SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30,2001
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices Zip Code)
(563) 589-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
classes of Registrant's common stock as of the latest practicable
date: As of November 14, 2001, the Registrant had outstanding
9,567,494 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Form 10-Q Signature Page
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
9/30/01 12/31/00
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 46,531 $ 38,387
Federal funds sold 7,000 46,300
----------- -----------
Cash and cash equivalents 53,531 84,687
Time deposits in other
financial institutions 564 1,504
Securities:
Trading 1,440 -
Available for sale-at fair value
(cost of $328,406 for 2001 and
$223,892 for 2000) 334,882 225,954
Held to maturity-at cost
(approximate fair value of
$2,154 for 2000) - 2,111
Loans and leases:
Held for sale 11,947 18,127
Held to maturity 1,070,750 1,023,969
Allowance for loan and lease losses (15,244) (13,592)
----------- -----------
Loans and leases, net 1,067,453 1,028,504
Assets under operating leases 34,708 35,285
Premises, furniture and equipment, net 31,245 30,155
Other real estate, net 419 583
Goodwill and core deposit premium, net 19,411 20,661
Other assets 44,233 36,943
----------- -----------
TOTAL ASSETS $1,587,886 $1,466,387
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 151,816 $ 136,066
Savings 451,316 406,712
Time 583,537 558,535
----------- -----------
Total deposits 1,186,669 1,101,313
Short-term borrowings 178,589 175,084
Other borrowings 88,034 67,681
Accrued expenses and other liabilities 30,976 26,163
----------- -----------
TOTAL LIABILITIES 1,484,268 1,370,241
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per
share; authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 16,000,000 and 12,000,000
shares at September 30, 2001, and
December 31, 2000, respectively;
Issued 9,905,783 shares at September
30, 2001, and December 31, 2000) 9,906 9,906
Capital surplus 18,812 18,812
Retained earnings 76,594 71,253
Accumulated other comprehensive income 4,017 1,301
Treasury stock at cost (333,289 and
287,573 shares at September 30, 2001,
and December 31, 2000, respectively) (5,711) (5,126)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 103,618 96,146
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,587,886 $1,466,387
=========== ===========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
9/30/01 9/30/00 9/30/01 9/30/00
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 23,131 $ 23,286 $ 69,926 $ 65,431
Interest on securities:
Taxable 3,626 2,895 10,346 8,952
Nontaxable 437 462 1,381 1,349
Interest on federal
funds sold 551 283 1,808 431
Interest on interest
bearing deposits in
other financial
institutions 29 104 120 286
-------- -------- -------- --------
TOTAL INTEREST INCOME 27,774 27,030 83,581 76,449
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 11,503 11,108 36,138 31,001
Interest on short-term
borrowings 1,898 2,774 6,708 7,465
Interest on other
borrowings 1,507 1,750 4,476 4,736
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 14,908 15,632 47,322 43,202
-------- -------- -------- --------
NET INTEREST INCOME 12,866 11,398 36,259 33,247
Provision for loan and
lease losses 1,197 779 3,041 2,605
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE LOSSES 11,669 10,619 33,218 30,642
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 1,702 1,433 4,717 3,904
Trust fees 767 761 2,311 2,268
Brokerage commissions 181 160 474 651
Insurance commissions 161 197 590 583
Securities gains, net 552 203 1,476 435
Loss on trading account
securities (331) - (510) -
Rental income on
operating leases 3,842 3,736 11,491 11,090
Gains on sale of loans 584 182 1,500 326
Impairment loss on
equity securities (455) (11) (455) (244)
Other noninterest income 164 271 561 784
-------- -------- -------- --------
TOTAL OTHER INCOME 7,167 6,932 22,155 19,797
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 6,381 6,016 18,919 17,949
Occupancy 758 738 2,365 2,221
Furniture and equipment 765 755 2,349 2,213
Depreciation on equipment
under operating leases 2,947 2,807 8,739 8,315
Outside services 901 643 2,525 1,983
FDIC deposit insurance
assessment 52 53 155 181
Advertising 394 382 1,180 1,168
Goodwill and core deposit
intangibles amortization 418 453 1,254 1,360
Other operating expenses 2,136 1,876 6,052 5,319
-------- -------- -------- --------
TOTAL OTHER EXPENSES 14,752 13,723 43,538 40,709
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 4,084 3,828 11,835 9,730
Income taxes 1,422 1,231 3,903 2,900
-------- -------- -------- --------
NET INCOME $ 2,662 $ 2,597 $ 7,932 $ 6,830
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC $ 0.28 $ 0.27 $ 0.83 $ 0.71
EARNINGS PER COMMON
SHARE-DILUTED $ 0.27 $ 0.27 $ 0.82 $ 0.70
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.09 $ 0.09 $ 0.27 $ 0.27
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 2000 $ 9,707 $15,339 $ 65,132
Net Income - - 6,830
Unrealized gain on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $0.27 per share - - (2,600)
Issuance of 319,010 shares of
common stock 199 3,480
Purchase of 290,374 shares of
common stock - - -
------- ------- --------
Balance at September 30, 2000 $ 9,906 $18,819 $ 69,362
======= ======= ========
Balance at January 1, 2001 $ 9,906 $18,812 $ 71,253
Net Income - - 7,932
Unrealized gain on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $0.27 per share - - (2,591)
Purchase of 45,716 shares of
common stock - - -
------- ------- --------
Balance at September 30, 2001 $ 9,906 $18,812 $ 76,594
======= ======= ========
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- -------- --------
Balance at January 1, 2000 $(1,511) $(2,094) $ 86,573
Net Income - - 6,830
Unrealized gain on securities
available for sale 1,328 - 1,328
Reclassification adjustment for
gains realized in income (191) - (191)
Income taxes (387) - (387)
--------
Comprehensive income 7,580
Cash dividends declared:
Common, $0.27 per share - - (2,600)
Issuance of 319,010 shares of
common stock - 2,094 5,773
Purchase of 290,374 shares of
common stock - (5,181) (5,181)
------- ------- --------
Balance at September 30, 2000 $ (761) $(5,181) $ 92,145
======= ======= ========
Balance at January 1, 2001 $ 1,301 $(5,126) $ 96,146
Net Income - - 7,932
Unrealized gain on securities
available for sale 5,136 - 5,136
Reclassification adjustment for
gains realized in income (1,021) - (1,021)
