UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2009
Commission
File Number: 0-24724
HEARTLAND
FINANCIAL USA, INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
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42-1405748
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(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 Global Select Market
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Preferred
Share Purchase Rights
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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 whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes 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
(Do not check if a 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 Global Select Market on June 30, 2009, the last business day of the
registrant's most recently completed second fiscal quarter, was approximately
$207,811,366. Such figures include 1,644,396 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.
As of
March 15, 2010, the Registrant had issued and outstanding 16,347,086 shares of
common stock, $1.00 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 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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Item
1.
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Business
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A.
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General
Description
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B.
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Market
Areas
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C.
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Competition
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D.
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Employees
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E.
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Internet
Access
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F.
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Supervision
and Regulation
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G.
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Governmental
Monetary Policy and Economic Conditions
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Item
1A.
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Risk
Factors
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Item
1B.
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Unresolved
Staff Comments
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Item
2.
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Properties
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Item
3.
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Legal
Proceedings
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Item
4.
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[Reserved]
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Executive
Officers
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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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Item
6.
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Selected
Financial Data
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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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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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Item
8.
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Financial
Statements and Supplementary Data
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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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Item
9A.
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Controls
and Procedures
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Item
9B.
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Other
Information
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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Item
11.
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Executive
Compensation
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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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Item
13.
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Certain
Relationships and Related Transactions, and Director Independence
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Item
14.
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Principal
Accountant Fees and Services
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Part
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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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 ten bank subsidiaries in the
states of Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado and
Minnesota, (collectively, the "Bank Subsidiaries"). All ten Bank Subsidiaries
are members of the Federal Deposit Insurance Corporation ("FDIC"). The Bank
Subsidiaries listed below operate a total of 61 banking locations:
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*
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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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*
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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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*
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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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*
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Minnesota
Bank & Trust, Edina, Minnesota, is chartered under the laws of the
State of Minnesota.
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Heartland
has eight active non-bank subsidiaries as listed below:
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*
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Citizens
Finance Co. is a consumer finance company with offices in Iowa, Illinois
and Wisconsin.
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*
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Heartland
Community Development Inc. is a property management company with a primary
purpose of holding and managing certain nonperforming assets acquired from
the Bank Subsidiaries.
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*
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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.
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All of
Heartland’s subsidiaries are wholly owned, except for Summit Bank & Trust,
of which Heartland owned 86% of the capital stock on December 31, 2009, and
Minnesota Bank & Trust, of which Heartland owned 80% of the capital stock on
December 31, 2009.
At
December 31, 2009, Heartland had total assets of $4.0 billion, total loans of
$2.3 billion and total deposits of $3.1 billion. Heartland’s total capital as of
December 31, 2009, was $315.1 million. Net income available to common
stockholders for 2009 was $1.2 million.
The Bank
Subsidiaries provide full service commercial and 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, online 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 and insurance sales.
Operating
Strategy
Heartland’s
operating strategy is based upon a community banking model with three major
components:
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1.
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Develop
strong community banks:
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Establish
community bank names and images
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Encourage
community involvement and leadership
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Maintain
active boards of directors chosen from the local
community
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Retain
local presidents and
decision-making
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2. 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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*
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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
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*
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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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3. Provide
customer-transparent cost savings:
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*
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Centralize
back office support functions so Bank Subsidiaries operate as efficiently
as possible
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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, 2009,
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 through acquisitions. In the current
environment, Heartland is seeking opportunities for growth via FDIC facilitated
acquisitions within existing markets. Heartland would not rule out a FDIC
facilitated transaction in a new market that fits our business model and would
be immediately additive to earnings. 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 2006. A sixth location was opened in 2007.
Heartland
took another step in the expansion of its Western presence in June 2004 when it
acquired Rocky Mountain Bancorporation, Inc., the one-bank holding company of
Rocky Mountain Bank. Headquartered in Billings, Montana, Rocky Mountain Bank has
nine branch locations throughout the state.
In
November 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 April
of 2008, Heartland and a group of investors opened Minnesota Bank & Trust in
Edina, Minnesota. 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. Heartland’s
initial investment was $13.2 million, or 80% of the targeted $16.5 million
opening capital.
In July
of 2009, Galena State Bank & Trust Co. acquired the deposits of The
Elizabeth State Bank in Elizabeth, Illinois in a whole bank with loss sharing
transaction facilitated by the FDIC. In addition to assuming all of the deposits
of the failed bank, Galena State Bank & Trust Co. purchased $53.6 million of
assets.
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. 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.
The Bank
Subsidiaries continue to seek opportunities to expand the production of loans
guaranteed by U.S. government agencies. Wisconsin Community Bank, Rocky Mountain
Bank and New Mexico Bank & Trust are each designated as a Preferred Lender
by the U.S. Small Business Administration (SBA). These three banks, along with
Riverside Community Bank, are also designated as SBA Express Lenders.
Additionally, Wisconsin Community Bank has been granted USDA Certified Lender
status for the USDA Rural Development Business and Industry loan program and has
been one of the leading lenders in the Midwest for this program. 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 is based upon 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 flow of the borrowers 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.
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.
The
slowdown in the overall economy has negatively impacted Heartland’s overall
asset quality in 2008 and 2009. Heartland has utilized a Special Assets group to
focus on resolving problem assets. All commercial or agricultural loans in a
default or workout status are assigned to the Special Assets group.
Representatives of the Special Assets group meet with representatives from each
bank on a monthly basis. Heartland anticipates continued focus with additional
personnel assigned to this group in 2010.
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
11% of the total loan portfolio at December 31, 2009. 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 its real estate lending business. As long-term interest rates
have remained at relatively low levels during the past several years, 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. At December 31, 2009, total residential real estate mortgage loans
serviced for others totaled $1.15 billion.
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 8,200 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., Riverside Community
Bank, Wisconsin Community Bank, New Mexico Bank & Trust, Arizona Bank &
Trust and Minnesota 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, 2009, 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.
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 is located in Dubuque County, Iowa, which encompasses the
city of Dubuque and a number of surrounding rural communities. Citizens Finance
Co. is also headquartered in this market with additional 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 operations 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, approximately 20
miles east of Dubuque and 155 miles west of Chicago. Galena operates a second
office in Stockton, Illinois. In conjunction with an FDIC assisted transaction
in 2009, Galena acquired all deposits of The Elizabeth State Bank in Elizabeth,
Illinois and two offices in Elizabeth, Illinois and Galena. The four 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 the 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 ten 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 from four locations in east central New Mexico. The
majority of these four locations are in Clovis, the county seat for Curry
County, located approximately 220 miles east of Albuquerque, 100 miles northwest
of Lubbock, Texas and 105 miles southwest of Amarillo, Texas. In addition, New
Mexico Bank & Trust operates two 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 90,000. 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 is located 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 June 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.
Minnesota
Bank & Trust
Minnesota
Bank & Trust currently operates from a leased facility in Edina, Minnesota.
Edina is centrally located between Minneapolis and the southwest suburbs of the
Twin Cities. The population of Edina was estimated at 45,000 in 2006 by the U.S.
Census Bureau.
The
following table sets forth certain information concerning the Bank Subsidiaries
as of December 31, 2009:
|
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
|
$ 658,274
|
$
864,133
|
|
Galena
State Bank & Trust Co.
|
Galena,
IL
|
1992
|
4
|
$ 134,104
|
$
253,073
|
|
First
Community Bank
|
Keokuk,
IA
|
1994
|
3
|
$ 72,113
|
$
100,328
|
|
Riverside
Community Bank
|
Rockford,
IL
|
1995
|
4
|
$ 161,280
|
$
232,459
|
|
Wisconsin
Community Bank
|
Madison,
WI
|
1997
|
7
|
$ 274,487
|
$
358,994
|
|
New
Mexico Bank & Trust
|
Albuquerque,
NM
|
1998
|
16
|
$ 502,497
|
$
589,468
|
|
Arizona
Bank & Trust
|
Phoenix,
AZ
|
2003
|
6
|
$ 138,604
|
$
202,730
|
|
Rocky
Mountain Bank
|
Billings,
MT
|
2004
|
9
|
$ 292,914
|
$
376,487
|
|
Summit
Bank & Trust
|
Broomfield,
CO
|
2006
|
3
|
$ 58,108
|
$
85,131
|
|
Minnesota
Bank & Trust
|
Edina,
MN
|
2008
|
1
|
$ 24,472
|
$
34,616
|
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, 2009, Heartland employed 1,001 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
Securities Exchange Act of 1934, as amended (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.
As a bank
holding company with subsidiary banks chartered under the laws of eight
different states, Heartland is regulated by the Board of Governors of the
Federal Reserve System (the “Federal Reserve”). Each of the Bank Subsidiaries is
regulated by the Federal Deposit Insurance Corporation (“FDIC”) as its principal
federal regulator and one of the following as its state regulator: the Arizona
State Banking Department (the “Arizona Department”), the Colorado Department of
Regulatory Agencies, Division of Banking (the “Colorado Division”), the Illinois
Department of Financial and Professional Regulation
(the “Illinois DFPR”), the Iowa Superintendent of Banking
(the “Iowa Superintendent”), the Minnesota Department of Commerce:
Division of Financial Institutions (the “Minnesota Division”), the Montana
Division of Banking and Financial Institutions (the “Montana Division”), the New
Mexico Financial Institutions Division (the “New Mexico FID”), the
Division of Banking of the Wisconsin Department of Financial Institutions (the
“Wisconsin DFI”).
As a
recipient of Capital Purchase Program funds under the Troubled Asset Relief
Program (“TARP ”) established by the Emergency Economic Stabilization Act of
2008 (“EESA”), Heartland is also subject to direct supervision by the United
States Department of the Treasury (“Treasury”).
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 also 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 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.
Heartland
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, First Community Bank and Arizona Bank &
Trust and the controlling shareholder of Summit Bank & Trust and Minnesota
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,
2009, Heartland had regulatory capital in excess of the Federal Reserve’s
minimum requirements.
Treasury
Regulation—the Emergency Economic Stabilization Act of 2008 and the American
Recovery and Reinvestment Tax Act of 2009
On
October 3, 2008, in response to stresses experienced in the financial markets,
the EESA was enacted. Pursuant to its authority under EESA, the
Treasury created the TARP Capital Purchase Program (the “CPP”) under which the
Treasury Department has invested in the senior preferred stock of qualifying
U.S. banks and savings associations or their holding companies. Under the CPP,
qualifying financial institutions may issue senior preferred stock with a value
equal to not less than 1% of risk-weighted assets and not more than the lesser
of $25 billion or 3% of risk-weighted assets.
On
December 19, 2008, Heartland issued and sold $81.7 million of its Fixed Rate
Cumulative Perpetual Preferred Stock (the “Senior Preferred Stock”) to the
Treasury pursuant to the CPP. The Senior Preferred Stock, which has
terms that were set by the Treasury and that are relatively uniform among
publicly held banks participating in the program:
|
*
|
pays
dividends to Treasury at a rate of 5% per year until the fifth anniversary
of the investment and at 9% after that time;
|
|
*
|
prohibits
dividends on common stock unless all dividends have been paid on the
Senior Preferred Stock;
|
|
*
|
requires
the consent of Treasury for any increase in the dividends paid on the
common stock, or for any stock repurchases, until the third anniversary of
the investment, unless the senior preferred has been previously redeemed
in its entirety or unless the Treasury has transferred the senior
preferred to third parties;
|
|
*
|
has
no voting rights, other than the right to vote as a class on the issuance
of any preferred stock ranking senior, any change in its terms or any
merger, exchange or similar transaction that would adversely affect its
rights;
|
|
*
|
has
the right to elect two directors if dividends have not been paid for six
quarterly periods; and
|
|
*
|
is
freely transferable and required Heartland to file a shelf registration
statement covering the sale of the Senior Preferred, which Heartland
completed in January, 2009.
|
|
*
|
may
be redeemed at any time with the approval of Heartland’s primary regulator
(the FDIC).
|
Heartland,
like all institutions participating in the CPP, also issued to Treasury an
immediately exercisable 10-year warrant to purchase shares of common stock with
an aggregate market price equal to 15% of the amount of senior preferred: a
warrant to purchase 609,687 shares for Heartland (the “Warrant”). The Warrant is
exercisable at a price of $20.10 per share (the average closing price of the
common stock for the 20 trading days prior to the date of the Treasury’s
approval). Under the purchase agreement pursuant to which the Senior
Preferred Stock and Warrant were acquired (the “Purchase Agreement”), Treasury
is prohibited from exercising voting rights with respect to any shares of common
stock acquired through exercise of the warrant and the shares of common stock
underlying the warrant were included in the shelf registration statement filed
by Heartland.
Prior to
issuance of the Senior Preferred Stock, Heartland and its senior executive
officers, like all other CPP participants, were required by the Purchase
Agreement to modify all benefit plans and arrangements to comply with
restrictions imposed by EESA. At the time, these restriction provided
that, so long as Treasury owns any debt or equity securities acquired pursuant
to the Purchase Agreement, Heartland would be:
|
*
|
prohibited
from making any “Golden Parachute Payments” to a senior executive officer
(payments for separation of the executive in excess of three times the
average compensation of the executive for the five years prior to
termination);
|
|
*
|
required
to have its compensation committee review with its senior risk officers
the incentive compensation arrangements for senior executive officers to
ensure that the arrangements did not encourage senior executive officers
to take unnecessary and excessive risks that threaten the value of
Heartland;
|
|
*
|
required
to “clawback” incentive compensation of senior executive officers to the
extent based on materially inaccurate financial statements or materially
inaccurate performance criteria; and
|
|
*
|
by
virtue of an amendment to Section 162(m)(5) of the Internal Revenue Code,
required to eliminate the deductibility of taxable compensation payments
that exceed $500,000 to an officer in any
year.
|
These
restrictions were substantially expanded when on February 17, 2009, the American
Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly know as the
Economic Stimulus Act, was enacted. Title VII of ARRA, and regulations issued by
Treasury under ARRA in June 2009, placed additional restrictions on the
compensation paid to executive officers and highly paid employees by financial
institutions, such as Heartland, that have received CPP funds. Among other
things, these additional restrictions will require that, while the Senior
Preferred Stock is outstanding, Heartland will be:
|
*
|
prohibited
from paying incentive compensation, except restricted stock that vests
after the CPP funds are repaid, to its five most highly compensated
employees;
|
|
*
|
required
to have its compensation committee review with its senior risk officers at
least every six months (i) the incentive compensation arrangements for
senior executive officers to ensure that the arrangements do not encourage
senior executive officers to take unnecessary and excessive risks, (ii)
all employee compensation plans to limit unnecessary risks those plans
impose, and (iii) all employee plans to eliminate features that would
encourage manipulation of reported earnings, and to have the compensation
committee certify annually as to the completion of that
review;
|
|
*
|
required
to extend the clawback provisions to its 20 most highly compensated
employees;
|
|
*
|
prohibited
from making any severance payment whatsoever, including what has
traditionally been referred to as a parachute payment, to the executives
named in the summary compensation table of its proxy statement or any of
the five next most highly compensated employees;
|
|
*
|
required
to annually present its compensation policies to a non-binding vote by
stockholders--a say-on-pay vote;
|
|
*
|
adopt
policies regarding excessive and luxury expenditures;
and
|
|
*
|
required
to have its CEO and CFO annually certify that Heartland has complied with
these requirements as part of its annual filing with the SEC (this Form
10-K).
|
Except
with respect to the prohibition on incentive compensation to its five most
highly compensated employees, Heartland does not believe these provisions have
any material impact on it.
Dividend
Payments
Heartland’s
ability to pay dividends to its shareholders may be affected by both general
corporate law considerations, the limitations imposed under the CPP described
above 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.
In addition, 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. Heartland is prohibited from paying any dividends on or
repurchasing shares of common stock unless all dividends on the Senior Preferred
Stock have been paid, and under the Purchase Agreement, Heartland is prohibited
until after December 19, 2011, from paying quarterly dividends, without the
Treasury’s consent, in excess of $0.10 per share as long as the Senior Preferred
Stock is outstanding.
Federal
Securities Regulation
Heartland’s
common stock is registered with the SEC under Section 12(b) of 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
All of
the Bank Subsidiaries are state chartered, non-member banks, which means that
they are all formed under state law and are not members of the Federal Reserve
System. As such, each bank is subject to direct regulation by the banking
authorities in the State in which it was chartered, as well as by the FDIC as
its primary federal regulator.
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.
Minnesota
Bank & Trust is a Minnesota-chartered bank. As a
Minnesota-chartered bank, Minnesota Bank & Trust is subject to the
examination, supervision, reporting and enforcement requirements of the
Minnesota Division, the chartering authority for Minnesota banks.
Deposit
Insurance
The FDIC
is an independent federal agency that insures the deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the commercial banking and thrift
industries. Until the adoption of EESA in October 2008, the maximum deposit
insurance coverage was $100,000 per beneficiary ($250,000 per participant for
retirement plans) and was indexed for inflation commencing in
2011. Under EESA, the maximum deposit insurance coverage has been
temporarily increased from $100,000 to $250,000 until December 31,
2013.
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 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.
The
aggregate level of assessments levied by the FDIC on depositary institutions is
dependent upon the reserve ratio of insurance funds available to the FDIC. Due
to bank failures during 2008, the reserve ratio fell below the statutory minimum
and the FDIC adopted a plan to restore the ratio to its 1.15% minimum,
originally over a period of five years, but more recently extended to seven
years. On February 27, 2009, the FDIC announced that it was increasing the
quarterly deposit insurance assessment for most insured institutions to a range
of 12 to 16 basis points (0.12% to 0.16%) per quarter for the second quarter of
2009. The FDIC also imposed a special emergency assessment of an additional 5
basis points on each FDIC-insured depository institution's assets, minus its
Tier 1 capital, as of June 30, 2009, which was due and paid by Heartland on
September 30, 2009. On November 12, 2009, the FDIC adopted a final rule
requiring prepayment of 13 quarters of each institution’s estimated FDIC
premiums for the fourth quarter of 2009 and all of 2010, 2011 and 2012.
Heartland prepaid the required $19.0 million in December 2009. The expense of
this prepayment will be recognized during the next three years based on the
calculation of actual quarterly assessments. Heartland expects that actual FDIC
assessments will remain higher as bank failures work through the economy and may
be further increased if the reserve ratio is further impaired. The reserve ratio
calculated by the FDIC in effect at September 30, 2009 was -0.16%.
The FDIC
established a Temporary Liquidity Guarantee Program on October 23, 2008 under
which the FDIC fully guaranteed all non-interest-bearing transaction accounts
and all senior unsecured debt of insured depository institutions or their
qualified holding companies issued between October 14, 2008 and October 31,
2009. Heartland did not opt out of the program and as such, was assessed ten
basis points for transaction account balances in excess of $250,000 and, since
it did not issue any senior unsecured debt during the designated time period,
was not assessed the applicable rate of 75 basis points on the amount of debt
issued. The guarantee of non-interest-bearing transaction accounts has been
extended to June 30, 2010, and participating institutions had until November 2,
2009, to opt out of the extension. Heartland did not opt out. After June 30,
2010, the FDIC insurance limit for all deposit accounts will be $250,000. The
total assessments paid by Heartland during 2009 for participation in the
Temporary Liquidity Guarantee Program totaled $105,000.
In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to recapitalize the
predecessor to the Savings Association Insurance Fund. During the fourth quarter
of 2009, the assessment rate was 0.0102% of insured deposits. These assessments
will continue until the Financing Corporation bonds mature in 2019.
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 2009, the Bank
Subsidiaries paid supervisory assessments totaling $483,000.
Capital
Requirements
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 Minnesota Bank &
Trust was conditioned upon Minnesota Bank & Trust maintaining higher Tier 1
capital to assets ratios for the first three years of their operations (through
April 2012). Further, under agreements with the FDIC and state banking agencies
described below under “Safety and Soundness Standards,” Summit Bank & Trust
is required to maintain a ratio of Tier 1 Capital to total assets of 8% and
Rocky Mountain Bank is required to maintain both a ratio of Tier 1 capital to
total assets of 8% and a ratio of total risk-based capital to risk-weighted
assets of 12%.
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, 2009: (i) none of the Bank Subsidiaries was subject to a directive
from its primary federal regulator to increase its capital; (ii) each of the
Bank Subsidiaries exceeded its minimum regulatory capital requirements under
applicable capital adequacy guidelines; (iii) each of the Bank Subsidiaries was
“well-capitalized,” as defined by applicable regulations; and (iv) each of the
Bank Subsidiaries subject to a directive to maintain capital higher than the
regulatory capital requirements, as discussed below under “Safety and Soundness
Standards,” complied with the directive.
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, 2009. Minnesota Bank & Trust is subject to the FDIC’s further
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. Pursuant
to agreements with the FDIC and the state banking agencies described below under
“Safety and Soundness Standards,” neither Summit Bank & Trust nor Rocky
Mountain Bank may pay any dividends without prior notice to, and consent from,
the FDIC and the state banking regulator. 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, 2009, approximately $94.5 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.
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.
Although Heartland believes its subsidiaries comply with these requirements, one
of its Bank Subsidiaries was cited in 2008 and 2009 for a deficiency in insider
transaction compliance in connection with the joint examination described in
“Safety and Soundness Standards” below.
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.
During
their regular scheduled joint examinations of the Bank Subsidiaries, the FDIC
and state banking commissioners cited three of the Bank Subsidiaries for certain
deficiencies, including asset quality. In January of 2009, the boards of
directors of Summit Bank & Trust and Arizona Bank & Trust, and in the
fall of 2009, the board of directors of Rocky Mountain Bank, entered into
informal agreements with the FDIC and their respective state banking
commissioners, agreeing to submit plans for improvement in the risks associated
with any classified asset with a balance of more than $250,000, agreeing not to
extend or renew credit to borrowers under loans that are classified, agreeing to
review and ensure the sufficiency of the allowance for loan and lease losses and
agreeing to submit a business plan outlining the plans to accomplish these
measures as well as periodic progress reports against that plan. As noted above,
two of these Bank Subsidiaries also agreed to maintain higher levels of
regulatory capital and to refrain from paying dividends without regulatory
approval. Each of these Bank Subsidiaries remains well capitalized and has
complied with its agreement with its regulators.
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: (i) for transaction
accounts aggregating $10.7 million or less, there is no reserve requirement;
(ii) for transaction accounts over $10.7 million and up to $55.2 million, the
reserve requirement is 3% of total transaction accounts; and (iii) for
transaction accounts aggregating in excess of $55.2 million, the
reserve requirement is $1.335 million plus 10% of the aggregate amount of total
transaction accounts in excess of $55.2 million. 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 that may adversely affect our business, financial results or stock
price. Additional risks that we currently do not know about or currently view as
immaterial may also impair our business or adversely impact our financial
results or stock price.
Our
business and financial results are significantly affected by general business
and economic conditions.
Our
business activities and earnings are affected by general business conditions in
the United States and particularly in the states in which our subsidiary banks
operate. The United States economy has undergone a dramatic downturn during the
past two years, with negative effects on the business, financial condition and
results of operations of financial institutions. Dramatic declines in the
housing market, with falling home prices and increasing foreclosures and
unemployment, have negatively impacted the credit performance of real estate
related loans and resulted in significant write-downs of asset values by
financial institutions, including Heartland. Further erosion of consumer
confidence levels could cause renewed increases in delinquencies and default
rates, which may impact our charge-offs and provision for credit losses.
Continuing economic deterioration that affects household and/or corporate
incomes could also result in reduced demand for credit or fee-based products and
services. In addition, changes in securities market conditions and monetary
fluctuations could adversely affect the availability and terms of funding
necessary to meet our liquidity needs. A worsening of these conditions would
likely exacerbate the adverse effects of these difficult market conditions on
Heartland and others in the financial institutions industry.
Additional
legislation and rulemaking could affect us adversely.
The
programs established under the EESA and TARP, as well as restrictions contained
in the rules implementing or related to them under ARRA, could adversely affect
our operations. For example, the restrictions contained in ARRA on our
compensation programs could make it more difficult for us to attract and retain
management. Requirements for dividends at the holding company level and
restrictions on dividends paid by the Bank Subsidiaries could restrict our
ability to fund expansion, and further restrictions imposed by regulation
because of our participation in the TARP CPP program could place us at a
competitive disadvantage relative to financial institutions that did not receive
CPP funds. We face increased regulation of our business and increased costs
associated with these programs. Similarly, programs established by the FDIC may
have an adverse effect on us, due to the costs of participation.
Other
changes in the laws, regulations and policies governing financial services
companies could alter our business environment and adversely affect
operations.
The Board
of Governors of the Federal Reserve System regulates the supply of money and
credit in the United States. Its fiscal and monetary policies determine, in a
large part, our cost of funds for lending and investing and the return that can
be earned on those loans and investments, both of which affect our net interest
margin. Federal Reserve Board policies can also materially affect the value of
financial instruments that we hold, such as debt securities and mortgage
servicing rights. Recent changes in the laws and regulations that apply to us
have been significant. Further dramatic changes in statutes, regulations or
policies could affect us in substantial and unpredictable ways, including
limiting the types of financial services and products that we offer and/or
increasing the ability of non-banks to offer competing financial services and
products. We cannot predict whether any of this potential legislation will be
enacted, and if enacted, the effect that it or any regulations would have on our
financial condition or results of operations.
The
soundness of other financial institutions could adversely affect our liquidity
and operations.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to many different
counterparties, and we routinely execute transactions with counterparties in the
financial industry, including brokers and dealers, commercial banks, investment
banks, and other institutional clients. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by Heartland or the Bank
Subsidiaries or by other institutions. Many of these transactions expose us to
credit risk in the event of default of our counterparty or client. In addition,
our credit risk may be exacerbated when the collateral held by us cannot be
realized upon or is liquidated at prices not sufficient to recover the full
amount of the financial instrument exposure due us. There is no assurance that
any such losses would not materially and adversely affect our results of
operations.
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, Colorado and Minnesota 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. For example, although all of our markets have been impacted to
some extent by the economic downturn, the markets in Arizona, Colorado and
Montana have been more severely affected than most of the markets in the
Midwest, creating correspondingly greater impact on our banks that serve those
areas.
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. We cannot
predict the number, size or timing of acquisitions. 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:
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potential
exposure to unknown or contingent liabilities of banks and businesses we
acquire;
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exposure
to potential asset quality issues of the acquired bank or related
business;
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difficulty
and expense of integrating the operations and personnel of banks and
businesses we acquire;
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potential
disruption to our business;
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potential
restrictions on our business resulting from the regulatory approval
process;
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potential
diversion of our management’s time and attention; and
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the
possible loss of key employees and customers of the banks and businesses
we acquire.
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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 and
is currently undergoing significant change. 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, and increasingly these competitors provide integrated financial
services over a broad geographic area. Some of our competitors may also have
access to governmental programs that impact their position in the marketplace
favorably. 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, changes in the
economy can cause the assumptions that we made at origination to change and can
cause borrowers to be unable to make payments on their loans, and significant
changes in collateral values such as those that occurred in late 2008 and 2009
can cause us to not be able to collect the full value of loans we make. 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 $1.67 billion (including $1.08 billion of commercial real estate
loans), or approximately 71% of our total loan portfolio as of December 31,
2009. 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 $1.08 billion, or approximately 64%, of our total commercial loan
portfolio as of December 31, 2009. 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. More than 60% 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
a few of our markets have adversely affected some of our commercial real estate
loans, and further developments 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 development 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 commercial real estate markets continue,
particularly within our Western 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. Until the recent economic crisis, particularly
in our Western markets in Arizona, Colorado and Montana, we generally had 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 continue to
experience deterioration in such performance.
