
Net
income as reported
|
$
|
22,726
|
|
Additional
compensation expense
|
210
|
|
|
Pro
forma
|
$
|
22,516
|
|
Earnings
per share-basic as reported
|
$
|
1.38
|
|
Pro
forma
|
1.37
|
|
|
Earnings
per share-diluted as reported
|
1.36
|
|
|
Pro
forma
|
1.35
|
|
Pro forma
net income only reflects options granted in the years from 1996 through
2005. Therefore, the full impact of calculating compensation cost for
stock options under FAS 123R is not reflected in the pro forma net income
amounts presented above because compensation is reflected over the options’
vesting period, and compensation cost for options granted prior to January 1,
1996, was not considered.
Effect of New
Financial Accounting Standards – In July 2006, the
Financial Accounting Standards Board (“FASB”) issued FIN 48, which is an
interpretation of FASB Statement No. 109, Accounting for Income Taxes.
This interpretation prescribes the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 also
provides guidance on the derecognition, measurement, classification, interest
and penalties, accounting in interim periods and disclosure requirements for
uncertain tax positions. FIN 48 is effective as of the beginning of an entity’s
first fiscal year that begins after December 15, 2006. Differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption should be accounted for as a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. The cumulative effect adjustment would not apply to those items that
would not have been recognized in earnings, such as the effect of adopting FIN
48 on tax positions related to business combinations. Heartland adopted FIN 48
on January 1, 2007. See footnote 14 for a discussion of the effect of the
adoption on Heartland’s consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 (“FAS 157”), Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of FAS 157 apply to
other accounting pronouncements that require or permit fair value measurements.
FAS 157 is effective for all financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Heartland adopted FAS 157 on January 1, 2008, and the adoption did not
have a material impact on its consolidated financial statements.
In
September 2006, the Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements, was ratified. EITF 06-4 addresses accounting for separate
agreements which split life insurance policy benefits between an employer and
employee and requires the employer to recognize a liability for future benefits
payable to the employee under these agreements. The effects of applying EITF
06-4 must be recognized through either a change in accounting principle through
an adjustment to equity or through the retrospective application to all prior
periods. For calendar year companies, EITF 06-4 is effective beginning January
1, 2008. Heartland adopted EITF 06-4 on January 1, 2008, and the adoption did
not have a material impact on its consolidated financial
statements.
In
September 2006, the Emerging Issues Task Force Issue 06-5 (“EITF 06-5”), Accounting for Purchases of Life
Insurance – Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulleting No. 85-4, was ratified. EITF 06-5 requires that
a policyholder should consider any additional amounts included in the
contractual terms of the policy in determining the amount that could be realized
under the insurance contract on a policy by policy basis. EITF 06-5 is effective
for fiscal years beginning after December 15, 2006, and requires that
recognition of the effects of adoption should be by a change in accounting
principle through a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption or a change in accounting principle through
retrospective application to all prior periods. Heartland’s adoption of EITF
06-5 on January 1, 2007, did not have an impact on its consolidated financial
statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159 (“FAS 159”), The Fair
Value Option for Financial Assets and Financial Liabilities, which allows
entities to voluntarily choose, at specified election dates, to measure many
financial assets and financial liabilities at fair value. The election is made
on an instrument-by-instrument basis and is irrevocable. If the fair value
option is elected for an instrument, FAS 159 specifies that all subsequent
changes in fair value for that instrument shall be reported in earnings. FAS 159
is effective for all financial statements issued for fiscal years beginning
after November 15, 2007. Heartland adopted FAS 159 on January 1, 2008, and the
adoption did not have an impact on its consolidated financial
statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (Revised 2007) Business
Combinations (“SFAS No. 141R”) and Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No.
160”). SFAS No. 141R and SFAS No. 160 require significant changes in the
accounting and reporting for business acquisitions and the reporting of a
noncontrolling interest in a subsidiary. Among many changes under SFAS No. 141R,
an acquirer will record 100% of all assets and liabilities at fair value at the
acquisition date with changes possibly recognized in earnings, and acquisition
related costs will be expensed rather than capitalized. SFAS No. 160 establishes
new accounting and reporting standards for the noncontrolling interest in a
subsidiary. Key changes under the standard are that noncontrolling interests in
a subsidiary will be reported as part of equity, losses allocated to a
noncontrolling interest can result in a deficit balance, and changes in
ownership interests that do not result in a change of control are accounted for
as equity transactions and upon a loss of control, gain or loss is recognized
and the remaining interest is remeasured at fair value on the date control is
lost. SFAS No. 141R and SFAS No. 160 apply prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is not permitted. Heartland will adopt these statements on January 1,
2009.
The SEC
released Staff Accounting Bulletin No. 109 (“SAB No. 109”) in November 2007. SAB
No. 109 provides guidance on written loan commitments that are accounted for at
fair value through earnings. SAB No. 109 supersedes SAB No. 105 which provided
guidance on derivative loan commitments pursuant to SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”. SAB No. 105 stated that in measuring
the fair value of a derivative loan commitment it would be inappropriate to
incorporate the expected net future cash flows related to the associated loan.
SAB No. 109, consistent with the guidance in SFAS No. 156 and SFAS No. 159,
requires that expected net future cash flows related to the associated servicing
of the loan be included in the measurement of all written loan commitments that
are accounted for at fair value through earnings. SAB No. 109 is effective for
fiscal quarters beginning after December 15, 2007. Heartland adopted SAB No. 109
on January 1, 2008, and the adoption of this issue did not have a material
impact on its consolidated financial statements.
The SEC
released SAB No. 110 in December 2007. SAB No. 110 provides guidance on the use
of a “simplified” method, as discussed in SAB No. 107, in developing as estimate
of expected term of “plain vanilla” share options in accordance with FAS No.
123R. SAB No. 107 did not expect a company to use the simplified method for
share option grants after December 31, 2007. At the time SAB No. 107 was issued,
the staff believed that more detailed external information about employee
exercise behavior (e.g., employee exercise patterns by industry and/or other
categories of companies) would, over time, become readily available to
companies. The staff understands that such detailed information about employee
exercise behavior may not be widely available by December 31, 2007. Accordingly,
the staff will continue to accept, under certain circumstances, the use of the
simplified method beyond December 31, 2007. Heartland does not expect the
adoption of SAB No. 110 to have a material impact on its consolidated financial
statements.
Reclassifications
- Certain reclassifications have been made to prior periods’ consolidated
financial statements to present them on a basis comparable with the current
period’s consolidated financial statements.
TWO
ACQUISITIONS
Heartland
regularly explores opportunities for acquisitions of financial institutions and
related businesses. Generally, management does not make a public
announcement about an acquisition opportunity until a definitive agreement has
been signed.
On March
9, 2007, Heartland completed its acquisition of a book of business from
Independent Financial Marketing Group, Inc. (“IFMG”), a subsidiary of Sun Life.
The brokers and support staff at the Denver office of IFMG served 8,800
investment clients. Immediately upon the acquisition, the staff relocated to
Summit Bank & Trust’s Broomfield, Colorado office. The purchase price of
$650 thousand will be paid in installments. Payments of $150 thousand were made
in 2007. Payments of $125 thousand are scheduled on December 31 of each year
through 2011. The resultant acquired customer relationship intangible
of $260 thousand is being amortized over a period of 5 years. The remaining
excess purchase price of $390 thousand was recorded as goodwill.
On
January 12, 2006, Heartland announced the signing of a definitive agreement to
acquire Bank of the Southwest, a financial institution with offices in Phoenix
and Tempe, Arizona. On May 15, 2006, Heartland’s acquisition of Bank of the
Southwest was completed. Immediately upon completion, the acquired entity became
a part of Arizona Bank & Trust, Heartland’s de novo bank chartered in
2003. As of the acquisition date, total assets at Bank of the Southwest were
$63.2 million, total loans were $52.4 million and total deposits were $44.4
million. The purchase price was $18.1 million, all in cash. The resultant
acquired core deposit intangible of $540 thousand, as determined by an
independent third party consultant, is being amortized over a period of eight
years. The remaining excess purchase price over the fair value of tangible and
identifiable intangible assets acquired of $5.1 million was recorded as
goodwill. The results of operations of Bank of the Southwest are included in the
consolidated financial statements from the date of acquisition. As a result of
the Bank of the Southwest acquisition, Heartland’s ownership percentage in
Arizona Bank & Trust increased from 86% to 90%. Additional information on
Heartland’s required repurchase of the Arizona Bank & Trust stock held by
minority shareholders is included in footnote 12.
In April
of 2006, Heartland entered into an agreement with a group of Colorado business
leaders to establish a new bank in Broomfield, Colorado. Summit Bank & Trust
opened on November 1, 2006, and Heartland funded its $12.0 million initial
investment through use of its revolving credit line. Additional information on
Heartland’s required repurchase of the Summit Bank & Trust stock held by
minority shareholders is included in footnote 12.
THREE
DISCONTINUED
OPERATIONS
On June
22, 2007, Rocky Mountain Bank, Heartland’s Montana bank subsidiary, completed
the sale of its branch banking office in Broadus, Montana. Included in the sale
were $20.9 million of loans and $30.2 million of deposits. As a result of the
sale, Heartland recorded a pre-tax gain of $2.4 million that is included in the
line item “income from discontinued operations” on the consolidated statements
of income. The results of operations of the branch have also been
reflected in this line item for both the current and prior periods reported. In
addition, the cash flows of this branch have been presented in the consolidated
statements of cash flows as cash provided or used by discontinued operations for
the current and prior periods reported.
Also
included with the results of operations of the Broadus branch on the income
statement as discontinued operations for the prior periods are the results of
the operations of ULTEA, Inc., Heartland’s fleet leasing subsidiary, which was
sold on December 22, 2006. Total assets of ULTEA at closing were $50.3 million.
Under the terms of the agreement, Heartland received proceeds of $9.2 million
and assumed the deferred tax liability of $5.4 million related to ULTEA.
Heartland recorded a pre-tax gain of $20 thousand that is included in the line
item “income from discontinued operations” on the consolidated statements of
income. ULTEA’s results of operations for all prior periods presented are also
reflected in this line item. In addition, the cash flows of ULTEA have been
presented in the consolidated statements of cash flows as cash provided or used
by discontinued operations for all prior periods reported.
FOUR
CASH
AND DUE FROM BANKS
The
Heartland banks are required to maintain certain average cash reserve balances
as a non-member bank of the Federal Reserve System. The reserve balance
requirements at December 31, 2007 and 2006 were $3.4 and $5.2 million,
respectively.
FIVE
SECURITIES
The
amortized cost, gross unrealized gains and losses and estimated fair values of
available for sale securities as of December 31, 2007 and 2006 are summarized as
follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
253,696
|
$
|
2,162
|
$
|
(601
|
)
|
$
|
255,257
|
|||||||
|
Mortgage-backed
securities
|
241,496
|
2,821
|
(493
|
)
|
243,824
|
|||||||||||
|
Obligations
of states and political subdivisions
|
137,162
|
5,706
|
(38
|
)
|
142,830
|
|||||||||||
|
Corporate
debt securities
|
13,038
|
338
|
(38
|
)
|
13,338
|
|||||||||||
|
Total
debt securities
|
645,392
|
11,027
|
(1,170
|
)
|
655,249
|
|||||||||||
|
Equity
securities
|
27,107
|
167
|
(140
|
)
|
27,134
|
|||||||||||
|
Total
|
$
|
672,499
|
$
|
11,194
|
$
|
(1,310
|
)
|
$
|
682,383
|
|||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2006
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
299,671
|
$
|
1,010
|
$
|
(3,858
|
)
|
$
|
296,823
|
|||||||
|
Mortgage-backed
securities
|
135,008
|
551
|
(1,502
|
)
|
134,057
|
|||||||||||
|
Obligations
of states and political subdivisions
|
130,671
|
5,247
|
(237
|
)
|
135,681
|
|||||||||||
|
Corporate
debt securities
|
22,076
|
4
|
-
|
22,080
|
||||||||||||
|
Total
debt securities
|
587,426
|
6,812
|
(5,597
|
)
|
588,641
|
|||||||||||
|
Equity
securities
|
25,014
|
402
|
(107
|
)
|
25,309
|
|||||||||||
|
Total
|
$
|
612,440
|
$
|
7,214
|
$
|
(5,704
|
)
|
$
|
613,950
|
|||||||
The
amortized cost, gross unrealized gains and losses and estimated fair values of
held to maturity securities as of December 31, 2007 and 2006 are summarized as
follows:
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
||||||||||||||
|
2007
|
|||||||||||||||||
|
Securities
held to maturity:
|
|||||||||||||||||
|
Mortgage-backed
securities
|
$
|
1,110
|
$
|
44
|
$
|
-
|
$
|
1,154
|
|||||||||
|
Obligations
of states and political subdivisions
|
4,568
|
32
|
-
|
4,600
|
|||||||||||||
|
Total
|
$
|
5,678
|
$
|
76
|
$
|
-
|
$
|
5,754
|
|||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
||||||||||||||
|
2006
|
|||||||||||||||||
|
Securities
held to maturity:
|
|||||||||||||||||
|
Obligations
of states and political subdivisions
|
$
|
1,522
|
$
|
4
|
$
|
(13
|
)
|
$
|
1,513
|
||||||||
|
Total
|
$
|
1,522
|
$
|
4
|
$
|
(13
|
)
|
$
|
1,513
|
||||||||
All of
our U.S. government corporations and agencies securities and a majority of our
mortgage-backed securities are issuances of government-sponsored
enterprises.
Included
in the equity securities at December 31, 2007 and 2006, were shares of stock in
the Federal Home Loan Banks of Des Moines, Chicago, Dallas, San Francisco and
Seattle at an amortized cost of $13.5 million and $12.3 million, respectively.