Income taxes (1,399) - (1,399)
--------
Comprehensive income 10,648
Cash dividends declared:
Common, $0.27 per share - - (2,591)
Purchase of 45,716 shares of
common stock - (585) (585)
------- ------- --------
Balance at September 30, 2001 $ 4,017 $(5,711) $103,618
======= ======= ========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
9/30/01 9/30/00
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,932 $ 6,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 12,333 12,053
Provision for loan and lease losses 3,041 2,605
Provision for income taxes in excess
of payments 3,387 54
Net amortization (accretion) of
premium (discount) on investment
securities 457 (21)
Securities gains, net (1,476) (435)
Increase in trading account securities (1,440) -
Loss on impairment of equity
securities 455 244
Loans originated for sale (81,197) (27,342)
Proceeds on sales of loans 88,877 22,783
Gain on sales of loans (1,500) (326)
Decrease (increase) in accrued
interest receivable 106 (4,262)
Increase (decrease) in accrued
interest payable (1) 1,246
Other, net 796 3,231
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 31,770 16,660
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits - (600)
Proceeds on maturities of time deposits 959 1,805
Proceeds from the sale of securities
available for sale 59,461 33,723
Proceeds from the maturity of and
principal paydowns on securities
held to maturity - 3,065
Proceeds from the maturity of and
principal paydowns on securities
available for sale 61,840 38,869
Purchase of securities available
for sale (223,200) (64,184)
Net increase in loans and leases (47,135) (127,996)
Purchase of bank-owned life insurance
policies (8,568) (2,248)
Increase in assets under operating
leases (9,316) (9,306)
Capital expenditures (3,615) (2,441)
Net cash and cash equivalents received
in acquisition of subsidiaries - 18,603
Net cash received from minority
stockholders - 780
Proceeds on sale of other real estate
and other repossessed assets 610 474
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (168,964) (109,456)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings
deposits 60,354 7,650
Net increase in time deposits 25,002 82,157
Net increase (decrease) in short-term
borrowings (13,854) 26,197
Net increase (decrease) in other
borrowings 37,712 (3,543)
Purchase of treasury stock (585) (5,181)
Dividends (2,591) (2,600)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 106,038 104,680
--------- ---------
Net increase (decrease) in cash and
cash equivalents (31,156) 11,884
Cash and cash equivalents at beginning
of year 84,687 35,953
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 53,531 $ 47,837
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 717 $ 2,662
========= =========
Cash paid for interest $ 47,323 $ 41,956
========= =========
Securities held to maturity
transferred to securities
available for sale $ 2,154 $ -
========= =========
Other borrowings transferred to
short-term borrowings $ 17,359 $ 3,439
========= =========
Acquisitions:
Assets acquired $ - $119,837
========= =========
Cash paid for purchase of stock $ - $(14,364)
Cash acquired - 32,967
--------- ---------
Net cash received in acquisitions $ - $ 18,603
========= =========
Notes issued for acquisitions $ - $ 3,820
========= =========
Common stock issued for acquisitions $ - $ 5,773
========= =========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained
herein should be read in conjunction with the audited
consolidated financial statements and accompanying notes to the
financial statements for the fiscal year ended December 31, 2000,
included in Heartland Financial USA, Inc.'s (the "Company") Form
10-K filed with the Securities and Exchange Commission on March
30, 2001. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the audited
consolidated financial statements has been omitted.
The financial information of the Company included herein is
prepared pursuant to the rules and regulations for reporting on
Form 10-Q. Such information reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. The results of the interim periods ended
September 30, 2001, are not necessarily indicative of the results
expected for the year ending December 31, 2001.
Basic earnings per share is determined using net income and
weighted average common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average
common shares and assumed incremental common shares issued.
Amounts used in the determination of basic and diluted earnings
per share for the three and nine month periods ended September
30, 2001 and 2000, are shown in the tables below:
Three Months Ended
9/30/01 9/30/00
------- -------
Net Income (000's) $ 2,662 $ 2,597
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,584 9,620
Assumed incremental common shares issued
upon exercise of stock options (000's) 109 126
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,693 9,746
======= =======
Nine Months Ended
9/30/01 9/30/00
------- -------
Net Income (000's) $ 7,932 $ 6,830
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,594 9,632
Assumed incremental common shares issued
upon exercise of stock options (000's) 102 137
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,696 9,769
======= =======
Trading Account Securities - Trading securities represent those
securities Heartland intends to actively trade and are stated at
fair value with changes in fair value reflected in other income.
During the first quarter of 2001, Heartland began purchasing
securities, on a limited basis, with the intent of actively
trading those securities.
Effect of New Financial Accounting Standards - In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. In July 1999, the
FASB issued FAS No. 137, Deferring Statement 133's Effective
Date, which defers the effective date for implementation of FAS
NO. 133 by one year, making FAS No. 133 effective no later than
January 1, 2001, for Heartland's financial statements. In June
2000, the FASB issued FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an
amendment of FAS No. 133. Heartland implemented FAS No. 133 on
January 1, 2001, and reclassified, at that date, all investments
previously included in its held to maturity investment portfolio
to the available for sale investment portfolio. There was no
material impact on the consolidated financial statements as a
result of the implementation.
In July 2001, the FASB issued FAS No. 141, Business Combinations,
and FAS No. 142, Goodwill and Other Intangible Assets. FAS No.