Our
commercial real estate loans also include commercial construction loans,
including land acquisition and development, which 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 $175.1 million, or 7%, of our
loan and lease portfolio at December 31, 2009, 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 we 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, 2009, consumer loans totaled $231.7 million, or 10%, 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 that can be recovered on these loans.
Citizens Finance loans, net of unearned, totaled $46.4 million at December 31,
2009, 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, 2009, agricultural real estate loans totaled
$197.9 million, or 8%, 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, 2009, these loans
totaled $58.9 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. Throughout 2009, we were
required to significantly increase our provision for loan losses because of the
impact of the declining economy and real estate assets on some of our borrowers,
resulting in charge-offs and an increased level of nonperforming assets. At
December 31, 2009, our allowance for loan losses as a percentage of total
loans was 1.80% and as a percentage of total nonperforming loans was
approximately 54%. 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. Further significant provisions, or charge-offs
against our allowance that result in provisions, could have a significant
negative impact on our profitability. Loan losses in excess of our reserves may
adversely affect our business, financial condition and results of
operations.
Impairment
of investment securities, goodwill, other intangible assets, or deferred tax
assets could require charges to earnings, which could result in a negative
impact on our results of operations.
In
assessing whether the impairment of investment securities is
other-than-temporary, management considers the length of time and extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability to retain our
investment in the security for a period of time sufficient to allow for any
anticipated recovery in fair value in the near term. Under current accounting
standards, goodwill is not amortized but, instead, is subject to impairment
tests on at least an annual basis or more frequently if an event occurs or
circumstances change that reduce the fair value of a reporting unit below its
carrying amount. During 2009, a goodwill impairment charge of $12.7 million was
recorded for Arizona Bank & Trust and Rocky Mountain Bank. In the event that
we conclude that additional amounts of our goodwill may be impaired, a non-cash
charge for the amount of such impairment would be recorded to earnings. Such a
charge would have no impact on tangible capital. A decline in our stock price or
occurrence of a triggering event following any of our quarterly earnings
releases and prior to the filing of the periodic report for that period could,
under certain circumstances, cause us to perform a goodwill impairment test and
result in an impairment charge being recorded for that period which was not
reflected in such earnings release. At December 31, 2009, we had goodwill
of $27.5 million, representing approximately 9% of stockholders’ equity. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Assessing the need for, or the sufficiency of, a valuation
allowance requires management to evaluate all available evidence, both negative
and positive. Positive evidence necessary to overcome the negative evidence
includes whether future taxable income in sufficient amounts and character
within the carryback and carryforward periods is available under the tax law.
When negative evidence (e.g., cumulative losses in recent years, history of
operating losses or tax credit carryforwards expiring unused) exists, more
positive evidence than negative evidence will be necessary. If the positive
evidence is not sufficient to exceed the negative evidence, a valuation
allowance for deferred tax assets is established. At December 31, 2009, net
deferred tax assets are approximately $23.7 million. The impact of each of
these impairment matters could have a material adverse effect on our business,
results of operations, and financial condition.
Changes
in interest rates could reduce the value of our mortgage servicing
rights.
A
mortgage servicing right is the right to service a mortgage loan for a fee. We
acquire mortgage servicing rights when we originate mortgage loans and keep the
servicing rights after we sell the loans. We carry mortgage servicing rights at
the lower of amortized cost or estimated fair value. Fair value is the present
value of estimated future net servicing income, calculated based on a number of
variables, including assumptions about the likelihood of prepayment by
borrowers. Changes in interest rates can affect prepayment assumptions. When
interest rates fall, borrowers are more likely to prepay their mortgage loans by
refinancing them at a lower rate. As the likelihood of prepayment increases, the
fair value of our mortgage servicing rights can decrease. Each
quarter we evaluate our mortgage servicing rights for impairment based on the
difference between the carrying amount and fair value. If temporary impairment
exists, we establish a valuation allowance through a charge to earnings for the
amount the carrying amount exceeds fair value.
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.
The
FDIC has increased, and may further increase, deposit insurance premiums,
negatively impacting our profitability.
The FDIC
charges insured financial institutions premiums to maintain the deposit
insurance fund, and increases or decreases the amount of premiums it assesses
based on reserve ratios for that fund, some of which are mandated by statute.
Current economic conditions have increased bank failures, and the payments the
FDIC must make using the resources of the deposit insurance fund to resolve such
bank failures. The EESA included a provision for an increase for deposits
insured by the FDIC to $250,000 until December 31, 2009, and has now extended
the increase to December 31, 2013, which may further increase the exposure of
the deposit insurance fund to losses. Further, Heartland has not opted out of
FDIC’s Temporary Liquidity Guarantee Program, which provides unlimited deposit
insurance on funds in noninterest-bearing transaction deposit accounts not
otherwise covered by the existing deposit insurance limit of $250,000, and
results in additional assessments. This program expires on June 30, 2010, and it
is unknown whether Congress will extend the program. Further increases in
deposit insurance premiums may be necessary in the future due to, among other
things, additional increases in the number of bank failures. Any additional
increase in deposit insurance premiums could have a material adverse effect on
our financial results.
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.
Negative
publicity could adversely impact our business and financial
results.
Reputation
risk, or the risk to our earnings and capital from negative publicity, is
inherent to our business. Current public uneasiness with the United States
banking system heightens this risk, as banking customers often transfer news
regarding financial difficulties or even failure of some institutions, to fear
of financial difficulty or failure of even the most secure institutions. In this
climate, any negative news may become cause for curtailment of business
relationships, withdrawal of funds or other actions that can have a compounding
effect, and could adversely affect our operations.
Our
stock price can be volatile.
Our stock
price can fluctuate widely in response to a variety of factors, including;
actual or anticipated variations in our quarterly operating results;
recommendations by securities analysts; acquisitions or business combinations;
capital commitments by or involving Heartland or our subsidiary banks; operating
and stock price performance of other companies that investors deem comparable to
us; new technology used or services offered by our competitors; new reports
relating to trends, concerns and other issues in the financial services
industry; and changes in government regulations. General market fluctuations,
industry factors and general economic and political conditions and events have
recently caused a decline in our stock price, and these factors as well as
interest rate changes, continued unfavorable credit loss trends, or unforeseen
events such as terrorist attacks could cause our stock price to remain volatile
regardless of our operating results.
Certain
Bank Subsidiaries are subject to informal written agreements with regulators and
failure to comply with these agreements could result in enforcement actions
against us.
Three of
the Bank Subsidiaries have entered into informal written agreements with the
FDIC and state regulators, which relate primarily to financial performance and
credit quality. These Bank Subsidiaries have submitted three to five year
business plans to their regulators and must operate within the parameters of
these business plans and submit periodic reports on compliance with these plans.
The agreements also require these Bank Subsidiaries to develop plans and take
action to address nonperforming assets and watch-list credits. If these Bank
Subsidiaries fail to comply with the terms of their respective agreements, the
regulators could take enforcement action against them, including the imposition
of monetary penalties or the issuance of cease and desist orders requiring
corrective action.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
As of
December 31, 2009, 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
|
|
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
|
4
|
|
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
|
|
Minnesota Bank
& Trust
7701
France Avenue South, Suite 110
Edina,
MN 55435
|
6,100
|
Lease
term
through
2013
|
1
|
|
Citizens
Finance Co.
1275 Main Street
Dubuque,
IA 52001
|
5,600
|
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, 2009, 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.
[RESERVED]
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, 2009,
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
|
60
|
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, Summit Bank
& Trust and Minnesota Bank & Trust; Chairman of Citizens Finance
Co.
|
|
|
John
K. Schmidt
|
50
|
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
|
58
|
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
|
58
|
Executive
Vice President, Operations, of Heartland; Senior Vice President,
Operations and Retail Banking of Dubuque Bank and Trust
Company
|
|
|
Douglas
J. Horstmann
|
56
|
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
|
64
|
Executive
Vice President, Wealth Management Group, of Heartland; Executive Vice
President, Manager Wealth Management Group, of Dubuque Bank and Trust
Company
|
|
|
Melvin
E. Miller
|
60
|
Executive
Vice President, Chief Investment Officer of Heartland; Senior Vice
President of Dubuque Bank and Trust Company
|
|
|
John
J. Berg
|
58
|
Executive
Vice President, Marketing and Sales of
Heartland
|
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, Summit
Bank & Trust since the opening of this de novo bank in 2006 and
Minnesota Bank & Trust since the opening of this de novo bank in 2008. 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 was named Executive Vice President, Operations, of Heartland in 2008.
Prior to this promotion, he served as Senior Vice President, Operations and
Retail Banking, 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. Mr. Everts announced his retirement at the Heartland board of
directors meeting on January 19, 2010. His retirement will be effective on
October 16, 2010.
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 was named Executive Vice President, Wealth Management Group, of
Heartland in 2008. Prior to this promotion, he 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. Mr. Peckosh
announced his retirement on March 2, 2010. His retirement will be effective on
April 4, 2011.
Melvin E.
Miller was named Executive Vice President, Chief Investment Officer, of
Heartland, in 2008. Prior to this promotion, he served as Senior Vice President,
Chief Investment Officer, of Heartland since 2000. He joined Dubuque Bank and
Trust in 1984 as a part-time Investment Officer and came on board full time in
1985 as Assistant Vice President and later was promoted to Senior Vice President
and Chief Investment Officer. A Chartered Financial Analyst, Mr. Miller received
his MBA degree in Finance from Ball State University in 1973. Prior to joining
Dubuque Bank and Trust, he had 12 years of college teaching experience in the
areas of investments and portfolio management. He was chair of the Department of
Accounting and Business at Loras College.
John J.
Berg joined Heartland in 2005 as Senior Vice President, Marketing and Sales. In
2008, he was promoted to Executive Vice President, Marketing and Sales. Berg’s
background includes over 30 years of retail marketing and banking experience.
Previous to joining Heartland, Mr. Berg served as Vice President and Marketing
Director of First Federal Capital Bank in LaCrosse, Wisconsin. His prior
experience includes marketing management positions with commercial banks and
savings banks in West Des Moines, Iowa, St. Louis, Missouri, Waterloo, Iowa and
Lansing, Michigan.
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, 2010, and approximately 1,600 additional stockholders held shares in street
name. The common stock of Heartland has been quoted on the NASDAQ Stock Market
since May 2003 under the symbol “HTLF” and is a NASDAQ Global Select Market
security.
For the
periods indicated, the following table shows the range of reported prices per
share of Heartland's common stock in the NASDAQ Global Select Market. 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
|
|||
|
2009:
|
|||||
|
First
|
$
|
20.81
|
$
|
8.51
|
|
|
Second
|
15.93
|
11.51
|
|||
|
Third
|
16.98
|
12.56
|
|||
|
Fourth
|
15.29
|
12.04
|
|||
|
2008:
|
|||||
|
First
|
$
|
22.40
|
$
|
16.78
|
|
|
Second
|
23.40
|
18.19
|
|||
|
Third
|
25.06
|
18.40
|
|||
|
Fourth
|
25.00
|
16.70
|
Cash
dividends have been declared by Heartland quarterly during the past two years
ending December 31, 2009. The following table sets forth the cash dividends per
share paid on Heartland's common stock for the past two years:
|
Calendar
Quarter
|
2009
|
2008
|
|||
|
First
|
$
|
.10
|
$
|
.10
|
|
|
Second
|
.10
|
.10
|
|||
|
Third
|
.10
|
.10
|
|||
|
Fourth
|
.10
|
.10
|
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. Heartland
will be prohibited from paying any dividends on common stock unless all
dividends on the Preferred Stock have been paid, and under the Purchase
Agreement with the Treasury and so long as the Preferred Stock is held by the
Treasury will be prohibited until after December 19, 2011, from paying quarterly
dividends, without the Treasury’s consent, in excess of $0.10 per share. 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. 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, 2009, of equity
securities that are registered by Heartland pursuant to Section 12 of the
Exchange Act:
|
Period
|
(a)
Total
Number of
Shares Purchased |
(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(2) |
|
10/01/09-10/31/09
|
-
|
-
|
-
|
$2,719,281
|
|
11/01/09-11/30/09
|
-
|
-
|
-
|
$2,852,760
|
|
12/01/09-12/31/09
|
11,464
|
$14.10
|
11,464
|
$3,367,816
|
|
Total:
|
11,464
|
$14.10
|
11,464
|
N/A
|
|
(1)
|
The
amounts listed represent solely shares surrendered in the cashless
exercise of stock options.
|
|
(2)
|
Although
Heartland’s board of directors authorized management to acquire and hold
up to 500,000 shares of common stock as treasury shares at any one time,
Heartland is prohibited from any repurchase, redemption, or acquisition of
its common stock, except for certain repurchases to the extent of
increases in shares outstanding because of issuances under existing
benefit plans, under the terms of the Securities Purchase Agreement
pursuant to which Heartland issued preferred stock to the Treasury under
the Capital Purchase Program.
|
There
were no unregistered sales of equity securities made during the fourth quarter
of Heartland’s fiscal year 2009.
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 2004. The table and graph were prepared at our request by Research Data
Group, Inc.
|
Cumulative
Total Return Performance
|
||||||
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
|
|
Heartland
Financial USA, Inc.
|
$100.00
|
$ 109.70
|
$ 147.95
|
$ 96.80
|
$
109.41
|
$ 78.47
|
|
NASDAQ
Composite
|
$100.00
|
$ 101.41
|
$ 114.05
|
$123.94
|
$
73.43
|
$
105.89
|
|
NASDAQ
Bank
|
$100.00
|
$
98.57
|
$ 111.92
|
$
89.33
|
$
71.39
|
$
60.47
|
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN*
ASSUMES
$100 INVESTED ON DECEMBER 31, 2004
*Total
return assumes reinvestment of dividends
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
|||||||||||||||||||||||
|
For
the years ended December 31, 2009, 2008, 2007, 2006, and
2005
|
|||||||||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
STATEMENT
OF INCOME DATA
|
|||||||||||||||||||||||
|
Interest
income
|
$
|
203,293
|
$
|
202,585
|
$
|
215,231
|
$
|
190,150
|
$
|
151,489
|
|||||||||||||
|
Interest
expense
|
70,530
|
86,899
|
105,891
|
85,409
|
58,916
|
||||||||||||||||||
|
Net
interest income
|
132,763
|
115,686
|
109,340
|
104,741
|
92,573
|
||||||||||||||||||
|
Provision
for loan and lease losses
|
39,377
|
29,319
|
10,073
|
3,883
|
6,533
|
||||||||||||||||||
|
Net
interest income after provision for loan and lease losses
|
93,386
|
86,367
|
99,267
|
100,858
|
86,040
|
||||||||||||||||||
|
Noninterest
income
|
52,704
|
30,196
|
31,710
|
29,938
|
25,457
|
||||||||||||||||||
|
Noninterest
expenses
|
132,520
|
102,239
|
97,606
|
94,943
|
80,285
|
||||||||||||||||||
|
Income
taxes
|
7,196
|
3,312
|
9,409
|
11,578
|
9,561
|
||||||||||||||||||
|
Income
from continuing operations
|
6,374
|
11,012
|
23,962
|
24,275
|
21,651
|
||||||||||||||||||
|
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
|
||||||||||||||||||
|
Income
taxes
|
-
|
-
|
1,085
|
931
|
589
|
||||||||||||||||||
|
Income
from discontinued operations
|
-
|
-
|
1,671
|
827
|
1,075
|
||||||||||||||||||
|
Net
income
|
6,374
|
11,012
|
25,633
|
25,102
|
22,726
|
||||||||||||||||||
|
Net
income attributable to noncontrolling interest, net of tax
|
188
|
280
|
-
|
-
|
-
|
||||||||||||||||||
|
Net
income attributable to Heartland
|
6,562
|
11,292
|
25,633
|
25,102
|
22,726
|
||||||||||||||||||
|
Preferred
dividends and discount
|
(5,344
|
)
|
(178
|
)
|
-
|
-
|
-
|
||||||||||||||||
|
Net
income available to common stockholders
|
$
|
1,218
|
$
|
11,114
|
$
|
25,633
|
$
|
25,102
|
$
|
22,726
|
|||||||||||||
|
PER
COMMON SHARE DATA
|
|||||||||||||||||||||||
|
Net
income – diluted
|
$
|
0.07
|
$
|
0.68
|
$
|
1.54
|
$
|
1.50
|
$
|
1.36
|
|||||||||||||
|
Income
from continuing operations – diluted1
|
0.07
|
0.68
|
1.44
|
1.45
|
1.30
|
||||||||||||||||||
|
Cash
dividends
|
0.40
|
0.40
|
0.37
|
0.36
|
0.33
|
||||||||||||||||||
|
Dividend
payout ratio
|
532.35
|
%
|
58.13
|
%
|
23.60
|
%
|
23.53
|
%
|
23.82
|
%
|
|||||||||||||
|
Book
value
|
$
|
14.38
|
$
|
14.13
|
$
|
14.04
|
$
|
12.65
|
$
|
11.46
|
|||||||||||||
|
Weighted
average shares outstanding-diluted
|
16,325,320
|
16,365,815
|
16,596,806
|
16,734,989
|
16,702,146
|
||||||||||||||||||
|
BALANCE
SHEET DATA
|
|||||||||||||||||||||||
|
Investments
and federal funds sold
|
$
|
1,175,217
|
$
|
903,705
|
$
|
689,949
|
$
|
617,119
|
$
|
567,002
|
|||||||||||||
|
Loans
available for sale
|
17,310
|
19,695
|
12,679
|
50,381
|
40,745
|
||||||||||||||||||
|
Total
loans and leases, net of unearned
|
2,331,142
|
2,405,001
|
2,280,167
|
2,147,845
|
1,953,066
|
||||||||||||||||||
|
Allowance
for loan and lease losses
|
41,848
|
35,651
|
32,993
|
29,981
|
27,791
|
||||||||||||||||||
|
Total
assets
|
4,012,991
|
3,630,268
|
3,264,126
|
3,058,242
|
2,818,332
|
||||||||||||||||||
|
Total
deposits
|
3,050,389
|
2,640,232
|
2,376,299
|
2,311,657
|
2,118,178
|
||||||||||||||||||
|
Long-term
obligations
|
451,429
|
437,833
|
263,607
|
224,523
|
220,871
|
||||||||||||||||||
|
Preferred
equity
|
77,224
|
75,578
|
-
|
-
|
-
|
||||||||||||||||||
|
Common
stockholders’ equity
|
235,057
|
230,025
|
230,600
|
209,711
|
187,812
|
||||||||||||||||||
|
EARNINGS
PERFORMANCE DATA
|
|||||||||||||||||||||||
|
Return
on average total assets
|
0.03
|
%
|
0.33
|
%
|
0.81
|
%
|
0.86
|
%
|
0.84
|
%
|
|||||||||||||
|
Return
on average stockholders’ equity
|
0.51
|
4.84
|
11.88
|
12.86
|
12.55
|
||||||||||||||||||
|
Net
interest margin ratio1,2
|
3.99
|
3.89
|
3.95
|
4.17
|
4.03
|
||||||||||||||||||
|
Earnings
to fixed charges:
|
|||||||||||||||||||||||
|
Excluding interest on
deposits
|
1.58
|
x
|
1.63
|
x
|
2.26
|
x
|
2.61
|
x
|
2.97
|
x
|
|||||||||||||
|
Including interest on
deposits
|
1.18
|
1.17
|
1.34
|
1.44
|
1.55
|
||||||||||||||||||
|
ASSET
QUALITY RATIOS
|
|||||||||||||||||||||||
|
Nonperforming
assets to total assets
|
2.71
|
%
|
2.51
|
%
|
1.06
|
%
|
0.34
|
%
|
0.60
|
%
|
|||||||||||||
|
Nonperforming
loans and leases to total loans and leases
|
3.35
|
3.24
|
1.40
|
0.39
|
0.77
|
||||||||||||||||||
|
Net
loan and lease charge-offs to average loans and leases
|
1.38
|
1.15
|
0.30
|
0.11
|
0.18
|
||||||||||||||||||
|
Allowance
for loan and lease losses to total loans and leases
|
1.80
|
1.48
|
1.45
|
1.40
|
1.42
|
||||||||||||||||||
|
Allowance
for loan and lease losses to nonperforming loans and
leases
|
53.56
|
45.73
|
103.66
|
356.11
|
185.37
|
||||||||||||||||||
|
CONSOLIDATED
CAPITAL RATIOS
|
|||||||||||||||||||||||
|
Average
equity to average assets
|
8.40
|
%
|
6.88
|
%
|
6.84
|
%
|
6.66
|
%
|
6.68
|
%
|
|||||||||||||
|
Average
common equity to average assets
|
6.32
|
6.80
|
6.84
|
6.66
|
6.68
|
||||||||||||||||||
|
Total
capital to risk-adjusted assets
|
15.20
|
14.92
|
12.48
|
11.18
|
10.61
|
||||||||||||||||||
|
Tier
1 leverage
|
13.53
|
10.68
|
8.01
|
7.74
|
7.66
|
||||||||||||||||||
|
*
|
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 Summit Bank & Trust, of which
Heartland was an 86% owner on December 31, 2009, an 82% owner on December 31,
2008 and an 81% owner on December 31, 2007; and Minnesota Bank & Trust, of
which Heartland was an 80% owner on December 31, 2009 and on December 31, 2008.
Heartland was a 90% owner of Arizona Bank & Trust on December 31,
2007.
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 the
current 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. 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 ten banking subsidiaries with a total of 61 banking
locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado
and Minnesota. 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 within existing market areas.
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 and fees, trust income, brokerage and insurance commissions and
gains on sale of loans, 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 the
provision for loan and lease losses.
Net
income for 2009, was $6.4 million, compared to $11.0 million recorded during
2008. Net income available to common stockholders was $1.2 million, or $0.07 per
diluted common share, for 2009, compared to $11.1 million, or $0.68 per diluted
common share, earned during 2008. Return on average common equity was 0.51% and
return on average assets was 0.03% for 2009, compared to 4.84% and 0.33%,
respectively, for 2008.
Included
in net income for 2009 was a $12.7 million goodwill impairment charge. This
non-cash charge, which had no impact on operations, liquidity or capital, was
due to the adverse economic conditions in Heartland’s Arizona and Montana
markets. Excluding the goodwill impairment charge, net income for 2009 would
have been $19.0 million, net income available to common stockholders would have
been $13.9 million, or $0.85 per diluted common share, return on average common
equity would have been 5.76% and return on average assets would have been
0.36%.
Earnings
for 2009 were positively affected by increased net interest income, which
increased $17.1 million or 15% over the prior year, primarily as a result of a
$360.7 million or 12% growth in average earning assets. Net interest margin,
expressed as a percentage of average earning assets, was 3.99% during 2009
compared to 3.89% during 2008. Also positively affecting net income for 2009,
was the $22.5 million or 75% increase in noninterest income, which was $52.7
million during 2009 compared to $30.2 million during 2008. The categories
experiencing the largest increases for the comparative period were securities
gains, which increased $7.1 million or 467%, loan servicing income, which
increased $5.1 million or 110%, and gains on sale of loans, which
increased $4.5 million or 278%. The growth in these areas was partially offset
by an increase in the loan loss provision, which was $39.4 million during 2009
compared to $29.3 million during 2008. Also negatively affecting earnings during
2009 was a $30.3 million or 30% increase in noninterest expense. Exclusive of
the $12.7 million goodwill impairment charge, noninterest expense totaled $119.8
million during 2009, an increase of $17.6 million or 17%. The noninterest
expense categories contributing to the increase during the periods under
comparison were employee salaries and benefits, which were $60.5 million during
2009 compared to $56.8 million during 2008, FDIC assessments, which were $6.6
million during 2009 compared to $1.4 million during 2008, and net losses on
repossessed assets, which were $10.8 million during 2009 compared to $827,000
during 2008.
On July
2, 2009, Heartland acquired all deposits of The Elizabeth State Bank in
Elizabeth, Illinois through its subsidiary Galena State Bank & Trust Co.
based in Galena, Illinois in a whole bank loss sharing transaction facilitated
by the FDIC. Bank branches previously owned and operated by The Elizabeth State
Bank reopened on Monday, July 6, 2009, as Galena State Bank & Trust Co.
branches. As of July 2, 2009, The Elizabeth State Bank had loans of $42.7
million and deposits of $49.3 million. Galena State Bank & Trust Co. paid a
premium of 1.0 percent to acquire all of the deposits of the failed bank. In
addition to assuming all of the deposits of the failed bank, Galena State Bank
& Trust Co. purchased $53.6 million of assets. The FDIC retained the
remaining assets for later disposition.
The
acquired loans and other real estate owned are covered by two loss share
agreements between the FDIC and Galena State Bank & Trust Co., which affords
Galena State Bank & Trust Co. significant loss protection. Under the loss
share agreements, the FDIC will cover 80 percent of the covered loan and other
real estate owned losses (referred to as covered assets) up to $10 million and
95 percent of losses in excess of that amount. The term for loss sharing on
non-residential real estate losses is five years with respect to losses and
eight years with respect to recoveries, while the term for loss sharing on
residential real estate loans is ten years with respect to losses and
recoveries. The reimbursable losses from the FDIC are based on the book value of
the relevant loan as determined by the FDIC at the date of the transaction. New
loans made after that date are not covered by the loss share
agreements.
Galena
State Bank & Trust Co. received a $2.5 million discount on the assets
acquired and paid a 1.0 percent deposit premium. The expected reimbursements
under the loss share agreements were recorded as an indemnification asset at the
estimated fair value of $4.4 million at the acquisition date. The estimated fair
value of the loans acquired was $37.8 million and the estimated fair value of
the deposits assumed was $49.5 million. In addition, a core deposit intangible
was recorded of $200 thousand. An acquisition gain totaling $1.3 million
resulted from the acquisition and is included as a component of noninterest
income on the statement of income. The amount of the gain was equal to the
amount by which the fair value of the liabilities assumed exceeded the fair
value of the assets purchased. During the fourth quarter of 2009, other
noninterest income included $1.1 million in payments due from the FDIC under
loss share agreements associated with The Elizabeth State Bank
acquisition.
Net
income for 2008, was $11.0 million, or $0.68 per diluted share, compared to
$25.6 million, or $1.54 per diluted share, recorded during 2007. Return on
average equity was 4.84% and return on average assets was 0.33% for 2008,
compared to 11.88% and 0.81%, respectively, for 2007. Income from continuing
operations during 2008 was $11.0 million, or $0.68 per diluted share, compared
to $24.0 million, or $1.44 per diluted share, earned during 2007.
The $13.0
million or 54% decrease in income from continuing operations resulted primarily
from increased provision for loan and lease losses, which was $29.3 million
during 2008 compared to $10.1 million during 2007, an increase of $19.2 million
or 191%. The increased loan loss provision in 2008 was due, in large part, to
the continued deterioration of economic conditions and reduced real estate
values, particularly in Heartland’s Western markets located in Arizona, Montana
and Colorado. The impact of this additional expense on earnings was partially
mitigated by increased net interest income, which increased $6.3 million or 6%
over the prior year, primarily as a result of a $215.3 million or 8% growth in
average earning assets and was partially offset as the amount of nonperforming
loans increased throughout the year. Nonperforming loans were $78.0 million or
3.24% of total loans and leases at December 31, 2008. Net interest margin,
expressed as a percentage of average earning assets, was 3.89% during 2008
compared to 3.95% during 2007.