There were no unrealized gains or losses recorded on these securities as they
are not readily marketable.
The
amortized cost and estimated fair value of debt securities available for sale at
December 31, 2007, by estimated maturity, are as follows. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without penalties.
|
(Dollars
in thousands)
|
||||||
|
Amortized
Cost
|
Estimated
Fair Value
|
|||||
|
Securities
available for sale:
|
||||||
|
Due
in 1 year or less
|
$
|
165,787
|
$
|
165,484
|
||
|
Due
in 1 to 5 years
|
325,502
|
330,118
|
||||
|
Due
in 5 to 10 years
|
112,759
|
115,385
|
||||
|
Due
after 10 years
|
41,344
|
44,262
|
||||
|
Total
|
$
|
645,392
|
$
|
655,249
|
||
The
amortized cost and estimated fair value of debt securities held to maturity at
December 31, 2007, by estimated maturity, are as follows. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without penalties.
|
(Dollars
in thousands)
|
||||||
|
Amortized
Cost
|
Estimated
Fair Value
|
|||||
|
Securities
held to maturity:
|
||||||
|
Due
in 1 to 5 years
|
$
|
1,110
|
$
|
1,154
|
||
|
Due
in 5 to 10 years
|
520
|
552
|
||||
|
Due
after 10 years
|
4,048
|
4,048
|
||||
|
Total
|
$
|
5,678
|
$
|
5,754
|
||
As of
December 31, 2007, securities with a fair value of $439.4 million were pledged
to secure public and trust deposits, short-term borrowings and for other
purposes as required by law.
Gross
gains and losses realized related to sales of securities for the years ended
December 31, 2007, 2006 and 2005, are summarized as follows:
|
(Dollars
in thousands)
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Securities
sold:
|
|||||||||
|
Proceeds
from sales
|
$
|
35,801
|
$
|
22,498
|
$
|
25,662
|
|||
|
Gross
security gains
|
358
|
697
|
376
|
||||||
|
Gross
security losses
|
17
|
144
|
178
|
||||||
During
the years ended December 31, 2007, 2006 and 2005, Heartland incurred other than
temporary impairment losses of $0, $76 and $0 thousand, respectively, on equity
securities available for sale.
The
following tables summarize the amount of unrealized losses, defined as the
amount by which cost or amortized cost exceeds fair value, and the related fair
value of investments with unrealized losses in Heartland’s securities portfolio
as of December 31, 2007 and 2006. The investments were segregated into two
categories: those that have been in a continuous unrealized loss position for
less than 12 months and those that have been in a continuous unrealized loss
position for 12 or more months. The reference point for determining how long an
investment was in an unrealized loss position was December 31, 2007 and 2006,
respectively. A majority of the unrealized losses in the debt security portfolio
are the result of changes in interest rates and not related to credit downgrades
of the securities. Therefore, Heartland has deemed the impairment as
temporary.
Unrealized
Losses on Securities Available for Sale
|
December
31, 2007
|
|||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
37,653
|
$
|
(35
|
)
|
$
|
88,909
|
$
|
(566
|
)
|
$
|
126,562
|
$
|
(601
|
)
|
||||||
|
Mortgage-backed
securities
|
14,029
|
(63
|
)
|
61,528
|
(430
|
)
|
75,557
|
(493
|
)
|
||||||||||||
|
Obligations
of states and political subdivisions
|
1,553
|
(5
|
)
|
7,177
|
(33
|
)
|
8,730
|
(38
|
)
|
||||||||||||
|
Corporate
debt securities
|
2,963
|
(38
|
)
|
-
|
-
|
2,963
|
(38
|
)
|
|||||||||||||
|
Total
debt securities
|
56,198
|
(141
|
)
|
157,614
|
(1,029
|
)
|
213,812
|
(1,170
|
)
|
||||||||||||
|
Equity
securities
|
820
|
(63
|
)
|
3,481
|
(77
|
)
|
4,301
|
(140
|
)
|
||||||||||||
|
Total
temporarily impaired securities
|
$
|
57,018
|
$
|
(204
|
)
|
$
|
161,095
|
$
|
(1,106
|
)
|
$
|
218,113
|
$
|
(1,310
|
)
|
||||||
Unrealized
Losses on Securities Available for Sale
|
December
31, 2006
|
|||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
14,866
|
$
|
(39
|
)
|
$
|
197,192
|
$
|
(3,819
|
)
|
$
|
212,058
|
$
|
(3,858
|
)
|
||||||
|
Mortgage-backed
securities
|
20,525
|
(225
|
)
|
71,029
|
(1,277
|
)
|
91,554
|
(1,502
|
)
|
||||||||||||
|
Obligations
of states and political subdivisions
|
5,431
|
(57
|
)
|
18,117
|
(180
|
)
|
23,548
|
(237
|
)
|
||||||||||||
|
Total
debt securities
|
40,822
|
(321
|
)
|
286,338
|
(5,276
|
)
|
327,160
|
(5,597
|
)
|
||||||||||||
|
Equity
securities
|
732
|
(26
|
)
|
2,776
|
(81
|
)
|
3,508
|
(107
|
)
|
||||||||||||
|
Total
temporarily impaired securities
|
$
|
41,554
|
$
|
(347
|
)
|
$
|
289,114
|
$
|
(5,357
|
)
|
$
|
330,668
|
$
|
(5,704
|
)
|
||||||
SIX
LOANS
AND LEASES
Loans and
leases as of December 31, 2007 and 2006, were as follows:
|
(Dollars
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Commercial
and commercial real estate
|
$
|
1,632,597
|
$
|
1,483,738
|
||||
|
Residential
mortgage
|
217,044
|
225,343
|
||||||
|
Agricultural
and agricultural real estate
|
225,663
|
233,748
|
||||||
|
Consumer
|
199,518
|
194,652
|
||||||
|
Loans,
gross
|
2,274,822
|
2,137,481
|
||||||
|
Unearned
discount
|
(2,107
|
)
|
(1,875
|
)
|
||||
|
Deferred
loan fees
|
(1,706
|
)
|
(2,120
|
)
|
||||
|
Loans,
net
|
2,271,009
|
2,133,486
|
||||||
|
Direct
financing leases:
|
||||||||
|
Gross
rents receivable
|
7,430
|
12,268
|
||||||
|
Estimated
residual value
|
2,695
|
3,770
|
||||||
|
Unearned
income
|
(967
|
)
|
(1,679
|
)
|
||||
|
Direct
financing leases, net
|
9,158
|
14,359
|
||||||
|
Allowance
for loan and lease losses
|
(32,993
|
)
|
(29,981
|
)
|
||||
|
Loans
and leases, net
|
$
|
2,247,174
|
$
|
2,117,864
|
||||
Direct
financing leases receivable are generally short-term equipment leases. Future
minimum lease payments as of December 31, 2007, were as follows: $3.8 million
for 2008, $3.0 million for 2009, $2.0 million for 2010, $701 thousand for 2011,
$365 thousand for 2012 and $269 thousand thereafter.
Nearly
57% of the loan portfolio is concentrated in the Midwestern States of Iowa,
Illinois and Wisconsin. The remaining portion of the loan portfolio is
concentrated in the Western States of New Mexico, Arizona, Montana and
Colorado.
Loans and
leases on a nonaccrual status and considered impaired totaled $30.7 million and
$8.1 million at December 31, 2007 and 2006, respectively. The allowance for loan
and lease losses related to these nonaccrual loans was $1.8 million and $301
thousand, respectively. The average balances of nonaccrual loans for the years
ended December 31, 2007, 2006 and 2005 were $19.3 million, $12.6 million and
$13.8 million, respectively. For the years ended December 31, 2007,
2006 and 2005, interest income which would have been recorded under the original
terms of these loans and leases amounted to approximately $2.1 million, $592
thousand and $1.1 million, respectively, and interest income actually
recorded amounted to approximately $261 thousand, $225 thousand and $68
thousand, respectively.
There
were no loans and leases on a restructured status at December 31, 2007 and
2006.
Loans are
made in the normal course of business to directors, officers and principal
holders of equity securities of Heartland. The terms of these loans, including
interest rates and collateral, are similar to those prevailing for comparable
transactions and do not involve more than a normal risk of collectibility.
Changes in such loans during the years ended December 31, 2007 and 2006, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance
at beginning of year
|
$
|
51,018
|
$
|
28,379
|
||||
|
Advances
|
26,386
|
43,938
|
||||||
|
Repayments
|
(11,359
|
)
|
(21,299
|
)
|
||||
|
Balance,
end of year
|
$
|
66,045
|
$
|
51,018
|
||||
SEVEN
ALLOWANCE
FOR
LOAN
AND LEASE LOSSES
Changes
in the allowance for loan and lease losses for the years ended December 31,
2007, 2006 and 2005, were as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Balance
at beginning of year
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
|||||
|
Provision
for loan and lease losses from continuing operations
|
10,073
|
3,883
|
6,533
|
||||||||
|
Provision
for loan and lease losses from discontinued operations
|
-
|
(5
|
)
|
31
|
|||||||
|
Recoveries
on loans and leases previously charged off
|
1,641
|
1,733
|
1,152
|
||||||||
|
Loans
and leases charged off
|
(8,564
|
)
|
(3,989
|
)
|
(4,579
|
)
|
|||||
|
Adjustment
for transfer to other liabilities for unfunded commitments
|
-
|
-
|
(319
|
)
|
|||||||
|
Additions
related to acquired bank
|
-
|
591
|
-
|
||||||||
|
Reduction
related to discontinued operations
|
(138
|
)
|
(23
|
)
|
-
|
||||||
|
Balance
at end of year
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
|||||
EIGHT
PREMISES,
FURNITURE AND EQUIPMENT
Premises,
furniture and equipment as of December 31, 2007 and 2006, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Land
and land improvements
|
$
|
29,212
|
$
|
22,782
|
||||
|
Buildings
and building improvements
|
90,423
|
82,455
|
||||||
|
Furniture
and equipment
|
42,290
|
38,481
|
||||||
|
Total
|
161,925
|
143,718
|
||||||
|
Less
accumulated depreciation
|
(41,640
|
)
|
(35,151
|
)
|
||||
|
Premises,
furniture and equipment, net
|
$
|
120,285
|
$
|
108,567
|
||||
Depreciation
expense on premises, furniture and equipment was $7.3 million, $6.5 million and
$5.8 million for 2007, 2006, and 2005, respectively.
NINE
INTANGIBLE
ASSETS
The gross
carrying amount of intangible assets and the associated accumulated amortization
at December 31, 2007 and 2006, are presented in the tables below.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2007
|
December
31, 2006
|
|||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||
|
Amortized
intangible assets
|
||||||||||||
|
Core
deposit intangibles
|
$
|
9,757
|
$
|
6,252
|
$
|
9,757
|
$
|
5,095
|
||||
|
Mortgage
servicing rights
|
6,505
|
2,592
|
5,546
|
1,986
|
||||||||
|
Customer
relationship intangible
|
1,177
|
226
|
917
|
129
|
||||||||
|
Total
|
$
|
17,439
|
$
|
9,070
|
$
|
16,220
|
$
|
7,210
|
||||
|
Unamortized
intangible assets
|
$
|
8,369
|
$
|
9,010
|
||||||||
The
following table shows the estimated future amortization expense related to
intangible assets:
|
(Dollars
in thousands)
|
||||||||||||
|
Core
Deposit
Intangibles
|
Mortgage
Servicing
Rights
|
Customer
Relationship Intangible
|
Total
|
|||||||||
|
Year
ended:
|
||||||||||||
|
2008
|
$
|
847
|
$
|
1,230
|
$
|
103
|
$
|
2,180
|
||||
|
2009
|
748
|
766
|
102
|
1,616
|
||||||||
|
2010
|
466
|
639
|
101
|
1,206
|
||||||||
|
2011
|
450
|
511
|
99
|
1,060
|
||||||||
|
2012
|
421
|
384
|
55
|
860
|
||||||||
|
Thereafter
|
573
|
383
|
491
|
1,447
|
||||||||
The
following table summarizes the changes in capitalized mortgage servicing
rights:
|
(Dollars
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance,
beginning of year
|
$
|
3,560
|
$
|
3,263
|
||||
|
Originations
|
1,532
|
1,309
|
||||||
|
Amortization
|
(1,179
|
)
|
(1,012
|
)
|
||||
|
Balance,
end of year
|
$
|
3,913
|
$
|
3,560
|
||||
Mortgage
loans serviced for others were $636.0 million and $602.7 million as of December
31, 2007 and 2006, respectively. Custodial escrow balances maintained in
connection with the mortgage loan servicing portfolio were approximately $3.1
million and $2.9 million as of December 31, 2007 and 2006, respectively. The
fair value of Heartland’s mortgage servicing rights was estimated at $6.4
million and $6.0 million at December 31, 2007 and 2006,
respectively.
TEN
DEPOSITS
The
aggregate amount of time certificates of deposit in denominations of $100,000 or
more as of December 31, 2007 and 2006 were $308.5 million and $235.7 million,
respectively. At December 31, 2007, the scheduled maturities of time
certificates of deposit were as follows:
|
(Dollars
in thousands)
|
|||
|
2008
|
$
|
877,249
|
|
|
2009
|
150,136
|
||
|
2010
|
47,240
|
||
|
2011
|
22,721
|
||
|
2012
|
35,582
|
||
|
Thereafter
|
6,836
|
||
|
$
|
1,139,764
|
||
Interest
expense on deposits for the years ended December 31, 2007, 2006 and 2005, was as
follows:
|
(Dollars
in thousands)
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Savings
and money market accounts
|
$
|
22,404
|
$
|
18,993
|
$
|
10,889
|
|||
|
Time
certificates of deposit in denominations of $100,000 or
more
|
14,307
|
9,287
|
6,343
|
||||||
|
Other
time deposits
|
41,154
|
34,250
|
25,643
|
||||||
|
Interest
expense on deposits
|
$
|
77,865
|
$
|
62,530
|
$
|
42,875
|
|||
ELEVEN
SHORT-TERM
BORROWINGS
Short-term
borrowings as of December 31, 2007 and 2006, were as follows:
|
(Dollars
in thousands)
|
||||||
|
2007
|
2006
|
|||||
|
Securities
sold under agreement to repurchase
|
$
|
237,914
|
$
|
225,880
|
||
|
Federal
funds purchased
|
95,075
|
11,550
|
||||
|
U.S.