141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001, as well
as all purchase method business combinations completed after June
30, 2001. FAS No. 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. FAS No.
142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of
FAS No. 142. FAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of. Heartland is required to adopt
the provisions of FAS No. 141 immediately, and FAS No. 142
effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001,
will continue to be amortized and tested for impairment in
accordance with the appropriate pre-FAS No. 142 accounting
requirements prior to adoption of FAS No. 142. As of September
30, 2001, Heartland had unamortized goodwill in the amount of
$16.328 million and unamortized identifiable intangible assets in
the amount of $3.083 million, all of which will be subject to the
transition provisions of FAS No. 141 and 142. Amortization
expense related to goodwill was $1.063 million and $798 thousand
for the year ended December 31, 2000, and the nine months ended
September 30, 2001, respectively. Amortization expense related to
identifiable intangible assets was $751 and $456 thousand for the
year ended December 31, 2000, and the nine months ended September
30, 2001, respectively. All of Heartland's identifiable
intangible assets are core deposit premiums related to
acquisitions. Because of the extensive effort needed to comply
with adopting FAS No. 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on
Heartland's financial statements at the date of this report,
including whether any transitional impairment losses will be
recognized as the cumulative effect of a change in accounting
principle.
In August 2001, the FASB issued FAS Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
supersedes both FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business (as previously defined in
that Opinion). FAS No. 144 retains the fundamental provisions in
FAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant
implementation issues associated with FAS No. 121. For example,
FAS No. 144 provides guidance on how a long-lived asset that is
used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for
sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. FAS No. 144 retains the
basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a
business). Unlike FAS No. 121, an impairment assessment under
FAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under FAS No. 142,
Goodwill and Other Intangible Assets. Heartland is required to
adopt FAS No. 144 no later than the year beginning after December
15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption
of FAS No. 144 for long-lived assets held for use to have a
material impact on Heartland's financial statements because the
impairment assessment under FAS No. 144 is largely unchanged from
FAS No. 121. The provisions of FAS No. 144 for assets held for
sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential
effects that adoption of FAS No. 144 will have on Heartland's
financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Heartland intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and
expectations of Heartland are generally identifiable by use of
the words "believe", "expect", "intend", "anticipate",
"estimate", "project" or similar expressions. Heartland's ability
to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of
Heartland and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions,
legislative/regulatory laws, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, accounting principles, policies and
guidelines, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Heartland's market area,
Heartland's ability to develop and maintain secure and reliable
electronic systems and implement new technologies. These risks
and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be placed on
such statements. Further information concerning Heartland and its
business, including additional factors that could materially
affect Heartland's financial results, is included in Heartland's
filings with the Securities and Exchange Commission.
GENERAL
Heartland's results of operations depend primarily on net
interest income, which is the difference between interest income
from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income includes service charges,
fees and gains on loans, rental income on operating leases and
trust income. Heartland's principal operating expenses, aside
from interest expense, consist of compensation and employee
benefits, occupancy and equipment costs, depreciation on
equipment under operating leases and provision for loan and lease
losses.
Even in the wake of the crisis our country experienced on
September 11 and the continuing signs of a weakening economy,
Heartland was able to continue its growth in earnings during the
third quarter of 2001. Earnings increased $65 thousand or 2% when
compared to the same quarter in 2000. Net income totaled $2.662
million compared to the $2.597 million recorded during the same
quarter in 2000. Diluted earnings per common share remained
consistent at $.27 for the third quarters under comparison.
Return on common equity was 10.38% and return on assets was .67%
for the third quarter of 2001. For the same period in 2000,
return on equity was 11.44% and return on assets was .74%.
Contributing to the sustained earnings during the third quarter
of 2001 was the $1.468 million or 13% increase in net interest
income, due primarily to growth in earning assets. Average
earning assets went from $1.240 billion during the third quarter
of 2000 to $1.420 billion during the same quarter in 2001, an
increase of $180 million or 14%. Exclusive of securities gains
and losses, other income experienced a $661 thousand or 10%
increase. Growth in other expenses was $1.029 million or 7%.
Securities activities negatively impacted earnings during the
third quarter as losses on trading account securities totaled
$331 thousand and a $455 thousand impairment loss was recorded on
one equity security held in the available for sale portfolio.
These losses are in part a result of the downturn in the stock
market. Also negatively impacting earnings was an additional $418
thousand in the provision for loan and lease losses, a 54%
increase over last year.
For the nine-month period ended September 30, 2001, net income
increased $1.102 million or 16% when compared to the same period
in 2000. Net income totaled $7.932 million, or $.82 on a diluted
per common share basis, for the nine-month period in 2001
compared to $6.830 million, or $.70 on a diluted per common share
basis, during the same nine-month period in 2000. Return on
common equity was 10.65% and return on assets was .69% for the
nine-month period in 2001 compared to 10.30% and .68%,
respectively, for the same period in 2000.
The double-digit growth in earnings for the nine-month period
under comparison was in part a result of the $3.012 million or 9%
growth in net interest income. Also reflecting significant
improvement during this period were the other income categories
of service charges and fees and gains on sale of loans.
The expansion of Heartland's franchise and the diversification of
its earnings stream continue to provide the payoffs anticipated.
Despite signs of a weakening economy, Heartland's management team
remains enthused about the future and focused on our country and
Heartland's role in maintaining a strong financial services
industry.
NET INTEREST INCOME
Net interest margin, expressed as a percentage of average earning
assets, was 3.67% during the third quarter of 2001 compared to
3.60% recorded during the previous quarter of 2001 and 3.75% for
the third quarter of 2000. During the third quarter of 2000,
national prime was 9.50%. Conversely, during the third quarter of
2001, national prime decreased from 7.00% to 6.00%. Heartland's
negative gap position suggested a larger improvement in the net
interest margin during such a period of downward movement in
interest rates, but management elected to remain competitive in
the market areas it serves and not reprice its deposit products
as quickly. In addition to the delay in repricing of deposit
products, also negatively impacting the net interest margin has
been the change in the composition of the balance sheet, as the
percentage of loans to total assets decreased from 73% at
September 30, 2000, to 68% at September 30, 2001.