For 2008,
noninterest income decreased $1.5 million or 5% from 2007, primarily as a result
of loss adjustments on the cash surrender value on bank-owned life insurance
totaling $1.2 million for 2008 compared to income of $1.8 million during 2007.
Included in the 2008 noninterest income was a $5.2 million gain on the sale of
Heartland’s merchant bankcard processing services to TransFirst LLC and a $4.6
million impairment loss recorded on Heartland’s investment in perpetual
preferred securities issued by Fannie Mae. For 2008, noninterest expense
increased $4.6 million or 5%. The largest component of noninterest expense,
salaries and employee benefits, grew by $2.2 million or 4%. Total full-time
equivalent employees were 1,028 at December 31, 2008, compared to 982 at
December 31, 2007. Occupancy expense increased during 2008, primarily as a
result of the opening of six new banking offices during 2007 and the 2008
opening of Heartland’s 10th bank subsidiary, Minnesota Bank & Trust, and one
new banking office at New Mexico Bank & Trust. The other category of
noninterest expense that increased significantly during 2008 was professional
fees, resulting primarily from additional legal fees related to collection
efforts on nonperforming loans and additional FDIC assessments as a majority of
the FDIC credits at Heartland’s bank subsidiaries were utilized during
2007.
At
December 31, 2009, total assets had increased $382.7 million or 11% since
year-end 2008. Securities represented 29% of total assets at December 31, 2009,
compared to 25% at December 31, 2008. Additional securities were purchased
during 2009 as deposit growth outpaced loan growth. Total loans and leases,
exclusive of those covered by the FDIC loss share agreements, were $2.33 billion
at December 31, 2009, compared to $2.41 billion at year-end 2008, a decrease of
$73.9 million or 3%. The only loan category to experience growth during 2009 was
agricultural and agricultural real estate loans, which also experienced a slight
decrease during the fourth quarter of 2009. Nearly all of this growth occurred
at Dubuque Bank and Trust Company. Total deposits grew to $3.05 billion at
December 31, 2009, an increase of $410.2 million or 16% since year-end 2008. The
Elizabeth State Bank acquisition accounted for $49.5 million of this growth.
This growth was weighted more heavily in Heartland’s Midwestern markets, which
were responsible for nearly 57% of the growth. Growth in demand and savings
deposits is attributable to an increased emphasis on non-maturity core deposit
products over higher-cost certificates of deposit. Additionally, commercial and
retail customers have continued to build cash reserves. Demand deposits
increased $77.6 million or 20% since year-end 2008 with $6.9 million coming from
The Elizabeth State Bank acquisition. Savings deposit balances experienced an
increase of $426.0 million or 38% since year-end 2008 with $21.0 million coming
from The Elizabeth State Bank acquisition. Time deposits, exclusive of brokered
deposits, experienced a decrease of $83.8 million or 8% since year-end 2008
despite the $21.6 million assumed in The Elizabeth State Bank acquisition.
Brokered time deposits decreased from $51.5 million or 2% of total deposits at
year-end 2008, to $41.8 million or 1% of total deposits at year-end 2009.
Deposit growth, exclusive of The Elizabeth State Bank acquisition, was $106.0
million during the fourth quarter of 2009, $67.4 million during the third
quarter of 2009, $38.8 million during the second quarter of 2009 and $148.5
million during the first quarter of 2009.
At
December 31, 2008, total assets had increased $366.1 million or 11% since
year-end 2007. Total loans and leases were $2.41 billion at December 31, 2008,
compared to $2.28 billion at year-end 2007, an increase of $124.8 million or 5%.
The loan categories contributing to this growth were the commercial,
agricultural and consumer loan categories which increased $85.5 million, $22.0
million and $34.5 million, respectively, since year-end 2007. Total deposits
grew to $2.64 billion at December 31, 2008, an increase of $263.9 million or 11%
since year-end 2007. Growth in deposits was weighted more heavily in Heartland’s
Western markets which were responsible for nearly 54% of the total growth.
Demand deposits experienced an increase of $1.6 million or nearly 1% since
year-end 2007. Savings deposit balances experienced an increase of $273.3
million or 32% since year-end 2007. Time deposits, exclusive of brokered
deposits, increased $6.6 million or 1% since year-end 2007. At December 31,
2008, brokered time deposits totaled $51.5 million or 2% of total deposits
compared to $69.0 million or 3% of total deposits at year-end 2007. A large
portion of the growth in savings deposits is attributable to the January 2008
introduction of a new retail interest-bearing checking account product, the
conversion of several retail repurchase agreement sweep accounts to a new money
market sweep product initially rolled out to business depositors during the
second quarter of 2008 and a promotional offer on a new money market savings
product offered late in the third quarter of 2008.
On
December 19, 2008, Heartland received $81.7 million through participation in the
CPP. Funds received by Heartland were allocated to debt reduction, capital
maintenance at the Bank Subsidiaries and short-term investments. Heartland
continues to honor the intent of the CPP by seeking high quality lending
opportunities and the potential acquisition of banks in its existing
markets.
NON-GAAP
FINANCIAL MEASURES
This
report contains financial information determined by methods other than in
accordance with U.S. generally accepted accounting principles, often referred to
as GAAP. Heartland has disclosed in this release certain non-GAAP financial
measures to provide meaningful supplemental information regarding its
operational performance and to enhance readers’ overall understanding of its
operating financial performance. Management believes that the impact of the
goodwill impairment charge to earnings in 2009 impairs the ability of the reader
to evaluate trends in results of operations without information that reports
results of operations without the charge. These non-GAAP financial measures are
presented for supplemental information purposes only and should not be
considered a substitute for financial information presented in accordance with
GAAP. The following schedule presents performance ratios in accordance with GAAP
and a reconciliation of the non-GAAP financial measurements to the GAAP
financial measurements. For the non-GAAP financial measurements, net income,
exclusive of goodwill impairment charge is defined as net income as presented in
accordance with GAAP less any goodwill impairment charge recorded during the
period.
|
For
the years ended
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
GAAP
net income
|
$
|
6,374
|
$
|
11,012
|
||||
|
Goodwill
impairment charge
|
12,659
|
-
|
||||||
|
GAAP
net income, exclusive of goodwill impairment charge
|
$
|
19,033
|
$
|
11,012
|
||||
|
Net
income available to common stockholders
|
$
|
1,218
|
$
|
11,114
|
||||
|
Goodwill
impairment charge
|
12,659
|
-
|
||||||
|
Net
income available to common stockholders, exclusive of goodwill impairment
charge
|
$
|
13,877
|
$
|
11,114
|
||||
|
GAAP
earnings per common share-diluted
|
$
|
0.07
|
$
|
0.68
|
||||
|
Earnings
per common share-diluted, exclusive of goodwill impairment
charge
|
$
|
0.85
|
$
|
0.68
|
||||
|
GAAP
return on average assets
|
0.03
|
%
|
0.33
|
%
|
||||
|
Return
on average assets, exclusive of goodwill impairment charge
|
0.36
|
%
|
0.33
|
%
|
||||
|
GAAP
return on average equity
|
0.51
|
%
|
4.84
|
%
|
||||
|
Return
on average equity, exclusive of goodwill impairment charge
|
5.76
|
%
|
4.84
|
%
|
||||
|
GAAP
return on average tangible equity
|
0.62
|
%
|
5.85
|
%
|
||||
|
Return
on average tangible equity, exclusive of goodwill impairment
charge
|
7.02
|
%
|
5.85
|
%
|
||||
|
GAAP
efficiency ratio
|
73.07
|
%
|
68.78
|
%
|
||||
|
Efficiency
ratio, exclusive of goodwill impairment charge
|
66.09
|
%
|
68.78
|
%
|
||||
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, income and
expenses. These estimates are based upon historical experience and on various
other assumptions that management believes are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The estimates and judgments that management believes
have the most effect on Heartland’s reported financial position and results of
operations are as follows:
Allowance
For Loan And Lease Losses
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 boards of directors of each subsidiary bank. Specific
factors considered by management in establishing the allowance included the
following:
|
*
|
Heartland
has experienced an increase in net charge-offs and nonperforming loans
during the past two years.
|
|
*
|
During
the last several years, Heartland has entered new geographical 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 loan losses, but management believes that the allowance for loan
and lease losses was adequate at December 31, 2009. 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 2009 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, 2009
|
$
|
41,848
|
|
|
Assuming
deterioration in credit quality:
|
|||
|
Addition
to provision
|
4,766
|
||
|
Resultant
allowance for loan and lease losses
|
$
|
46,614
|
|
|
Assuming
improvement in credit quality:
|
|||
|
Reduction
in provision
|
(2,050
|
)
|
|
|
Resultant
allowance for loan and lease losses
|
$
|
39,798
|
|
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.
Goodwill
And Other Intangibles
Heartland
records all assets and liabilities acquired in purchase acquisitions, including
goodwill and other intangibles, at fair value. Goodwill and indefinite-lived
assets are not amortized but are subject, at a minimum, to annual tests for
impairment. In certain situations, interim impairment tests may be required if
events occur or circumstances change that would more likely than not reduce the
fair value of a reporting segment below its carrying amount. Other intangible
assets are amortized over their estimated useful lives using straight-line and
accelerated methods and are subject to impairment if events or circumstances
indicate a possible inability to realize the carrying amount.
The
initial recognition of goodwill and other intangible assets and subsequent
impairment analysis require management to make subjective judgments concerning
estimates of how the acquired assets will perform in the future using valuation
methods including discounted cash flow analysis. Additionally, estimated cash
flows may extend beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors that may significantly
affect the estimates include, among others, competitive forces, customer
behaviors, changes in revenue growth trends, cost structures, technology,
changes in discount rates and market conditions. In determining the
reasonableness of cash flow estimates, Heartland reviews historical performance
of the underlying assets or similar assets in an effort to assess and validate
assumptions utilized in its estimates.
In
assessing the fair value of reporting units, Heartland may consider the stage of
the current business cycle and potential changes in market conditions in
estimating the timing and extent of future cash flows. Also, management often
utilizes other information to validate the reasonableness of its valuations
including public market comparables, and multiples of recent mergers and
acquisitions of similar businesses. Valuation multiples may be based on revenue,
price-to-earnings and tangible capital ratios of comparable companies and
business segments. These multiples may be adjusted to consider competitive
differences, including size, operating leverage and other factors. The carrying
amount of a reporting unit is determined based on the capital required to
support the reporting unit’s activities, including its tangible and intangible
assets. The determination of a reporting unit’s capital allocation requires
management judgment and considers many factors, including the regulatory capital
regulations and capital characteristics of comparable companies in relevant
industry sectors. In certain circumstances, management will engage a third-party
to independently validate its assessment of the fair value of its reporting
units.
Management
assesses the impairment of identifiable intangible assets, long lived assets and
related goodwill whenever events or changes in circumstances indicate the
carrying value may not be recoverable. Factors considered important, which could
trigger an impairment review include the following:
|
*
|
Significant
under-performance relative to expected historical or projected future
operating results.
|
|
*
|
Significant
changes in the manner of use of the acquired assets or the strategy for
the overall business.
|
|
*
|
Significant
negative industry or economic trends.
|
|
*
|
Significant
decline in Heartland’s stock price for a sustained period; and market
capitalization relative to net book value.
|
|
*
|
For
intangible assets and long-lived assets, if the carrying value of the
asset exceeds the undiscounted cash flows from such
asset.
|
Heartland
engaged a third-party valuation consultant to determine the fair value of
goodwill recorded in connection with two of its Bank Subsidiaries at the end of
2009. Based on this valuation, Heartland determined that the fair
value of the goodwill associated with these two subsidiaries was less than the
carrying amount previously used for this goodwill and that the goodwill was
impaired. Accordingly, Heartland recorded an impairment charge of
$12.7 million in the fourth quarter of 2009 to reduce the carrying value to fair
value.
Because
of current economic conditions, Heartland continues to monitor goodwill and
other intangible assets for impairment indicators throughout the
year.
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 3.99%
during 2009 compared to 3.89% during 2008 and 3.95% during 2007. Success at
growing net interest margin has been a direct result of continued price
discipline. Management is committed to maintaining margin near the 4.00% level
and will not compete for loans or deposits strictly for the sake of growth.
Affecting the net interest margin throughout 2009, 2008 and most of 2007 was the
impact of foregone interest on Heartland’s nonperforming loans, which had
balances of $78.1 million or 3.35% of total loans and leases at December 31,
2009, $78.0 million or 3.24% of total loans and leases at December 31, 2008, and
$31.8 million or 1.40% of total loans and leases at December 31,
2007.
Net
interest income on a tax-equivalent basis increased $17.7 million or 15% during
2009 and $6.5 million or 6% during 2008. The growth in average earning assets,
particularly in relation to the growth in interest bearing liabilities, was the
most significant contributor to the increase in net interest income in 2009, as
average interest earning assets increased by $360.7 million or 12%, while
interest bearing liabilities increased by $283.7 million or 10%. More
rapidly declining rates paid on interest bearing liabilities also contributed to
the increased net interest income in 2009, as the rate paid on average interest
bearing liabilities decreased by 84 basis points, compared to a 67 basis point
decrease in the rate earned in average earning assets. Growth in average earning
assets and declining rates also positively contributed to increased net interest
income in 2008, with the decline in interest rates paid on interest bearing
liabilities being a more significant contributor. During 2008, average interest
earning assets increased by $215.3 million or 8% and average interest bearing
liabilities increased by $206.7 million or 8%. The rate paid on average interest
bearing liabilities decreased by 101 basis points during 2008, compared to a 94
basis point decrease in the rate earned in average earning assets during 2008.
Fluctuations in net interest income between years is also related to the
composition of average earning assets and interest bearing liabilities. The
percentage of average loans, which are typically the highest yielding asset, to
total average assets was 62% during 2009, 68% during 2008 and 71% during 2007.
The percentage of average time deposits, which are typically the highest cost
deposits, to total average deposits was 40% during 2009, 47% during 2008 and 49%
during 2007.
On a
tax-equivalent basis, interest income increased $1.3 million or 1% to $207.8
million in 2009 from $206.5 million in 2008 but decreased $12.4 million or 6% in
2008 from $218.9 million during 2007. The increase in net interest income
attributable to the growth in average earnings assets was almost equally offset
by the impact of a decrease in the average interest rate earned on these assets
of 67 basis points during 2009 as compared to 2008. Nearly half of Heartland’s
commercial and agricultural loan portfolios consist of 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. The national prime interest rate remained
unchanged at 3.25% throughout 2009 whereas throughout 2008, the national prime
interest rate decreased from a high of 7.25% on January 1 to a low of 3.25% at
December 31. A portion of the negative impact decreasing interest rates would
have on Heartland’s interest income was mitigated by interest rate floors that
have been in effect on a large portion of Heartland’s floating rate loans.
Additionally, Heartland had two $50.0 million derivative transactions on the
loan portfolio that were at their floor interest rates, one of which matured on
April 4, 2009.
Interest
expense for 2009 was $70.5 million , a decrease of $16.4 million or 19% from
$86.9 million during 2008, which in turn represented a decrease of $19.0 million
or 18% from $105.9 million in 2007. Interest rates paid on Heartland’s deposits
and borrowings decreased significantly during 2009 and 2008. Despite increases
in average interest bearing liabilities of 10% in 2009 and 8% in 2008, the
average interest rates paid on Heartland’s deposits and borrowings declined 84
basis points in 2009 and 67 basis points in 2008. Approximately 35% of
Heartland’s certificate of deposit accounts, which carry a weighted average rate
of 1.91%, will mature within the next six months.
Heartland
attempts to manage its balance sheet to minimize the effect that a change in
interest rates has on its net interest margin. Heartland plans to continue to
work toward improving both its earning asset and funding mix through targeted
growth strategies that emphasize conservative pricing of deposits and careful
underwriting of loans, which management believes will result in additional net
interest margin. Heartland’s net interest income simulations reflect a
well-balanced and manageable interest rate posture. Management supports a
pricing discipline in which the focus is less on price and more on the unique
value provided to business and retail clients. Item 7A of this Form 10-K
contains additional information about the results of Heartland’s most recent net
interest income simulations. Note 13 to the consolidated financial statements
contains a detailed discussion of the derivative instruments Heartland has
utilized to manage its interest rate risk.
The table
below sets forth certain information relating to Heartland’s average
consolidated balance sheets and reflects the yield on average earning assets and
the cost of average interest bearing liabilities for the 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. Interest
income is measured on a tax equivalent basis using a 35% tax rate.
|
ANALYSIS
OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
1
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
For
the years ended Decmeber 31,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
||||||||||||||||||||||
|
EARNING
ASSETS
|
||||||||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||
|
Taxable
|
$
|
873,276
|
$
|
39,782
|
4.56
|
%
|
$
|
616,525
|
$
|
31,232
|
5.07
|
%
|
$
|
477,338
|
$
|
21,937
|
4.60
|
%
|
||||||||||||
|
Nontaxable
1
|
186,716
|
12,307
|
6.59
|
151,828
|
9,813
|
6.46
|
136,552
|
9,077
|
6.65
|
|||||||||||||||||||||
|
Total
securities
|
1,059,992
|
52,089
|
4.91
|
768,353
|
41,045
|
5.34
|
613,890
|
31,014
|
5.05
|
|||||||||||||||||||||
|
Interest
bearing deposits
|
2,943
|
27
|
0.92
|
706
|
18
|
2.55
|
700
|
33
|
4.71
|
|||||||||||||||||||||
|
Federal
funds sold
|
835
|
2
|
0.24
|
15,494
|
299
|
1.93
|
7,295
|
387
|
5.31
|
|||||||||||||||||||||
|
Loans
and leases:
|
||||||||||||||||||||||||||||||
|
Commercial
and commercial real estate 1
|
1,696,794
|
101,854
|
6.00
|
1,645,264
|
108,651
|
6.60
|
1,597,247
|
125,916
|
7.88
|
|||||||||||||||||||||
|
Residential
mortgage
|
219,303
|
12,596
|
5.74
|
223,334
|
14,169
|
6.34
|
240,932
|
16,303
|
6.77
|
|||||||||||||||||||||
|
Agricultural
and agricultural real estate 1
|
259,700
|
16,633
|
6.40
|
238,328
|
16,933
|
7.10
|
225,471
|
18,209
|
8.08
|
|||||||||||||||||||||
|
Consumer
|
232,475
|
20,325
|
8.74
|
212,430
|
20,004
|
9.42
|
196,432
|
20,655
|
10.52
|
|||||||||||||||||||||
|
Direct
financing leases, net
|
3,927
|
213
|
5.42
|
7,489
|
445
|
5.94
|
11,939
|
714
|
5.98
|
|||||||||||||||||||||
|
Fees
on loans
|
-
|
4,085
|
-
|
-
|
4,914
|
-
|
-
|
5,696
|
-
|
|||||||||||||||||||||
|
Less:
allowance for loan and lease losses
|
(37,964
|
)
|
-
|
-
|
(34,048
|
)
|
-
|
-
|
(31,870
|
)
|
-
|
-
|
||||||||||||||||||
|
Net
loans and leases
|
2,374,235
|
155,706
|
6.56
|
2,292,797
|
165,116
|
7.20
|
2,240,151
|
187,493
|
8.37
|
|||||||||||||||||||||
|
Total
earning assets
|
3,438,005
|
$
|
207,824
|
6.04
|
%
|
3,077,350
|
$
|
206,478
|
6.71
|
%
|
2,862,036
|
$
|
218,927
|
7.65
|
%
|
|||||||||||||||
|
NONEARNING
ASSETS
|
||||||||||||||||||||||||||||||
|
Total
nonearning assets
|
374,738
|
301,580
|
292,788
|
|||||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
3,812,743
|
$
|
3,378,930
|
$
|
3,154,824
|
||||||||||||||||||||||||
|
INTEREST
BEARING LIABILITIES
|
||||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||||||||
|
Savings
|
$
|
1,282,212
|
$
|
18,407
|
1.44
|
%
|
$
|
938,701
|
$
|
18,176
|
1.94
|
%
|
$
|
831,675
|
$
|
22,404
|
2.69
|
%
|
||||||||||||
|
Time,
$100,000 and over
|
373,159
|
11,202
|
3.00
|
336,926
|
13,422
|
3.98
|
291,073
|
14,307
|
4.92
|
|||||||||||||||||||||
|
Other
time deposits
|
754,814
|
23,135
|
3.06
|
807,617
|
32,506
|
4.02
|
876,146
|
41,154
|
4.70
|
|||||||||||||||||||||
|
Short-term
borrowings
|
143,239
|
733
|
0.51
|
233,856
|
4,571
|
1.95
|
287,428
|
13,293
|
4.62
|
|||||||||||||||||||||
|
Other
borrowings
|
464,816
|
17,053
|
3.67
|
417,462
|
18,224
|
4.37
|
241,517
|
14,733
|
6.10
|
|||||||||||||||||||||
|
Total
interest bearing liabilities
|
3,018,240
|
70,530
|
2.34
|
2,734,562
|
86,899
|
3.18
|
2,527,839
|
105,891
|
4.19
|
|||||||||||||||||||||
|
NONINTEREST
BEARING LIABILITIES
|
||||||||||||||||||||||||||||||
|
Noninterest
bearing deposits
|
437,468
|
372,496
|
362,109
|
|||||||||||||||||||||||||||
|
Accrued
interest and other liabilities
|
36,700
|
39,351
|
49,136
|
|||||||||||||||||||||||||||
|
Total
noninterest bearing liabilities
|
474,168
|
411,847
|
411,245
|
|||||||||||||||||||||||||||
|
STOCKHOLDERS’
EQUITY
|
320,335
|
232,521
|
215,740
|
|||||||||||||||||||||||||||
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
$
|
3,812,743
|
$
|
3,378,930
|
$
|
3,154,824
|
||||||||||||||||||||||||
|
Net
interest income
1
|
$
|
137,294
|
$
|
119,579
|
$
|
113,036
|
||||||||||||||||||||||||
|
Net
interest spread
|
3.70
|
%
|
3.53
|
%
|
3.46
|
%
|
||||||||||||||||||||||||
|
Net
interest income to total earning assets
1
|
3.99
|
%
|
3.89
|
%
|
3.95
|
%
|
||||||||||||||||||||||||
|
Interest
bearing liabilities to earning assets
|
87.79
|
%
|
88.86
|
%
|
88.32
|
%
|
||||||||||||||||||||||||
|
1 Tax
equivalent basis is calculated using an effective tax rate of
35%.
|
||||||||||||||||||||||||||||||
The
following table presents the dollar amount of changes in interest income and
interest expense for the major components of interest earning assets and
interest bearing liabilities. It quantifies the changes in interest income and
interest expense related to changes in the average outstanding balances (volume)
and those changes caused by fluctuating interest rates. For each category of
interest earning assets and interest bearing liabilities, information is
provided on changes attributable to (i) changes in volume, calculated by
multiplying the difference between the average balance for the current period
and the average balance for the prior period by the rate for the previous
period, and (ii) changes in rate, calculated by subtracting the current year
average balance multiplied by the prior year rate from the current year average
balance multiplied by the current year rate.
|
ANALYSIS
OF CHANGES IN NET INTEREST INCOME
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
For
the years ended December 31,
|
||||||||||||||||||||||||
|
2009
Compared to 2008
|
2008
Compared to 2007
|
|||||||||||||||||||||||
|
Change
Due to
|
Change
Due to
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
|
EARNING
ASSETS / INTEREST INCOME
|
||||||||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||
|
Taxable
|
$
|
13,007
|
$
|
(4,457
|
)
|
$
|
8,550
|
$
|
6,397
|
$
|
2,898
|
$
|
9,295
|
|||||||||||
|
Tax-exempt
|
2,255
|
239
|
2,494
|
1,015
|
(279
|
)
|
736
|
|||||||||||||||||
|
Interest
bearing deposits
|
57
|
(48
|
)
|
9
|
-
|
(15
|
)
|
(15
|
)
|
|||||||||||||||
|
Federal
funds sold
|
(283
|
)
|
(14
|
)
|
(297
|
)
|
435
|
(523
|
)
|
(88
|
)
|
|||||||||||||
|
Loans
and leases
|
5,865
|
(15,275
|
)
|
(9,410
|
)
|
4,406
|
(26,783
|
)
|
(22,377
|
)
|
||||||||||||||
|
TOTAL
EARNING ASSETS
|
20,901
|
(19,555
|
)
|
1,346
|
12,253
|
(24,702
|
)
|
(12,449
|
)
|
|||||||||||||||
|
LIABILITIES
/ INTEREST EXPENSE
|
||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||
|
Savings
|
6,651
|
(6,420
|
)
|
231
|
2,883
|
(7,111
|
)
|
(4,228
|
)
|
|||||||||||||||
|
Time,
$100,000 and over
|
1,443
|
(3,663
|
)
|
(2,220
|
)
|
2,254
|
(3,139
|
)
|
(885
|
)
|
||||||||||||||
|
Other
time deposits
|
(2,125
|
)
|
(7,246
|
)
|
(9,371
|
)
|
(3,219
|
)
|
(5,429
|
)
|
(8,648
|
)
|
||||||||||||
|
Short-term
borrowings
|
(1,771
|
)
|
(2,067
|
)
|
(3,838
|
)
|
(2,478
|
)
|
(6,244
|
)
|
(8,722
|
)
|
||||||||||||
|
Other
borrowings
|
2,067
|
(3,238
|
)
|
(1,171
|
)
|
10,733
|
(7,242
|
)
|
3,491
|
|||||||||||||||
|
TOTAL
INTEREST BEARING LIABILITIES
|
6,265
|
(22,634
|
)
|
(16,369
|
)
|
10,173
|
(29,165
|
)
|
(18,992
|
)
|
||||||||||||||
|
NET
INTEREST INCOME
|
$
|
14,636
|
$
|
3,079
|
$
|
17,715
|
$
|
2,080
|
$
|
4,463
|
$
|
6,543
|
||||||||||||
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
allowance for loan and lease losses at December 31, 2009, was 1.80% of loans and
leases and 53.56% of nonperforming loans, compared to 1.48% of loans and leases
and 45.73% of nonperforming loans at December 31, 2008. The total provision for
loan losses for 2009 was $39.4 million compared to $29.3 million for 2008.
Additions to the allowance for loan and lease losses during 2009 were driven by
a variety of factors including deterioration of economic conditions, downgrades
in internal risk ratings, reductions in appraised values and higher levels of
charge-offs, primarily in Heartland’s Western markets of Arizona, Montana and
Colorado.
The
allowance for loan and lease losses at December 31, 2008, was 1.48% of loans and
leases and 45.73% of nonperforming loans, compared to 1.45% of loans and leases
and 103.66% of nonperforming loans at December 31, 2007. The total provision for
loan losses for 2008 was $29.3 million compared to $10.1 million for 2007.
Additions to the allowance for loan and lease losses during 2008 were driven by
a variety of factors including deterioration of economic conditions, downgrades
in internal risk ratings, reductions in appraised values, higher levels of
charge-offs and an increase in nonperforming loans, primarily in Heartland’s
Western markets of Arizona, Montana and Colorado.