Treasury demand note
|
4,157
|
3,264
|
||||
|
FHLB
advances
|
2,000
|
-
|
||||
|
Notes
payable to unaffiliated banks
|
15,000
|
35,000
|
||||
|
Total
|
$
|
354,146
|
$
|
275,694
|
||
Heartland
has a credit agreement with four unaffiliated banks under a revolving credit
line. Under the unsecured revolving credit line, Heartland may borrow
up to $60.0 million at any one time. This credit line was established
primarily to provide working capital to Heartland and Citizens Finance
Co. At December 31, 2007, and December 31, 2006, $15.0 million and
$35.0 million was outstanding on the revolving credit line respectively. The
revolving credit agreement contains specific covenants which, among other
things, limit dividend payments and restrict the sale of assets by Heartland
under certain circumstances. Also contained within the agreement are certain
financial covenants, including the maintenance by Heartland of a maximum
nonperforming assets to total loans ratio, minimum return on average assets
ratio and maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well capitalized, as
defined from time to time by the federal banking regulators. At December 31,
2007, Heartland was in compliance with the covenants contained in the credit
agreement.
All
retail repurchase agreements as of December 31, 2007 and 2006, were due within
twelve months.
Average
and maximum balances and rates on aggregate short-term borrowings outstanding
during the years ended December 31, 2007, 2006 and 2005, were as
follows:
|
(Dollars
in thousands)
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
Maximum
month-end balance
|
$
|
354,146
|
$
|
277,604
|
$
|
266,194
|
|||
|
Average
month-end balance
|
291,289
|
258,844
|
233,051
|
||||||
|
Weighted
average interest rate for the year
|
4.62
|
%
|
4.36%
|
2.67%
|
|||||
|
Weighted
average interest rate at year-end
|
2.90
|
%
|
4.71%
|
3.68%
|
|||||
Dubuque
Bank and Trust Company is a participant in the Borrower-In-Custody of Collateral
Program at the Federal Reserve Bank of Chicago, which provides the capability to
borrow short-term funds under the Discount Window Program. Advances under this
program were collateralized by a portion of the commercial loan portfolio
of Dubuque Bank and Trust Company in the amount of $199.3 million at December
31, 2007, and $229.4 million at December 31, 2006. No borrowings were utilized
under the Discount Window Program during either year.
TWELVE
OTHER
BORROWINGS
Other
borrowings at December 31, 2007 and 2006, were as follows:
|
(Dollars
in thousands)
|
|||||||
|
2007
|
2006
|
||||||
|
Advances
from the FHLB; weighted average maturity dates at December 31, 2007 and
2006 were January 2011 and February 2011, respectively; and weighted
average interest rates were 4.54% and 4.23%, respectively
|
$
|
91,530
|
$
|
81,264
|
|||
|
Wholesale
repurchase agreements
|
50,000
|
50,000
|
|||||
|
Trust
preferred securities
|
113,405
|
85,570
|
|||||
|
Obligations
to repurchase minority interest shares of Arizona Bank & Trust and
Summit Bank & Trust
|
7,014
|
6,350
|
|||||
|
Community
Development Block Grant Loan Program with the City of Dubuque at 3.00% due
January 2014
|
300
|
300
|
|||||
|
Contracts
payable for purchase of real estate and other assets
|
1,358
|
1,039
|
|||||
|
Total
|
$
|
263,607
|
$
|
224,523
|
|||
The
Heartland banks are members of the Federal Home Loan Bank ("FHLB") of Des
Moines, Chicago, Dallas, San Francisco and Seattle. The advances from the FHLB
are collateralized by the banks’ investment in FHLB stock of $7.5 and $6.6
million at December 31, 2007 and 2006, respectively. Additional collateral is
provided by the banks’ one-to-four unit residential mortgages, commercial and
agricultural mortgages and securities pledged totaling $958.6 million at
December 31, 2007 and $964.8 million at December 31, 2006. Callable
advances from the FHLB totaled $13.0 million as of December 31, 2007, at a
weighted average rate of 3.39% with call dates during 2008. At December 31,
2006, callable advances from the FHLB totaled $13.0 million at a weighted
average rate of 3.39% with call dates during 2007.
Heartland
entered into a leverage structured wholesale repurchase agreement transaction on
August 28, 2006, which was subsequently amended in December of 2007. This
wholesale repurchase agreement is in the amount of $50.0 million with a capped
rate of 3.06% through the call date of August 28, 2009, and, if not called,
through the maturity date of November 28, 2010. If the 3-month LIBOR rate
exceeds 5.15%, the rate paid is reduced to 3.06% less the amount by which the
3-month LIBOR rate exceeds 5.15%. In no case will the rate paid fall below
0.00%. In order to effectuate the initial wholesale repurchase agreement, a
$55.0 million government agency bond was acquired on August 28, 2006. As of
December 31, 2007 and 2006, the rate paid on this repurchase agreement
transaction was 3.06% and 5.66%, respectively.
On June
21, 2007, Heartland completed an offering of $20.0 million of fixed/variable
rate cumulative capital securities representing undivided beneficial interests
in Heartland Statutory Trust VI. On June 26, 2007, Heartland completed a second
offering of $20.0 million of variable rate cumulative capital securities
representing undivided beneficial interests in Heartland Statutory Trust
VII.
On March
19, 2007, Heartland redeemed $8.0 million of variable rate cumulative trust
preferred securities representing undivided beneficial interests in Heartland
Statutory Trust II, and on October 1, 2007, Heartland redeemed $5.0 million of
variable rate cumulative trust preferred securities representing undivided
beneficial interests in Heartland Financial Capital Trust II. The remaining
unamortized issuance costs of $202 thousand and $137 thousand, respectively,
were expensed under the noninterest expense category upon
redemption.
Heartland
currently has six wholly-owned trust subsidiaries that were formed to issue
trust preferred securities. The proceeds from the offerings were used to
purchase junior subordinated debentures from Heartland. The proceeds are being
used for general corporate purposes. Heartland has the option to shorten the
maturity date to a date not earlier than the callable dates listed in the
schedule below. Heartland may not shorten the maturity date without
prior approval of the Board of Governors of the Federal Reserve System, if
required. Prior redemption is permitted under certain circumstances, such as
changes in tax or regulatory capital rules. In connection with these offerings,
the balance of deferred issuance costs included in other assets was $302
thousand as of December 31, 2007. These deferred costs are amortized on a
straight-line basis over the life of the debentures. The majority of the
interest payments are due quarterly.
A
schedule of Heartland’s trust preferred offerings outstanding as of December 31,
2007, is as follows:
|
(Dollars
in thousands)
|
||||||
|
Name
|
Amount
Issued
|
Interest
Rate
|
Interest
Rate as of 12/31/07
|
Maturity
Date
|
Callable
Date
|
|
|
Rocky
Mountain Statutory Trust I
|
$
|
5,155
|
10.60%
|
10.60%
|
09/07/2030
|
09/07/2010
|
|
Heartland
Financial Statutory Trust III
|
20,619
|
8.25%
|
8.25%
|
10/10/2033
|
10/10/2008
|
|
|
Heartland
Financial Statutory Trust IV
|
25,774
|
2.75%
over Libor
|
7.74%
|
03/17/2034
|
03/17/2009
|
|
|
Heartland
Financial Statutory Trust V
|
20,619
|
1.33%
over Libor
|
6.57%
|
04/07/2036
|
04/07/2011
|
|
|
Heartland
Financial Statutory Trust VI
|
20,619
|
6.75%
|
6.75%
|
09/15/2037
|
06/15/2012
|
|
|
Heartland
Financial Statutory Trust VII
|
20,619
|
1.48%
over Libor
|
6.60%
|
09/01/2037
|
09/01/2012
|
|
|
$
|
113,405
|
|||||
For
regulatory purposes, $74.7 and $69.6 million of the capital securities qualified
as Tier 1 capital for regulatory purposes as of December 31, 2007 and 2006,
respectively.
Heartland
has an irrevocable obligation to repurchase the common shares of Summit Bank
& Trust owned by minority shareholders on November 1, 2011. The minority
shareholders are obligated to sell their shares to Heartland on that same date.
The stock will be valued by an independent third party appraiser with the
required purchase by Heartland at the appraised value, not to exceed 18x
earnings, or a minimum return of 6% on the original investment amount, whichever
is greater. Through
December 31, 2007, Heartland accrued the amount due to the minority shareholders
at 6%. The obligation to repay the original investment is payable in cash or
Heartland stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders is
payable in cash or Heartland stock or a combination of cash and stock at the
option of Heartland. Additionally, the minority shareholders may put their
shares to Heartland at any time through November 1, 2011, at an amount equal to
the amount originally paid plus 6% compounded annually. The amount of the
obligation as of December 31, 2007, included in other borrowings is $3.5
million.
Heartland
has an irrevocable obligation to repurchase the common shares of Arizona Bank
& Trust owned by minority shareholders on August 18, 2008. The minority
shareholders are obligated to sell their shares to Heartland on that same date.
The stock will be valued by an independent third party appraiser with the
required purchase by Heartland at the appraised value, not to exceed 18x
earnings, or a minimum return of 6% on the original investment amount, whichever
is greater. Through
December 31, 2007, Heartland accrued the amount due to the minority shareholders
at 6%. The obligation to repay the original investment is payable in cash or
Heartland stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders is
payable in cash or Heartland stock or a combination of cash and stock at the
option of Heartland. Additionally, the minority shareholders may put their
shares to Heartland at any time through August 18, 2008, at an amount equal to
the amount originally paid plus 6% compounded annually. The amount of the
obligation as of December 31, 2007, included in other borrowings is $3.5
million.
Future
payments at December 31, 2007, for all other borrowings follow in the table
below. Callable FHLB advances are included in the table at their maturity
date.
|
(Dollars
in thousands)
|
|||
|
2008
|
$
|
35,142
|
|
|
2009
|
60,614
|
||
|
2010
|
23,538
|
||
|
2011
|
7,051
|
||
|
2012
|
415
|
||
|
Thereafter
|
136,847
|
||
|
$
|
263,607
|
||
THIRTEEN
DERIVATIVE
FINANCIAL INSTRUMENTS
On
occasion, Heartland uses derivative financial instruments as part of its
interest rate risk management, including interest rate swaps, caps, floors and
collars. Heartland’s objectives in using derivatives are to add stability to its
net interest margin and to manage its exposure to movements in interest
rates.
To reduce
the potentially negative impact a downward movement in interest rates would have
on its interest income, Heartland entered into the following two transactions
during 2006 and 2005, respectively. On April 4, 2006, Heartland
entered into a three-year interest rate collar transaction with a notional
amount of $50.0 million. The collar was effective on April 4, 2006, and matures
on April 4, 2009. Heartland is the payer on prime at a cap strike
rate of 8.95% and the counterparty is the payer on prime at a floor strike rate
of 7.00%. As of December 31, 2007, and December 31, 2006, the fair market value
of this collar transaction was recorded as an asset of $391 thousand and $59
thousand, respectively.
On
September 19, 2005, Heartland entered into a five-year interest rate collar
transaction on a notional amount of $50.0 million. The collar has an effective
date of September 21, 2005, and a maturity date of September 21, 2010. Heartland
is the payer on prime at a cap strike rate of 9.00% and the counterparty is the
payer on prime at a floor strike rate of 6.00%. As of December 31, 2007, the
fair market value of this collar transaction was recorded as an asset of $387
thousand. As of December 31, 2006, the fair market value of this collar
transaction was recorded as a liability of $43 thousand.
For
accounting purposes, the two collar transactions above are designated as cash
flow hedges of the overall changes in the cash flows above and below the collar
strike rates associated with interest payments on certain of Heartland’s
prime-based loans that reset whenever prime changes. The hedged
transactions for the two hedging relationships are designated as the first
prime-based interest payments received by Heartland each calendar month during
the term of the collar that, in aggregate for each period, are interest payments
on principal from specified portfolios equal to the notional amount of the
collar.
Prepayments
in the hedged loan portfolios are treated in a manner consistent with the
guidance in SFAS 133 Implementation Issue No. G25, Cash Flow Hedges: Using the
First-Payments-Received Technique in Hedging the Variable Interest Payments on a
Group of Non-Benchmark-Rate-Based Loans, which allows the designated forecasted
transactions to be the variable, prime-rate-based interest payments on a rolling
portfolio of prepayable interest-bearing loans using the first-payments-received
technique, thereby allowing interest payments from loans that prepay to be
replaced with interest payments from new loan originations. Based on Heartland’s
assessments, both at inception and throughout the life of the hedging
relationship, it is probable that sufficient prime-based interest receipts will
exist through the maturity dates of the collars.