For the nine-month comparative periods, market rates also changed
significantly. National prime rose from 8.50% to 9.50% during the
first nine months of 2000 compared to a decline from 9.50% to
6.00% during the same nine-month period of 2001. In addition to
the delay in repricing of deposit products, also negatively
impacting the net interest margin was the change in the
composition of the balance sheet. Loan growth was slower during
the first nine months of 2001 due to paydowns experienced in the
mortgage loan portfolio and reduced demand in the commercial loan
portfolio. As rates declined, the real estate loan portfolio
experienced refinancing activity into fifteen- and thirty-year
mortgages, which Heartland usually elects to sell into the
secondary market. Growth in the commercial loan portfolio
increased during the second and third quarters of 2001 and
management continues to feel that opportunities for growth within
this portfolio will expand during the remaining months of 2001.
Subsequent to September 30, 2001, national prime had declined
another 100 basis points. Management does not anticipate a
significant reduction in Heartland's net interest margin as a
result of this additional decrease in rates.
For the three- and nine-month periods ended September 30, 2001,
interest income increased $744 thousand or 3% and $7.1 million or
9%, respectively, when compared to the same periods in 2000.
These increases were primarily attributable to the growth in
earning assets and was partially offset by the reduction in
overall yield as rates moved downward.
For the quarter ended September 30, 2001, interest expense
decreased $724 thousand or 5% when compared to the same period in
2000 primarily as a result of the decline in rates and the
maturity of higher-rate certificates of deposit accounts. For the
nine-month comparative periods ended September 30, interest
expense increased $4.1 million or 10% in 2001. The growth in
interest expense was a result of the growth in deposits and
Heartland's decision not to reprice its deposit products as
quickly as market rates declined. Average interest-bearing
deposit accounts for the nine-month comparative periods increased
$141.3 million or 15% from $869.3 million in 2000 to $1.0 billion
in 2001. Management continues to focus efforts on improving the
mix of its funding sources to minimize its interest costs.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan losses increased $418 thousand or 54%
during the third quarter of 2001 when compared to the same period
in 2000. On a nine-month comparative basis, the provision for
loan losses increased $436 thousand or 17%. These increases were
partially in response to a rise in nonperforming loans. Early in
2001, loan growth was slower than in previous years due to
paydowns experienced in the mortgage portfolio and reduced demand
in the commercial portfolio. During the second and third quarters
of this year, additional growth was experienced in the commercial
loan portfolio which also contributed to the additional
provision. The adequacy of the allowance for loan and lease
losses is determined by management using factors that include the
overall composition of the loan portfolio, general economic
conditions, types of loans, past loss experience, loan
delinquencies, and potential substandard and doubtful credits.
For additional details on the specific factors considered during
this quarter, refer to the loans and allowance for loan and lease
losses section of this report.
OTHER INCOME
Total other income increased $235 thousand or 3% during the
quarter ended on September 30, 2001, compared to the same period
in 2000. On a year-to-date comparison, other income grew $2.4
million or 12%. During both periods, the other income categories
reflecting significant improvement were service charges and fees
and gains on sale of loans.
For the three- and nine-month periods ended on September 30,
2001, service charges and fees increased $269 thousand or 19% and
$813 thousand or 21%, respectively. The $14.2 million or 12%
growth in average checking account balances for the nine-month
periods under comparison resulted in the generation of additional
service charge revenue related to activity fees charged to these
accounts. Also contributing to the increase in service charges
and fees was the growth in fees collected for the processing of
merchant credit card activity.
Gains on sale of loans for the three- and nine-month periods
ended on September 30, 2001, were $584 thousand and $1.5 million,
respectively. During the same three- and nine-month periods in
2000, these gains were $182 and $326 thousand, respectively. The
volume of mortgage loans sold into the secondary market during
the first nine months of 2001 was significantly greater than
those sold during the same period in 2000. As rates moved
downward, customers frequently elected to take fifteen- and
thirty-year, fixed-rate mortgage loans, which Heartland usually
elects to sell into the secondary market.
Rental income on operating leases increased $401 thousand or 4%
during the first nine months of 2001. This increase resulted from
the normal replacement of vehicles under lease at our vehicle
leasing and fleet management subsidiary, ULTEA. As vehicles
within a fleet are replaced every three or four years, rent
levels rise correspondingly to the increase in the cost of new
vehicles.
As interest rates continued to decline during the third quarter
of 2001, this provided an opportunity to realize security gains
in Heartland's bond securities portfolio. Security gains were
$552 thousand, an increase of $349 thousand, when compared to the
$203 thousand recorded during the same quarter in 2000. Security
gains would have been even larger had it not been for losses
realized in Heartland's equity securities portfolio, driven
primarily by the continued decline in the stock market. For the
nine-month period ended September 30, 2001, securities gains were
$1.5 million, an increase of $1 million when compared to the $435
thousand gains recorded during the same period in 2000. Even
with the decline in the stock market during the first nine months
of 2001, some net gains were realized in the equity securities
portfolio, but the majority of the security gains to date have
been realized in the bond securities portfolio. During 2000,
gains on the equity securities portfolio were partially offset by
losses realized when short term agency securities were sold and
replaced with longer term agency securities to enhance the future
total return of the bond securities portfolio by lengthening the
portfolio. These trades were made because of the Heartland
interest rate forecast, which called for declining rates during
the remainder of 2000. As rates declined in 2001, Heartland's
interest rate forecast changed to an upward bias and therefore,
longer-term agency securities were sold at a gain to shorten the
portfolio. In order to reduce the interest rate risk of rising
interest rates, the proceeds were invested in well-seasoned
premium mortgaged backed securities that were projected to
outperform the agency securities in a rising interest rate
environment.