Noninterest
Income
The table
below shows Heartland’s noninterest income for the years indicated:
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2009
|
2008
|
2007
|
2009/
2008
|
2008/
2007
|
||||||||||||||
|
Service
charges and fees, net
|
$
|
12,541
|
$
|
11,654
|
$
|
11,108
|
8
|
%
|
5
|
%
|
||||||||
|
Loan
servicing income
|
9,666
|
4,600
|
4,376
|
110
|
5
|
|||||||||||||
|
Trust
fees
|
7,773
|
7,906
|
8,053
|
(2
|
)
|
(2
|
)
|
|||||||||||
|
Brokerage
and insurance commissions
|
3,117
|
3,719
|
3,097
|
(16
|
)
|
20
|
||||||||||||
|
Securities
gains, net
|
8,648
|
1,525
|
341
|
467
|
347
|
|||||||||||||
|
Gain
(loss) on trading account securities
|
211
|
(998
|
)
|
(105
|
)
|
121
|
(850
|
)
|
||||||||||
|
Impairment
loss on equity securities
|
(40
|
)
|
(5,151
|
)
|
-
|
99
|
-
|
|||||||||||
|
Gains
on sale of loans
|
6,084
|
1,610
|
3,578
|
278
|
(55
|
)
|
||||||||||||
|
Income
(loss) on bank-owned life insurance
|
1,002
|
(1,184
|
)
|
1,777
|
185
|
(167
|
)
|
|||||||||||
|
Gain
on acquisition
|
1,296
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Gain
on sale of merchant services
|
-
|
5,200
|
-
|
-
|
-
|
|||||||||||||
|
Other
noninterest income (loss)
|
2,406
|
1,315
|
(515
|
)
|
83
|
355
|
||||||||||||
|
Total
noninterest income
|
$
|
52,704
|
$
|
30,196
|
$
|
31,710
|
75
|
%
|
(5
|
)%
|
||||||||
Noninterest
income increased $22.5 million or 75% during 2009. The categories experiencing
the largest increases were loan servicing income, securities gains and gains on
sale of loans. Included in other noninterest income during 2009 was $1.1 million
in payments due from the FDIC under loss share agreements associated with The
Elizabeth State Bank acquisition. Noninterest income decreased $1.5 million or
5% during 2008. Included in the 2008 noninterest income was a $5.2 million gain
on the sale of Heartland’s merchant bankcard processing services to TransFirst
LLC and a $4.6 million impairment loss recorded on Heartland’s investment in
perpetual preferred securities issued by Fannie Mae. Noninterest income during
2008 was positively affected by increased service charges and fees, loan
servicing income, brokerage and insurance commissions and securities gains.
Negatively impacting noninterest income for 2008 were increased losses on
trading account securities, reduced gains on sale of loans and a reduction in
the cash surrender value on bank-owned life insurance.
During
2009, service charges and fees increased $887,000 or 8%. Overdraft fees recorded
during 2009 were $5.9 million compared to $6.0 million during 2008, a decrease
of $102,000 or 2%. Interchange revenue from activity on bank debit cards, along
with surcharges on ATM activity, resulted in deposit service charges and fees of
$3.6 million during 2009 compared to $2.9 million during 2008, an increase of
$687,000 or 24%. During 2008, service charges and fees increased $546,000 or 5%.
Overdraft fees recorded during 2008 were $6.0 million compared to $5.5 million
during 2007, an increase of $500,000 or 9%. Growth in the number of checking
accounts resulted in the increased overdraft fees. Interchange revenue from
activity on bank debit cards, along with surcharges on ATM activity, resulted in
deposit service charges and fees of $2.9 million during 2008 compared to $2.0
million during 2007, an increase of $900,000 or 45%. Included in service charges
and fees are the fees generated from the issuance of bank credit cards. During
the fourth quarter of 2007, Heartland sold its credit card portfolio. As a
result of this sale, revenue resulting from activity on these credit cards
decreased by $578,000 or 81% during 2008 compared to 2007.
Loan
servicing income increased $5.1 million or 110% during 2009 and $224,000 or 5%
during 2008. These increases were largely due to an increase in service fees
collected on the mortgage loans Heartland sold into the secondary market while
retaining servicing. The portfolio of mortgage loans serviced for others by
Heartland totaled $1.15 billion at December 31, 2009, compared to $712.9 million
at December 31, 2008, and $636.0 million at December 31, 2007, generating
mortgage loan servicing fees of $2.4 million for 2009, $1.7 million for 2008 and
$1.6 million for 2007. Mortgage servicing rights income totaled $8.6 million
during 2009 compared to $2.5 million during 2008 and $1.5 million during 2007.
Amortization of mortgage servicing rights was $3.6 million in 2009 compared to
$1.8 million during 2008 and $1.2 million during 2007. Note 9 to the financial
statements contains a discussion about Heartland’s mortgage servicing rights. As
fixed rate loan originations began to moderate late in 2009, we expect the level
of increases in loan servicing income to be at a more moderate pace in
2010.
Trust
fees decreased $133,000 or 2% during 2009 and $147,000 or 2% during 2008. A
large portion of trust fees are based upon the market value of the trust assets
under management, which was $1.70 billion at year-end 2009, $1.40 billion at
year-end 2008 and $1.68 billion at year-end 2007. Given the increase in the
market value of trust assets at year-end 2009 and assuming those values continue
to grow as market conditions improve, management expects trust fees to increase
during 2010.
Brokerage
and insurance commissions decreased $602,000 or 16% during 2009 compared to
an increase of $622,000 or 20% during 2008. The decrease during 2009
occurred in the brokerage area as clients were uncertain about the condition of
the financial markets and unwilling to make investments that could result in
further losses in their portfolios. The decline at Heartland was consistent with
the national average decrease of 16-20% other providers experienced during 2009.
The increase during 2008 was primarily attributable to active promotion of
brokerage and investment services at many of Heartland’s subsidiary banks and
the receipt by Dubuque Bank and Trust Company’s insurance agency of insurance
contingencies that exceeded the prior year’s amounts by nearly
$160,000.
Securities
gains totaled $8.6 million during 2009, $1.5 million during 2008 and $341,000
during 2007. Securities designed to outperform in a declining rate environment
were sold during 2009 and replaced with securities that are expected to
outperform as rates rise. As the yield curve steepened and the spreads on
mortgage-backed securities in comparison to government agency securities widened
during the first six months of 2008, management elected to sell a portion of its
agency securities at gains and replace them with mortgage-backed securities that
provided enhanced yields.
The
equity securities trading portfolio recorded gains of $211,000 during 2009
compared to losses of $998,000 during 2008 and losses of $105,000 during 2007.
The gains and losses recorded on this portfolio were generally reflective of the
overall activity in the stock market. The losses recorded during 2008 included
$270,000 recorded for further declines in the market value of Fannie Mae
preferred securities that had been transferred into the trading portfolio in
September 2008.
Impairment
losses on securities deemed to be other than temporary totaled $40,000 during
2009 and $5.2 million during 2008. Nearly all of the loss in 2008 was
attributable to Heartland’s investment in perpetual preferred securities issued
by Fannie Mae, which was included in securities available for sale at a cost of
$5.1 million. At September 30, 2008, these securities were written down to their
trading value of $436,000 and transferred to the trading portfolio. Heartland
does not hold any common or any other equity securities issued by Fannie Mae or
Freddie Mac.
Gains on
sale of loans totaled $6.1 million during 2009, $1.6 million during 2008 and
$3.6 million during 2007. 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 15- and 30--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 and retain servicing on these loans. Customer demand for these types of
loans had decreased during 2008 as economic conditions softened. As long-term
mortgage loan rates fell below 5.00 percent during the first half of 2009,
refinancing activity significantly increased on 15- and 30-year, fixed-rate
mortgage loans. During 2009, Heartland banks originated $825.2 million in new
and refinanced mortgage loans to 4,560 borrowers compared to $328.4 million to
1,830 borrowers in 2008. Heartland normally elects to sell these types of loans
into the secondary market and retains the servicing on these loans. If market
rates on fixed rate mortgage loans increase during 2010, we would expect less
refinance activity and therefore lower gains on sale of loans, unless there is a
significant resurgence in the housing industry.
The
change in cash surrender value on bank-owned life insurance resulted in income
of $1.0 million during 2009 compared to a loss of $1.2 million during 2008 and
income of $1.8 million during 2007. A large portion of Heartland’s bank-owned
life insurance is held in a separate account product that experienced
significant market value declines during the last half of 2008.
Other
noninterest income increased $1.1 million or 83% during 2009 compared to 2008.
Included in the 2009 noninterest income was $1.1 million in payments due from
the FDIC under loss share agreements associated with The Elizabeth State Bank
acquisition. During 2008, noninterest income increased $1.8 million or 355% over
2007. From time to time, Dubuque Bank and Trust Company has acquired a 99.9%
ownership interest in 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 other noninterest income category in the amount of $466,000
during 2008 and $1.2 million during 2007. Excluding this amortization, other
noninterest income increased $88,000 or 5% during 2008.
Noninterest
Expense
The table
below shows Heartland’s noninterest expense for the years
indicated:
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2009
|
2008
|
2007
|
2009/
2008
|
2008/
2007
|
||||||||||||||
|
Salaries
and employee benefits
|
$
|
60,465
|
$
|
56,752
|
$
|
54,568
|
7
|
%
|
4
|
%
|
||||||||
|
Occupancy
|
8,992
|
9,019
|
7,902
|
-
|
14
|
|||||||||||||
|
Furniture
and equipment
|
6,574
|
6,968
|
6,972
|
(6
|
)
|
-
|
||||||||||||
|
Professional
fees
|
9,127
|
9,876
|
8,793
|
(8
|
)
|
12
|
||||||||||||
|
FDIC
insurance assessments
|
6,578
|
1,446
|
762
|
355
|
90
|
|||||||||||||
|
Advertising
|
3,337
|
3,762
|
3,642
|
(11
|
)
|
3
|
||||||||||||
|
Goodwill
impairment charge
|
12,659
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Intangible
assets amortization
|
866
|
943
|
892
|
(8
|
)
|
6
|
||||||||||||
|
Net
loss on repossessed assets
|
10,847
|
827
|
1,004
|
1212
|
(18
|
)
|
||||||||||||
|
Other
noninterest expenses
|
13,075
|
12,646
|
13,071
|
3
|
(3
|
)
|
||||||||||||
|
Total
noninterest expense
|
$
|
132,520
|
$
|
102,239
|
$
|
97,606
|
30%
|
5%
|
||||||||||
|
Efficiency
ratio1
|
73.07
|
%
|
68.78
|
%
|
67.59
|
%
|
||||||||||||
|
1 Noninterest
expense divided by the sum of net interest income and noninterest income
less security gains.
|
||||||||||||||||||
For 2009,
noninterest expense increased $30.3 million or 30% when compared to 2008.
Exclusive of the $12.7 million goodwill impairment charge, noninterest expense
increased $17.6 million or 17%. The noninterest expense categories contributing
to the increase during 2009 were employee salaries and benefits, FDIC
assessments and net losses on repossessed assets. For 2008, total noninterest
expense increased $4.6 million or 5% when compared to 2007. The noninterest
expense categories experiencing the largest increases during 2008 were salaries
and employee benefits, occupancy and outside services.
The
largest component of noninterest expense, salaries and employee benefits, grew
by $3.7 million or 7% during 2009 and $2.2 million or 4% during 2008. Total
average full-time equivalent employees were 1,024 during 2009 compared to 1,006
during 2008 and 984 during 2007. The increase in 2009 was primarily due to the
opening of Minnesota Bank & Trust in April 2008 and additional staffing at
New Mexico Bank & Trust to grow its customer base, at Heartland’s operations
center to provide support services to the bank subsidiaries and at Galena State
Bank & Trust Co. as a result of The Elizabeth State Bank acquisition. The
smaller increase during 2008 was primarily related to a slowdown in expansion
efforts. All three years included lower employer incentive payouts and reduced
employer contributions to Heartland’s retirement plan as earnings fell short of
expectations.
Occupancy
expense totaled $9.0 million in 2009 and 2008 compared to $7.9 million in 2007.
The increase in 2008 was primarily a result of the opening of six new banking
offices during 2007 and the 2008 opening of Heartland’s 10th bank subsidiary,
Minnesota Bank & Trust, and one new banking office at New Mexico Bank &
Trust. 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. Summit Bank & Trust 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 sixth branch office in Gilbert, Arizona in October 2007. Even though branch
expansion efforts adversely affect short-term profitability, management believed
these investments offered great potential for Heartland’s future profitability.
Of Heartland’s 61 banking offices, 16 have been opened within the past five
years. Of these, seven have been open three years or less. Management
believes that it generally takes at least three years for new branch offices to
become profitable. Therefore, Heartland has roughly ten percent of its
distribution network yet to make a meaningful contribution to earnings. During
2009, deposits in offices open five years or less increased from $255.7 million
to $406.4 million or 60%.
Professional
fees decreased $749,000 or 8% during 2009 compared to an increase of $1.1
million or 12% during 2008. The increase in 2008 resulted primarily from
additional legal fees related to collection efforts on nonperforming
loans.
FDIC
assessments totaled $6.6 million during 2009 compared to $1.4 million during
2008 and $762,000 during 2007, an increase of $5.1 million or 355% for 2009 and
$684,000 or 90% in 2008. The significant increase in 2009 was primarily
attributable to the FDIC assessment rate change from a range of 10 to 14 basis
points to a range of 12 to 16 basis points beginning in the second quarter. Also
included in the FDIC assessments recorded during 2009 was $1.7 million for the
emergency special assessment. Credits applied towards FDIC assessments totaled
$13,000 during 2009, $256,000 during 2008 and $868,000 during 2007.
Heartland’s
goodwill, which is related to acquisitions in prior years, is evaluated for
impairment on an annual basis or when events or circumstances suggest impairment
may have occurred. Due to the adverse economic conditions in Heartland’s Arizona
and Montana markets, management engaged an independent third party valuation
expert to value the goodwill of those banks. As a result of these valuations in
2009, Heartland recorded a goodwill impairment charge of $5.2 million at Arizona
Bank & Trust and $7.5 million at Rocky Mountain Bank. After the impairment
charge was recorded, Heartland’s goodwill totaled $27.5 million or less than 1%
of total assets at December 31, 2009.
Net
losses on repossessed assets totaled $10.8 million during 2009 compared to
$827,000 during 2008 and $1.0 million during 2007. The 2009 net loss on
repossessed assets included $8.1 million in valuation adjustments due to
decreasing real estate values, particularly in our Western markets.
Other
noninterest expenses increased $429,000 or 3% during 2009 and decreased $425,000
or 3% during 2008. Included in 2007 other noninterest expenses was $339,000 of
remaining unamortized issuance costs expensed due to the redemption of $13.0
million of floating rate trust preferred securities. 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
Excluding
the non-deductible goodwill impairment charge, Heartland’s effective tax rate
was 27.2% for 2009 compared to 22.7% for 2008. Heartland’s effective tax rate
during 2009 did not include any federal rehabilitation tax credits, whereas
Heartland’s effective tax rate during 2008 included $570,000 in federal
rehabilitation tax credits associated with Dubuque Bank and Trust Company’s
ownership interests in 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 exclusive of
the non-deductible goodwill impairment charge, was 32.1% during 2009 compared to
50.5% during 2008. The tax-equivalent adjustment for this tax-exempt interest
income was $4.5 million during 2009 compared to $3.9 million during
2008.
Income
tax expense from continuing operations during 2008 decreased $6.1 million or 65%
when compared to 2007, resulting in an effective tax rate of 22.7% for 2008
compared to 28.2% for 2007. Heartland’s effective tax rate is affected by the
level of tax-exempt interest income which, as a percentage of pre-tax income,
was 50.5% during 2008 and 19.0% during 2007. The tax-equivalent adjustment for
this tax-exempt interest income was $3.9 million during 2008 compared to $3.7
million during 2007. Heartland’s effective tax rate during 2007 included a tax
benefit totaling $1.4 million in federal rehabilitation tax credits associated
with Dubuque Bank and Trust Company’s 99.9% ownership interest in two limited
liability companies that own certified historic structures.
FINANCIAL
CONDITION
At
December 31, 2009, total assets had increased $382.7 million or 11% since
year-end 2008. Securities represented 29% of total assets at December 31, 2009,
compared to 25% at December 31, 2008. Additional securities were purchased
during 2009 as deposit growth outpaced loan growth.
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
|
|||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||
|
As
of December 31,
|
|||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||
|
Loans
and leases held to maturity:
|
|||||||||||||||||||||||||||||||||||
|
Commercial
and commercial real estate
|
$
|
1,670,108
|
71.50
|
%
|
$
|
1,718,071
|
71.30
|
%
|
$
|
1,632,597
|
71.48
|
%
|
$
|
1,483,738
|
68.95
|
%
|
$
|
1,304,080
|
66.65
|
%
|
|||||||||||||||
|
Residential
mortgage
|
175,059
|
7.49
|
203,921
|
8.46
|
217,044
|
9.50
|
225,343
|
10.47
|
219,671
|
11.23
|
|||||||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
256,780
|
10.99
|
247,664
|
10.28
|
225,663
|
9.88
|
233,748
|
10.86
|
230,357
|
11.77
|
|||||||||||||||||||||||||
|
Consumer
|
231,709
|
9.92
|
234,061
|
9.72
|
199,518
|
8.74
|
194,652
|
9.05
|
181,019
|
9.25
|
|||||||||||||||||||||||||
|
Lease
financing, net
|
2,326
|
0.10
|
5,829
|
0.24
|
9,158
|
0.40
|
14,359
|
0.67
|
21,586
|
1.10
|
|||||||||||||||||||||||||
|
Gross
loans and leases held to maturity
|
2,335,982
|
100.00
|
%
|
2,409,546
|
100.00
|
%
|
2,283,980
|
100.00
|
%
|
2,151,840
|
100.00
|
%
|
1,956,713
|
100.00
|
%
|
||||||||||||||||||||
|
Unearned
discount
|
(2,491
|
)
|
(2,443
|
)
|
(2,107
|
)
|
(1,875
|
)
|
(1,870
|
)
|
|||||||||||||||||||||||||
|
Deferred
loan fees
|
(2,349
|
)
|
(2,102
|
)
|
(1,706
|
)
|
(2,120
|
)
|
(1,777
|
)
|
|||||||||||||||||||||||||
|
Total
loans and leases held to maturity
|
2,331,142
|
2,405,001
|
2,280,167
|
2,147,845
|
1,953,066
|
||||||||||||||||||||||||||||||
|
Loans
covered under loss share agreements:
|
|||||||||||||||||||||||||||||||||||
|
Commercial
and commercial real estate
|
$
|
15,068
|
47.29
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
|||||||||||||||
|
Residential
mortgage
|
8,984
|
28.20
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
3,626
|
11.38
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Consumer
|
4,182
|
13.13
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
|
Total
loans covered under loss share agreements
|
31,860
|
100.00
|
%
|
-
|
-
|
%
|
-
|
-
|
%
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||||||||||||
|
Allowance
for loan and lease losses
|
(41,848
|
)
|
(35,651
|
)
|
(32,993
|
)
|
(29,981
|
)
|
(27,791
|
)
|
|||||||||||||||||||||||||
|
Loans
and leases, net
|
$
|
2,321,154
|
$
|
2,369,350
|
$
|
2,247,174
|
$
|
2,117,864
|
$
|
1,925,275
|
|||||||||||||||||||||||||
The table
below sets forth the remaining maturities by loan and lease category, including
loans held for sale, as of December 31, 2009:
|
MATURITY
AND RATE SENSITIVITY OF LOANS AND LEASES
1
|
||||||||||||||||||
|
(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
|
$
|
727,357
|
$
|
523,090
|
$
|
242,252
|
$
|
51,459
|
$
|
141,018
|
$
|
1,685,176
|
||||||
|
Residential
mortgage
|
65,675
|
37,364
|
21,440
|
35,432
|
41,442
|
201,353
|
||||||||||||
|
Agricultural
and agricultural real estate
|
126,741
|
66,888
|
36,143
|
9,082
|
21,552
|
260,406
|
||||||||||||
|
Consumer
|
52,908
|
68,135
|
9,132
|
14,677
|
91,039
|
235,891
|
||||||||||||
|
Lease
financing, net
|
1,377
|
900
|
-
|
49
|
-
|
2,326
|
||||||||||||
|
Total
|
$
|
974,058
|
$
|
696,377
|
$
|
308,967
|
$
|
110,699
|
$
|
295,051
|
$
|
2,385,152
|
||||||
|
1
Maturities based upon contractual
dates
|
||||||||||||||||||
Total
loans and leases, exclusive of those covered by the FDIC loss share agreements,
were $2.33 billion at December 31, 2009, compared to $2.41 billion at year-end
2008, a decrease of $73.9 million or 3%. The only loan category to experience
growth during 2009 was agricultural and agricultural real estate loans, which
also experienced a slight decrease during the fourth quarter of 2009. Total
loans and leases, exclusive of The Elizabeth State Bank acquisition, decreased
$36.7 million during the fourth quarter of 2009, decreased $7.2 million during
the third quarter of 2009, increased $18.6 million during the second quarter of
2009 and decreased $48.6 million during the first quarter of 2009. Heartland
experienced growth in total loans and leases of $124.8 million or 5% in 2008.
The Bank Subsidiaries experiencing notable loan growth during 2008 were Dubuque
Bank and Trust Company, New Mexico Bank & Trust and Summit Bank &
Trust.
The
commercial and commercial real estate loan category continues to be the primary
focus for all the Heartland subsidiary banks. These loans have comprised 71% of
the loan portfolio at year-end 2009, 2008 and 2007. These loans decreased $48.0
million or 3% during 2009 compared to an increase of $85.5 million or 5% during
2008. Most of the 2008 loan growth in the commercial and commercial real estate
category occurred at Dubuque Bank and Trust Company, Riverside Community Bank,
New Mexico Bank & Trust, Summit Bank & Trust and Minnesota Bank &
Trust.
Residential
mortgage loans experienced a decrease of $28.9 million or 14% during 2009 and
$13.1 million or 6% during 2008. Management anticipates that growth in our
residential mortgage loan portfolio will be slower in low interest rate
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 Bank Subsidiaries have an
opportunity to continue providing their customers the excellent service they
expect.
Agricultural
and agricultural real estate loans outstanding increased $9.1 million or 4%
during 2009 and $22.0 million or 10% during 2008. Nearly all of the growth in
2009 occurred at Dubuque Bank and Trust Company. During 2008, a majority of the
increase in agricultural and agricultural real estate loans occurred at Dubuque
Bank and Trust Company and Wisconsin Community Bank. Of the $256.8 million in
agricultural loans, over 70% were originated at Heartland’s Midwestern banks.
The agricultural loan portfolio is well diversified between grains, dairy, hogs
and cattle, with approximately 32% being in grain production.
Consumer
loans decreased $2.4 million or 1% during 2009 compared to an increase of $34.5
million or 17% during 2008. Growth in the consumer portfolio during 2008
occurred primarily at New Mexico Bank & Trust, Wisconsin Community Bank,
Rocky Mountain Bank, Summit Bank & Trust and Citizens Finance Co. Consumer
loans at Citizens Finance Co.’s comprised 21% of Heartland’s total consumer loan
portfolio at December 31, 2009, and 20% as of December 31, 2008. Heartland’s
expansion of its Citizens Finance Co. subsidiary has been put on hold until
there is improvement in the economy. Contributing to the growth in consumer
loans during 2008 was the successful origination of home equity lines of credit,
primarily in Heartland’s Western banks.
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.
Loans and
leases secured by real estate, either fully or partially, totaled $1.8 billion
or 78% of total loans and leases at December 31, 2009, and $1.9 billion or 78%
of total loans and leases at December 31, 2008. More than 60% of the non-farm,
nonresidential loans are owner occupied. The largest categories within
Heartland’s real estate secured loans are listed below:
|
(Dollars
in thousands)
|
As
of December 31,
|
|||||
|
2009
|
2008
|
|||||
|
Residential
real estate, excluding residential construction and residential lot
loans
|
$
|
427,276
|
$
|
400,112
|
||
|
Industrial,
manufacturing, business and commercial
|
235,929
|
387,226
|
||||
|
Agriculture
|
197,885
|
189,982
|
||||
|
Land
development and lots
|
176,995
|
147,729
|
||||
|
Retail
|
161,008
|
120,942
|
||||
|
Office
|
130,479
|
98,584
|
||||
|
Hotel,
resort and hospitality
|
101,182
|
97,931
|
||||
|
Warehousing
|
72,639
|
51,773
|
||||
|
Food
and beverage
|
61,982
|
46,931
|
||||
|
Multi-family
|
49,884
|
47,331
|
||||
|
Residential
construction
|
46,940
|
111,670
|
||||
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
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Not
covered under loss share agreements:
|
||||||||||||||||||||
|
Nonaccrual
loans and leases
|
$
|
78,118
|
$
|
76,953
|
$
|
30,694
|
$
|
8,104
|
$
|
14,877
|
||||||||||
|
Loans
and leases contractually past due 90 days or more
|
17
|
1,005
|
1,134
|
315
|
115
|
|||||||||||||||
|
Total
nonperforming loans and leases
|
78,135
|
77,958
|
31,828
|
8,419
|
14,992
|
|||||||||||||||
|
Other
real estate
|
30,205
|
11,750
|
2,195
|
1,575
|
1,586
|
|||||||||||||||
|
Other
repossessed assets
|
501
|
1,484
|
438
|
349
|
471
|
|||||||||||||||
|
Total
nonperforming assets not covered under loss share
agreements
|
$
|
108,841
|
$
|
91,192
|
$
|
34,461
|
$
|
10,343
|
$
|
17,049
|
||||||||||
|
Covered
under loss share agreements:
|
||||||||||||||||||||
|
Nonaccrual
loans and leases
|
$
|
4,170
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Loans
and leases contractually past due 90 days or more
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total
nonperforming loans and leases
|
4,170
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Other
real estate
|
363
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Other
repossessed assets
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total
nonperforming assets covered under loss share agreements
|
$
|
4,533
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Restructured
loans(1)
|
$
|
46,656
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Nonperforming
loans and leases not covered under loss share agreements to total loans
and leases
|
3.35
|
%
|
3.24
|
%
|
1.40
|
%
|
0.39
|
%
|
0.77
|
%
|
||||||||||
|
Nonperforming
assets not covered under loss share agreements to total loans and leases
plus repossessed property
|
4.61
|
%
|
3.77
|
%
|
1.51
|
%
|
0.48
|
%
|
0.87
|
%
|
||||||||||
|
Nonperforming
assets not covered under loss share agreements to total
assets
|
2.71
|
%
|
2.51
|
%
|
1.06
|
%
|
0.34
|
%
|
0.60
|
%
|
||||||||||
|
(1)
Represents accruing restructured loans performing according to their
restructured terms.
|
||||||||||||||||||||
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, exclusive of those covered under the loss sharing agreements, were $78.1
million or 3.35% of total loans and leases at December 31, 2009, compared to
$78.0 million or 3.24% of total loans and leases at December 31, 2008, and $31.8
million or 1.40% of total loans and leases at December 31, 2007. Approximately
64%, or $50.1 million, of Heartland’s nonperforming loans at December 31, 2009,
were to twenty borrowers, with $15.0 million originated by Rocky Mountain Bank,
$13.7 million originated by Summit Bank & Trust, $7.5 million originated by
Wisconsin Community Bank, $6.5 million originated by Arizona Bank & Trust,
$2.9 million originated by New Mexico Bank & Trust, $2.9 million originated
by Riverside Community Bank and $1.6 million originated by Dubuque Bank and
Trust. At December 31, 2008, approximately 73%, or $56.9 million, of Heartland’s
nonperforming loans were to eighteen borrowers, with $21.3 million originated by
Rocky Mountain Bank, $15.3 million originated by Arizona Bank & Trust, $7.7
million originated by Summit Bank & Trust, $7.1 million originated by
Wisconsin Community Bank, $3.1 million originated by Riverside Community Bank,
$1.4 million originated by First Community Bank and $1.0 million originated by
Dubuque Bank and Trust Company. The portion of Heartland’s nonperforming loans
covered by government guarantees under the SBA or USDA lending programs was $3.3
million at December 31, 2009, and $2.9 million at December 31, 2008. The
allowance for loan and lease losses related to total nonperforming loans and
leases was $7.9 million at December 31, 2009, $4.4 million at December 31, 2008,
and $1.8 million at December 31, 2007. The allowance for loan and lease losses
related to total restructured loans and leases was $5.1 million at December 31,
2009. Heartland had no restructured loans at December 31, 2008 and 2007. The
industry breakdown for these nonperforming loans at December 31, 2009, was $16.7
million lots and land development, $6.5 million real estate financing provider,
$6.0 million construction and development of commercial real estate, $5.8
million transportation and $4.9 million lessors of real estate. The remaining
$15.1 million was distributed among seven other industries.