To reduce
the potentially negative impact an upward movement in interest rates would have
on its net interest income, Heartland entered into the following two
transactions on February 1, 2007. For accounting purposes, these two cap
transactions are designated as cash flow hedges of the changes in cash flows
attributable to changes in LIBOR, the benchmark interest rate being hedged,
above the cap strike rate associated with the interest payments made on $45.0
million of Heartland’s subordinated debentures (issued in connection with the
trust preferred securities of Heartland Financial Statutory Trust IV and V) that
reset quarterly on a specified reset date. At inception, Heartland asserted that
the underlying principal balance will remain outstanding throughout the hedge
transaction making it probable that sufficient LIBOR-based interest payments
will exist through the maturity date of the caps.
The first
transaction executed was a twenty-three month interest rate cap transaction on a
notional amount of $20.0 million. The cap has an effective date of February 1,
2007, and a maturity date of January 7, 2009. Should 3-month LIBOR exceed 5.5%
on a reset date, the counterparty will pay Heartland the amount of interest that
exceeds the amount owed on the debt at the cap LIBOR rate of 5.5%. The
floating-rate subordinated debentures contain an interest deferral feature that
is mirrored in the cap transaction. As of December 31, 2007, this cap
transaction had no fair value.
The
second transaction executed on February 1, 2007, was a twenty-five month
interest rate cap transaction on a notional amount of $25.0 million to reduce
the potentially negative impact an upward movement in interest rates would have
on its net interest income. The cap has an effective date of February 1, 2007,
and a maturity date of March 17, 2009. Should 3-month LIBOR exceed 5.5% on a
reset date, the counterparty will pay Heartland the amount of interest that
exceeds the amount owed on the debt at the cap LIBOR rate of 5.5%. The
floating-rate subordinated debentures contain an interest rate deferral feature
that is mirrored in the cap transaction. As of December 31, 2007, this cap
transaction had no fair value.
For both
the collar and cap transactions described above, the effective portion of
changes in the fair values of the derivatives is initially reported in other
comprehensive income (outside of earnings) and subsequently reclassified to
earnings (interest income on loans or interest expense on borrowings) when the
hedged transactions affect earnings. Ineffectiveness resulting from the hedging
relationship, if any, is recorded as a gain or loss in earnings as part of
noninterest income. Heartland uses the “Hypothetical Derivative Method”
described in SFAS 133 Implementation Issue No. G20, Cash Flow Hedges: Assessing
and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge,
for its quarterly prospective and retrospective assessments of hedge
effectiveness, as well as for measurements of hedge ineffectiveness. All
components of the derivative instruments’ change in fair value were included in
the assessment of hedge effectiveness. The amount of ineffectiveness recognized
for the cash flow hedge transactions for the years ending December 31, 2007 and
2006 was $15 thousand and $2 thousand, respectively. No ineffectiveness was
recognized for the cash flow hedge transactions for the year ended December 31,
2005.
A portion
of the September 19, 2005, collar transaction did not meet the retrospective
hedge effectiveness test at June 30, 2007. The failure was on a portion of the
$50.0 million notional amount. That portion, $14.3 million, was designated as a
cash flow hedge of the overall changes in the cash flows above and below the
collar strike rates associated with interest payments on certain of Rocky
Mountain Bank’s prime-based loans. The failure of this hedge relationship was
caused by the sale of the Broadus branch (see footnote 3), which reduced the
designated loan pool from $14.3 million to $7.5 million. This hedge failure
resulted in the recognition of a loss of $51 thousand during the quarter ended
June 30, 2007, which consists of the mark to market loss on the collar
transaction of $36 thousand and a reclass of unrealized losses out of other
comprehensive income to earnings of $15 thousand. On August 17, 2007, the $14.3
million portion of the September 19, 2005, collar transaction was redesignated
and met the requirements for hedge accounting treatment. Since the fair value of
the collar transaction was zero on the redesignation date, a mark to market gain
of $36 thousand was recorded as other noninterest income during the period from
June 30, 2007, to August 17, 2007. As was the case at origination, the
redesignation remains as a cash flow hedge of the overall changes in the cash
flows above and below the collar strike rates associated with interest payments
on certain of Rocky Mountain Bank’s prime-based loans. On December 31, 2007,
this portion of the collar transaction demonstrated retrospective hedge
effectiveness.
For the
year ended December 31, 2007, the change in net unrealized gains of $672
thousand for derivatives designated as cash flow hedges is separately disclosed
in the statement of changes in stockholders’ equity, before income taxes of $253
thousand. For the year ended December 31, 2006, the change in net
unrealized gains of $104 thousand for derivatives designated as cash flow hedges
is separately disclosed in the statement of changes in shareholders’ equity,
before income taxes of $39 thousand. For the year ended December 31, 2005, the
change in net unrealized gains of $337 thousand for derivatives designated as
cash flow hedges is separately disclosed in the statement of changes in
stockholders’ equity, before income taxes of $126 thousand.
Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest income or expense as interest payments are received
or made on Heartland’s variable-rate assets and liabilities. For the year ended
December 31, 2007, the change in net unrealized gains on cash flow hedges
reflects a reclassification of $15 thousand of net unrealized losses from
accumulated other comprehensive income to interest income or interest expense.
As of December 31, 2007, Heartland estimates that an additional $18 thousand
will be reclassified from accumulated other comprehensive income to interest
income within the next 12 months.
On July
8, 2005, Heartland entered into a two-year interest rate floor transaction on
prime at a strike level of 5.50% on a notional amount of $100.0 million. This
floor transaction matured on July 8, 2007, and was not replaced upon maturity.
Changes in the fair market value of this hedge transaction were recorded through
Heartland’s income statement under the other noninterest income category as it
was not designated in a formal hedging relationship. The floor contract had no
fair market value as of December 31, 2006.
By using
derivatives, Heartland is exposed to credit risk if counterparties to derivative
instruments do not perform as expected. Heartland minimizes this risk by
entering into derivative contracts with large, stable financial institutions and
Heartland has not experienced any losses from counterparty nonperformance on
derivative instruments. Furthermore, Heartland also periodically monitors
counterparty credit risk in accordance with the provisions of SFAS
133.
FOURTEEN
INCOME
TAXES
Income
taxes for the years ended December 31, 2007, 2006 and 2005, were as
follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$
|
9,481
|
$
|
17,344
|
$
|
9,396
|
|||||
|
State
|
2,577
|
841
|
1,081
|
||||||||
|
Total
current
|
$
|
12,058
|
$
|
18,185
|
$
|
10,477
|
|||||
|
Deferred:
|
|||||||||||
|
Federal
|
$
|
(2,185
|
)
|
$
|
(6,114
|
)
|
$
|
(1,490
|
)
|
||
|
State
|
621
|
438
|
1,163
|
||||||||
|
Total
deferred
|
$
|
(1,564
|
)
|
$
|
(5,676
|
)
|
$
|
(327
|
)
|
||
|
Total income tax
expense
|
$
|
10,494
|
$
|
12,509
|
$
|
10,150
|
|||||
Income
tax expense is included in the financial statements as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Income
tax from continuing operations
|
$
|
9,409
|
$
|
11,578
|
$
|
9,561
|
|||||
|
Income
tax from discontinued operations
|
1,085
|
931
|
589
|
||||||||
|
Total income tax
expense
|
$
|
10,494
|
$
|
12,509
|
$
|
10,150
|
|||||
The
income tax provisions above do not include the effects of income tax deductions
resulting from exercises of stock options in the amounts of $896 thousand, $559
thousand and $476 thousand in 2007, 2006 and 2005, respectively, which were
recorded as increases to stockholders’ equity. Additionally, the income tax
provision in 2005 does not include federal rehabilitation tax credits of $313
thousand, and state rehabilitation tax credits of $392 thousand, all of which
were recorded as a reduction in the depreciable basis of the capitalized
asset. A deferred tax asset had been recorded for the $1.4 million
($915 thousand, net of federal tax) state rehabilitation tax credits as they
initially were not available until tax years 2011 and 2013. During 2005, state
legislation provided for earlier availability of these credits with $489
thousand available in tax year 2005 and the remaining $1.3 million available in
tax year 2006.
Temporary
differences between the amounts reported in the financial statements and the tax
basis of assets and liabilities result in deferred taxes. Deferred
tax assets and liabilities at December 31, 2007 and 2006, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Tax
effect of net unrealized loss on derivatives reflected in stockholders’
equity
|
$
|
-
|
$
|
45
|
||||
|
Allowance
for loan and lease losses
|
12,036
|
10,880
|
||||||
|
Deferred
compensation
|
1,742
|
1,189
|
||||||
|
Organization
and acquisitions costs
|
399
|
463
|
||||||
|
Net
operating loss carryforwards
|
1,061
|
805
|
||||||
|
Rehabilitation
tax credits
|
186
|
747
|
||||||
|
Non-accrual
loan interest
|
831
|
233
|
||||||
|
Other
|
453
|
82
|
||||||
|
Gross
deferred tax assets
|
16,708
|
14,444
|
||||||
|
Valuation
allowance
|
(780
|
)
|
-
|
|||||
|
Total
deferred tax assets
|
$
|
15,928
|
$
|
14,444
|
||||
|
Deferred
tax liabilities:
|
||||||||
|
Tax
effect of net unrealized gain on derivatives reflected in stockholders’
equity
|
$
|
(200
|
)
|
$
|
-
|
|||
|
Tax
effect of net unrealized gain on securities available for sale reflected
in stockholders’ equity
|
(3,738
|
)
|
(573
|
)
|
||||
|
Securities
|
(850
|
)
|
(902
|
)
|
||||
|
Premises,
furniture and equipment
|
(3,614
|
)
|
(3,101
|
)
|
||||
|
Lease
financing
|
(1,674
|
)
|
(2,247
|
)
|
||||
|
Tax
bad debt reserves
|
(515
|
)
|
(515
|
)
|
||||
|
Purchase
accounting
|
(3,305
|
)
|
(3,168
|
)
|
||||
|
Prepaid
expenses
|
(788
|
)
|
(472
|
)
|
||||
|
Mortgage
servicing rights
|
(1,461
|
)
|
(1,330
|
)
|
||||
|
Deferred
loan fees
|
(164
|
)
|
(140
|
)
|
||||
|
Other
|
(202
|
)
|
(226
|
)
|
||||
|
Gross
deferred tax liabilities
|
$
|
(16,511
|
)
|
$
|
(12,674
|
)
|
||
|
Net
deferred tax asset (liability)
|
$
|
(583
|
)
|
$
|
1,770
|
The
deferred tax liabilities related to net unrealized gains(losses) on securities
available for sale and the deferred tax assets and liabilities related to net
unrealized losses on derivatives had no effect on income tax expense as these
gains and losses, net of taxes, were recorded in other comprehensive income.
Also, the $1.1 million deferred tax asset recorded during 2006 as a result of
the Bank of the Southwest acquisition had no effect on income tax expense. Net
operating loss carryforwards for state income tax purposes were approximately
$17.1 million at December 31, 2007. The associated deferred tax asset is
$1.0 million, net of federal tax. These carryforwards expire beginning December
31, 2015, through December 31, 2022. A valuation allowance of $780 thousand
existed at December 31, 2007, against the deferred tax asset due to the
uncertainty surrounding the utilization of these state net operating loss
carryforwards. In connection with the adoption of FIN 48 on January 1, 2007,
$506 thousand was reclassified from current taxes payable to deferred tax assets
as a valuation allowance. Realization of the deferred tax asset over time is
dependent upon the existence of taxable income in carryback periods or the
ability to generate sufficient taxable income in future periods. In determining
that realization of the deferred tax asset was more likely than not, Heartland
gave consideration to a number of factors including its taxable income during
carryback periods, its recent earnings history, its expectations for earnings in
the future and, where applicable, the expiration dates associated with tax
carryforwards.
The
actual income tax expense from continuing operations differs from the expected
amounts (computed by applying the U.S. federal corporate tax rate of 35% for
2007, 2006 and 2005, to income before income taxes) as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Computed
“expected” tax on income from continuing operations
|
$
|
11,680
|
$
|
12,548
|
$
|
10,925
|
||||||
|
Increase
(decrease) resulting from:
|
||||||||||||
|
Nontaxable
interest income
|
(1,988
|
)
|
(1,948
|
)
|
(1,923
|
)
|
||||||
|
State
income taxes, net of federal tax benefit
|
1,577
|
1,560
|
1,382
|
|||||||||
|
Nondeductible
goodwill and other intangibles
|
57
|
57
|
57
|
|||||||||
|
Tax
credits
|
(1,292
|
)
|
(218
|
)
|
(412
|
)
|
||||||
|
Other
|
(625
|
)
|
(421
|
)
|
(468
|
)
|
||||||
|
Income
taxes
|
$
|
9,409
|
$
|
11,578
|
$
|
9,561
|
||||||
|
Effective
tax rates
|
28.2
|
%
|
32.3
|
%
|
30.6
|
%
|
||||||
Heartland
had investments in certain low-income housing projects totaling $4.7 million as
of December 31, 2007, $5.1 million as of December 31, 2006 and $5.4 million as
of December 31, 2005, the majority of which have been fully consolidated in the
consolidated financial statements. These investments generated federal
low-income housing tax credits of $218 thousand in 2007, $218 thousand in 2006
and $412 thousand in 2005. For each future year through 2013, these investments
are expected to continue generating federal low-income housing tax credits of
approximately $218 thousand. During 2007, Dubuque Bank and Trust Company
acquired a 99.9% ownership interest in two limited liability companies that
provided federal historic rehabilitation credits totaling $1.4 million. A 99.9%
ownership in a limited liability company was acquired in 2004 that provided a
federal historic rehabilitation credit totaling $675 thousand for the tax year
2004 and state historic rehabilitation credits totaling $843 thousand for the
tax years 2004, 2005 and 2007. In 2002, Heartland had acquired a 99.9% ownership
in a similarly structured limited liability company that provided a federal
historic rehabilitation credit totaling $389 thousand for the 2002 tax year and
state historic rehabilitation credits totaling $450 thousand for the tax years
2002 and 2006.