During the first quarter of 2001, Heartland elected to begin
classifying a portion of its securities portfolio as trading.
Losses on this portfolio totaled $331 thousand during the third
quarter. On a year-to-date basis, losses on this portfolio
totaled $510 thousand. These were primarily a result of the
continued decline in the stock market.
An impairment loss on equity securities totaling $455 thousand
was recorded during the third quarter of 2001. Heartland is a
limited partner in an investment partnership that had a portion
of its funds invested in a company that filed bankruptcy under
chapter 11. The impairment loss recorded reflects Heartland's
ownership percentage of 26%. The fair value of the remaining
portion of Heartland's investment in this partnership at
September 30, 2001, was $367 thousand. Similarly, during the
second quarter of 2000, an impairment loss on equity securities
totaling $233 thousand was recorded as a result of the
announcement that Safety Kleen Corp. had filed bankruptcy under
chapter 11. Heartland held shares of Safety Kleen's common stock
in its equity securities portfolio. Subsequently, an additional
impairment loss of $11 thousand was recorded during the third
quarter of 2000 on this same equity security.
OTHER EXPENSE
Total other expense increased $1.0 million or 8% during the third
quarter of 2001 when compared to the same quarter in 2000. For
the nine-month period, total other expense increased $2.8 million
or 7%. The categories making up more than 94% of these changes
during both periods were salaries and employee benefits,
depreciation on equipment under operating leases, outside
services and other operating expenses.
Salaries and employee benefits, the largest component of
noninterest expense, increased $365 thousand or 6% for the
quarter under comparison. On a year-to-date basis, salaries and
employee benefits grew $970 thousand or 5%. In addition to normal
merit increases, these increases were also attributable to
expansion efforts. The number of full-time equivalent employees
employed by Heartland increased from 546 at September 30, 2000,
to 568 at September 30, 2001.
Consistent with the vehicle replacement activity occurring at
ULTEA, the depreciation on equipment under operating leases grew
$140 thousand or 5% for the third quarter and $424 thousand or 5%
for the first nine months of 2001.
Fees for outside services increased by $258 thousand or 40% for
the quarter under comparison and $542 thousand or 27% for the
nine-month period under comparison. Contributing to these
increases were the following:
- Beginning this year, Heartland elected to outsource its
internal audit function instead of fully staffing an
internal audit department.
- As on-line banking has grown in popularity, Heartland
has incurred additional costs to provide this service
to its customers.
- As a result of enhancing the fleet card program at
ULTEA, additional conversion costs were incurred during
the second and third quarters of this year.
- Legal and professional fees related to a potential
acquisition were paid during the first half of 2001.
Other operating expenses increased $260 thousand or 14% for the
quarters under comparison and $733 thousand or 14% for the nine-
month periods under comparison. Over half of these increases were
the result of additional processing fees related to the increased
activity in the merchant credit card processing area.
INCOME TAX EXPENSE
Income tax expense for the third quarter of 2001 increased $191
thousand or 16% when compared to the same period in 2000. On a
nine-month comparative basis, income tax expense increased $1.0
million or 35%. These increases reflect the continued growth in
pre-tax earnings.
Heartland's effective tax rate increased to 34.82% during the
third quarter of 2001 compared to 32.16% for the third quarter of
2000. For the nine-month periods ended September 30, 2001 and
2000, the effective tax rate was 32.98% and 29.80%, respectively.
These increases were, in part, a result of a decrease in the
amount of tax-exempt interest income recorded during 2001. Tax-
exempt interest income was 14% of pre-tax income during the first
nine months of 2001 compared to 17% for the same period in 2000.
Exclusive of tax benefits recorded in conjunction with an
acquisition, Heartland's year-to-date adjusted effective tax rate
in 2000 was 31.35%.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Total loans and leases increased $40.6 million or 4% during the
first nine months of 2001. This loan growth was slower than
during the first nine months of 2000 due to paydowns experienced
in the mortgage loan portfolio and reduced demand in the
commercial loan portfolio, particularly during the first quarter.
Growth in the commercial loan portfolio increased during the
second and third quarters of 2001 and management continues to
feel that opportunities for growth within this portfolio will
expand during the remaining months of 2001.
Commercial and commercial real estate loans increased by $65.6
million or 12% during the first nine months of 2001. All the bank
subsidiaries experienced growth in this loan category,
principally as a result of continued calling efforts.
Agricultural and agricultural real estate loans grew $12.1
million or 9% during the first nine months of 2001. The majority
of this growth occurred at New Mexico Bank & Trust's office in
Clovis, New Mexico, and Dubuque Bank and Trust Company,
Heartland's flagship bank in Dubuque, Iowa.
During the first nine months of 2001, the residential mortgage
loan portfolio experienced a decline of $37.2 million or 17%. As
long-term rates decreased, customers decided to refinance their
mortgage loans into fifteen- and thirty-year fixed rate loans,
which Heartland usually sells into the secondary market.
Servicing is retained on a majority of these loans so that the
Heartland bank subsidiaries have an opportunity to continue
providing their customers the excellent service they expect.
The table below presents the composition of Heartland's loan
portfolio as of September 30, 2001, and December 31, 2000.
LOAN PORTFOLIO
(Dollars in thousands)
September 30, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $ 616,004 56.68% $ 550,366 52.62%
Residential mortgage 178,451 16.42 215,638 20.62
Agricultural and
agricultural real estate 145,692 13.41 133,614 12.78
Consumer 130,430 12.00 128,685 12.30
Lease financing, net 16,149 1.49 17,590 1.68
---------- ------- ---------- -------
Gross loans and leases $1,086,726 100.00% $1,045,893 100.00%
======= =======
Unearned discount (3,484) (3,397)
Deferred loan fees (545) (400)
---------- ----------
Total loans and leases 1,082,697 1,042,096
Allowance for loan and
lease losses (15,244) (13,592)
---------- ----------
Loans and leases, net $1,067,453 $1,028,504
========== ==========
The adequacy of the allowance for loan and lease losses is
determined by management using factors that include the overall
composition of the loan portfolio, general economic conditions,
types of loans, past loss experience, loan delinquencies, and
potential substandard and doubtful credits. The adequacy of the
allowance for loan and lease losses is monitored on an ongoing
basis by the loan review staff, senior management and the board
of directors. Factors considered by the loan review committee
included the following:
- The amount of Heartland's nonperforming loans has
trended upward.