Other
real estate owned, exclusive of assets covered under the loss sharing
agreements, was $30.2 million at December 31, 2009, compared to $11.8 million at
year-end 2008. A majority of the increase during 2009 was attributable to the
real estate securing two loans originated at Rocky Mountain Bank, which at
December 31, 2009, had a market value totaling $13.5 million, comprised of $8.9
million on a residential subdivision development project in Bozeman, Montana and
$4.6 million on a condominium development project in Big Sky, Montana.
Liquidation strategies have been identified for all the assets held in other
real estate owned. Management plans to market these properties under an orderly
liquidation process instead of under a quick liquidation process which would
most likely result in discounts greater than the projected carrying costs. As a
result of continued collection activities, it is likely that other real estate
owned will rise during the first half of 2010.
In
certain circumstances, Heartland may modify the terms of a loan to maximize the
collection of amounts due. In most cases, the modification is either a reduction
in interest rate, conversion to interest only payments, extension of the
maturity date or a reduction in the principal balance. Generally, the borrower
is experiencing financial difficulties or is expected to experience difficulties
in the near-term, so concessionary modification is granted to the borrower that
would otherwise not be considered. Restructured loans accrue interest as long as
the borrower complies with the revised terms and conditions and has demonstrated
repayment performance at a level commensurate with the modified terms over
several payment cycles. Although, many of Heartland’s loan restructurings occur
on a case-by-case basis in connection with ongoing loan collection processes,
Heartland has also participated in certain restructuring programs for
residential real estate borrowers. In general, certain residential real estate
borrowers facing an interest rate reset that are current in their repayment
status, are allowed to retain the lower of their existing interest rate or the
market interest rate as of their interest reset date. In addition, during 2009,
Heartland began participating in the U.S. Department of the Treasury Home
Affordable Modification Program (“HAMP”) for loans in its servicing portfolio.
HAMP gives qualifying homeowners an opportunity to refinance into more
affordable monthly payments, with the U.S. Department of the Treasury
compensating Heartland for a portion of the reduction in monthly amounts due
from borrowers participating in this program. Heartland also utilizes a similar
mortgage loan restructuring program for certain borrowers within its portfolio
loans.
The Bank
Subsidiaries have not been active in the origination of subprime loans.
Consistent with Heartland’s community banking model, which includes meeting the
legitimate credit needs within the communities served, the Bank Subsidiaries may
make loans to borrowers possessing subprime characteristics if there are
mitigating factors present that reduce the potential default risk of the
loan.
At
December 31, 2009, $104.4 million or 56% of the consumer loans originated by the
Heartland banks were in home equity lines of credit (“HELOC’s”) compared to
$106.0 million or 56% at December 31, 2008. Under Heartland’s policy guidelines
for the underwriting of these lines of credit, the customer may receive advances
of up to 90% of the value of the property securing the line, provided the
customer qualifies for Tier I classification, Heartland’s internal ranking for
customers considered to possess a high credit quality profile. Additionally, to
qualify for advances up to 90% of the value of the property securing the line,
the first mortgage must be held by Heartland and the customer must escrow for
both taxes and insurance. Otherwise, HELOC’s are established at an 80% loan to
value.
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, 2009, was 1.80% of loans and
leases and 53.56% of nonperforming loans, compared to 1.48% of loans and leases
and 45.73% of nonperforming loans at December 31, 2008, and 1.45% of loans and
leases and 103.66% of nonperforming loans and leases at December 31, 2007. The
provision for loan losses was $39.4 million for 2009 compared to $29.3 million
for 2008 and $10.1 million for 2007. Additions to the allowance for loan and
lease losses during both 2009 and 2008 were driven by a variety of factors
including deterioration of economic conditions, downgrades in internal risk
ratings, reductions in appraised values and higher levels of charge-offs,
primarily in Heartland’s Western markets of Arizona, Montana and Colorado.
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 during
both 2008 and 2007 was the expansion of the loan portfolio, 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 $33.2 million during 2009
compared to $26.7 million during 2008. As a percentage of average loans and
leases, net charge-offs were 1.38% during 2009 and 1.15% during 2008. A large
portion of the net charge-offs during both years was related to commercial real
estate development loans and residential lot loans. Heartland has generally
recognized the charge-off on a loan when the loan was resolved, sold or
transferred to other real estate owned. However, during the last half of 2008,
Heartland began to recognize charge-offs on certain collateral dependent loans
by writing down the loan balance to an estimated net realizable value based on
the anticipated disposition value. Citizens Finance Co., Heartland's consumer
finance subsidiary, experienced net charge-offs of $1.9 million during 2009 and
$2.0 million during 2008. Net losses as a percentage of average loans, net of
unearned, at Citizens were 4.27% for 2009 compared to 4.83% for 2008 and 4.31%
for 2007. Loans with payments past due for more than thirty days at Citizens
were 5.41% of gross loans at year-end 2009 compared to 6.69% of gross loans at
year-end 2008 and 7.06% of gross loans at year-end 2007. 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.
The first
table below 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 second 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.
|
ANALYSIS
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Allowance
at beginning of year
|
$
|
35,651
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
||||||||||||
|
Charge-offs:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
26,883
|
22,487
|
5,226
|
1,494
|
2,203
|
|||||||||||||||||
|
Residential
mortgage
|
1,869
|
1,010
|
237
|
227
|
75
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
496
|
33
|
-
|
148
|
160
|
|||||||||||||||||
|
Consumer
|
4,712
|
4,217
|
3,101
|
2,120
|
2,141
|
|||||||||||||||||
|
Lease
financing
|
1,005
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
charge-offs
|
34,965
|
27,747
|
8,564
|
3,989
|
4,579
|
|||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
1,073
|
226
|
983
|
1,031
|
544
|
|||||||||||||||||
|
Residential
mortgage
|
79
|
18
|
4
|
95
|
1
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
32
|
177
|
-
|
62
|
141
|
|||||||||||||||||
|
Consumer
|
601
|
665
|
654
|
545
|
466
|
|||||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
recoveries
|
1,785
|
1,086
|
1,641
|
1,733
|
1,152
|
|||||||||||||||||
|
Net
charge-offs 1
2
|
33,180
|
26,661
|
6,923
|
2,256
|
3,427
|
|||||||||||||||||
|
Provision
for loan and lease losses from continuing operations
|
39,377
|
29,319
|
10,073
|
3,883
|
6,533
|
|||||||||||||||||
|
Provision
for loan and lease losses from discontinued operations
|
-
|
-
|
-
|
(5
|
)
|
31
|
||||||||||||||||
|
Additions
related to acquisitions
|
-
|
-
|
-
|
591
|
-
|
|||||||||||||||||
|
Reduction
related to discontinued operations
|
-
|
-
|
(138
|
)
|
(23
|
)
|
-
|
|||||||||||||||
|
Adjustment
for transfer to other liabilities for unfunded commitments
|
-
|
-
|
-
|
-
|
(319
|
)
|
||||||||||||||||
|
Allowance
at end of year
|
$
|
41,848
|
$
|
35,651
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
||||||||||||
|
Net
charge-offs to average loans and leases
|
1.38
|
%
|
1.15
|
%
|
0.30
|
%
|
0.11
|
%
|
0.18
|
%
|
||||||||||||
|
1
|
Includes
net charge-offs at Citizens Finance, Heartland’s consumer finance company,
of $1,942 for 2009; $2,012 for 2008; $1,646 for 2007; $1,215 for 2006; and
$1,185 for 2005.
|
|||||||||||||||||||||
|
2
|
Includes
net charge-offs on loans covered under loss share agreements of $1,344 for
2009.
|
|||||||||||||||||||||
|
ALLOCATION
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
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
|
$
|
33,585
|
71.50
|
%
|
$
|
23,133
|
71.30
|
%
|
$
|
22,564
|
71.48
|
%
|
$
|
18,612
|
68.95
|
%
|
$
|
17,478
|
66.65
|
%
|
||||||||||
|
Residential
mortgage
|
1,691
|
7.49
|
2,007
|
8.46
|
2,345
|
9.50
|
1,688
|
10.47
|
1,593
|
11.23
|
||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
2,852
|
10.99
|
2,013
|
10.28
|
1,868
|
9.88
|
2,075
|
10.86
|
2,526
|
11.77
|
||||||||||||||||||||
|
Consumer
|
3,566
|
9.92
|
3,322
|
9.72
|
2,954
|
8.74
|
3,008
|
9.05
|
2,893
|
9.25
|
||||||||||||||||||||
|
Lease
financing
|
17
|
0.10
|
97
|
0.24
|
128
|
0.40
|
192
|
0.67
|
149
|
1.10
|
||||||||||||||||||||
|
Unallocated
|
137
|
5,079
|
3,134
|
4,406
|
3,152
|
|||||||||||||||||||||||||
|
Total
allowance for loan and lease losses
|
$
|
41,848
|
$
|
35,651
|
$
|
32,993
|
$
|
29,981
|
$
|
27,791
|
||||||||||||||||||||
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 29% of
total assets at December 31, 2009, and 25% of total assets at December 31, 2008.
Total available for sale securities as of December 31, 2009, were $1.14 billion,
an increase of $263.8 million or 30% from year-end 2008. Total available for
sale securities as of December 31, 2008, were $871.7 million, an increase of
$189.3 million or 28% from year-end 2007. Additional securities were purchased
during both years as loan growth slowed.
The
composition of the securities portfolio shifted from an emphasis in U.S.
government corporations and agencies to mortgage-backed securities during 2009
and 2008 as the spread on mortgage-backed securities widened in comparison to
government agency securities. The percentage of mortgage-backed securities was
53% at year-end 2009 compared to 56% at year-end 2008 and 36% at year-end 2007.
More than 75% of Heartland’s mortgage-backed securities are issuances of
government-sponsored enterprises as of year-end 2009.
The table
below presents the composition of the securities portfolio, by major
category:
|
SECURITIES
PORTFOLIO COMPOSITION
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
|||||||||||||
|
U.S.
government corporations and agencies
|
$
|
279,441
|
23.78
|
%
|
$
|
195,356
|
21.62
|
%
|
$
|
255,257
|
37.10
|
%
|
||||||
|
Mortgage-backed
securities
|
623,949
|
53.09
|
509,501
|
56.38
|
244,934
|
35.60
|
||||||||||||
|
Obligations
of states and political subdivisions
|
238,893
|
20.33
|
163,597
|
18.10
|
147,398
|
21.42
|
||||||||||||
|
Other
securities
|
32,934
|
2.80
|
35,251
|
3.90
|
40,472
|
5.88
|
||||||||||||
|
Total
|
$
|
1,175,217
|
100.00
|
%
|
$
|
903,705
|
100.00
|
%
|
$
|
688,061
|
100.00
|
%
|
||||||
Heartland
had $30.4 million of equity securities, including capital stock in the various
Federal Home Loan Banks of which the Bank Subsidiaries are members and all of
which were classified as available for sale at December 31, 2009. The
tables below present the maturities of the debt securities in the securities
portfolio at December 31, 2009, by major category and classification as
available for sale or held to maturity:
|
SECURITIES
AVAILABLE FOR SALE PORTFOLIO MATURITIES
|
||||||||||||||||||||||||||||||
|
(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
|
$
|
33,316
|
0.68
|
%
|
$
|
194,625
|
1.95
|
%
|
$
|
51,500
|
3.22
|
%
|
$
|
-
|
-
|
%
|
$
|
279,441
|
2.39
|
%
|
||||||||||
|
Mortgage-backed
securities
|
57,855
|
4.32
|
509,548
|
5.80
|
33,224
|
6.03
|
11,311
|
5.47
|
611,938
|
5.66
|
||||||||||||||||||||
|
Obligations
of states and political subdivisions 1
|
8,533
|
5.50
|
41,550
|
5.48
|
101,824
|
5.77
|
59,943
|
6.61
|
211,850
|
5.94
|
||||||||||||||||||||
|
Corporate
debt securities
|
-
|
-
|
-
|
-
|
-
|
-
|
1,872
|
12.45
|
1,872
|
12.45
|
||||||||||||||||||||
|
Total
|
$
|
99,704
|
3.20
|
%
|
$
|
745,723
|
4.77
|
%
|
$
|
186,548
|
5.11
|
%
|
$
|
73,126
|
7.47
|
%
|
$
|
1,105,101
|
4.90
|
%
|
||||||||||
|
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
|
||||||||||||||||||||||||||||||
|
(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
|
$
|
-
|
-
|
%
|
$
|
4,765
|
7.98
|
%
|
$
|
6,075
|
10.46
|
%
|
$
|
1,171
|
8.06
|
%
|
$
|
12,011
|
9.17
|
%
|
||||||||||
|
Obligations
of states and political subdivisions 1
|
-
|
-
|
-
|
-
|
1,289
|
5.87
|
25,754
|
6.49
|
27,043
|
7.76
|
||||||||||||||||||||
|
Total
|
$
|
-
|
-
|
%
|
$
|
4,765
|
7.98
|
%
|
$
|
7,364
|
9.66
|
%
|
$
|
26,925
|
7.86
|
%
|
$
|
39,054
|
8.20
|
%
|
||||||||||
|
1
|
Rates
on obligations of states and political subdivisions have been adjusted to
tax equivalent yields using a 34%
tax.
|
Although
there remains a net unrealized aggregate gain on the debt securities held in
Heartland’s available for sale portfolio, some of those securities had market
values below their amortized cost basis at December 31, 2009. Because the
majority of the decline in market value is 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, 2009. See Note 5 to Heartland’s consolidated financial
statements for further discussion regarding unrealized losses on Heartland’s
securities portfolio.
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:
|
AVERAGE
DEPOSITS
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||
|
For
the years ended December 31,
|
|||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||
|
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
|
$
|
437,468
|
15.36
|
%
|
0.00
|
%
|
$
|
372,496
|
15.17
|
%
|
0.00
|
%
|
$
|
362,109
|
15.34
|
%
|
0.00
|
%
|
|||||||||
|
Savings
|
1,282,212
|
45.03
|
1.44
|
938,701
|
38.22
|
1.94
|
831,675
|
35.22
|
2.69
|
||||||||||||||||||
|
Time
deposits less than $100,000
|
754,814
|
26.51
|
3.06
|
807,617
|
32.89
|
4.02
|
876,146
|
37.11
|
4.70
|
||||||||||||||||||
|
Time
deposits of $100,000 or more
|
373,159
|
13.10
|
3.00
|
336,926
|
13.72
|
3.98
|
291,073
|
12.33
|
4.92
|
||||||||||||||||||
|
Total
deposits
|
$
|
2,847,653
|
100.00
|
%
|
$
|
2,455,740
|
100.00
|
%
|
$
|
2,361,003
|
100.00
|
%
|
|||||||||||||||
Total
average deposits experienced an increase of $391.9 million or 16% during 2009
and $94.7 million or 4% during 2008. Exclusive of brokered deposits, total
average deposits increased $423.3 million or 18% during 2009 and $126.1 million
or 6% during 2008. The Elizabeth State Bank acquisition included $49.5 million
in deposits, which accounted for $24.8 million of the growth in average deposits
for 2009 as these deposits were only with Heartland for half of the year. All
the Bank Subsidiaries experienced growth in nonbrokered deposits during 2009.
For 2008, all the Bank Subsidiaries, except for Wisconsin Community Bank and
Arizona Bank & Trust, experienced growth in nonbrokered deposits. During
both years, this growth was weighted more heavily in Heartland’s Midwestern
markets, which were responsible for nearly 58% of the growth during 2009 and 61%
during 2008. 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.
Growth in
demand and savings deposits is attributable to an increased emphasis on
non-maturity core deposit products over higher-cost certificates of deposit.
Additionally, commercial and retail customers have continued to build cash
reserves. Average demand deposits increased $65.0 million or 17% during 2009 and
$10.4 million or 3% during 2008. Management will continue to focus efforts on
growing demand deposit account balances with internally-developed, companywide
acquisition programs. The percentage of Heartland’s total average demand deposit
balances attributable to branch banking offices in our Western markets was 59%
in 2009 compared to 56% in 2008 and 58% in 2007.
Average
savings deposit balances increased by $343.5 million or 37% during 2009 and
$107.0 million or 13% during 2008. A large portion of the growth in savings
deposits during both years was attributable to the January 2008 introduction of
a new retail interest-bearing checking account product, the conversion of
several retail repurchase agreement sweep accounts to a new money market sweep
product initially rolled out to business depositors during the second quarter of
2008 and a promotional offer on a new money market savings product offered late
in the third quarter of 2008. The percentage of Heartland’s total average
savings deposits balances attributable to branch banking officers in our Western
markets was 39% in 2009 compared to 40% in 2008 and 2007.
Average
time deposits, excluding brokered time deposits, increased $14.8 million or 1%
during 2009 and $8.7 million or 1% during 2008. The slower growth in time
deposits is attributable to an increased emphasis on growing our customer base
in non-maturity deposit products instead of higher-cost certificates of deposit.
The Bank Subsidiaries have priced time deposit products competitively to retain
existing deposit customers, but not to attract new customers. The percentage of
Heartland’s total average time deposit balances attributable to branch banking
offices in our Western markets was 38% during 2009 compared to 35% during 2008
and 2007.
Average
brokered time deposits as a percentage of total average deposits were 2% during
2009 compared to 3% during 2008 and 5% during 2007. The reliance on brokered
time deposits has decreased during the more recent years 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, 2009:
|
TIME
DEPOSITS $100,000 AND OVER
|
|||
|
(Dollars
in thousands)
|
|||
|
December
31, 2009
|
|||
|
3
months or less
|
$
|
64,633
|
|
|
Over
3 months through 6 months
|
56,610
|
||
|
Over
6 months through 12 months
|
64,711
|
||
|
Over
12 months
|
146,628
|
||
|
$
|
332,582
|
||
Short-term
borrowings generally include federal funds purchased, treasury tax and loan note
options, securities sold under agreement to repurchase, short-term Federal Home
Loan Bank ("FHLB") advances and discount window borrowings from the Federal
Reserve Bank. These funding alternatives are utilized in varying degrees
depending on their pricing and availability. As of December 31, 2009, the amount
of short-term borrowings was $162.4 million compared to $210.2 million at
year-end 2008, a decrease of $47.8 million or 23%, primarily due to activity in
retail repurchase agreements. All of the Bank Subsidiaries provide retail
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 reserve requirements of the Bank Subsidiaries, nor
does it create an expense relating to FDIC premiums on deposits. Although the
aggregate balance of these retail repurchase agreements is subject to variation,
the account relationships represented by these balances are principally local.
These balances were $145.6 million at December 31, 2009, compared to $170.5
million at year-end 2008, a decrease of $24.9 million or 15%. For 2008, these
balances had decreased $67.4 million or 28% over the balances at year-end 2007,
primarily as a result of the conversion of several retail repurchase agreement
sweep accounts to a new money market sweep product rolled out to business
depositors during the second quarter of 2008. At year-end 2008, short-term
borrowings were $210.2 million compared to $354.1 million at year-end 2007, a
decrease of $143.9 million or 41%. Management elected to utilize some additional
long-term FHLB borrowings in 2008 as the interest rates on these borrowings were
at lower levels than other funding alternatives, particularly brokered
deposits.
Also
included in short-term borrowings is the revolving credit line Heartland
established with an unaffiliated bank on September 28, 2009, primarily to
provide working capital to Heartland. This credit line may also be used to fund
the operations of Heartland Community Development Inc., a wholly-owned
subsidiary of Heartland. Under this unsecured revolving credit line, Heartland
may borrow up to $15.0 million at any one time. At December 31, 2009, $5.0
million was outstanding on this revolving credit line.During 2008, short-term
borrowings included a $60.0 million revolving credit line Heartland had with
third-party banks, 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. On December 19, 2008, Heartland received $81.7
million through participation in the CPP. In an effort to prudently manage its
funding costs until the Bank Subsidiaries were in need of additional capital to
meet loan demands or an acquisition of a financial institution in an existing
market was identified, Heartland used $34.0 million of the CPP funds received to
extinguish the debt on its credit line and terminate the credit agreement.
Heartland continues to honor the intent of the CPP by seeking high quality
lending opportunities and the potential acquisition of banks in its existing
markets.
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,
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
Balance
at end of period
|
$
|
162,349
|
$
|
210,184
|
$
|
354,146
|
|||
|
Maximum
month-end amount outstanding
|
205,747
|
367,991
|
354,146
|
||||||
|
Average
month-end amount outstanding
|
140,289
|
230,680
|
291,289
|
||||||
|
Weighted
average interest rate at year-end
|
0.58%
|
0.68%
|
2.90%
|
||||||
|
Weighted
average interest rate for the year
|
0.51%
|
1.95%
|
4.62%
|
||||||
Other
borrowings include all debt arrangements Heartland and its subsidiaries have
entered into with original maturities that extend beyond one year. These
borrowings were $451.4 million at December 31, 2009, compared to $437.8 million
at December 31, 2008, an increase of $13.6 million or 3%. Other borrowings
include wholesale repurchase agreements which totaled $135.0 million at December
31, 2009, and $120.0 million at December 31, 2008. The balances outstanding on
trust preferred capital securities issued by Heartland are also included in
other borrowings. A schedule of Heartland’s trust preferred offerings
outstanding as of December 31, 2009, is as follows:
(Dollars
in thousands)
|
Amount
Issued
|
Issuance
Date
|
Interest
Rate
|
Interest Rate as of
12/31/09
|
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
|
03/31/10
|
|
|
25,000
|
03/17/04
|
2.75%
over Libor
|
3.00%
|
03/17/34
|
03/17/10
|
|
|
20,000
|
01/31/06
|
1.33%
over Libor
|
1.61%
|
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
|
1.74%
|
09/01/37
|
09/01/12
|
|
|
$
|
110,000
|
|||||
Also in
other borrowings are the Bank Subsidiaries’ borrowings from the regional Federal
Home Loan Banks. All of the Bank Subsidiaries, except for Heartland’s most
recent de novo bank,
Minnesota Bank & Trust, own stock in the Federal Home Loan Bank of Chicago,
Dallas, Des Moines, Seattle, San Francisco or Topeka, enabling them to borrow
funds from their respective FHLB for short- or long-term purposes under a
variety of programs. FHLB borrowings at December 31, 2009, totaled $199.1
million compared to $199.5 million at December 31, 2008, and $93.5 million at
December 31, 2007. Total FHLB borrowings at December 31, 2009, had an average
rate of 3.26 percent and an average maturity of 3.38 years. When considering the
earliest possible call date on these advances, the average maturity is shortened
to 1.86 years. For additional information regarding these borrowings see Note 12
to our consolidated financial statements.
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.
The
following table summarizes Heartland’s significant contractual obligations and
other commitments as of December 31, 2009:
|
(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
|
$
|
1,035,386
|
$
|
528,774
|
$
|
299,643
|
$
|
170,107
|
$
|
36,862
|
|||||
|
Long-term
debt obligations
|
451,429
|
182,038
|
73,844
|
61,219
|
134,328
|
||||||||||
|
Operating
lease obligations
|
5,382
|
906
|
1,059
|
539
|
2,878
|
||||||||||
|
Purchase
obligations
|
5,595
|
2,182
|
3,340
|
73
|
-
|
||||||||||
|
Other
long-term liabilities
|
2,139
|
109
|
290
|
304
|
1,436
|
||||||||||
|
Total
contractual obligations
|
$
|
1,499,931
|
$
|
714,009
|
$
|
378,176
|
$
|
232,242
|
$
|
175,504
|
|||||
|
Other
commitments:
|
|||||||||||||||
|
Lines
of credit
|
$
|
603,383
|
$
|
499,321
|
$
|
57,377
|
$
|
21,330
|
$
|
25,355
|
|||||
|
Standby
letters of credit
|
26,681
|
23,766
|
2,403
|
359
|
153
|
||||||||||
|
Total
other commitments
|
$
|
630,064
|
$
|
523,087
|
$
|
59,780
|
$
|
21,689
|
$
|
25,508
|
|||||
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 13.53% and 15.20%,
respectively, on December 31, 2009, compared to 13.26% and 14.91%, respectively,
on December 31, 2008, and 9.74% and 12.48%, respectively, on December 31, 2007.
At December 31, 2009, Heartland’s leverage ratio, the ratio of Tier 1 capital to
total average assets, was 9.64% compared to 10.68% and 8.01% at December 31,
2008 and 2007, 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)
|
||||||||||||||||||
|
As
of and for the year ended December 31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
380,334
|
13.53
|
%
|
$
|
368,101
|
13.26
|
%
|
$
|
253,675
|
9.74
|
%
|
||||||
|
Tier
1 capital minimum requirement
|
112,471
|
4.00
|
%
|
111,017
|
4.00
|
%
|
104,191
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
267,863
|
9.53
|
%
|
$
|
257,084
|
9.26
|
%
|
$
|
149,484
|
5.74
|
%
|
||||||
|
Total
capital
|
$
|
427,523
|
15.20
|
%
|
$
|
413,913
|
14.91
|
%
|
$
|
325,016
|
12.48
|
%
|
||||||
|
Total
capital minimum requirement
|
224,943
|
8.00
|
%
|
222,035
|
8.00
|
%
|
208,382
|
8.00
|
%
|
|||||||||
|
Excess
|
$
|
202,580
|
7.20
|
%
|
$
|
191,878
|
6.91
|
%
|
$
|
116,634
|
4.48
|
%
|
||||||
|
Total
risk-adjusted assets
|
$
|
2,811,782
|
$
|
2,775,436
|
$
|
2,604,771
|
||||||||||||
|
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%
|
|
LEVERAGE
RATIOS 1
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
As
of and for the year ended December 31,
|
||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
380,334
|
9.64
|
%
|
$
|
368,101
|
10.68
|
%
|
$
|
253,675
|
8.01
|
%
|
||||||
|
Tier
1 capital minimum requirement 2
|
157,830
|
4.00
|
%
|
137,917
|
4.00
|
%
|
126,644
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
222,504
|
5.64
|
%
|
$
|
230,184
|
6.68
|
%
|
$
|
127,031
|
4.01
|
%
|
||||||
|
Average
adjusted assets
|
$
|
3,945,757
|
$
|
3,447,927
|
$
|
3,166,102
|
||||||||||||
|
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 2009, Heartland invested capital of $26.0 million into Heartland
Community Development Inc., a wholly-owned subsidiary of Heartland. The primary
purpose of Heartland Community Development Inc. is to hold and manage certain
nonperforming loans and assets to allow the liquidation of such assets at a time
that is more economically advantageous. Heartland Community Development Inc.
purchased other real estate with a fair value of $26.0 million from certain of
the Bank Subsidiaries during 2009.