On
January 1, 2007, Heartland adopted the provisions of FIN 48. As a result of the
implementation of FIN 48, Heartland did not recognize any increase or decrease
for unrecognized tax benefits. The amount of unrecognized tax benefits on
January 1, 2007, was $1.5 million, including $193 thousand of accrued interest
and penalties. On December 31, 2007, the amount of unrecognized tax benefits was
$1.9 million, including $339 thousand of accrued interest and penalties. If
recognized, the entire amount of the unrecognized tax benefits would affect the
effective tax rate. A reconciliation of the beginning and ending balances for
liabilities associated with unrecognized tax benefits for the year ended
December 31, 2007, follows:
|
(Dollars
in thousands)
|
|||
|
Balance
at January 1, 2007
|
$
|
1,480
|
|
|
Additions
for tax positions related to the current year
|
397
|
||
|
Additions
for tax positions related to prior years
|
204
|
||
|
Reductions
for tax positions related to prior years
|
(153
|
)
|
|
|
Balance
at December 31, 2007
|
$
|
1,928
|
|
The tax
years ended December 31, 2007, 2006, 2005 and 2004, remain subject to
examination by the Internal Revenue Service. For state purposes, the tax years
ended December 31, 2007, 2006, 2005, 2004 and 2003 remain open for examination.
Wisconsin Community Bank, one of Heartland’s bank subsidiaries, has undergone a
franchise tax review for the years ended December 31, 2002 and 2003, and is
currently in the process of appealing the field audit report. In dispute is $1.1
million of deducted expenditures, or $142 thousand in taxes, interest and
penalties, which have been fully accrued for. Except for settlement on this
specific open item, Heartland does not anticipate any significant increase or
decrease in unrecognized tax benefits during the next twelve
months.
FIFTEEN
EMPLOYEE
BENEFIT PLANS
Heartland
sponsors a defined contribution retirement plan covering substantially all
employees. Contributions to this plan are subject to approval by the Heartland
Board of Directors. The Heartland subsidiaries fund and record as an expense all
approved contributions. Costs charged to operating expenses were $1.9 million,
$2.9 million, and $2.7 million for 2007, 2006, and 2005, respectively. This plan
includes an employee savings program, under which the Heartland subsidiaries
make matching contributions of up to 2% of the participants’ wages. Costs
charged to operating expenses with respect to the matching contributions were
$614 thousand, $578 thousand, and $532 thousand for 2007, 2006, and 2005,
respectively.
SIXTEEN
COMMITMENTS
AND CONTINGENT LIABILITIES
Heartland
leases certain land and facilities under operating leases. Minimum future rental
commitments at December 31, 2007, for all non-cancelable leases were as
follows:
|
(Dollars
in thousands)
|
|||
|
2008
|
$
|
901
|
|
|
2009
|
795
|
||
|
2010
|
541
|
||
|
2011
|
354
|
||
|
2012
|
287
|
||
|
Thereafter
|
3,217
|
||
|
$
|
6,095
|
||
Rental
expense for premises and equipment leased under operating leases was $1.7
million, $1.6 million, and $1.7 million for 2007, 2006, and 2005, respectively.
Occupancy expense is presented net of rental income of $1.3 million, $1.2
million and $1.0 million for 2007, 2006 and 2005, respectively.
In the
normal course of business, the Heartland banks make various commitments and
incur certain contingent liabilities that are not presented in the accompanying
consolidated financial statements. The commitments and contingent liabilities
include various guarantees, commitments to extend credit and standby letters of
credit.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Heartland banks evaluate each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Heartland banks upon extension of credit, is based upon management’s
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties. Standby letters of credit and financial
guarantees written are conditional commitments issued by the Heartland banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. At December
31, 2007 and 2006, commitments to extend credit aggregated $588.7 and $651.3
million, and standby letters of credit aggregated $36.0 and $35.8 million,
respectively. Heartland enters into commitments to sell mortgage loans to reduce
interest rate risk on certain mortgage loans held for sale and loan commitments.
At December 31, 2007 and 2006, Heartland had commitments to sell residential
real estate loans totaling $12.4 and $4.7 million, respectively. Heartland does
not anticipate any material loss as a result of the commitments and contingent
liabilities.
Heartland
established a loss reserve for unfunded commitments, including loan commitments
and letters of credit, during 2005 by reclassifying $319 thousand of the
allowance for loan losses. At December 31, 2007 and 2006, the reserve for
unfunded commitments, which is included in other liabilities on the consolidated
balance sheets, was approximately $390 and $424 thousand, respectively. The
adequacy of the reserve for unfunded commitments is reviewed on a quarterly
basis, based upon changes in the amounts of commitments, loss experience and
economic conditions.
During
the fourth quarter of 2007, Heartland recorded a non-cash indemnification charge
of $101 thousand related to Heartland’s obligation to share certain estimated
litigation costs of Visa, Inc. (Visa). The charge was the result of revisions in
October 2007 to Visa’s by-laws affecting all member banks, as part of an overall
reorganization in which the member banks indemnified Visa on certain covered
litigation. The expense charge relates to Visa’s American Express litigation,
which was settled by Visa in November 2007, and other Visa litigation, including
the Discover and other interchange litigation, which has not yet been
settled. As part of the reorganization, Visa plans an initial public
offering early in 2008, and part of the proceeds from the offering representing
the member banks’ proportionate share will be placed in escrow and used to fund
the actual litigation settlements when they occur.
There are
certain legal proceedings pending against Heartland and its subsidiaries at
December 31, 2007, that are ordinary routine litigation incidental to business.
While the ultimate outcome of current legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on Heartland's consolidated financial
position or results of operations.
SEVENTEEN
STOCK
PLANS
Effective
January 1, 2006, Heartland adopted the provisions of FAS 123R using the
“modified prospective” transition method. FAS 123R requires the measurement of
the cost of employee services received in exchange for an award of equity
instruments based upon the fair value of the award on the grant date. The cost
of the award is recognized in the income statement over the vesting period of
the award. Under the “modified prospective” transition method, awards that are
granted, modified or settled beginning at the date of adoption are measured and
accounted for in accordance with FAS 123R. In addition, expense must be
recognized in the income statement for unvested awards that were granted prior
to the date of adoption. The expense is based on the fair value determined at
the grant date. The impact of the adoption of FAS 123R on Heartland’s
consolidated financial statements for the years ending December 31, 2007 and
2006, was a reduction in net income of $686 thousand or diluted earnings per
share of $.04 and $351 thousand or diluted earnings per share of $0.02,
respectively.
On May
18, 2005, the Heartland 2005 Long-Term Incentive Plan was adopted, replacing the
2003 Stock Option Plan. Under the 2005 Long-Term Incentive Plan, 1,000,000
shares have been reserved for issuance. The 2005 Long-Term Incentive Plan is
administered by the Nominating and Compensation Committee (“Compensation
Committee”) of the Board of Directors. All employees and directors of, and
service providers to, Heartland or its subsidiaries are eligible to become
participants in the 2005 Long-Term Incentive Plan, except that non-employees may
not be granted incentive stock options. The 2005 Long-Term Incentive Plan
provides for the grant of non-qualified and incentive stock options, stock
appreciation rights (“SARS”), stock awards and cash incentive awards. The
Compensation Committee determines the specific employees who will be granted
awards under the 2005 Long-Term Incentive Plan and the type and amount of any
such awards. Options may be granted that are either intended to be "incentive
stock options" as defined under Section 422 of the Internal Revenue Code or not
intended to be incentive stock options ("non-qualified stock options"). The
exercise price of stock options granted is established by the Compensation
Committee, but the exercise price for the stock options may not be less than the
fair market value of the shares on the date that the option is granted or, if
greater, the par value of a share of stock. Each option granted is exercisable
in full at any time or from time to time, subject to vesting provisions, as
determined by the Compensation Committee and as provided in the option
agreement, but such time may not exceed ten years from the grant date. At
December 31, 2007, there were 612,460 shares available for issuance under the
2005 Long-Term Incentive Plan. At December 31, 2006, there were 746,110 shares
available for issuance under the 2005 Stock Option Plan. Shares available for
options forfeited under the 2003 Option Plan are transferable to shares
available under the 2005 Long-Term Incentive Plan. Shares available for options
forfeited under the 1993 Stock Option Plan are not transferable to shares
available under the 2003 Stock Option Plan or the 2005 Long-Term Incentive
Plan.
Under the
2005 Long-Term Incentive Plan, SARS may also be granted. A SAR
entitles the participant to receive stock equal in value to the amount by which
the fair market value of a specified number of shares on the exercise date
exceeds the exercise price as established by the Compensation Committee. SARS
may be exercisable for up to ten years after the date of grant. No SARS have
been granted under the 2005 Long-Term Incentive Plan, the 2003 Stock Option Plan
or the 1993 Stock Option Plan.
Under the
2005 Long-Term Incentive Plan, stock awards may be granted as determined by the
Compensation Committee. In 2005, stock awards totaling 136,500 were granted to
key policy-making employees. These stock awards were granted at no cost to the
employees. These awards are contingent upon the achievement of performance
objectives through December 31, 2010, and additional compensation expense will
be recorded through 2010.
Options
have been granted with an exercise price equal to the fair market value of
Heartland stock on the date of grant and expire ten years after the date of
grant. Vesting is generally over a five-year service period with portions of a
grant becoming exercisable at three years, four years and five years after the
date of grant. A summary of the status of the 2005 Long-Term Incentive Plan, the
2003 and 1993 Stock Option Plans as of December 31, 2007, 2006 and 2005, and
changes during the years ended follows:
|
2007
Shares
|
2007
Weighted- Average Exercise Price
|
2006
Shares
|
2006
Weighted- Average Exercise Price
|
2005
Shares
|
2005
Weighted-
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
815,300
|
$
|
14.46
|
796,650
|
$
|
12.70
|
808,375
|
$
|
11.12
|
|||||||||
|
Granted
|
146,750
|
29.65
|
130,750
|
21.60
|
105,750
|
21.00
|
||||||||||||
|
Exercised
|
(214,538
|
)
|
9.96
|
(94,450
|
)
|
8.97
|
(112,875
|
)
|
)
|
8.14
|
||||||||
|
Forfeited
|
(14,500
|
)
|
25.24
|
(17,650
|
)
|
17.33
|
(4,600
|
)
|
)
|
19.66
|
||||||||
|
Outstanding
at end of year
|
733,012
|
$
|
18.61
|
815,300
|
$
|
14.46
|
796,650
|
$
|
12.70
|
|||||||||
|
Options
exercisable at end of year
|
280,804
|
$
|
11.65
|
409,425
|
$
|
10.34
|
430,694
|
$
|
10.06
|
|||||||||
|
Weighted-average
fair value of options granted during the year
|
$7.69
|
$5.65
|
$6.13
|
|||||||||||||||
At
December 31, 2007, the vested options totaled 280,804 shares with a weighted
average exercise price of $11.65 per share and a weighted average remaining
contractual life of 3.22 years. The intrinsic value for the vested options as of
December 31, 2007 was $2.0 million. The intrinsic value for the total of all
options exercised during the year ended December 31, 2007 was $1.8 million, and
the total fair value of shares vested during the year ended December 31, 2007
was $1.1 million. As of December 31, 2007 and 2006, options outstanding under
the 2005 Long-Term Incentive Plan and the 2003 and 1993 Stock Option Plans had
exercise prices ranging from $8.67 to $29.65 per share and a weighted-average
remaining contractual life of 6.00 and 5.15 years, respectively.
The fair
value of stock options granted was determined utilizing the Black Scholes
valuation model. Significant assumptions include:
|
2007
|
2006
|
2005
|
||||
|
Risk-free
interest rate
|
4.74%
|
4.52%
|
4.00%
|
|||
|
Expected
option life
|
6
years
|
7
years
|
10
years
|
|||
|
Expected
volatility
|
24.20%
|
22.00%
|
19.75%
|
|||
|
Expected
dividends
|
1.25%
|
2.00%
|
1.52%
|
The
option term of each award granted was based upon Heartland’s historical
experience of employees’ exercise behavior. Expected volatility was based upon
historical volatility levels and future expected volatility of Heartland’s
common stock. Expected dividend yield was based on a set dividend rate. The 2007
risk free interest rate reflects the average of the yields on the 5 year and 7
year zero coupon U.S. Treasury bond. Cash received from options exercised for
the year ended December 31, 2007, was $2.1 million, with a related tax benefit
of $896 thousand. Cash received from options exercised for the year ended
December 31, 2006, was $736 thousand, with a related tax benefit of $559
thousand.
Total
compensation costs recorded for stock options and restricted stock awards were
$1.4 million for the year ended December 31, 2007, and $856 thousand for the
year ended December 31, 2006. For the year ended December 31, 2005, total
compensation costs recorded for restricted stock awards were $493 thousand. As
of December 31, 2007 there was $2.9 million of total unrecognized compensation
costs related to the 2005 Long-Term Incentive Plan for stock options and
restricted stock awards which is expected to be recognized through 2011. In
addition, for the years ended December 31, 2007, 2006 and 2005, the shares of
stock awarded to Heartland directors in return for services performed were
1,400, 1,500 and 1,390, respectively, The related compensation expense recorded
was $26 thousand, $45 thousand and $30 thousand for the respective
years.
At
Heartland’s annual meeting of stockholders on May 18, 2005, the 2006 Employee
Stock Purchase Plan (the “2006 ESPP”), was adopted, effective January 1, 2006.