- The nation appears to be in a period of economic
slowdown.
- During the last several years, Heartland has entered
new markets in which it had little or no previous
lending experience.
- Heartland has continued to experience growth in more-
complex commercial loans as compared to relatively
lower-risk residential real estate loans.
There can be no assurances that the allowance for loan and lease
losses will be adequate to cover all losses, but management
believes that the allowance for loan and lease losses was
adequate at September 30, 2001. While management uses available
information to provide for loan and lease losses, the ultimate
collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based on
changes in economic conditions. Along with other financial
institutions, management shares a concern for the possible
continued softening of the economy in 2001. Should the economic
climate continue to deteriorate, borrowers may experience
difficulty, and the level of non-performing loans, charge-offs,
and delinquencies could rise and require further increases in the
provision.
The allowance for loan and lease losses increased by $1.7 million
or 12% during the first nine months of 2001. At September 30,
2001, the allowance for loan and lease losses was 1.41% of loans
and 175% of nonperforming loans, compared to 1.30% of loans and
202% of nonperforming loans, at year-end 2000. Nonperforming
loans, defined as nonaccrual loans, restructured loans and loans
past due ninety days or more, decreased to .80% of total loans
and leases at September 30, 2001, compared to 1.05% of total
loans and leases at June 30, 2001, as one large credit in the
Wisconsin market that had been considered to be a nonperforming
loan paid off in full during the third quarter. Nonperforming
loans at September 30, 2001, were up from the .65% of total loans
and leases at December 31, 2000, primarily as a result of one
large credit in the New Mexico market. Workout plans are in
process on a majority of the remaining nonperforming loans and,
because of the net realizable value of collateral, guarantees and
other factors, anticipated losses on these credits are expected
to be minimal. A weakening economy will inevitably result in
increased problem loans, but Heartland expects the problems to be
manageable and of a lesser scope for Heartland than for the
industry as a whole.
During the first nine months of 2001, Heartland recorded net
charge offs of $1.4 million compared to $1.1 million for the same
period in 2000. The acquisition of First National Bank of Clovis
in New Mexico was responsible for $614 thousand or 58% of the net
charge-offs during the first nine months of 2000 and $339
thousand or 24% of the net charge-offs during the first nine
months of 2001. Heartland's loan review area, along with
management at New Mexico Bank & Trust, have spent considerable
time aggressively managing the exposure within the loan portfolio
in this newest market for Heartland. Citizens Finance Co.,
Heartland's consumer finance subsidiary, was responsible for $590
thousand or 42% of the net charge-offs during the first nine
months of 2001. Increased losses at Citizens relate directly to
the rapid growth it experienced during the previous two years
with expansion into the Appleton, Wisconsin and Rockford,
Illinois markets. Due to the newness of a large portion of the
portfolio, the identification of problem loans in the portfolio
had not occurred until the portfolio began to mature.
Additionally, the weakening economy has affected the ability of
borrowers to repay their consumer loans. Losses as a percentage
of gross loans at Citizens was 3.32% for the first nine months of
2001 compared to 2.87% for the year ended on December 31, 2000.
Loans with payments past due for more than thirty days increased
from 4.67% of gross loans at December 31, 2000, to 4.87% at
September 30, 2001. These ratios still compare favorably to the
consumer finance industry.
SECURITIES
The composition of Heartland's securities portfolio is managed to
maximize the return on the portfolio while considering the impact
it has on Heartland's asset/liability position and liquidity
needs. Securities represented 21% of total assets at September
30, 2001, as compared to 16% at December 31, 2000. The amount of
securities held in Heartland's portfolio was increased during the
first nine months of 2001 as deposit growth outpaced growth in
the loan portfolio.
During 2000, management elected to replace paydowns received on
mortgage-backed securities with U.S. government agency securities
to lengthen the portfolio. U.S. government agency securities
offer a better total return in a declining interest rate
environment, which was Heartland's forecast at the time. The
state tax-exempt nature of selected U.S. government agency
securities also made them attractive purchases for Heartland's
Illinois bank subsidiaries. As Heartland's interest rate forecast
changed to one of rising rates, except for the short end of the
yield curve, management elected to shift a portion of its
securities portfolio into mortgage-backed securities from U.S.
government agencies during the first nine months of 2001. Tightly
structured tranches in well-seasoned mortgage-backed securities
were purchased to enhance the performance of the portfolio given
a rise in interest rates. Because of the well-seasoned nature of
the mortgage-backed securities purchased, management anticipates
that risk of prepayment within Heartland's securities portfolio
has been minimized.
The table below presents the composition of the securities
portfolio by major category as of September 30, 2001, and
December 31, 2000.
SECURITIES PORTFOLIO
(Dollars in thousands)
September 30, December 31,
2001 2000
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 495 .15% $ - -%
U.S. government agencies 92,271 27.44 118,897 52.13
Mortgage-backed securities 180,723 53.73 53,407 23.42
States and political
subdivisions 32,087 9.54 34,044 14.93
Other securities 30,746 9.14 21,717 9.52
-------- ------- -------- -------
Total securities $336,322 100.00% $228,065 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $85.4 million or 8%
during the first nine months of 2001. The demand and savings
deposit categories experienced growth in excess of 10% and most
of this growth was reflective of increased marketing efforts and
customers' election to keep funds on deposit in a financial
institution as the volatility in the stock market continued.