Summit
Bank & Trust began operations on November 1, 2006, in the Denver, Colorado
suburban 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 7.66% on the original investment amount,
whichever is greater. Heartland pays the 7.66% minimum return to the minority
stockholders annually. 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 stockholders. The remainder of the obligation to the
minority stockholders is payable in cash or Heartland stock or a combination of
cash and stock at the option of Heartland.
Minnesota
Bank & Trust, Heartland’s tenth de novo, began operations on
April 15, 2008, in Edina, Minnesota, located in the Minneapolis, Minnesota
metropolitan area. Heartland’s initial investment was $13.2 million, or 80%, of
the $16.5 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 Minnesota Bank & Trust and allows,
but does not require, Heartland to repurchase the shares from
investors.
On
December 19, 2008, Heartland received $81.7 million through participation in the
CPP. Funds received by Heartland were allocated to debt reduction (including
$34.0 million used to extinguish debt on Heartland’s credit line), capital
maintenance at the Bank Subsidiaries and short-term investments. Heartland
continues to honor the intent of the CPP by seeking high quality lending
opportunities and the potential acquisition of banks in its existing markets,
such as The Elizabeth State Bank acquisition completed during the third quarter
of 2009.
Heartland
continues to explore opportunities to expand its footprint of independent
community banks. Given the current issues in the banking industry and the
availability of capital via the CPP, Heartland has changed its strategic growth
initiatives from de
novo banks and branching to acquisitions. Attention will be focused on
markets Heartland currently serves, where there would be an opportunity to grow
market share, achieve efficiencies and provide greater convenience for current
customers. Additionally, management has asked regulators to notify them when
troubled institutions surface in Heartland’s existing markets. 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 $219.8 million during 2009
compared to $402.2 million during 2008 and $236.1 million during 2007. The
proceeds from securities sales, paydowns and maturities were $437.0 million
during 2009 compared to $300.8 million during 2008 and $244.2 million during
2007. Purchases of securities used cash of $683.4 million during 2009 compared
to $531.3 million during 2008 and $307.8 million during 2007. The net decrease
in loans and leases generated $8.2 million of cash during 2009 while the net
increase in loans and leases used cash of $164.5 million during 2008 and $135.3
million during 2007. Also contributing to cash outflows from investing
activities during 2007 was the $20.5 million purchase of bank-owned life
insurance policies.
Financing
activities from continuing operations provided cash of $311.0 million during
2009 compared to $365.3 million during 2008 and $202.6 million during 2007. A
net increase in deposit accounts generated $360.5 million of cash during 2009
compared to $263.9 million during 2008 and $95.4 million during 2007. Activity
in short-term borrowings used cash of $53.7 million during 2009 and $144.0
million during 2008 compared to providing cash of $80.3 million during 2007.
Cash proceeds from other borrowings were $55.6 million during 2009 compared to
$222.1 million during 2008 and $62.5 million during 2007. Repayments on other
borrowings used cash of $42.0 million during 2009 compared to $47.8 million
during 2008 and $23.4 million during 2007. Proceeds from the issuance of
preferred stock associated with participation in the CPP totaled $81.7 million
during 2008. The preferred shares require cumulative dividends at a rate of
5% per year for the first five years, and at a rate of 9% per year
after the fifth year and rank senior to the common stock. The preferred shares
may be redeemed at any time pending approval from the banking regulatory
authorities.
Total
cash provided by operating activities from continuing operations was $39.9
million during 2009 compared to $41.4 million during 2008 and $41.2 million
during 2007. Cash used for the payment of income taxes was $7.3 million during
2009 compared to $9.4 million during 2008 and $17.3 million during 2007. The
larger payment in 2007 resulted from the sale of Heartland’s fleet leasing
subsidiary, ULTEA, Inc., 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 during 2007. Net cash provided
from investing activities of discontinued operations of the Broadus branch was
$22.6 million during 2007. During 2007, financing activities from the
discontinued operations of the Broadus branch used cash of $32.5 million.
Relative to operating activities, cash provided from the discontinued operations
of the Broadus branch was $10,000 during 2007. For additional information
regarding these discontinued operations see note 3 to Heartland’s consolidated
financial statements.
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 Bank Subsidiaries’ FHLB memberships give
them the ability to borrow funds for short- and long-term purposes under a
variety of programs.
At
December 31, 2009, Heartland’s revolving credit agreement with an unaffiliated
bank provided a maximum borrowing capacity of $15.0 million, of which $5.0
million had been borrowed. This credit agreement contains specific covenants
which are listed in Note 11 to the consolidated financial statements. At
December 31, 2009, Heartland was in compliance with these
covenants.
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. Retained earnings that could be available for the payment of
dividends to Heartland under the regulatory capital requirements to remain
well-capitalized totaled approximately $59.8 million as of December 31,
2009.
EFFECTS
OF INFLATION
Consolidated
financial data included in this report has been prepared in accordance with U.S.
generally accepted accounting principles. 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. See Item 7A of this Form 10-K for a
discussion on the process Heartland utilizes to mitigate market
risk.
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 Heartland’s executive
management and 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 the balance sheet risk profile is performed for Heartland
and each of the Bank Subsidiaries. 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 Heartland has entered into derivative financial instruments to mitigate
the exposure of Heartland’s net interest income to a change in the rate
environment, management does not believe that Heartland’s primary market risk
exposures have changed significantly in 2009 when compared to 2008.
The core
interest rate risk analysis utilized by Heartland examines the balance sheet
under increasing and decreasing interest scenarios that are neither too modest
nor too extreme. All rate changes are ramped over a 12-month horizon based upon
a parallel shift in the yield curve 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 income. 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 to be
isolated from the interest rate risk often caused by growth in assets and
liabilities. Due to the low interest rate environment, the simulations under a
decreasing interest rate scenario were prepared using a 100 basis point shift in
rates during 2009 and 2008 instead of the 200 basis point shift typically used.
The most recent reviews at December 31, 2009 and 2008, provided the following
results:
|
2009
|
2008
|
||||||||||||
|
Net
Interest
Income
(in thousands)
|
%
Change
From
Base
|
Net
Interest
Income
(in thousands)
|
%
Change
From
Base
|
||||||||||
|
Year 1
|
|||||||||||||
|
Down
100 Basis Points
|
$
|
134,074
|
0.05
|
%
|
$
|
117,957
|
1.02
|
%
|
|||||
|
Base
|
$
|
134,002
|
$
|
116,762
|
|||||||||
|
Up
200 Basis Points
|
$
|
130,832
|
(2.37
|
)
|
%
|
$
|
113,969
|
(2.39
|
)
|
%
|
|||
|
Year 2
|
|||||||||||||
|
Down
100 Basis Points
|
$
|
127,041
|
(5.19
|
)
|
%
|
$
|
115,369
|
(1.19
|
)
|
%
|
|||
|
Base
|
$
|
130,973
|
(2.26
|
)
|
%
|
$
|
115,348
|
(1.21
|
)
|
%
|
|||
|
Up
200 Basis Points
|
$
|
131,626
|
(1.77
|
)
|
%
|
$
|
114,905
|
(1.59
|
)
|
%
|
|||
Heartland
uses derivative financial instruments to manage the impact of changes in
interest rates on its future interest income or interest expense. Heartland is
exposed to credit-related losses in the event of nonperformance by the
counterparties to these derivative instruments, but believes it has minimized
the risk of these losses 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
enters 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.
Heartland
holds a securities trading portfolio that would also be subject to elements of
market risk. These securities are carried on the balance sheet at fair value. As
of December 31, 2009, these securities had a carrying value of $695,000 or 0.02%
of total assets compared to $1.7 million or 0.05% of total assets at year-end
2008.
ITEM
8.
|
HEARTLAND
FINANCIAL USA, INC.
|
||||||||||
|
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
||||||||||
|
December
31,
|
December
31,
|
|||||||||
|
Notes
|
2009
|
2008
|
||||||||
|
ASSETS
|
||||||||||
|
Cash
and due from banks
|
4
|
$
|
177,619
|
$
|
48,977
|
|||||
|
Federal
funds sold and other short-term investments
|
4,791
|
2,326
|
||||||||
|
Cash
and cash equivalents
|
182,410
|
51,303
|
||||||||
|
Securities:
|
5
|
|||||||||
|
Trading,
at fair value
|
695
|
1,694
|
||||||||
|
Available
for sale, at fair value (cost of $1,125,665 for 2009 and $875,143 for
2008)
|
1,135,468
|
871,686
|
||||||||
|
Held
to maturity-at cost (fair value of $37,477 for 2009 and $26,326 for
2008)
|
39,054
|
30,325
|
||||||||
|
Loans
held for sale
|
17,310
|
19,695
|
||||||||
|
Gross
loans and leases:
|
6
|
|||||||||
|
Held
to maturity
|
2,331,142
|
2,405,001
|
||||||||
|
Loans
covered by loss share agreement
|
2,
6
|
31,860
|
-
|
|||||||
|
Allowance
for loan and lease losses
|
7
|
(41,848
|
)
|
(35,651
|
)
|
|||||
|
Loans
and leases, net
|
2,321,154
|
2,369,350
|
||||||||
|
Premises,
furniture and equipment, net
|
8
|
118,835
|
120,500
|
|||||||
|
Other
real estate, net
|
30,568
|
11,750
|
||||||||
|
Goodwill
|
9
|
27,548
|
40,207
|
|||||||
|
Other
intangible assets, net
|
9
|
12,380
|
8,079
|
|||||||
|
Cash
surrender value on life insurance
|
55,516
|
54,431
|
||||||||
|
FDIC
indemnification asset
|
2
|
5,532
|
-
|
|||||||
|
Other
assets
|
66,521
|
51,248
|
||||||||
|
TOTAL
ASSETS
|
$
|
4,012,991
|
$
|
3,630,268
|
||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
LIABILITIES:
|
||||||||||
|
Deposits:
|
10
|
|||||||||
|
Demand
|
$
|
460,645
|
$
|
383,061
|
||||||
|
Savings
|
1,554,358
|
1,128,312
|
||||||||
|
Time
|
1,035,386
|
1,128,859
|
||||||||
|
Total
deposits
|
3,050,389
|
2,640,232
|
||||||||
|
Short-term
borrowings
|
11
|
162,349
|
210,184
|
|||||||
|
Other
borrowings
|
12
|
451,429
|
437,833
|
|||||||
|
Accrued
expenses and other liabilities
|
33,767
|
33,396
|
||||||||
|
TOTAL
LIABILITIES
|
3,697,934
|
3,321,645
|
||||||||
|
STOCKHOLDERS’
EQUITY:
|
17,
18, 19
|
|||||||||
|
Preferred
stock (par value $1 per share; authorized, 102,302 shares;, none issued or
outstanding)
|
-
|
-
|
||||||||
|
Series
A Junior Participating preferred stock (par value $1 per share;
authorized, 16,000 shares; none issued or outstanding)
|
-
|
-
|
||||||||
|
Series
B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1,000 per
share; authorized 81,698 shares; issued 81,698 shares)
|
77,224
|
75,578
|
||||||||
|
Common
stock (par value $1 per share; authorized, 25,000,000 shares at December
31, 2009 and 20,000,000 shares at December 31, 2008; issued 16,611,671
shares)
|
16,612
|
16,612
|
||||||||
|
Capital
surplus
|
44,284
|
43,827
|
||||||||
|
Retained
earnings
|
172,487
|
177,753
|
||||||||
|
Accumulated
other comprehensive income (loss)
|
7,107
|
(1,341
|
)
|
|||||||
|
Treasury
stock at cost (265,309 shares at December 31, 2009 and 337,181 shares at
December 31, 2008)
|
(5,433
|
)
|
(6,826
|
)
|
||||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
312,281
|
305,603
|
||||||||
|
Noncontrolling
interest
|
2,776
|
3,020
|
||||||||
|
TOTAL
EQUITY
|
315,057
|
308,623
|
||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
4,012,991
|
$
|
3,630,268
|
||||||
|
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
|
2009
|
2008
|
2007
|
|||||||||||
|
INTEREST
INCOME:
|
||||||||||||||
|
Interest
and fees on loans and leases
|
6
|
$
|
154,887
|
$
|
164,349
|
$
|
186,795
|
|||||||
|
Interest
on securities:
|
||||||||||||||
|
Taxable
|
39,782
|
31,231
|
21,937
|
|||||||||||
|
Nontaxable
|
8,595
|
6,688
|
6,079
|
|||||||||||
|
Interest
on federal funds sold
|
2
|
299
|
387
|
|||||||||||
|
Interest
on interest bearing deposits in other financial
institutions
|
27
|
18
|
33
|
|||||||||||
|
TOTAL
INTEREST INCOME
|
203,293
|
202,585
|
215,231
|
|||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||
|
Interest
on deposits
|
10
|
52,744
|
64,104
|
77,865
|
||||||||||
|
Interest
on short-term borrowings
|
733
|
4,571
|
13,293
|
|||||||||||
|
Interest
on other borrowings
|
17,053
|
18,224
|
14,733
|
|||||||||||
|
TOTAL
INTEREST EXPENSE
|
70,530
|
86,899
|
105,891
|
|||||||||||
|
NET
INTEREST INCOME
|
132,763
|
115,686
|
109,340
|
|||||||||||
|
Provision
for loan and lease losses
|
7
|
39,377
|
29,319
|
10,073
|
||||||||||
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
|
93,386
|
86,367
|
99,267
|
|||||||||||
|
NONINTEREST
INCOME:
|
||||||||||||||
|
Service
charges and fees
|
12,541
|
11,654
|
11,108
|
|||||||||||
|
Loan
servicing income
|
9,666
|
4,600
|
4,376
|
|||||||||||
|
Trust
fees
|
7,773
|
7,906
|
8,053
|
|||||||||||
|
Brokerage
and insurance commissions
|
3,117
|
3,719
|
3,097
|
|||||||||||
|
Securities
gains, net
|
8,648
|
1,525
|
341
|
|||||||||||
|
Gain
(loss) on trading account securities
|
211
|
(998
|
)
|
(105
|
)
|
|||||||||
|
Impairment
loss on equity securities
|
(40
|
)
|
(5,151
|
)
|
-
|
|||||||||
|
Gains
on sale of loans
|
6,084
|
1,610
|
3,578
|
|||||||||||
|
Income
(loss) on bank-owned life insurance
|
1,002
|
(1,184
|
)
|
1,777
|
||||||||||
|
Gain
on acquisition
|
1,296
|
-
|
-
|
|||||||||||
|
Gain
on sale of merchant services
|
-
|
5,200
|
-
|
|||||||||||
|
Other
noninterest income
|
2,406
|
1,315
|
(515
|
)
|
||||||||||
|
TOTAL
NONINTEREST INCOME
|
52,704
|
30,196
|
31,710
|
|||||||||||
|
NONINTEREST
EXPENSES:
|
||||||||||||||
|
Salaries
and employee benefits
|
15,
17
|
60,465
|
56,752
|
54,568
|
||||||||||
|
Occupancy
|
16
|
8,992
|
9,019
|
7,902
|
||||||||||
|
Furniture
and equipment
|
8
|
6,574
|
6,968
|
6,972
|
||||||||||
|
Professional
fees
|
9,127
|
9,876
|
8,793
|
|||||||||||
|
FDIC
insurance assessments
|
6,578
|
1,446
|
762
|
|||||||||||
|
Advertising
|
3,337
|
3,762
|
3,642
|
|||||||||||
|
Goodwill
impairment charge
|
9
|
12,659
|
-
|
-
|
||||||||||
|
Intangible
assets amortization
|
9
|
866
|
943
|
892
|
||||||||||
|
Net
loss on repossessed assets
|
10,847
|
827
|
1,004
|
|||||||||||
|
Other
noninterest expenses
|
13,075
|
12,646
|
13,071
|
|||||||||||
|
TOTAL
NONINTEREST EXPENSES
|
132,520
|
102,239
|
97,606
|
|||||||||||
|
INCOME
BEFORE INCOME TAXES
|
13,570
|
14,324
|
33,371
|
|||||||||||
|
Income
taxes
|
14
|
7,196
|
3,312
|
9,409
|
||||||||||
|
INCOME
FROM CONTINUING OPERATIONS
|
6,374
|
11,012
|
23,962
|
|||||||||||
|
Discontinued
operations:
|
||||||||||||||
|
Income
from discontinued operations before income taxes
|
-
|
-
|
2,756
|
|||||||||||
|
Income
taxes
|
-
|
-
|
1,085
|
|||||||||||
|
INCOME
FROM DISCONTINUED OPERATIONS
|
-
|
-
|
1,671
|
|||||||||||
|
NET
INCOME
|
6,374
|
11,012
|
25,633
|
|||||||||||
|
Net
income available to noncontrolling interest, net of tax
|
188
|
280
|
-
|
|||||||||||
|
NET
INCOME ATTRIBUTABLE TO HEARTLAND
|
6,562
|
11,292
|
25,633
|
|||||||||||
|
Preferred
dividends and discount
|
(5,344
|
)
|
(178
|
)
|
-
|
|||||||||
|
NET
INCOME AVAILABLE TO COMMON STOCKHOLDERS
|
$
|
1,218
|
$
|
11,114
|
$
|
25,633
|
||||||||
|
EARNINGS
PER COMMON SHARE – BASIC
|
$
|
0.07
|
$
|
0.68
|
$
|
1.56
|
||||||||
|
EARNINGS
PER COMMON SHARE – DILUTED
|
$
|
0.07
|
$
|
0.68
|
$
|
1.54
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING OPERATIONS-BASIC
|
$
|
0.07
|
$
|
0.68
|
$
|
1.45
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING OPERATIONS-DILUTED
|
$
|
0.07
|
$
|
0.68
|
$
|
1.44
|
||||||||
|
CASH
DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.40
|
$
|
0.40
|
$
|
0.37
|
||||||||
|
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,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
Flows From Operating Activities:
|
|||||||||||
|
Net
income
|
$
|
6,374
|
$
|
11,012
|
$
|
25,633
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Depreciation
and amortization
|
9,036
|
9,244
|
8,938
|
||||||||
|
Goodwill
impairment charge
|
12,659
|
-
|
-
|
||||||||
|
Provision
for loan and lease losses
|
39,377
|
29,319
|
10,073
|
||||||||
|
Provision
for deferred taxes
|
(2,598
|
)
|
(3,311
|
)
|
(1,564
|
)
|
|||||
|
Net
amortization (accretion) of premium/discount on securities
|
2,492
|
(397
|
)
|
(318
|
)
|
||||||
|
Securities
gains, net
|
(8,648
|
)
|
(1,525
|
)
|
(341
|
)
|
|||||
|
(Increase)
decrease in trading account securities
|
795
|
194
|
(320
|
)
|
|||||||
|
Loss
on impairment of equity securities
|
40
|
5,151
|
-
|
||||||||
|
Stock
based compensation
|
953
|
920
|
1,459
|
||||||||
|
Loans
originated for sale
|
(805,250
|
)
|
(266,936
|
)
|
(305,391
|
)
|
|||||
|
Proceeds
on sales of loans
|
808,949
|
261,531
|
318,340
|
||||||||
|
Net
gain on sales of loans
|
(6,084
|
)
|
(1,610
|
)
|
(3,578
|
)
|
|||||
|
(Increase)
decrease in accrued interest receivable
|
(933
|
)
|
1,460
|
221
|
|||||||
|
Increase
in prepaid expenses
|
(17,979
|
)
|
(193
|
)
|
(557
|
)
|
|||||
|
Decrease
in accrued interest payable
|
(2,564
|
)
|
(3,182
|
)
|
(941
|
)
|
|||||
|
Gain
on acquisition
|
(1,296
|
)
|
-
|
-
|
|||||||
|
Other,
net
|
4,558
|
(312
|
)
|
(10,499
|
)
|
||||||
|
Net
cash provided by operating activities from continuing
operations
|
39,881
|
41,365
|
41,155
|
||||||||
|
Net
cash provided by operating activities from discontinued
operations
|
-
|
-
|
10
|
||||||||
|
Net
cash provided by operating activities
|
39,881
|
41,365
|
41,165
|
||||||||
|
Cash
Flows From Investing Activities:
|
|||||||||||
|
Proceeds
from the sale of securities available for sale
|
198,086
|
99,265
|
35,801
|
||||||||
|
Proceeds
from the sale on securities held to maturity
|
1,659
|
-
|
-
|
||||||||
|
Proceeds
from the maturity of and principal paydowns on securities available for
sale
|
234,640
|
201,022
|
208,411
|
||||||||
|
Proceeds
from the maturity of and principal paydowns on securities held to
maturity
|
2,592
|
485
|
33
|
||||||||
|
Purchase
of securities available for sale
|
(670,493
|
)
|
(506,254
|
)
|
(303,596
|
)
|
|||||
|
Purchase
of securities held to maturity
|
(12,895
|
)
|
(25,038
|
)
|
(4,205
|
)
|
|||||
|
Net
(increase) decrease in loans and leases
|
8,156
|
(164,481
|
)
|
(135,305
|
)
|
||||||
|
Purchase
of bank-owned life insurance policies
|
-
|
-
|
(20,500
|
)
|
|||||||
|
Capital
expenditures
|
(6,596
|
)
|
(9,503
|
)
|
(20,033
|
)
|
|||||
|
Net
cash and cash equivalents received in acquisition, net of cash
paid
|
7,193
|
-
|
-
|
||||||||
|
Net
cash and cash equivalents received from sale of discontinued
operations
|
-
|
-
|
2,416
|
||||||||
|
Proceeds
on sale of OREO and other repossessed assets
|
17,871
|
2,334
|
840
|
||||||||
|
Net
cash used by investing activities from continuing
operations
|
(219,787
|
)
|
(402,170
|
)
|
(236,138
|
)
|
|||||
|
Net
cash provided by discontinued operations
|
-
|
-
|
22,631
|
||||||||
|
Net
cash used by investing activities
|
(219,787
|
)
|
(402,170
|
)
|
(213,507
|
)
|
|||||
|
Cash
Flows From Financing Activities:
|
|||||||||||
|
Net
increase in demand deposits and savings accounts
|
475,702
|
274,838
|
56,897
|
||||||||
|
Net
increase (decrease) in time deposit accounts
|
(115,192
|
)
|
(10,905
|
)
|
38,459
|
||||||
|
Net
increase (decrease) in short-term borrowings
|
(53,663
|
)
|
(143,962
|
)
|
80,263
|
||||||
|
Proceeds
from other borrowings
|
55,552
|
222,063
|
62,502
|
||||||||
|
Repayments
of other borrowings
|
(41,956
|
)
|
(47,837
|
)
|
(23,418
|
)
|
|||||
|
Proceeds
from issuance of preferred stock and warrant
|
-
|
81,698
|
-
|
||||||||
|
Purchase
of treasury stock
|
(236
|
)
|
(6,978
|
)
|
(9,821
|
)
|
|||||
|
Proceeds
from issuance of common stock
|
970
|
2,358
|
2,828
|
||||||||
|
Excess
tax benefits on exercised stock options
|
18
|
462
|
896
|
||||||||
|
Dividends
paid
|
(10,182
|
)
|
(6,461
|
)
|
(6,050
|
)
|
|||||
|
Net
cash provided by financing activities from continuing
operations
|
311,013
|
365,276
|
202,556
|
||||||||
|
Net
cash used by financing activities from discontinued
operations
|
-
|
-
|
(32,525
|
)
|
|||||||
|
Net
cash provided by financing activities
|
311,013
|
365,276
|
170,031
|
||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
131,107
|
4,471
|
(2,311
|
)
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
51,303
|
46,832
|
49,143
|
||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$
|
182,410
|
$
|
51,303
|
$
|
46,832
|
|||||
|
Supplemental
disclosure:
|
|||||||||||
|
Cash
paid for income/franchise taxes
|
$
|
7,269
|
$
|
9,406
|
$
|
17,322
|
|||||
|
Cash
paid for interest
|
$
|
73,094
|
$
|
90,081
|
$
|
106,832
|
|||||
|
Acquisitions:
|
|||||||||||
|
Net
assets acquired
|
$
|
5,625
|
$
|
-
|
$
|
650
|
|||||
|
Cash
received (paid) for acquisition
|
$
|
3,995
|
$
|
-
|
$
|
(50
|
)
|
||||
|
Cash
acquired from acquisition
|
$
|
3,198
|
$
|
-
|
$
|
-
|
|||||
|
Net
cash received (paid) for acquisition
|
$
|
7,193
|
$
|
-
|
$
|
(50
|
)
|
||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
|||||||||||
|
HEARTLAND
FINANCIAL USA, INC.
|
|||||||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Dollars
in thousands, except per share data)
|
|||||||||||||||||||||||||||||||||
|
Heartland
Financial USA, Inc. Stockholders’ Equity
|
|||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Capital
Surplus
|
Retained
Earnings
|
Acculumulated
Other Comprehensive Income (loss)
|
Treasury
Stock
|
Noncontrolling
Interest
|
Total
Equity
|
||||||||||||||||||||||||||
|
Balance
at January 1, 2007
|
$
|
-
|
$
|
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
|
|||||||||||||||
|
Cumulative
effect from adoption of EITF 06-4
|
(791
|
)
|
(791
|
)
|
|||||||||||||||||||||||||||||
|
Balance
at January 1, 2008
|
-
|
16,612
|
37,269
|
173,100
|
6,506
|
(3,678
|
)
|
- |
|
229,809
|
|||||||||||||||||||||||
|
Net
Income
|
11,292
|
(280
|
)
|
11,012
|
|||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
(16,967
|
)
|
(16,967
|
)
|
|||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period
|
1,782
|
1,782
|
|||||||||||||||||||||||||||||||
|
Reclassification
adjustment for net security (gains)/losses realized in net
income
|
3,626
|
3,626
|
|||||||||||||||||||||||||||||||
|
Reclassification
adjustment for net derivative gains realized in net income
|
(1,025
|
)
|
(1,025
|
)
|
|||||||||||||||||||||||||||||
|
Income
taxes
|
4,737
|
4,737
|
|||||||||||||||||||||||||||||||
|
Comprehensive
income
|
3,165
|
||||||||||||||||||||||||||||||||
|
Initial
capital injection by noncontrolling interest
|
3,300
|
3,300
|
|||||||||||||||||||||||||||||||
|
Issuance
of 81,698 shares of preferred stock and warrant
|
75,400
|
6,298
|
81,698
|
||||||||||||||||||||||||||||||
|
Cumulative
preferred dividends accrued and discount accretion
|
178
|
(178
|
)
|
-
|
|||||||||||||||||||||||||||||
|
Cash
dividends declared:
|
|||||||||||||||||||||||||||||||||
|
Common,
$.40 per share
|
(6,461
|
)
|
(6,461
|
)
|
|||||||||||||||||||||||||||||
|
Purchase
of 345,627 shares of common stock
|
(6,978
|
)
|
(6,978
|
)
|
|||||||||||||||||||||||||||||
|
Issuance
of 193,101 shares of common stock
|
(660
|
)
|
3,830
|
3,170
|
|||||||||||||||||||||||||||||
|
Commitments
to issue common stock
|
920
|
920
|
|||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
$
|
75,578
|
$
|
16,612
|
$
|
43,827
|
$
|
177,753
|
$
|
(1,341
|
)
|
$
|
(6,826
|
)
|
$
|
3,020
|
$
|
308,623
|
|||||||||||||||
|
Net
Income
|
6,562
|
(188
|
)
|
6,374
|
|||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
21,868
|
21,868
|
|||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period
|
(41
|
)
|
(41
|
)
|
|||||||||||||||||||||||||||||
|
Reclassification
adjustment for net security (gains)/losses realized in net
income
|
(8,608
|
)
|
(8,608
|
)
|
|||||||||||||||||||||||||||||
|
Reclassification
adjustment for net derivative gains realized in net income
|
196
|
196
|
|||||||||||||||||||||||||||||||
|
Income
taxes
|
(4,967
|
)
|
(4,967
|
)
|
|||||||||||||||||||||||||||||
|
Comprehensive
income
|
14,822
|
||||||||||||||||||||||||||||||||
|
Purchase
of noncontrolling interest
|
(56
|
)
|
(56
|
)
|
|||||||||||||||||||||||||||||
|
Cumulative
preferred dividends accrued and discount accretion
|
1,646
|
(1,646
|
)
|
-
|
|||||||||||||||||||||||||||||
|
Cash
dividends declared:
|
|||||||||||||||||||||||||||||||||
|
Preferred,
$50.00 per share
|
(3,698
|
)
|
(3,698
|
)
|
|||||||||||||||||||||||||||||
|
Common,
$.40 per share
|
(6,484
|
)
|
(6,484
|
)
|
|||||||||||||||||||||||||||||
|
Purchase
of 16,021 shares of common stock
|
(236
|
)
|
(236
|
)
|
|||||||||||||||||||||||||||||
|
Issuance
of 87,893 shares of common stock
|
(496
|
)
|
1,629
|
1,133
|
|||||||||||||||||||||||||||||
|
Commitments
to issue common stock
|
953
|
953
|
|||||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
$
|
77,224
|
$
|
16,612
|
$
|
44,284
|
$
|
172,487
|
$
|
7,107
|
$
|
(5,433
|
)
|
$
|
2,776
|
$
|
315,057
|
||||||||||||||||
|
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 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; Broomfield County in Colorado; and Hennepin
County in Minnesota. 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; Minnesota 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 Summit Bank & Trust, of which Heartland was an 84%
owner on December 31, 2009 and Minnesota Bank & Trust, of which Heartland
was an 80% owner on December 31, 2009. All significant intercompany balances and
transactions have been eliminated in consolidation. The noncontrolling interest
in the majority-owned subsidiaries is noted on the consolidated balance sheets
and 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 2007.