The 2006 ESPP replaced the 1996 Employee Stock Purchase Plan (the “1996 ESPP”)
continuing to permit all eligible employees to purchase shares of Heartland
common stock at a price of not less than 85% of the fair market value on the
determination date (as determined by the Committee). A maximum of
500,000 shares is available for sale under the 2006 ESPP. For the
year ended December 31, 2007, Heartland approved a purchase price of 100% of
fair market value as determined by the closing price on December 31, 2006. For
the year ended December 31, 2006, Heartland approved a purchase price of 100% of
fair market value as determined by averaging the closing price of the last five
trading days in 2005. At December 31, 2007, 250 shares were purchased under the
2007 ESPP and at December 31, 2006, 26,451 shares were purchased under the 2006
ESPP. As a result of the adoption of FAS 123R, compensation expense of $57
thousand was recorded in 2007 and $69 thousand was recorded in 2006, because the
price of the shares purchased was set at the beginning of the year for the
purchases at the end of the year.
During
each of the years ended December 31, 2007, 2006 and 2005, Heartland acquired
shares for use in the 2005 Long-Term Incentive Plan, 2003 Stock Option Plan, the
2006 ESPP and the 1996 ESPP. Shares acquired totaled 407,245, 166,259 and
290,651 for 2007, 2006 and 2005, respectively.
EIGHTEEN
STOCKHOLDER
RIGHTS PLAN
On June
7, 2002, Heartland adopted a stockholders’ rights plan (the "Rights Plan").
Under the terms of the Rights Plan, on June 26, 2002, the Board of Directors
distributed one purchase right for each share of common stock outstanding as of
June 24, 2002. Upon becoming exercisable, each right entitles the registered
holder thereof, under certain limited circumstances, to purchase one-thousandth
of a share of Series A Junior Participating preferred stock at an exercise price
of $85.00. Rights do not become exercisable until ten business days after any
person or group has acquired, commenced, or announced its intention to commence
a tender or exchange offer to acquire 15% or more of Heartland’s common stock.
If the rights become exercisable, holders of each right, other than the
acquirer, upon payment of the exercise price, will have the right to purchase
Heartland’s common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If Heartland is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated assets
or earning power are sold, rights holders, other than the acquiring or adverse
person or group, will be entitled to purchase the acquirer’s shares at a similar
discount. If the rights become exercisable, Heartland may also exchange rights,
other than those held by the acquiring or adverse person or group, in whole or
in part, at an exchange ratio of one share of Heartland’s common stock per right
held. Rights are redeemable by Heartland at any time until they are exercisable
at the exchange rate of $.01 per right. Issuance of the rights has no immediate
dilutive effect, does not currently affect reported earnings per share, is not
taxable to Heartland or its shareholders, and will not change the way in which
Heartland’s shares are traded. The rights expire on June 7, 2012.
In
connection with the Rights Plan, Heartland designated 16,000 shares, par value
$1.00 per share, of Series A Junior Participating preferred stock. These shares,
if issued, will be entitled to receive quarterly dividends and a liquidation
preference. There are no shares issued and outstanding and Heartland does not
anticipate issuing any shares of Series A Junior Participating preferred stock
except as may be required under the Rights Plan.
NINETEEN
REGULATORY
CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY DIVIDENDS
The
Heartland banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Heartland banks’ financial statements. The regulations
prescribe specific capital adequacy guidelines that involve quantitative
measures of a bank’s assets, liabilities and certain off balance sheet items as
calculated under regulatory accounting practices. Capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Heartland banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2007 and
2006, that the Heartland banks met all capital adequacy requirements
to which they were subject.
As of
December 31, 2007 and 2006, the FDIC categorized each of the Heartland banks as
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Heartland banks
must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have changed each
institution’s category.
The
Heartland banks’ actual capital amounts and ratios are also presented in the
table below.
|
(Dollars
in thousands)
|
||||||||||||||||||
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
325,016
|
12.48
|
%
|
$
|
208,382
|
8.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
83,887
|
11.24
|
59,698
|
8.0
|
74,623
|
10.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
19,236
|
12.29
|
12,526
|
8.0
|
15,658
|
10.0
|
||||||||||||
|
First
Community Bank
|
10,688
|
11.38
|
7,516
|
8.0
|
9,395
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
17,240
|
10.59
|
13,019
|
8.0
|
16,274
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
36,683
|
12.19
|
24,081
|
8.0
|
30,102
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
56,082
|
10.63
|
42,221
|
8.0
|
52,776
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
28,202
|
14.27
|
15,808
|
8.0
|
19,759
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
38,910
|
10.84
|
28,722
|
8.0
|
35,903
|
10.0
|
||||||||||||
|
Summit
Bank & Trust
|
14,473
|
36.99
|
3,131
|
8.0
|
3,913
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
253,675
|
9.74
|
%
|
$
|
104,191
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
75,937
|
10.18
|
29,849
|
4.0
|
44,774
|
6.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
17,380
|
11.10
|
6,263
|
4.0
|
9,395
|
6.0
|
||||||||||||
|
First
Community Bank
|
9,509
|
10.12
|
3,758
|
4.0
|
5,637
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
15,329
|
9.42
|
6,510
|
4.0
|
9,764
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,910
|
10.93
|
12,041
|
4.0
|
18,061
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
49,920
|
9.46
|
21,110
|
4.0
|
31,666
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,706
|
13.01
|
7,904
|
4.0
|
11,856
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
34,797
|
9.69
|
14,361
|
4.0
|
21,542
|
6.0
|
||||||||||||
|
Summit
Bank & Trust
|
14,103
|
36.04
|
1,565
|
4.0
|
2,348
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
253,675
|
8.01
|
%
|
$
|
126,644
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
75,937
|
8.36
|
36,346
|
4.0
|
45,432
|
5.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
17,380
|
7.95
|
8,748
|
4.0
|
10,935
|
5.0
|
||||||||||||
|
First
Community Bank
|
9,509
|
7.67
|
4,957
|
4.0
|
6,197
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
15,329
|
6.88
|
8,911
|
4.0
|
11,139
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,910
|
8.21
|
16,031
|
4.0
|
20,039
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
49,920
|
7.63
|
26,162
|
4.0
|
32,703
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,706
|
11.60
|
8,866
|
4.0
|
11,082
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
34,797
|
8.46
|
16,450
|
4.0
|
20,563
|
5.0
|
||||||||||||
|
Summit
Bank & Trust
|
14,103
|
29.06
|
1,941
|
4.0
|
2,426
|
5.0
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
Actual
|
For
Capital Adequacy Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action
Provisions
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
As
of December 31, 2006
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
279,112
|
11.18
|
%
|
$
|
199,757
|
8.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
75,378
|
10.96
|
55,044
|
8.0
|
$
|
68,806
|
10.0
|
%
|
||||||||||
|
Galena
State Bank & Trust Co.
|
20,903
|
12.55
|
13,329
|
8.0
|
16,662
|
10.0
|
||||||||||||
|
First
Community Bank
|
10,801
|
12.09
|
7,147
|
8.0
|
8,934
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
17,142
|
11.26
|
12,179
|
8.0
|
15,224
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
36,312
|
11.48
|
25,297
|
8.0
|
31,621
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
49,465
|
10.04
|
39,415
|
8.0
|
49,269
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
27,921
|
13.72
|
16,281
|
8.0
|
20,352
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
39,485
|
11.12
|
28,403
|
8.0
|
35,504
|
10.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,854
|
62.38
|
1,777
|
8.0
|
2,221
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
232,702
|
9.32
|
%
|
$
|
99,878
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
68,008
|
9.88
|
27,522
|
4.0
|
$
|
41,283
|
6.0
|
%
|
||||||||||
|
Galena
State Bank & Trust Co.
|
18,833
|
11.30
|
6,665
|
4.0
|
9,997
|
6.0
|
||||||||||||
|
First
Community Bank
|
9,682
|
10.84
|
3,574
|
4.0
|
5,360
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
15,370
|
10.10
|
6,090
|
4.0
|
9,134
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,350
|
10.23
|
12,648
|
4.0
|
18,972
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
44,018
|
8.93
|
19,708
|
4.0
|
29,561
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,742
|
12.65
|
8,141
|
4.0
|
12,211
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,390
|
9.97
|
14,201
|
4.0
|
21,302
|
6.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,660
|
61.51
|
888
|
4.0
|
1,332
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
232,702
|
7.74
|
%
|
$
|
120,255
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
68,008
|
8.14
|
33,406
|
4.0
|
$
|
41,758
|
5.0
|
%
|
||||||||||
|
Galena
State Bank & Trust Co.
|
18,833
|
8.41
|
8,954
|
4.0
|
11,193
|
5.0
|
||||||||||||
|
First
Community Bank
|
9,682
|
8.13
|
4,765
|
4.0
|
5,957
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
15,370
|
7.72
|
7,967
|
4.0
|
9,958
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,350
|
7.95
|
16,267
|
4.0
|
20,334
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
44,018
|
7.40
|
23,778
|
4.0
|
29,722
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,742
|
11.75
|
8,761
|
4.0
|
10,951
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,390
|
8.36
|
16,943
|
4.0
|
21,178
|
5.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,660
|
106.01
|
515
|
4.0
|
644
|
5.0
|
||||||||||||
The
ability of Heartland to pay dividends to its stockholders is dependent upon
dividends paid by its subsidiaries. The Heartland banks are subject to certain
statutory and regulatory restrictions on the amount they may pay in dividends.
To maintain acceptable capital ratios in the Heartland banks, certain portions
of their retained earnings are not available for the payment of dividends.
Retained earnings that could be available for the payment of dividends to
Heartland totaled approximately $98.7 million as of December 31, 2007, under the
most restrictive minimum capital requirements. Heartland’s revolving credit
agreement requires our bank subsidiaries to remain well capitalized. Retained
earnings that could be available for the payment of dividends to Heartland
totaled approximately $47.0 million as of December 31, 2007, under the capital
requirements to remain well capitalized.
TWENTY
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Following
are disclosures of the estimated fair value of Heartland’s financial
instruments. The estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts Heartland could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2007
|
December
31, 2006
|
|||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$
|
46,832
|
$
|
46,832
|
$
|
49,143
|
$
|
49,143
|
||||
|
Trading
securities
|
1,888
|
1,888
|
1,568
|
1,568
|
||||||||
|
Securities
available for sale
|
682,383
|
682,383
|
613,950
|
613,950
|
||||||||
|
Securities
held to maturity
|
5,678
|
5,754
|
1,522
|
1,513
|
||||||||
|
Loans
and leases, net of unearned
|
2,292,846
|
2,292,438
|
2,198,226
|
2,180,929
|
||||||||
|
Derivatives
|
778
|
778
|
59
|
59
|
||||||||
|
Financial
Liabilities:
|
||||||||||||
|
Demand
deposits
|
$
|
381,499
|
$
|
381,499
|
$
|
371,465
|
$
|
371,465
|
||||
|
Savings
deposits
|
855,036
|
855,036
|
822,915
|
822,915
|
||||||||
|
Time
deposits
|
1,139,764
|
1,139,764
|
1,117,277
|
1,117,277
|
||||||||
|
Short-term
borrowings
|
354,146
|
354,146
|
275,694
|
275,694
|
||||||||
|
Other
borrowings
|
263,607
|
253,581
|
224,523
|
220,520
|
||||||||
|
Derivatives
|
-
|
-
|
43
|
43
|
||||||||
Cash and
Cash Equivalents - The
carrying amount is a reasonable estimate of fair value due to the short-term
nature of these instruments.
Securities
- For securities either
held to maturity, available for sale or trading, fair value equals quoted market
price if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans and
Leases - The fair value
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The fair value of loans held for
sale is estimated using quoted market prices.
Deposits
- The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. If the fair value of the
fixed maturity certificates of deposits is calculated at less than the carrying
amount, the carrying value of these deposits is reported as the fair
value.
Short-term
and Other Borrowings -
Rates currently available to Heartland for debt with similar terms and
remaining maturities are used to estimate fair value of existing
debt.
Commitments
to Extend Credit, Unused Lines of Credit and Standby Letters of Credit - Based
upon management’s analysis of the off balance sheet financial instruments, there
are no significant unrealized gains or losses associated with these financial
instruments based upon our review of the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties.
Derivatives
- The fair value of all derivatives was estimated based on the amount that
Heartland would pay or would be paid to terminate the contract or agreement,
using current rates and, when appropriate, the current creditworthiness of the
counter-party.