Nearly two-thirds of the $15.8 million growth in demand deposits
occurred at New Mexico Bank & Trust in Albuquerque, New Mexico.
The $44.6 million growth in savings deposits resulted from growth
in all of the markets served by the Heartland banks. The money
market product line was enhanced last year and much of the growth
in savings was attributable to marketing efforts focused at
attracting new customers into this product line, as well as,
customers' election to keep funds on deposit in a financial
institution as the volatility in the stock market continued. Time
deposits grew by $25.0 million since year-end 2000. All of the
Heartland banks, except for Dubuque Bank and Trust Company,
experienced growth in this deposit category. As long-term rates
moved downward during 2001, efforts were focused on attracting
customers into certificates of deposit with a maturity exceeding
two years.
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability.
Over the nine month period ended September 30, 2001, the amount
of short-term borrowings increased $3.5 million or 2%. Also
included in short-term borrowings are the credit lines Heartland
entered into with two unaffiliated banks. Under the unsecured
credit lines, Heartland may borrow up to $50.0 million. At
September 30, 2001, $40.1 million was outstanding as compared to
$39.3 million at December 31, 2000.
Other borrowings increased $20.4 million or 30% during the first
nine months of 2001. Included in these borrowings are long-term
FHLB advances, which totaled $47.5 million on September 30, 2001,
with a weighted average remaining term of 4.2 years and a
weighted average rate of 5.43%. As rates moved downward during
the first nine months of 2001, Heartland obtained additional long-
term FHLB advances. On December 31, 2000, long-term FHLB advances
totaled $25.1 million.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but also the
composition of assets and capital and the amount of off-balance
sheet commitments. Heartland's capital ratios were as follows for
the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
September 30, December 31,
2001 2000
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 108,371 8.93% $ 102,443 8.74%
Tier 1 capital minimum
requirement 48,529 4.00% 46,878 4.00%
---------- ------ ---------- ------
Excess $ 59,842 4.93% $ 55,565 4.74%
========== ====== ========== ======
Total capital $ 123,489 10.21% $ 116,034 9.90%
Total capital minimum
requirement 96,737 8.00% 93,756 8.00%
---------- ------ ---------- ------
Excess $ 26,752 2.21% $ 22,278 1.90%
========== ====== ========== ======
Total risk-adjusted
assets $1,209,216 $1,171,951
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 108,371 6.92% $ 102,443 7.25%
Tier 1 capital minimum
requirement(3) 62,622 4.00% 56,492 4.00%
---------- ------ ---------- ------
Excess $ 45,749 2.92% $ 45,951 3.25%
========== ====== ========== ======
Average adjusted assets
(less goodwill and other
intangibles) $1,565,545 $1,412,301
========== ==========
(1)Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 capital to risk-adjusted assets ratio of 4.00% and
total capital to risk-adjusted assets ratio of 8.00%.
(2)The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(3)Management of Heartland has established a minimum target
leverage ratio of 4.00%. Based on Federal Reserve
guidelines, a bank holding company generally is required to
maintain a leverage ratio of 3.00% plus additional capital of
at least 100 basis points.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. On January 1, 2000, Heartland
completed its acquisition of National Bancshares, Inc., the one-
bank holding company of First National Bank of Clovis. At the
discretion of the stockholders, a portion of the purchase price
was made in notes payable over three or five years, bearing
interest at 7.00%. The remaining requisite cash payments under
these notes payable total $855 thousand in 2002, and $637
thousand in 2003 and 2004, plus interest.
In October of 1999, Heartland completed an offering of $25.0
million of 9.60% cumulative capital securities. All of the
securities qualified as Tier 1 capital for regulatory purposes as
of September 30, 2001. Subsequent acquisitions accounted for
under the purchase method of accounting could cause a portion of
these securities to not qualify as Tier 1 capital, as regulations
do not allow the amount of these securities included in Tier 1
capital to exceed 25% of total Tier 1 capital. These securities
are classified as other borrowings on Heartland's financial
statements.
Heartland continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities. As
evidenced by the recent expansion into New Mexico, Heartland is
seeking to operate in high growth areas, even if they are outside
of its traditional Midwest market areas. Future expenditures
relating to these efforts are not estimable at this time.
Heartland will not allow its ownership in New Mexico Bank & Trust
to fall below 80% and all minority stockholders have entered into
a stock transfer agreement with Heartland. This stock transfer
agreement imposes certain restrictions on the investor's sale,
transfer or other disposition of their shares and requires
Heartland to repurchase the shares from the investor on April 9,
2003.
LIQUIDITY
Liquidity measures the ability of Heartland to meet maturing
obligations and its existing commitments, to withstand
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. The liquidity of Heartland
principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of
deposits and borrowings and its ability to borrow funds in the
money or capital markets.
Net cash outflows from investing activities increased $59.5
million during the first nine months of 2001 compared to the same
period in 2000. The acquisition of First National Bank of Clovis
provided net cash and cash equivalents of $18.6 million during
the first quarter of 2000. The net increase in loans and leases
was $47.1 million during the first nine months of 2001 compared
to $128.0 million during the same period in 2000, an $80.9
million change. During the first nine months of 2001, proceeds
from the sale and maturity of securities increased by $45.6
million compared to the same period in 2000 and the purchases of
securities increased by $159.0 million for the periods under
comparison. As loan growth was below the levels experienced
during the first nine months of 2000, additional securities
purchases were made to enhance the net interest margin.
Financing activities provided net cash of $106.0 million during the
first nine months of 2001 compared to $104.7 million during the
same period in 2000. A net increase in demand and savings deposit
accounts provided cash of $60.4 million during the first nine
months of 2001 compared to $7.7 million during the same period in
2000. Conversely, the amount of cash provided by a net increase in
time deposit accounts declined from $82.2 million during the first
nine months of 2000 to $25.0 million during the same period in
2001. The net change in short-term borrowings went from a $26.2
million provider of cash during the first nine months of 2000 to a
$13.9 million user of cash during the same period in 2001,
primarily as a result of the growth in deposits. The $41.3 million
additional cash provided by a net increase in other borrowings
during the first nine months of 2001 was reflective of $38.9
million new FHLB long-term advances recorded.