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.
Heartland
evaluated subsequent events through the filing date of its annual 10-K with the
SEC on March 16, 2010.
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. Declines in the fair value of investment securities
available for sale (with certain exceptions for debt securities noted below)
that are deemed to be other-than-temporary are charged to earnings as a realized
loss, and a new cost basis for the securities is established. In evaluating
other-than-temporary impairment, Heartland considers the length of time and
extent to which the fair value has been less than cost, the financial condition
and near-term prospects of the issuer, and the intent and ability of Heartland
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value in the near term. Declines in the
fair value of debt securities below amortized cost are deemed to be
other-than-temporary in circumstances where: (1) Heartland has the intent
to sell a security; (2) it is more likely than not that Heartland will be
required to sell the security before recovery of its amortized cost basis; or
(3) Heartland does not expect to recover the entire amortized cost basis of
the security. If Heartland intends to sell a security or if it is more likely
than not that Heartland will be required to sell the security before recovery,
an other-than-temporary impairment write-down is recognized in earnings equal to
the difference between the security’s amortized cost basis and its fair value.
If an entity does not intend to sell the security or it is not more likely than
not that it will be required to sell the security before recovery, the
other-than-temporary impairment write-down is separated into an amount
representing credit loss, which is recognized in earnings, and an amount related
to all other factors, which is recognized in other comprehensive income.
Realized securities gains or losses on securities sales (using specific
identification method) and declines in value judged to be other-than-temporary
are included in investment securities gains (losses), net, in the consolidated
statements of 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 or lease 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,
2009 and 2008, Heartland was servicing loans for others with aggregate unpaid
principal balances of $1.15 billion and $712.9 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.
Goodwill and
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 if events occur which may indicate possible
impairment, and assesses goodwill at both the consolidated and the bank level.
Goodwill impairment is determined using a two-step process. In the first step,
the fair value of a reporting unit is compared to its carrying amount, including
goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is not considered impaired and it is not necessary to continue to step
two of the impairment process. If the fair value of the reporting unit is less
than the carrying amount, step two is performed, where the implied fair value of
goodwill is compared to the carrying value of the reporting units’ goodwill.
Implied goodwill is computed as a residual value after allocating the fair value
of the reporting unit to its assets and liabilities. Heartland estimates the
fair value of its reporting units using market multiples of comparable entities,
including recent transactions, or a combination of market multiples and
discounted cash flow methodology. These methods incorporate assumptions specific
to the entity, such as the use of financial forecasts.
Core
deposit premiums are amortized over eight to eighteen 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 as an offset to the servicing revenue earned 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, 2009 and
2008.
Bank-Owned Life
Insurance – Heartland and its subsidiaries have purchased life insurance
policies on the lives 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 (loss).
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.
Derivative
Financial Instruments
- Heartland
uses derivative financial instruments as part of its interest rate risk
management including interest rate swaps, caps, floors and collars. FASB
Accounting Standards Topic 815, “Disclosures about Derivative Instruments and Hedging
Activities”, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. As required by ASC 815, 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, 2009 or 2008.
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 ASC 815.
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, 2009, 2008, and 2007 are shown in the
table below:
|
(Dollars
and number of shares in thousands)
|
|
2009
|
2008
|
2007
|
||||||||||
|
Income
from continuing operations
|
$
|
6,374
|
$
|
11,012
|
$
|
23,962
|
||||||
|
Discontinued
operations:
|
||||||||||||
|
Income
from discontinued operations before income taxes
|
-
|
-
|
2,756
|
|||||||||
|
Income
taxes
|
-
|
-
|
1,085
|
|||||||||
|
Income
from discontinued operations
|
-
|
-
|
1,671
|
|||||||||
|
Net
income
|
6,374
|
11,012
|
25,633
|
|||||||||
|
Net
income attributable to non controlling interest, net of
tax
|
188
|
280
|
-
|
|||||||||
|
Net
income attributable to Heartland
|
6,562
|
11,292
|
25,633
|
|||||||||
|
Preferred
dividends and discount
|
(5,344
|
)
|
(178
|
)
|
-
|
|||||||
|
Net
income available to common stockholders
|
$
|
1,218
|
$
|
11,114
|
$
|
25,633
|
||||||
|
Weighted
average common shares outstanding for basic earnings per
share
|
16,304
|
16,299
|
16,478
|
|||||||||
|
Assumed
incremental common shares issued upon exercise of stock options
|
21
|
67
|
119
|
|||||||||
|
Weighted
average common shares for diluted earnings per share
|
16,325
|
16,366
|
16,597
|
|||||||||
|
Earnings
per common share-basic
|
$
|
0.07
|
$
|
0.69
|
$
|
1.56
|
||||||
|
Earnings
per common share-diluted
|
0.07
|
0.68
|
1.54
|
|||||||||
|
Earnings
per share from continuing operations-basic
|
0.07
|
0.69
|
1.45
|
|||||||||
|
Earnings
per share from continuing operations-diluted
|
0.07
|
0.68
|
1.44
|
|||||||||
|
Number
of antidilutive stock options excluded from diluted earnings per share
computation
|
573
|
342
|
140
|
|||||||||
Effect of New
Financial Accounting Standards – Effective for
interim and annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification (“Codification” or “ASC”) is the single source of
authoritative literature recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in accordance with U.S.
generally accepted accounting principles (“GAAP”). The Codification does not
change current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all of the authoritative literature related to a
particular topic in one place. The Codification supersedes all pre-existing
accounting and reporting standards, excluding separate rules and other
interpretive guidance released by the Securities and Exchange Commission. New
accounting guidance is now issued in the form of Accounting Standards Updates,
which update the Codification. All guidance contained in the Codification
carries an equal level of authority. Heartland adopted the Codification in the
period ending September 30, 2009, and as a result has replaced references to
standards that were issued prior to the Codification with a description of the
applicable accounting guidance. The adoption of this accounting standard did not
have any impact on Heartland’s consolidated financial statements.
In
December 2007, the FASB issued ASC 805, “Business Combinations”, which
requires significant changes in the accounting and reporting for business
acquisitions. Among many changes under this accounting standard, an acquirer
will record 100 percent 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. ASC 805 applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. Heartland adopted this accounting standard on January 1,
2009, and, in the third quarter of 2009, applied its provisions to the assets
acquired and liabilities assumed related to the acquisition of The Elizabeth
State Bank. For a description of this acquisition, see Note 2.
In
December 2007, the FASB issued ASC 810, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 5”, which
establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary. Key changes under this accounting standard are that
noncontrolling interests in a subsidiary are to 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, the resultant
gain or loss is recognized and the remaining interest is remeasured at fair
value on the date control is lost. Effective January 1, 2009, this accounting
standard requires retroactive adoption of the presentation and disclosure
requirements for existing consolidated minority interests and prospective
application for any new minority interests. The presentation and disclosure
requirements of ASC 810 have been applied for the current period and
retrospectively for prior periods on Heartland’s accompanying consolidated
financial statements.
In March
2008, the FASB issued ASC 815, “Disclosures about Derivative
Instruments and Hedging Activities”, which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows. ASC
815 is effective for all financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. For further detail on
Heartland’s derivative instruments and hedging activities, see Note
13.
In
January 2009, the FASB issued ASC 325, “Amendments to the Impairment and
Interest Income Measurement Guidance of EITF issue No. 99-20”. ASC 325
amends the impairment guidance previously issued in order to achieve more
consistent determination of whether an other-than-temporary impairment (“OTTI”)
has occurred. This ASC amended previous guidance to more closely align the OTTI
guidance therein in ASC 320. Retrospective application to a prior interim or
annual period is prohibited. The implementation of ASC 325 in 2009 did not have
a material impact on Heartland’s consolidated financial statements.
In April
2009, the FASB issued an accounting standard which amended OTTI guidance in GAAP
for debt securities. This accounting standard revises the guidance for
determining whether an impairment is other than temporary for debt securities,
requires bifurcation of any other than temporary impairment between the amount
representing credit loss and the amount related to all other factors and
requires additional disclosures on other than temporary impairment of debt and
equity securities. This accounting standard was effective for interim and annual
reporting periods ending after June 15, 2009. Heartland adopted this accounting
standard for the period ended June 30, 2009. See Note 5 for the disclosures
required under this accounting standard, which was subsequently codified into
ASC 320, “Investments-Debt and
Equity Securities”.
In April
2009, the FASB issued an accounting standard related to disclosure about the
fair value of financial instruments in interim reporting periods of publicly
traded companies that were previously only required to be disclosed in annual
financial statements. Heartland adopted this standard for the period ended June
30, 2009. As this accounting standard amended only the disclosure requirements
about the fair value of financial statements in interim periods, the adoption
had no impact on Heartland’s consolidated financial statements. See Note 21 for
the disclosures required under this accounting standard, which was subsequently
codified into ASC Topic 825, “Financial
Instruments”.
In April
2009, the FASB issued an accounting standard which provides additional guidance
on estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased in relation to normal market activity for
the asset or liability, provides guidance on circumstances that may indicate
that a transaction is not orderly and requires additional disclosures about fair
value measurements in annual and interim reporting periods. Heartland adopted
this accounting standard for the period ended June 30, 2009. The provisions in
this accounting standard were applied prospectively and did not result in
significant changes to Heartland’s valuation techniques. Furthermore, the
adoption of this accounting standard, which was subsequently codified into ASC
Topic 820, “Fair Value
Measurements and Disclosures”, did not have a material
impact on Heartland’s consolidated financial statements.
In May
2009, the FASB issued an accounting standard on reporting of subsequent events.
The objective of this standard is to establish general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this accounting standard sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This accounting
standard was subsequently codified into ASC Topic 855, “Subsequent Events”. This
accounting standard was effective for financial statements issued for interim
and annual periods ending after June 15, 2009, and did not have any impact on
Heartland’s consolidated financial statements.
In June
2009, the FASB issued an accounting standard which amends current GAAP related
to the accounting for transfers and servicing of financial assets and
extinguishments of liabilities, including the removal of the concept of a
qualifying special-purpose entity from GAAP. This new accounting standard also
clarifies that a transferor must evaluate whether it has maintained effective
control of a financial asset by considering its continuing direct or indirect
involvement with the transferred financial asset. This accounting
standard was subsequently codified into ASC Topic 860, “Accounting for Transfers of
Financial Assets”. This accounting standard is effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter and is
not anticipated to have any material impact on Heartland’s consolidated
financial statements.
In June
2009, the FASB issued an accounting standard which will require a qualitative
rather than a quantitative analysis to determine the primary beneficiary of a
variable interest entity for consolidation purposes. This accounting standard
requires an enterprise to perform an analysis and ongoing reassessments to
determine whether the enterprise’s variable interest or interests give it a
controlling financial interest in a variable interest entity and amends certain
guidance for determining whether an entity is a variable interest entity. It
also requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement
in a variable interest entity. This accounting standard was subsequently
codified into ASC Topic 810, “Improvements for Financial
Reporting by Enterprises Involved with Variable Interest
Entities”. This accounting standard is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, and for all interim reporting periods after that and is
not anticipated to have any material impact on Heartland’s consolidated
financial statements.
In
January 2010, the FASB issued an accounting standard which requires (i) fair
value disclosures by each class of assets and liabilities (generally a subset
within a line item as presented in these statement of financial position) rather
than major category, (ii) for items measured at fair value on a recurring basis,
the amounts of significant transfers between Levels 1 and 2, and transfers into
and out of Level 3, and the reasons for those transfers, including separate
discussion related to the transfers into each level apart from transfers out of
each level, and (iii) gross presentation of the amounts of purchases, sales,
issuances and settlements in the Level 3 recurring measurement reconciliation.
Additionally, the standard clarifies that a description of the valuation
techniques(s) and inputs used to measure fair values is required for both
recurring and nonrecurring fair value measurements. Also, if a valuation
technique has changed, entities should disclose that change and the reason for
the changes. This accounting standard was subsequently codified into ASC Topic
820, “Improving Disclosures
about Fair Value Measurements”. Disclosures other than the
gross presentation changes in the Level 3 reconciliation are effective for the
first reported period beginning after December 31, 2009. The requirement to
present the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis will be effective for fiscal years beginning after December 15,
2010 and is not anticipated to have a material impact on Heartland’s
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 July
2, 2009, Heartland acquired all deposits of The Elizabeth State Bank in
Elizabeth, Illinois through its subsidiary Galena State Bank based in Galena,
Illinois in a whole bank loss sharing transaction facilitated by the FDIC. Bank
branches previously owned and operated by The Elizabeth State Bank reopened on
Monday, July 6, 2009, as Galena State Bank branches. As of July 2, 2009, The
Elizabeth State Bank had loans of $42.7 million and deposits of $49.3 million.
Galena State Bank paid a premium of 1.0 percent to acquire all of the deposits
of the failed bank. In addition to assuming all of the deposits of the failed
bank, Galena State Bank agreed to purchase $53.6 million of assets. The FDIC
retained the remaining assets for later disposition.
The
acquired loans and other real estate owned are covered by two loss share
agreements between the FDIC and Galena State Bank, which affords Galena State
Bank significant loss protection. Under the loss share agreements, the FDIC will
cover 80 percent of the covered loan and other real estate owned losses
(referred to as covered assets) up to $10 million and 95 percent of losses in
excess of that amount. The term for loss sharing on non-residential real estate
losses is five years with respect to losses and eight years with respect to
recoveries, while the term for loss sharing on residential real estate loans is
ten years with respect to losses and recoveries. The reimbursable losses from
the FDIC are based on the book value of the relevant loan as determined by the
FDIC at the date of the transaction. New loans made after that date are not
covered by the loss share agreements.
Galena
State Bank received a $2.5 million discount on the assets acquired and paid a
1.0 percent deposit premium. The expected reimbursements under the loss share
agreements were recorded as an indemnification asset at the estimated fair value
of $4.4 million at the acquisition date. The estimated fair value of the loans
acquired was $37.8 million and the estimated fair value of the deposits assumed
was $49.5 million. In addition, a core deposit intangible of $200 thousand was
recorded. A gain totaling $1.3 million resulted from the acquisition and is
included as a component of noninterest income on the statement of income. The
amount of the gain is equal to the amount by which the fair value of the
liabilities assumed exceeded the fair value of the assets
purchased.
The
Elizabeth State Bank acquisition was accounted for under the acquisition method
of accounting in accordance with ASC 805, “Business Combinations”.
Purchased loans acquired in a business combination, which include loans
purchased in The Elizabeth State Bank acquisition, are recorded at estimated
fair value on their purchase date, but the purchaser can not carryover the
related allowance for loan and lease losses. Purchased loans are accounted for
under ASC 310-30, “Loans and
Debt Securities with Deteriorated Credit Quality”, when the loans have
evidence of credit deterioration since origination and it is probable at the
date of the acquisition that Heartland will not collect all contractually
required principal and interest payments. Evidence of credit quality
deterioration at the purchase date included statistics such as past due and
nonaccrual status. Generally, acquired loans that meet Heartland’s definition
for nonaccrual status fall within the scope of ASC 310-30. The difference
between contractually required payments at acquisition and the cash flows
expected to be collected at acquisition is referred to as the nonaccretable
difference which is included in the carrying value of the loans. Subsequent
decreases to the expected cash flows will generally result in a provision for
loan and lease losses. Subsequent increases in cash flows result in a reversal
of the provision for loan and lease losses to the extent of prior charges, or a
reclassification of the difference from nonaccretable to accretable with a
positive impact on interest income. Further, any excess of cash flows expected
at acquisition over the estimated fair value is referred to as the accretable
yield and is recognized into interest income over the remaining life of the loan
when there is a reasonable expectation about the amount and timing of such cash
flows.
The
carrying amount of the covered loans at December 31, 2009, consisted of impaired
and nonimpaired loans purchased and are summarized in the following
table:
|
(Dollars
in thousands)
|
||||||||||||
|
Impaired
Purchased Loans
|
Non
Impaired Purchased Loans
|
Total
Covered Loans
|
||||||||||
|
Commercial
and commercial real estate
|
$
|
5,102
|
$
|
9,966
|
$
|
15,068
|
||||||
|
Residential
mortgage
|
407
|
8,577
|
8,984
|
|||||||||
|
Agricultural
and agricultural real estate
|
594
|
3,032
|
3,626
|
|||||||||
|
Consumer
loans
|
1,057
|
3,125
|
4,182
|
|||||||||
|
Total
Covered Loans
|
$
|
7,160
|
$
|
24,700
|
$
|
31,860
|
||||||
On the
acquisition date, the preliminary estimate of the contractually required
payments receivable for all loans with evidence of credit deterioration since
origination acquired in the acquisition was $13.8 million and the estimated fair
value of the loans were $9.0 million. At December 31, 2009, a majority of these
loans were valued based upon the liquidation value of the underlying collateral,
because the expected cash flows are primarily based on the liquidation of
underlying collateral and the timing and amount of the cash flows could not be
reasonably estimated. There was no allowance for loan and lease losses related
to these ASC 310-30 loans at December 31, 2009.
On the
acquisition date, the preliminary estimate of the contractually required
payments receivable for all non impaired loans acquired in the acquisition was
$28.9 million and the estimated fair value of the loans was $28.7
million.
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 been reflected in this
line item for 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.
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, 2009 and 2008 were $2.9 million and $1.4 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, 2009 and 2008 are summarized as
follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2009
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
277,219
|
$
|
2,503
|
$
|
(281
|
)
|
$
|
279,441
|
|||||||
|
Mortgage-backed
securities
|
608,556
|
11,765
|
(8,383
|
)
|
611,938
|
|||||||||||
|
Obligations
of states and political subdivisions
|
208,197
|
5,328
|
(1,675
|
)
|
211,850
|
|||||||||||
|
Corporate
debt securities
|
1,942
|
-
|
(70
|
)
|
1,872
|
|||||||||||
|
Total
debt securities
|
1,095,914
|
19,596
|
(10,409
|
)
|
1,105,101
|
|||||||||||
|
Equity
securities
|
29,751
|
616
|
-
|
30,367
|
||||||||||||
|
Total
|
$
|
1,125,665
|
$
|
20,212
|
$
|
(10,409
|
)
|
$
|
1,135,468
|
|||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
190,599
|
$
|
4,832
|
$
|
(75
|
)
|
$
|
195,356
|
|||||||
|
Mortgage-backed
securities
|
505,711
|
4,688
|
(16,409
|
)
|
493,990
|
|||||||||||
|
Obligations
of states and political subdivisions
|
145,534
|
4,230
|
(981
|
)
|
148,783
|
|||||||||||
|
Corporate
debt securities
|
4,479
|
185
|
-
|
4,664
|
||||||||||||
|
Total
debt securities
|
846,323
|
13,935
|
(17,465
|
)
|
842,793
|
|||||||||||
|
Equity
securities
|
28,820
|
73
|
-
|
28,893
|
||||||||||||
|
Total
|
$
|
875,143
|
$
|
14,008
|
$
|
(17,465
|
)
|
$
|
871,686
|
|||||||
The
amortized cost, gross unrealized gains and losses and estimated fair values of
held to maturity securities as of December 31, 2009 and 2008 are summarized as
follows:
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
||||||||||||||
|
2009
|
|||||||||||||||||
|
Securities
held to maturity:
|
|||||||||||||||||
|
Mortgage-backed
securities
|
$
|
12,011
|
$
|
35
|
$
|
(1,596
|
)
|
$
|
10,450
|
||||||||
|
Obligations
of states and political subdivisions
|
27,043
|
-
|
(16
|
)
|
27,027
|
||||||||||||
|
Total
|
$
|
39,054
|
$
|
35
|
$
|
(1,612
|
)
|
$
|
37,477
|
||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
||||||||||||||
|
2008
|
|||||||||||||||||
|
Securities
held to maturity:
|
|||||||||||||||||
|
Mortgage-backed
securities
|
$
|
15,511
|
$
|
57
|
$
|
(4,108
|
)
|
$
|
11,460
|
||||||||
|
Obligations
of states and political subdivisions
|
14,814
|
60
|
(8
|
)
|
14,866
|
||||||||||||
|
Total
|
$
|
30,325
|
$
|
117
|
$
|
(4,116
|
)
|
$
|
26,326
|
||||||||
More than
75% of our mortgage-backed securities are issuances of government-sponsored
enterprises.
Included
in the equity securities at December 31, 2009 and 2008, were shares of stock in
the Federal Home Loan Banks of Des Moines, Chicago, Dallas, San Francisco,
Seattle and Topeka at an amortized cost of $15.8 million and $15.2 million,
respectively. There were no unrealized gains or losses recorded on these
securities as they are not readily marketable. Heartland considers its FHLB
stock as a long-term investment that provides access to competitive products and
liquidity. During 2009, certain Federal Home Loan Banks in the FHLB System
suspended repurchases of excess capital stock. Heartland evaluates impairment in
this investment based on the ultimate recoverability of the par value and at
December 31, 2009, did not consider the investment to be other than temporarily
impaired.
The
amortized cost and estimated fair value of debt securities available for sale at
December 31, 2009, 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
|
$
|
99,010
|
$
|
99,704
|
||
|
Due
in 1 to 5 years
|
740,108
|
745,723
|
||||
|
Due
in 5 to 10 years
|
186,163
|
186,548
|
||||
|
Due
after 10 years
|
70,633
|
73,126
|
||||
|
Total
|
$
|
1,095,914
|
$
|
1,105,101
|
||
The
amortized cost and estimated fair value of debt securities held to maturity at
December 31, 2009, 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 year or less
|
$
|
-
|
$
|
-
|
||
|
Due
in 1 to 5 years
|
4,765
|
4,442
|
||||
|
Due
in 5 to 10 years
|
7,364
|
6,208
|
||||
|
Due
after 10 years
|
26,925
|
26,827
|
||||
|
Total
|
$
|
39,054
|
$
|
37,477
|
||
As of
December 31, 2009, securities with a fair value of $494.4 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, 2009, 2008, and 2007, are summarized as follows:
|
(Dollars
in thousands)
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
Securities
sold:
|
|||||||||
|
Proceeds
from sales
|
$
|
199,745
|
$
|
99,265
|
$
|
35,801
|
|||
|
Gross
security gains
|
9,012
|
1,525
|
358
|
||||||
|
Gross
security losses
|
364
|
-
|
17
|
||||||
During
the years ended December 31, 2009, 2008, and 2007, Heartland incurred
other than temporary impairment losses of $40,000, $5.2 million, and $0,
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, 2009 and 2008. 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, 2008 and 2007,
respectively.
Unrealized
Losses on Securities Available for Sale
|
December
31, 2009
|
|||||||||||||||||||||
|
(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
|
$
|
41,255
|
$
|
(281
|
)
|
$
|
-
|
$
|
-
|
$
|
41,255
|
$
|
(281
|
)
|
|||||||
|
Mortgage-backed
securities
|
120,270
|
(4,120
|
)
|
32,784
|
(4,263
|
)
|
153,054
|
(8,383
|
)
|
||||||||||||
|
Obligations
of states and political subdivisions
|
47,831
|
(1,510
|
)
|
2,681
|
(165
|
)
|
50,512
|
(1,675
|
)
|
||||||||||||
|
Corporate
debt securities
|
1,872
|
(70
|
)
|
-
|
-
|
1,872
|
(70
|
)
|
|||||||||||||
|
Total
debt securities
|
211,228
|
(5,981
|
)
|
35,465
|
(4,428
|
)
|
246,693
|
(10,409
|
)
|
||||||||||||
|
Equity
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total
temporarily impaired securities
|
$
|
211,228
|
$
|
(5,981
|
)
|
$
|
35,465
|
$
|
(4,428
|
)
|
$
|
246,693
|
$
|
(10,409
|
)
|
||||||
Unrealized
Losses on Securities Available for Sale
|
December
31, 2008
|
|||||||||||||||||||||
|
(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
|
$
|
18,022
|
$
|
(75
|
)
|
$
|
-
|
$
|
-
|
$
|
18,022
|
$
|
(75
|
)
|
|||||||
|
Mortgage-backed
securities
|
231,056
|
(8,820
|
)
|
31,366
|
(7,589
|
)
|
262,422
|
(16,409
|
)
|
||||||||||||
|
Obligations
of states and political subdivisions
|
32,280
|
(981
|
)
|
-
|
-
|
32,280
|
(981
|
)
|
|||||||||||||
|
Corporate
debt securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total
debt securities
|
281,358
|
(9,876
|
)
|
31,366
|
(7,589
|
)
|
312,724
|
(17,465
|
)
|
||||||||||||
|
Equity
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Total
temporarily impaired securities
|
$
|
281,358
|
$
|
(9,876
|
)
|
$
|
31,366
|
$
|
(7,589
|
)
|
$
|
312,724
|
$
|
(17,465
|
)
|
||||||
Unrealized
losses on Heartland’s mortgage-backed securities are the result of changes in
market interest rates or widening of market spreads subsequent to the initial
purchase of the securities and not related to concerns regarding the underlying
credit of the issuers or the underlying collateral. It is expected that the
securities will not be settled at a price less than the amortized cost of the
investment. Because the decline in fair value is attributable to changes in
interest rates or widening market spreads and not credit quality, and because
Heartland has the intent and ability to hold these investments until a market
price recovery or to maturity, the unrealized losses on these investments are
not considered other-than-temporarily impaired.