TWENTY-ONE
PARENT
COMPANY ONLY FINANCIAL INFORMATION
Condensed
financial information for Heartland Financial USA, Inc. is as
follows:
BALANCE
SHEETS
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Assets:
|
||||||||
|
Cash
and interest bearing deposits
|
$
|
826
|
$
|
1,047
|
||||
|
Trading
securities
|
1,888
|
1,568
|
||||||
|
Securities
available for sale
|
1,020
|
1,430
|
||||||
|
Investment
in subsidiaries
|
337,303
|
317,937
|
||||||
|
Other
assets
|
15,256
|
9,426
|
||||||
|
Due
from subsidiaries
|
15,500
|
15,500
|
||||||
|
Total
assets
|
$
|
371,793
|
$
|
346,908
|
||||
|
Liabilities
and stockholders’ equity:
|
||||||||
|
Short-term
borrowings
|
$
|
15,000
|
$
|
35,000
|
||||
|
Other
borrowings
|
120,719
|
92,220
|
||||||
|
Accrued
expenses and other liabilities
|
5,474
|
9,977
|
||||||
|
Total
liabilities
|
141,193
|
137,197
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock
|
16,612
|
16,572
|
||||||
|
Capital
surplus
|
37,269
|
37,963
|
||||||
|
Retained
earnings
|
173,891
|
154,308
|
||||||
|
Accumulated
other comprehensive income
|
6,506
|
868
|
||||||
|
Treasury
stock
|
(3,678
|
)
|
-
|
|||||
|
Total
stockholders’ equity
|
230,600
|
209,711
|
||||||
|
Total
liabilities & stockholders’ equity
|
$
|
371,793
|
$
|
346,908
|
||||
INCOME
STATEMENTS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Operating
revenues:
|
||||||||||||
|
Dividends
from subsidiaries
|
$
|
25,500
|
$
|
15,050
|
$
|
12,250
|
||||||
|
Securities
gains (losses), net
|
35
|
150
|
(5
|
)
|
||||||||
|
Gain
(loss) on trading account securities
|
(105
|
)
|
141
|
(11
|
)
|
|||||||
|
Impairment
loss on equity securities
|
-
|
(76
|
)
|
-
|
||||||||
|
Other
|
1,464
|
2,326
|
2,197
|
|||||||||
|
Total
operating revenues
|
26,894
|
17,591
|
14,431
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Interest
|
9,510
|
10,121
|
7,505
|
|||||||||
|
Salaries
and benefits
|
1,590
|
376
|
798
|
|||||||||
|
Outside
services
|
971
|
1,357
|
806
|
|||||||||
|
Other
operating expenses
|
1,114
|
943
|
663
|
|||||||||
|
Minority
interest expense
|
380
|
181
|
119
|
|||||||||
|
Total
operating expenses
|
13,565
|
12,978
|
9,891
|
|||||||||
|
Equity
in undistributed earnings
|
8,278
|
17,465
|
15,667
|
|||||||||
|
Income
before income tax benefit
|
21,607
|
22,078
|
20,207
|
|||||||||
|
Income
tax benefit
|
4,026
|
3,024
|
2,519
|
|||||||||
|
Net
income
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
||||||
STATEMENTS
OF CASH FLOWS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
||||||
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
||||||||||||
|
Undistributed
earnings of subsidiaries
|
(8,278
|
)
|
(17,465
|
)
|
(15,667
|
)
|
||||||
|
(Increase)
decrease in due from subsidiaries
|
-
|
19,500
|
(10,600
|
)
|
||||||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
(4,503
|
)
|
6,568
|
(1,589
|
)
|
|||||||
|
(Increase)
decrease in other assets
|
(5,830
|
)
|
4,092
|
(5,681
|
)
|
|||||||
|
(Increase)
decrease in trading account securities
|
(320
|
)
|
(1,053
|
)
|
6
|
|||||||
|
Other,
net
|
473
|
1,294
|
2,336
|
|||||||||
|
Net
cash provided (used) by operating activities
|
7,175
|
38,038
|
(8,469
|
)
|
||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital contributions to
subsidiaries
|
(3,162
|
)
|
(24,882
|
)
|
-
|
|||||||
|
Purchases of available for sale
securities
|
-
|
(541
|
)
|
(1,093
|
)
|
|||||||
|
Proceeds from sales of available
for sale securities
|
310
|
1,467
|
200
|
|||||||||
|
Net cash used by investing
activities
|
(2,852
|
)
|
(23,956
|
)
|
(893
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net change in short-term
borrowings
|
(20,000
|
)
|
(25,750
|
)
|
17,750
|
|||||||
|
Proceeds from other
borrowings
|
41,902
|
20,619
|
-
|
|||||||||
|
Repayments of other
borrowings
|
(13,403
|
)
|
-
|
-
|
||||||||
|
Cash dividends
paid
|
(6,050
|
)
|
(5,906
|
)
|
(5,414
|
)
|
||||||
|
Purchase of treasury
stock
|
(9,821
|
)
|
(4,022
|
)
|
(5,784
|
)
|
||||||
|
Proceeds from issuance of common
stock
|
2,828
|
1,516
|
2,007
|
|||||||||
|
Net
cash provided (used) by financing activities
|
(4,544
|
)
|
(13,543
|
)
|
8,559
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(221
|
)
|
539
|
(803
|
)
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
1,047
|
508
|
1,311
|
|||||||||
|
Cash
and cash equivalents at end of year
|
$
|
826
|
$
|
1,047
|
$
|
508
|
||||||
TWENTY-TWO
SUMMARY
OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
(Dollars
in thousands, except per share data)
|
|||||||||||||
|
2007
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
27,506
|
$
|
27,237
|
$
|
27,706
|
$
|
26,891
|
|||||
|
Provision
for loan and lease losses
|
3,304
|
575
|
4,268
|
1,926
|
|||||||||
|
Net
interest income after provision for loan and lease losses
|
24,202
|
26,662
|
23,438
|
24,965
|
|||||||||
|
Noninterest
income
|
8,090
|
7,916
|
8,093
|
7,611
|
|||||||||
|
Noninterest
expense
|
23,534
|
24,747
|
24,929
|
24,396
|
|||||||||
|
Income
taxes
|
2,006
|
2,906
|
1,965
|
2,532
|
|||||||||
|
Income
from continuing operations
|
6,752
|
6,925
|
4,637
|
5,648
|
|||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from operations of discontinued subsidiary
|
-
|
-
|
2,565
|
191
|
|||||||||
|
Income
taxes
|
-
|
-
|
1,017
|
68
|
|||||||||
|
Income
from discontinued operations
|
-
|
-
|
1,548
|
123
|
|||||||||
|
Net
income
|
$
|
6,752
|
$
|
6,925
|
$
|
6,185
|
$
|
5,771
|
|||||
|
Per
share:
|
|||||||||||||
|
Earnings
per share-basic
|
$
|
0.41
|
$
|
0.42
|
$
|
0.38
|
$
|
0.35
|
|||||
|
Earnings
per share-diluted
|
0.41
|
0.42
|
0.37
|
0.34
|
|||||||||
|
Earnings
per share from continuing operations-basic
|
0.41
|
0.42
|
0.28
|
0.34
|
|||||||||
|
Earnings
per share from continuing operations-diluted
|
0.41
|
0.42
|
0.28
|
0.34
|
|||||||||
|
Cash
dividends declared on common stock
|
0.10
|
0.09
|
0.09
|
0.09
|
|||||||||
|
Book
value per common share
|
14.04
|
13.48
|
12.88
|
12.85
|
|||||||||
|
Market
price – high
|
22.25
|
23.67
|
27.20
|
28.80
|
|||||||||
|
Market
price – low
|
18.08
|
17.04
|
23.07
|
25.75
|
|||||||||
|
Weighted
average common shares outstanding
|
16,481,854
|
16,447,270
|
16,451,031
|
16,542,876
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,574,540
|
16,543,635
|
16,644,286
|
16,760,688
|
|||||||||
|
Ratios:
|
|||||||||||||
|
Return
on average assets
|
0.83
|
%
|
0.86
|
%
|
0.79
|
%
|
0.76
|
%
|
|||||
|
Return
on average equity
|
11.86
|
12.72
|
11.72
|
11.18
|
|||||||||
|
Net
interest margin
|
3.87
|
3.87
|
4.02
|
4.04
|
|||||||||
|
Efficiency
ratio
|
64.54
|
68.58
|
68.39
|
69.13
|
|||||||||
|
2006
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
26,784
|
$
|
26,852
|
$
|
26,197
|
$
|
24,908
|
|||||
|
Provision
for loan and lease losses
|
(157
|
)
|
1,381
|
1,484
|
1,175
|
||||||||
|
Net
interest income after provision for loan and lease losses
|
26,941
|
25,471
|
24,713
|
23,733
|
|||||||||
|
Noninterest
income
|
7,701
|
7,517
|
7,337
|
6,889
|
|||||||||
|
Noninterest
expense
|
23,266
|
23,176
|
23,246
|
24,761
|
|||||||||
|
Income
taxes
|
3,913
|
3,207
|
2,802
|
1,656
|
|||||||||
|
Income
from continuing operations
|
7,463
|
6,605
|
6,002
|
4,205
|
|||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from operations of discontinued subsidiary
|
567
|
423
|
346
|
422
|
|||||||||
|
Income
taxes
|
497
|
154
|
126
|
154
|
|||||||||
|
Income
from discontinued operations
|
70
|
269
|
220
|
268
|
|||||||||
|
Net
income
|
$
|
7,533
|
$
|
6,874
|
$
|
6,222
|
$
|
4,473
|
|||||
|
Per
share:
|
|||||||||||||
|
Earnings
per share-basic
|
$
|
0.46
|
$
|
0.42
|
$
|
0.38
|
$
|
0.27
|
|||||
|
Earnings
per share-diluted
|
0.45
|
0.41
|
0.37
|
0.27
|
|||||||||
|
Earnings
per share from continuing operations-basic
|
0.45
|
0.40
|
0.36
|
0.26
|
|||||||||
|
Earnings
per share from continuing operations-diluted
|
0.44
|
0.39
|
0.36
|
0.25
|
|||||||||
|
Cash
dividends declared on common stock
|
0.09
|
0.09
|
0.09
|
0.09
|
|||||||||
|
Book
value per common share
|
12.65
|
12.22
|
11.59
|
11.49
|
|||||||||
|
Market
price – high
|
31.08
|
27.86
|
26.67
|
23.60
|
|||||||||
|
Market
price – low
|
25.10
|
24.16
|
22.55
|
20.11
|
|||||||||
|
Weighted
average common shares outstanding
|
16,531,998
|
16,521,527
|
16,540,587
|
16,430,504
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,784,656
|
16,775,749
|
16,798,654
|
16,638,458
|
|||||||||
|
Ratios:
|
|
|
|||||||||||
|
Return
on average assets
|
0.98
|
%
|
0.91
|
%
|
0.87
|
%
|
0.65
|
%
|
|||||
|
Return
on average equity
|
14.62
|
13.93
|
13.10
|
9.56
|
|||||||||
|
Net
interest margin
|
4.04
|
4.16
|
4.27
|
4.22
|
|||||||||
|
Efficiency
ratio
|
65.97
|
65.84
|
67.84
|
76.11
|
|||||||||
KPMG
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Heartland
Financial USA, Inc.:
We have
audited the accompanying consolidated balance sheets of Heartland Financial USA,
Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Heartland Financial USA,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Heartland Financial USA, Inc.’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 14,
2008 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
KPMG,
LLP
Des
Moines, Iowa
March 14,
2008
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
9A.
CONTROLS
AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Under the
direction of our Chief Executive Officer and Chief Financial Officer, Heartland
has evaluated the effectiveness of the design and operation of Heartland’s
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2007. Based on that evaluation, Heartland’s management, including
the Chief Executive Officer and Chief Financial Officer, concluded that
Heartland’s disclosure controls and procedures were effective in providing
reasonable assurances that material information required to be disclosed is
included on a timely basis in the reports we file with the Securities and
Exchange Commission.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Heartland’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Heartland’s internal control system was
designed to provide reasonable assurance to Heartland’s management, board of
directors and stockholders regarding the reliability of financial reporting and
the preparation and fair presentation of financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. All internal control systems, no matter how well designed
have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Heartland’s management, under the
supervision and with the participation of Heartland’s Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of Heartland’s
internal control over financial reporting based upon the framework set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control –Integrated
Framework. Based on our assessment, Heartland’s internal control over
financial reporting was effective as of December 31, 2007.
KPMG LLP,
the independent registered public accounting firm that audited Heartland’s
consolidated financial statements as of and for the year ended December 31,
2007, included herein, has issued an attestation report on Heartland’s internal
control over financial reporting. This report follows management’s
report.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes to Heartland’s internal control over financial reporting during
the quarter ended December 31, 2007, that materially affected, or are reasonably
likely, to affect Heartland’s internal control over financial
reporting.
KPMG
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Heartland
Financial USA, Inc.:
We have
audited Heartland Financial USA, Inc.’s (the Company) internal control over
financial reporting as of December 31, 2007, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of
internal control based upon the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Heartland Financial USA, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Heartland
Financial USA, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007, and our report dated March 14, 2008 expressed an
unqualified opinion on those consolidated financial statements.
KPMG, LLP
Des
Moines, Iowa
March 14,
2008
ITEM
9B.
OTHER
INFORMATION
None
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information in the Heartland Proxy Statement for the 2008 Annual Meeting of
Stockholders to be held on May 21, 2008 (the "2008 Proxy Statement") under the
captions "Election of Directors", "Security Ownership of Certain Beneficial
Owners and Management", “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance and the Board of Directors” is
incorporated by reference. The information regarding executive officers is noted
below.
EXECUTIVE
OFFICERS
The term
of office for the executive officers of Heartland is from the date of election
until the next annual organizational meeting of the board of directors. The
names and ages of the executive officers of Heartland as of December 31, 2007,
offices held by these officers on that date and other positions held with
Heartland and its subsidiaries are set forth below.
|
Name
|
Age
|
Position
with Heartland and Subsidiaries and Principal
Occupation
|
|
Lynn
B. Fuller
|
58
|
Chairman,
President and Chief Executive Officer of Heartland; Vice Chairman of
Dubuque Bank and Trust Company, Wisconsin Community Bank, New Mexico Bank
& Trust, Arizona Bank & Trust, Rocky Mountain Bank, and Summit
Bank & Trust; Chairman of Citizens Finance Co.
|
|
John
K. Schmidt
|
48
|
Director,
Executive Vice President, Chief Operating Officer and Chief Financial
Officer and Treasurer of Heartland; Vice Chairman of Dubuque Bank and
Trust Company, Galena State Bank & Trust Co. and Riverside Community
Bank; Director and Treasurer of Citizens Finance Co.
|
|
Kenneth
J. Erickson
|
56
|
Executive
Vice President, Chief Credit Officer of Heartland; Executive Vice
President, Lending, of Dubuque Bank and Trust Company; Vice Chairman of
Citizens Finance Co.
|
|
Edward
H. Everts
|
56
|
Senior
Vice President, Operations and Retail Banking, of Heartland; Senior Vice
President, Operations and Retail Banking of Dubuque Bank and Trust
Company
|
|
Douglas
J. Horstmann
|
54
|
Senior
Vice President, Lending, of Heartland; Director, President and Chief
Executive Officer of Dubuque Bank and Trust Company; Vice Chairman of
First Community Bank
|
|
Paul
J. Peckosh
|
62
|
Senior
Vice President, Wealth Management Group, of Heartland; Executive Vice
President, Manager Wealth Management Group, of Dubuque Bank and Trust
Company
|
Mr. Lynn
B. Fuller is the brother-in-law of Mr. James F. Conlan, who is a director of
Heartland. There are no other family relationships among any of the directors or
executive officers of Heartland.