Total cash inflows from operating activities increased $15.1
million for the first nine months of 2001 compared to the same
period in 2000. The $53.9 million increase in cash used for loans
originated for sale and the offsetting $66.1 million increase in
cash provided by the sale of loans were the primary factors
contributing to the increase in cash provided from operating
activities. Management of investing and financing activities, and
market conditions, determine the level and the stability of net
interest cash flows. Management attempts to mitigate the impact
of changes in market interest rates to the extent possible, so
that balance sheet growth is the principal determinant of growth
in net interest cash flows.
In the event of short-term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks and may also borrow from the Federal Reserve Bank.
Additionally, the subsidiary banks' FHLB memberships give them
the ability to borrow funds for short- and long-term purposes
under a variety of programs.
Heartland's revolving credit agreements, as of September 30,
2001, provided an additional borrowing capacity of $9.9 million.
These agreements contain specific covenants which, among other
things, limit dividend payments and restrict the sale of assets
by Heartland under certain circumstances. Also contained within
the agreements are certain financial covenants, including the
maintenance by Heartland of a maximum nonperforming assets to
total loans ratio, minimum return on average assets ratio and
maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well
capitalized, as defined from time to time by the federal banking
regulators. At September 30, 2001, Heartland was in compliance
with the covenants contained in these credit agreements.
RECENT DEVELOPMENTS
In June of this year, Heartland was saddened by the sudden death
of long-time director, Evangeline K. Jansen. Ms. Jansen first
joined the board of directors of Dubuque Bank and Trust in 1974
and was one of the initial directors of Heartland when it was
formed in 1981.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No.
141, Business Combinations, and FAS No. 142, Goodwill and Other
Intangible Assets. FAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. FAS No. 141 also
specifies criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and
reported apart from goodwill. FAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in
accordance with the provisions of FAS No. 142. FAS No. 142 also
requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in
accordance with FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Heartland is required to adopt the provisions of FAS No. 141
immediately, and FAS No. 142 effective January 1, 2002. Goodwill
and intangible assets acquired in business combinations completed
before July 1, 2001, will continue to be amortized and tested for
impairment in accordance with the appropriate pre-FAS No. 142
accounting requirements prior to adoption of FAS No. 142.
As of September 30, 2001, Heartland had unamortized goodwill in
the amount of $16.3 million and unamortized identifiable
intangible assets in the amount of $3.1 million, all of which
will be subject to the transition provisions of FAS No. 141 and
142. Amortization expense related to goodwill was $1.1 million
and $798 thousand for the year ended December 31, 2000, and the
nine months ended September 30, 2001, respectively. Amortization
expense related to identifiable intangible assets was $751 and
$456 thousand for the year ended December 31, 2000, and the nine
months ended September 30, 2001, respectively. All of Heartland's
identifiable intangible assets are core deposit premiums related
to acquisitions. Because of the extensive effort needed to comply
with adopting FAS No. 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on
Heartland's financial statements at the date of this report,
including whether any transitional impairment losses will be
recognized as the cumulative effect of a change in accounting
principle.
In August 2001, the FASB issued FAS Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which
supersedes both FAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business (as previously defined in
that Opinion). FAS No. 144 retains the fundamental provisions in
FAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant
implementation issues associated with FAS No. 121. For example,
FAS No. 144 provides guidance on how a long-lived asset that is
used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for
sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. FAS No. 144 retains the
basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a
business). Unlike FAS No. 121, an impairment assessment under
FAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under FAS No. 142,
Goodwill and Other Intangible Assets.
Heartland is required to adopt FAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its
provisions for the quarter ending March 31, 2002. Management
does not expect the adoption of FAS No. 144 for long-lived assets
held for use to have a material impact on Heartland's financial
statements because the impairment assessment under FAS No. 144 is
largely unchanged from FAS No. 121. The provisions of FAS No.
144 for assets held for sale or other disposal generally are
required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, management
cannot determine the potential effects that adoption of FAS No.
144 will have on Heartland's financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollars in thousands)
Market risk is the risk of loss arising from adverse changes in
market prices and rates. Heartland's market risk is comprised
primarily of interest rate risk resulting from its core banking
activities of lending and deposit gathering. Interest rate risk
measures the impact on earnings from changes in interest rates
and the effect on current fair market values of Heartland's
assets, liabilities and off-balance sheet contracts. The
objective is to measure this risk and manage the balance sheet to
avoid unacceptable potential for economic loss. Management
continually develops and applies strategies to mitigate market
risk. Exposure to market risk is reviewed on a regular basis by
the asset/liability committees at the banks and, on a
consolidated basis, by the Heartland board of directors.
Management does not believe that Heartland's primary market risk
exposures and how those exposures have been managed to-date in
2001 changed significantly when compared to 2000.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
10.21 Second Amendment to Second Amended and Restated Credit
Agreement between Heartland Financial USA, Inc. and
The Northern Trust Company dated as of October 31,
2001
10.22 See Exhibit 10.21 for substantially the same form of a
Second Amendment to Credit Agreement between Heartland
Financial USA, Inc. and Harris Trust and Savings Bank
dated as of October 31, 2001, except that the lender
is Harris Trust and Savings Bank and the commitment is
$20 million
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
Principal Executive Officer
/s/ Lynn B. Fuller
-----------------------
By: Lynn B. Fuller
President
Principal Financial and
Accounting Officer
/s/ John K. Schmidt
-----------------------
By: John K. Schmidt
Executive Vice President
and Chief Financial Officer
Dated: November 14, 2001