Lynn B.
Fuller has been a Director of Heartland and of Dubuque Bank and Trust Company
since 1984 and has been President of Heartland since 1987. Until 2004, Mr.
Fuller had been a Director of Galena State Bank & Trust Co. since its
acquisition by Heartland in 1992, First Community Bank since the merger in 1994
and Riverside Community Bank since the opening of this de novo operation in 1995. He
has been a Director of Wisconsin Community Bank since the purchase of Cottage
Grove State Bank in 1997, New Mexico Bank & Trust since the opening of this
de novo bank in 1998,
Arizona Bank & Trust since the opening of this de novo bank in 2003 and
Summit Bank & Trust since the opening of this de novo bank in 2006. Mr.
Fuller joined Dubuque Bank and Trust Company in 1971 as a consumer loan officer
and was named Dubuque Bank and Trust Company's Executive Vice President and
Chief Executive Officer in 1985. Mr. Fuller was President of Dubuque Bank and
Trust Company from 1987 until 1999 at which time he was named Chief Executive
Officer of Heartland.
John K.
Schmidt has been a Director of Heartland since 2001. Mr. Schmidt has been
Heartland's Executive Vice President and Chief Financial Officer since 1991 and
Chief Operating Officer since 2004. He has been employed by Dubuque Bank and
Trust Company since 1984 and became Dubuque Bank and Trust Company's Vice
President, Finance in 1986, Senior Vice President and Chief Financial Officer in
January 1991, President and Chief Executive Officer in 1999 and Vice Chairman in
2004. Mr. Schmidt also was named Vice Chairman of Galena State Bank & Trust
Co. and Riverside Community Bank in 2004. He also served as Vice
Chairman and director of First Community Bank from 2004 to 2007. He is an
inactive holder of the certified public accountant certification and worked at
KPMG LLP in Des Moines, Iowa, prior to joining Dubuque Bank and Trust
Company.
Kenneth
J. Erickson was named Executive Vice President, Chief Credit Officer, of
Heartland in 1999. Mr. Erickson has been employed by Dubuque Bank and
Trust Company since 1975, and was appointed Vice President, Commercial Loans in
1985, Senior Vice President, Lending in 1989 and Executive Vice President in
2000. He was named Vice Chairman of Citizens Finance Co. in 2004. Prior to 2004,
Mr. Erickson was Senior Vice President at Citizens Finance Co.
Edward H.
Everts has served as Senior Vice President of Heartland since 1996. Mr. Everts
has been employed by Dubuque Bank and Trust Company as Senior Vice President,
Operations and Retail Banking since 1992. Prior to his service with Dubuque Bank
and Trust Company, Mr. Everts was Vice President and Lead Retail Banking Manager
of First Bank, Duluth, Minnesota.
Douglas
J. Horstmann has served as Senior Vice President of Heartland since
1999. He was also appointed as Vice Chairman and director of First
Community Bank in 2007. Mr. Horstmann has been employed by Dubuque Bank and
Trust Company since 1980, was appointed Vice President, Commercial Loans in
1985, Senior Vice President, Lending in 1989, Executive Vice President, Lending
in 2000 and Director, President and Chief Executive Officer in 2004. Prior to
joining Dubuque Bank and Trust Company, Mr. Horstmann was an examiner for the
Iowa Division of Banking.
Paul J.
Peckosh has served as Senior Vice President of Heartland since
1999. Mr. Peckosh has been employed by Dubuque Bank and Trust Company
since 1975, was appointed Assistant Vice President, Trust, in 1975, Vice
President, Trust in 1980, Senior Vice President, Trust in 1991 and Executive
Vice President, Trust in 2000. Mr. Peckosh is an attorney and
graduated from the Marquette University of Law School in 1970.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information in our 2008 Proxy Statement, under the captions “Compensation
Discussion and Analysis”, “Compensation/Nominating Committee Interlocks”,
“Compensation/Nominating Committee Report On Executive Compensation” and
"Executive Compensation" is incorporated by reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information in our 2008 Proxy Statement, under the caption "Security Ownership
of Certain Beneficial Owners and Management" is incorporated by
reference.
The table
below sets forth the following information as of December 31, 2007 for (i) all
compensation plans previously approved by Heartland's shareholders and (ii) all
compensation plans not previously approved by Heartland's
shareholders:
(a) the
number of securities to be issued upon the exercise of outstanding options,
warrants and rights;
(b) the
weighted-average exercise price of such outstanding options, warrants and
rights;
|
|
(c)
|
other
than securities to be issued upon the exercise of such outstanding
options, warrants and rights, the number of securities remaining available
for future issuance under the
plans.
|
|
EQUITY
COMPENSATION PLAN INFORMATION
|
|||
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities available for future issuance
|
|
|
Equity
compensation plans approved
by security holders
|
733,012
|
$18.61
|
1,085,759
|
|
Equity
compensation plans not
approved by security holders
|
-
|
-
|
-
|
|
Total
|
733,012
|
$18.61
|
1,085,799 1
|
|
1
Includes 612,460 shares available for use under the Heartland
Long-Term Incentive Plan and 473,299 shares available for use under the
Heartland Employee Stock Purchase
Plan.
|
|||
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information in the 2008 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information in the 2008 Proxy Statement under the caption “Relationship with
Independent Registered Public Accounting Firm” is incorporated by
reference.
PART
IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)
|
The
documents filed as a part of this report are listed
below:
|
|||
|
3.
|
Exhibits
|
|||
|
The
exhibits required by Item 601 of Regulation S-K are included along with
this Form 10-K and are listed on the “Index of Exhibits” immediately
following the signature page.
|
||||
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 14, 2008.
Heartland
Financial USA, Inc.
By: /s/
Lynn B. Fuller /s/ John K.
Schmidt
------------------------ ------------------------
Lynn B.
Fuller John K.
Schmidt
Principal Executive
Officer
Executive Vice President and
Principal Financial and Accounting Officer
Date: March
14, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 14, 2008.
/s/ Lynn
B.
Fuller /s/
John K. Schmidt
----------------------------- -----------------------------
Lynn B.
Fuller John
K. Schmidt
President,
CEO,
Chairman Executive
Vice President, CFO a
and Director and Director
and Director and Director
/s/ James F. Conlan /s/ Mark C. Falb
----------------------------- -----------------------------
James F.
Conlan Mark
C. Falb
Director
Director
/s/
Thomas L.
Flynn /s/
John W. Cox, Jr.
----------------------------- -----------------------------
Thomas L.
Flynn John
W. Cox, Jr.
Director Director
/s/ James
R. Hill
-----------------------------
James R.
Hill
Director
|
INDEX
OF EXHIBITS
|
||
|
3.1
|
Certificate
of Incorporation of Heartland Financial USA, Inc. (Filed as Exhibit 3.1 to
the Registrant’s Form 10-K filed on March 15, 2004, and incorporated by
reference herein.)
|
|
|
3.2
|
Bylaws
of Heartland Financial USA, Inc. (Filed as Exhibit 3.2 to the Registrant’s
Form 10-K filed on March 15, 2004, and incorporated by reference
herein.)
|
|
|
4.1
|
Specimen
Stock Certificate of Heartland Financial USA, Inc. (Filed as Exhibit 4.1
to the Registration Statement on Form S-4 filed with the Commission May 4,
1994, as amended (SEC File No. 33-76228) and incorporated by reference
herein.)
|
|
|
10.1
|
Form
of Split-Dollar Life Insurance Plan effective November 13, 2001, between
the Heartland subsidiaries and their selected officers who have met the
three years of service requirement. These plans are in place at Dubuque
Bank and Trust Company, Galena State Bank & Trust Co., First Community
Bank, Riverside Community Bank, Wisconsin Community Bank and New Mexico
Bank & Trust (Filed as Exhibit 10.4 to the Registrant’s Form 10-K
filed on March 26, 2003, and incorporated by reference
herein.)
|
|
|
10.2
|
Dividend
Reinvestment Plan dated as of January 24, 2002. (Filed as Form S-3D on
January 25, 2002, and incorporated by reference
herein.)
|
|
|
10.3
|
Stockholder
Rights Agreement between Heartland Financial USA, Inc., and Dubuque Bank
and Trust Company, as Rights Agent, dated as of June 7, 2002. (Filed as
Form 8-K on June 11, 2002, and incorporated by reference
herein.)
|
|
|
10.4
|
Agreement
to Organize and Stockholder Agreement between Heartland Financial USA,
Inc. and Investors in the Proposed Arizona Bank dated February 1, 2003.
(Filed as Exhibit 10.24 to Registrant’s Form 10-K filed on March 26, 2003,
and incorporated by reference herein.)
|
|
|
10.5
|
Supplemental
Initial Investor Agreement between Heartland Financial USA, Inc. and
Initial Investors in the Proposed Arizona Bank dated February 1, 2003.
(Filed as Exhibit 10.25 to Registrant’s Form 10-K filed on March 26, 2003,
and incorporated by reference herein.)
|
|
|
10.6
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association, dated as of October 10, 2003. (Filed as Exhibit 10.1 to the
Registrant’s third quarter Form 10-Q filed on November 13, 2003, and
incorporated by reference herein.)
|
|
|
10.7
|
Form
of Executive Supplemental Life Insurance Plan effective January 20, 2004,
between the Heartland subsidiaries and their selected officers. These
plans are in place at Dubuque Bank and Trust Company, Galena State Bank
& Trust Co., First Community Bank, Riverside Community Bank, Wisconsin
Community Bank, New Mexico Bank & Trust, Arizona Bank & Trust,
Rocky Mountain Bank and Citizens Finance Co. (Filed as Exhibit
10.16 to the Registrant’s Form 10-K filed on March 15, 2004, and
incorporated by reference herein.)
|
|
|
10.8
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association dated as of March 17, 2004. (Filed as Exhibit 10.12 to the
Registrant’s Form 10-K filed on March 14, 2007, and incorporated by
reference herein.)
|
|
|
10.9
|
Heartland
Financial USA, Inc. 2005 Long-Term Incentive Plan. (Filed as Exhibit 10.01
to Registrant’s Form 8-K filed on May 19, 2005, and incorporated by
reference herein.)
|
|
|
10.10
|
Heartland
Financial USA, Inc. 2006 Employee Stock Purchase Plan effective January 1,
2006. (Filed as Exhibit 10.02 to Registrant’s Form 8-K filed on May 19,
2005, and incorporated by reference herein.)
|
|
|
10.11
|
Indenture
by and between Heartland Financial USA, Inc. and Wells Fargo Bank,
National Association, dated as of January 31, 2006. (Filed as Exhibit
10.19 to the Registrant’s Form 10-K filed on March 10, 2006, and
incorporated herein.)
|
|
|
10.12
|
Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term Incentive
Plan Non-Qualified Stock Option Awards. (Filed as Exhibit 10.1 to
Registrant’s Form 8-K filed on February 10, 2006, and incorporated by
reference herein.)
|
|
|
10.13
|
Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive Plan Performance Restricted Stock Agreement. (Filed as Exhibit
10.21 to the Registrant’s Form 10-K filed on March 10, 2006, and
incorporated herein.)
|
|
|
10.14
|
Amended
and Restated Credit Agreement among Heartland Financial USA, Inc., The
Northern Trust Company, Harris Trust and Savings Bank, Wells Fargo and
U.S. Bank National Association, dated as of June 8, 2007. (Filed as
Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 9, 2007, and
incorporated by reference herein.)
|
|
|
10.15
|
Indenture
between Heartland Financial USA, Inc. and Wilmington Trust Company dated
as of June 26, 2007. (Filed as Exhibit 10.3 to Registrant’s second quarter
Form 10-Q filed on August 9, 2007, and incorporated by reference
herein.)
|
|
|
10.16
|
Indenture
between Heartland Financial USA, Inc. and Wilmington Trust Company dated
as of June 26, 2007. (Filed as Exhibit 10.3 to Registrant’s second quarter
Form 10-Q filed on August 9, 2007, and incorporated by reference herein.
)
|
|
|
10.17
|
Change
of Control Agreements between Heartland Financial USA, Inc. and Executive
Officers dated September 7, 2007. (Filed as Exhibit 10.1 to Registrant’s
Form 8-K filed on September 7, 2007, and incorporated by reference
herein.)
|
|
|
10.18
|
Heartland
Financial USA, Inc. Policy on Director Fees and Policy on Expense
Reimbursement For Directors. (Filed as Exhibit 99.1 to the Registrant’s
Form 8-K filed on December 5, 2007, and incorporated by reference
herein.)
|
|
|
10.19
|
First
Amendment and Waiver to Amended and Restated Credit Agreement among
Heartland Financial USA, Inc. and The Northern Trust Company, Harris Trust
and Savings Bank, Wells Fargo and U.S. Bank National Association, dated as
of November 30, 2007.
|
|
|
11
|
Statement
re Computation of Per Share Earnings
|
|
|
21.1
|
Subsidiaries
of the Registrant
|
|
|
23.1
|
Consent
of KPMG LLP
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-15.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-15.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|