Unrealized
losses on Heartland’s obligations of states and political subdivisions are the
result of changes in market interest rates or widening of market spreads
subsequent to the initial purchase of the securities. Management monitors the
published credit ratings of these securities and has noted credit rating
reductions in a number of these securities, primarily due to the downgrade in
the credit ratings of the insurance companies providing credit enhancement to
that of the issuing municipalities. Because the decline in fair value is
attributable to changes in interest rates or widening market spreads due to
insurance company downgrades and not underlying credit quality, and because
Heartland has the intent and ability to hold these investments until a market
price recovery or to maturity, the unrealized losses on these investments are
not considered other-than-temporarily impaired.
SIX
LOANS
AND LEASES
Loans and
leases as of December 31, 2009 and 2008, were as follows:
|
(Dollars
in thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Loans and
leases held to maturity:
|
||||||||
|
Commercial
and commercial real estate
|
$
|
1,670,108
|
$
|
1,718,071
|
||||
|
Residential
mortgage
|
175,059
|
203,921
|
||||||
|
Agricultural
and agricultural real estate
|
256,780
|
247,664
|
||||||
|
Consumer
|
231,709
|
234,061
|
||||||
|
Gross
loans held to maturity
|
2,333,656
|
2,403,717
|
||||||
|
Unearned
discount
|
(2,491
|
)
|
(2,443
|
)
|
||||
|
Deferred
loan fees
|
(2,349
|
)
|
(2,102
|
)
|
||||
|
Net
loans held to maturity
|
2,328,816
|
2,399,172
|
||||||
|
Direct
financing leases held to maturity:
|
||||||||
|
Gross
rents receivable
|
1,386
|
4,160
|
||||||
|
Estimated
residual value
|
1,104
|
2,128
|
||||||
|
Unearned
income
|
(164
|
)
|
(459
|
)
|
||||
|
Net
direct financing leases held to maturity
|
2,326
|
5,829
|
||||||
|
Total
loans and leases held to maturity
|
2,331,142
|
2,405,001
|
||||||
|
Loans
covered under loss share agreements:
|
||||||||
|
Commercial
and commercial real estate
|
|
15,068
|
|
-
|
||||
|
Residential
mortgage
|
8,984
|
-
|
||||||
|
Agricultural
and agricultural real estate
|
3,626
|
-
|
||||||
|
Consumer
|
4,182
|
-
|
||||||
|
Total
loans covered under loss share agreements
|
31,860
|
-
|
||||||
|
Allowance
for loan and lease losses
|
(41,848
|
)
|
(35,651
|
)
|
||||
|
Loans
and leases, net
|
$
|
2,321,154
|
$
|
2,369,350
|
||||
Direct
financing leases receivable are generally short-term equipment leases. Future
minimum lease payments as of December 31, 2009, were as follows: $1.5 million
for 2010, $504,000 for 2011, $327,000 for 2012, $67,000 for 2013, $46,000 for
2014 and $87,000 thereafter.
Nearly
58% of the loan portfolio is concentrated in the Midwestern States of Iowa,
Illinois, Wisconsin and Minnesota. The remaining portion of the loan portfolio
is concentrated in the Western States of New Mexico, Arizona, Montana and
Colorado.
The
following table presents nonperforming loans at December 31, 2009 and
2008.
|
(Dollars
in thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Nonaccrual
loans
|
$
|
78,118
|
$
|
76,953
|
||||
|
Loans
and leases contractually past due 90 days or more
|
17
|
1,005
|
||||||
|
Total
nonperforming loans
|
$
|
78,135
|
$
|
77,958
|
||||
Management
has determined that the majority of the impaired loans are those that have
nonaccrual status, are past due 90 days or more and still accruing or have had
their terms restructured in a troubled debt restructuring. The following table
presents data on impaired loans as of December 31, 2009 and
2008:
|
(Dollars
in thousands)
|
|||||||||
|
2009
|
2008
|
||||||||
|
Impaired
loans for which a valuation allowance has been provided
|
$
|
98,859
|
$
|
42,454
|
|||||
|
Impaired
loans for which no valuation allowance has been provided
|
25,932
|
35,204
|
|||||||
|
Total
loans determined to be impaired
|
$
|
124,791
|
$
|
77,658
|
|||||
|
Allowance
for loan losses related to impaired loans
|
$
|
12,956
|
$
|
4,376
|
|||||
The
average balances of impaired loans for the years ended December 31, 2009, 2008
and 2007 were $95.4 million, $45.2 million and $19.3 million, respectively. For
the years ended December 31, 2009, 2008 and 2007, interest income which would
have been recorded under the original terms of these loans and leases amounted
to approximately $6.4 million, $5.1 million and $2.1 million, respectively, and
interest income actually recorded amounted to approximately $1.0 million,
$323,000 and $261,000, respectively.
Heartland
had $62.6 million of restructured loans at December 31, 2009 of which $16.0
million were classified as nonaccrual. Commercial and agricultural loans
comprised $52.3 million and $9.0 million of the restructured loans,
respectively, at December 31, 2009. There were no loans and leases on a
restructured status at December 31, 2008.
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, 2009 and 2008, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
|
2009
|
2008
|
||||||
|
Balance
at beginning of year
|
$
|
72,187
|
$
|
66,045
|
||||
|
Advances
|
20,397
|
26,035
|
||||||
|
Repayments
|
(5,734
|
)
|
(19,893
|
)
|
||||
|
Balance,
end of year
|
$
|
86,850
|
$
|
72,187
|
||||
SEVEN
ALLOWANCE
FOR LOAN AND LEASE LOSSES
Changes
in the allowance for loan and lease losses for the years ended December 31,
2009, 2008 and 2007, were as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$
|
35,651
|
$
|
32,993
|
$
|
29,981
|
|||||
|
Provision
for loan and lease losses
|
39,377
|
29,319
|
10,073
|
||||||||
|
Recoveries
on loans and leases previously charged off
|
1,785
|
1,086
|
1,641
|
||||||||
|
Loans
and leases charged off
|
(34,965
|
)
|
(27,747
|
)
|
(8,564
|
)
|
|||||
|
Reduction
related to discontinued operations
|
-
|
-
|
(138
|
)
|
|||||||
|
Balance
at end of year
|
$
|
41,848
|
$
|
35,651
|
$
|
32,993
|
|||||
EIGHT
PREMISES,
FURNITURE AND EQUIPMENT
Premises,
furniture and equipment as of December 31, 2009 and 2008, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
and land improvements
|
$
|
33,984
|
$
|
33,354
|
||||
|
Buildings
and building improvements
|
95,000
|
91,504
|
||||||
|
Furniture
and equipment
|
44,014
|
43,402
|
||||||
|
Total
|
172,998
|
168,260
|
||||||
|
Less
accumulated depreciation
|
(54,163
|
)
|
(47,760
|
)
|
||||
|
Premises,
furniture and equipment, net
|
$
|
118,835
|
$
|
120,500
|
||||
Depreciation
expense on premises, furniture and equipment was $7.3 million, $7.6 million and
$7.3 million for 2009, 2008, and 2007, respectively.
NINE
GOODWILL
AND INTANGIBLE ASSETS
The
following table summarizes the changes in Heartland’s goodwill for 2009 and
2008.
|
(Dollars
in thousands)
|
|||
|
Goodwill
balance at December 31, 2007
|
$
|
40,207
|
|
|
Acquisitions
and adjustments
|
-
|
||
|
Goodwill
balance at December 31, 2008
|
40,207
|
||
|
Impairment
charges in 2009
|
(12,659
|
)
|
|
|
Goodwill
balance at December 31, 2009
|
$
|
27,548
|
|
Goodwill
impairment charges were recorded at Rocky Mountain Bank and Arizona Bank &
Trust in 2009 of $7.5 million and $5.2 million, respectively. No impairment was
recorded for the years ended December 31, 2008 or 2007.
The gross
carrying amount of intangible assets and the associated accumulated amortization
at December 31, 2009 and 2008, are presented in the tables below.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||
|
Amortized
intangible assets
|
||||||||||||
|
Core
deposit intangibles
|
$
|
9,957
|
$
|
7,856
|
$
|
9,757
|
$
|
7,092
|
||||
|
Mortgage
servicing rights
|
13,021
|
3,488
|
7,799
|
3,233
|
||||||||
|
Customer
relationship intangible
|
1,177
|
431
|
1,177
|
329
|
||||||||
|
Total
|
$
|
24,155
|
$
|
11,775
|
$
|
18,733
|
$
|
10,654
|
||||
|
Unamortized
intangible assets
|
$
|
12,380
|
$
|
8,079
|
||||||||
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:
|
||||||||||||
|
2010
|
$
|
487
|
$
|
2,847
|
$
|
101
|
$
|
3,435
|
||||
|
2011
|
470
|
1,910
|
100
|
2,480
|
||||||||
|
2012
|
441
|
1,592
|
55
|
2,088
|
||||||||
|
2013
|
423
|
1,274
|
44
|
1,741
|
||||||||
|
2014
|
186
|
955
|
43
|
1,184
|
||||||||
|
Thereafter
|
94
|
955
|
403
|
1,452
|
||||||||
The
following table summarizes the changes in capitalized mortgage servicing
rights:
|
(Dollars
in thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance,
beginning of year
|
$
|
4,566
|
$
|
3,913
|
||||
|
Originations
|
8,614
|
2,457
|
||||||
|
Amortization
|
(3,647
|
)
|
(1,804
|
)
|
||||
|
Balance,
end of year
|
$
|
9,533
|
$
|
4,566
|
||||
Mortgage
loans serviced for others were $1.15 billion and $712.9 million as of December
31, 2009 and 2008, respectively. Custodial escrow balances maintained in
connection with the mortgage loan servicing portfolio were approximately $5.1
million and $3.4 million as of December 31, 2009 and 2008, respectively. The
fair value of Heartland’s mortgage servicing rights was estimated at $10.0
million and $6.2 million at December 31, 2009 and 2008,
respectively.
TEN
DEPOSITS
At
December 31, 2009, the scheduled maturities of time certificates of deposit were
as follows:
|
(Dollars
in thousands)
|
|||
|
2010
|
$
|
528,774
|
|
|
2011
|
205,931
|
||
|
2012
|
93,712
|
||
|
2013
|
73,821
|
||
|
2014
|
96,286
|
||
|
Thereafter
|
36,862
|
||
|
$
|
1,035,386
|
||
The
aggregate amount of time certificates of deposit in denominations of $100,000 or
more as of December 31, 2009 and 2008 were $332.6 million and $370.6 million,
respectively.
Interest
expense on deposits for the years ended December 31, 2009, 2008 and 2007, was as
follows:
|
(Dollars
in thousands)
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
Savings
and money market accounts
|
$
|
18,407
|
$
|
18,176
|
$
|
22,404
|
|||
|
Time
certificates of deposit in denominations of $100,000 or
more
|
11,202
|
13,422
|
14,307
|
||||||
|
Other
time deposits
|
23,135
|
32,506
|
41,154
|
||||||
|
Interest
expense on deposits
|
$
|
52,744
|
$
|
64,104
|
$
|
77,865
|
|||
ELEVEN
SHORT-TERM
BORROWINGS
Short-term
borrowings as of December 31, 2009 and 2008, were as follows:
|
(Dollars
in thousands)
|
||||||
|
2009
|
2008
|
|||||
|
Securities
sold under agreement to repurchase
|
$
|
145,553
|
$
|
170,485
|
||
|
Federal
funds purchased
|
4,300
|
34,725
|
||||
|
U.S.
Treasury demand note
|
5,596
|
4,974
|
||||
|
Notes
payable to unaffiliated banks
|
6,900
|
-
|
||||
|
Total
|
$
|
162,349
|
$
|
210,184
|
||
On
December 19, 2008, Heartland received $81.7 million of cash in conjunction with
the participation in the United States Department of the Treasury TARP Capital
Purchase Program (the “TARP”). Heartland initially utilized $34.0 million of the
cash to repay its revolving credit line and terminate its credit agreement with
three unaffiliated banks on the same date. On September 28, 2009, Heartland
established a $15.0 million revolving credit line with an unaffiliated bank,
primarily to provide working capital to Heartland. This credit line may also be
used to fund the operations of Heartland Community Development Inc., a
wholly-owned subsidiary of Heartland. At December 31, 2009, $5.0 million was
outstanding on this revolving credit line. The agreement on this credit line
contains specific financial covenants, all of which Heartland was in compliance
with as of December 31, 2009:
|
*
|
Heartland
will maintain regulatory capital at well capitalized levels and Citizens
Finance Co. will maintain a tangible net worth to total assets ratio of 14
percent, measured quarterly.
|
|
*
|
Citizens
Finance Co. will maintain a net charge-off ratio not to exceed 5.00
percent based upon the trailing four quarters, measured
quarterly.
|
|
*
|
Heartland
will inform the lender of any material regulatory non-compliance or
written agreement concerning Heartland or any of its
subsidiaries.
|
|
*
|
Within
thirty days after the end of each quarter, Heartland will provide a
certificate signed by the chief financial officer certifying compliance
with the covenants established under the credit
agreement.
|
All
retail repurchase agreements as of December 31, 2009 and 2008, were due within
twelve months.
Average
and maximum balances and rates on aggregate short-term borrowings outstanding
during the years ended December 31, 2009, 2008, and 2007, were as
follows:
|
(Dollars
in thousands)
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
Maximum
month-end balance
|
$
|
205,747
|
$
|
367,991
|
$
|
354,146
|
||||
|
Average
month-end balance
|
140,289
|
230,680
|
291,289
|
|||||||
|
Weighted
average interest rate for the year
|
.51
|
%
|
1.95
|
%
|
4.62
|
%
|
||||
|
Weighted
average interest rate at year-end
|
.58
|
%
|
.68
|
%
|
2.90
|
%
|
||||
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 $78.6 million at December 31,
2009, and $259.4 million at December 31, 2008. Dubuque Bank and Trust Company
utilized $20.0 million of borrowings under the Discount Window Program in 2009
and 2008. There were no borrowings under the Discount Window Program outstanding
at year-end 2009 and 2008.
TWELVE
OTHER
BORROWINGS
Other
borrowings at December 31, 2009 and 2008, were as follows:
|
(Dollars
in thousands)
|
||||||
|
2009
|
2008
|
|||||
|
Advances
from the FHLB; weighted average call dates at December 31, 2009 and 2008
were October 2011 and June 2010, respectively; and weighted
average interest rates were 3.26% and 3.73%, respectively
|
$
|
199,088
|
$
|
199,545
|
||
|
Wholesale
repurchase agreements; weighted average call dates at December 31, 2009
and 2008 were May 2011 and October 2010, respectively; and weighted
average interest rates were 2.89% and 2.92%, respectively
|
135,000
|
120,000
|
||||
|
Trust
preferred securities
|
113,405
|
113,405
|
||||
|
Obligations
to repurchase minority interest shares of Summit Bank &
Trust
|
2,890
|
3,382
|
||||
|
Community
Development Block Grant Loan Program with the City of
Dubuque
|
-
|
300
|
||||
|
Contracts
payable for purchase of real estate and other assets
|
1,046
|
1,201
|
||||
|
Total
|
$
|
451,429
|
$
|
437,833
|
||
The Heartland banks are members of the Federal Home Loan Bank ("FHLB") of Des Moines, Chicago, Dallas, San Francisco, Seattle and Topeka. The advances from the FHLB are collateralized by the banks’ investment in FHLB stock of $10.7 million and $11.0 million at December 31, 2009 and 2008, respectively. Additional collateral is provided by the banks’ one-to-four unit residential mortgages, commercial and agricultural mortgages and securities pledged totaling $958.3 million at December 31, 2009 and $1.05 billion at December 31, 2008. Callable advances from the FHLB totaled $77.5 million as of December 31, 2009, at a weighted average rate of 3.20% and are included in the table above at their call date.
Heartland
has entered into various wholesale repurchase agreements with balances totaling
$135.0 million and $120.0 million at December 31, 2009 and 2008, respectively.
Heartland has utilized three counterparties and at December 31, 2009 had $75.0
million with JP Morgan Chase Bank, $50.0 million with Citigroup Global Markets
and $10.0 million with Barclays Capital. The maturity schedule of the wholesale
repurchase agreements with JP Morgan Chase as of December 31, 2009 was $50.0
million in November of 2010 and $25.0 million in January of 2013. The maturity
schedule of the wholesale repurchase agreements with Citigroup Global Markets as
of December 31, 2009 was $15.0 million in January of 2014, $15.0 million in
April of 2015 and $20.0 million in April of 2018. The maturity schedule of the
wholesale repurchase agreements with Barclays Capital as of December 31, 2009
was $10.0 million in January of 2013. Except for $15.0 million for which pricing
is fixed, all of the wholesale repurchase agreements have repricing dates during
2009 through 2013.
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 $271,000 as of December
31, 2009. 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,
2009, is as follows:
|
(Dollars
in thousands)
|
||||||
|
Name
|
Amount
Issued
|
Interest
Rate
|
Interest
Rate as of 12/31/09
|
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
|
03/31/2010
|
|
|
Heartland
Financial Statutory Trust IV
|
25,774
|
2.75%
over Libor
|
3.00%
|
03/17/2034
|
03/17/2010
|
|
|
Heartland
Financial Statutory Trust V
|
20,619
|
1.33%
over Libor
|
1.61%
|
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
|
1.74%
|
09/01/2037
|
09/01/2012
|
|
|
$
|
113,405
|
|||||
For
regulatory purposes, $101.7 million and $102.3 million of the capital securities
qualified as Tier 1 capital for regulatory purposes as of December 31, 2009 and
2008, 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 7.66% on the original investment amount,
whichever is greater. 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 prior to November 1, 2011, at an amount equal to
the amount originally paid plus 7.66%. The amount of the obligation as of
December 31, 2009, included in other borrowings is $2.9 million.
Heartland
repurchased the common shares of Arizona Bank & Trust owned by minority
shareholders in August of 2008 for $3.7 million in cash. Heartland had an
agreement with the minority shareholders of Arizona Bank & Trust that
required Heartland to repurchase the common shares five years from the date of
opening at a minimum rate of 6% on the original investment amount.
Future
payments at December 31, 2009, for other borrowings follow in the table below.
Callable FHLB advances and wholesale repurchase agreements are included in the
table at their call date.
|
(Dollars
in thousands)
|
|||
|
2010
|
$
|
182,038
|
|
|
2011
|
13,429
|
||
|
2012
|
60,415
|
||
|
2013
|
41,105
|
||
|
2014
|
20,114
|
||
|
Thereafter
|
134,328
|
||
|
$
|
451,429
|
||
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. 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 matured on April 4, 2009. Heartland
was 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, 2008, the
fair market value of this collar transaction was recorded as an asset of
$636,000.
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, 2009 and
December 31, 2008, the fair market value of this collar transaction was recorded
as an asset of $1.0 million and $2.1 million, respectively.
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 ASC 815-20-25, “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 four cap
transactions. For accounting purposes, these four 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 $65.0 million of Heartland’s
subordinated debentures (issued in connection with the trust preferred
securities of Heartland Financial Statutory Trust IV, V and VII) 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 had an effective date of February 1,
2007, and matured on January 7, 2009. Should 3-month LIBOR exceed 5.5% on a
reset date, the counterparty would have paid Heartland the amount of interest
that exceeded the amount owed on the debt at the cap LIBOR rate of 5.5%. The
floating-rate subordinated debentures contained an interest deferral feature
that is mirrored in the cap transaction. As of December 31, 2008, 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 matured on March 17, 2009. Should 3-month LIBOR have exceeded 5.5% on a
reset date, the counterparty would have paid Heartland the amount of interest
that exceeded the amount owed on the debt at the cap LIBOR rate of 5.5%. The
floating-rate subordinated debentures contained an interest rate deferral
feature that is mirrored in the cap transaction. As of December 31, 2008, this
cap transaction had no fair value.
The third
transaction executed on January 15, 2008, was a fifty-five month interest rate
cap transaction on a notional amount of $20.0 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 January 15, 2008, and a
maturity date of September 1, 2012. Should 3-month LIBOR exceed 5.12% 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 5.12%. The floating-rate
subordinated debentures contain an interest rate deferral feature that is
mirrored in the cap transaction. As of December 31, 2009 and December 31, 2008,
the fair market value of this cap transaction was recorded as an asset of
$75,000 and $46,000, respectively. Upon the execution of the second swap
transaction discussed below, this cap transaction was converted to a mark to
market hedge. During 2009, the mark to market adjustment on this cap transaction
was recorded as a gain of $39,000.
The
fourth transaction executed on March 27, 2008, was a twenty-eight month interest
rate cap transaction on a notional amount of $20.0 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 January 7, 2009, and a
maturity date of April 7, 2011. 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, 2009 and December 31, 2008,
the fair market value of this cap transaction was recorded as an asset of $3,000
and $8,000, respectively. Upon the execution of the third swap transaction
discussed below, this cap transaction was converted to a mark to market hedge.
During 2009, the mark to market adjustment on this cap transaction was recorded
as a loss of $2,000.
In
addition to the four cap transactions, Heartland entered into the following
three forward-starting interest rate swap transactions to effectively convert
$65.0 million of its variable interest rate subordinated debentures (issued in
connection with the trust preferred securities of Heartland Financial Statutory
Trust IV, V and VII) to fixed interest rate debt. For accounting purposes, these
three swap transactions are designated as cash flow hedges of the changes in
cash flows attributable to changes in LIBOR, the benchmark interest rate being
hedged, associated with the interest payments made on $65.0 million of
Heartland’s subordinated debentures (issued in connection with the trust
preferred securities of Heartland Financial Statutory Trust IV, V and VII) 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 swaps.
The first
swap transaction was executed on January 28, 2009, on a notional amount of $25.0
million with an effective date of March 17, 2010, and an expiration date of
March 17, 2014. Under this interest rate swap contract, Heartland will pay a
fixed interest rate of 2.58% and receive a variable interest rate equal to
3-month LIBOR. As of December 31, 2009, the fair value of this swap transaction
was recorded as an asset of $136,000.
The
second swap transaction was executed on February 4, 2009, on a notional amount
of $20.0 million with an effective date of January 7, 2010, and an expiration
date of January 7, 2020. Under this interest rate swap contract, Heartland will
pay a fixed interest rate of 3.35% and receive a variable interest rate equal to
3-month LIBOR. As of December 31, 2009, the fair value of this swap transaction
was recorded as an asset of $885,000.
The third
swap transaction was executed on February 4, 2009, on a notional amount of $20.0
million with an effective date of March 1, 2010, and an expiration date of March
1, 2017. Under this interest rate swap contract, Heartland will pay a fixed
interest rate of 3.22% and receive a variable interest rate equal to 3-month
LIBOR. As of December 31, 2009, the fair value of this swap transaction was
recorded as an asset of $403,000.
For the
collar, cap and swap 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 ASC 815-20-25, “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. No ineffectiveness was recognized for the
cash flow hedge transactions for the years ended December 31, 2008 and
2009.
At the
inception of the September 19, 2005 collar transaction, Heartland designated
separate proportions of the $50.0 million collar in qualifying cash flow hedging
relationships. Designation of a proportion of a derivative instrument is
discussed in ASC 815, which states that “Either all or a proportion of a
derivative may be designated as the hedging instrument. The proportion must be
expressed as a percentage of the entire derivative so that the profile of risk
exposures in the hedging portion of the derivative is the same as that in the
entire derivative.” Consistent with that guidance, Heartland identified four
different proportions of the $50.0 million collar and documented four separate
hedging relationships based on those proportions. Although only one collar was
executed with an external party, Heartland established four distinct hedging
relationships for various proportions of the collar and designated them against
hedged transactions specifically identified at each of four different subsidiary
banks. Because each proportion of the collar was designated against hedged
transactions specified at different subsidiary banks, the hedging relationship
for one proportion of the collar could fail hedge accounting (or have hedge
ineffectiveness), without affecting the separate hedging relationships
established for other proportions of the collar that were designated against
hedged transactions at other subsidiary banks. Effectiveness of each hedging
relationship is assessed and measured independently of the other hedging
relationships.
A portion
of the September 19, 2005 collar transaction did not meet the retrospective
hedge effectiveness test at March 31, 2008. 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 Dubuque Bank
and Trust Company’s prime-based loans. The failure of this hedge relationship
was caused by paydowns, which reduced the designated loan pool from $14.3
million to $9.6 million. This hedge failure resulted in the recognition of a
gain of $198 thousand during the quarter ended March 31, 2008, which consists of
the mark to market gain on this portion of the collar transaction of $212
thousand and a reclass of unrealized losses out of other comprehensive income to
earnings of $14 thousand. During 2009, the mark to market adjustment on this
portion of the collar transaction was recorded as a loss of
$304,000.
A portion
of the September 19, 2005 collar transaction also 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 its Broadus branch, which reduced the designated loan pool
from $14.3 million to $7.5 million. 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. The fair value of this portion
of the collar transaction was zero on the redesignation date. The redesignated
collar transaction did not meet the retrospective hedge effectiveness test at
December 31, 2008. The failure of the redesignated hedge was caused by paydowns,
which reduced the redesignated loan pool from $14.3 million to $10.4 million.
During 2009, the mark to market adjustment on this portion of the collar
transaction was recorded as a loss of $292,000.
An
additional portion of the September 19, 2005 collar transaction did not meet the
retrospective hedge effectiveness test at March 31, 2009. 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 New Mexico Bank & Trust’s prime-based loans. The failure of this hedge
relationship was caused by paydowns, which reduced the designated loan pool from
$14.3 million to $11.6 million. This hedge failure resulted in the recognition
of a gain of $68 thousand during the first quarter of 2009, which consists of
the mark to market loss on this portion of the collar transaction of $64
thousand and a reclass of unrealized gains out of other comprehensive income to
earnings of $132 thousand. During the second, third and fourth quarters of 2009,
the mark to market adjustment on this collar transaction was recorded as a loss
of $226,000.
The final
portion of the September 19, 2005 collar transaction did not meet the
retrospective hedge effectiveness test at June 30, 2009. The failure was on a
portion of the $50.0 million notional amount. That portion, $7.2 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 Wisconsin Community Bank’s prime-based loans. The failure of this hedge
relationship was caused by paydowns, which reduced the designated loan pool from
$7.2 million to $4.8 million. This hedge failure resulted in the recognition of
a loss of $68 thousand during the second quarter of 2009, which consists of the
mark to market loss on this portion of the collar transaction of $41,000 and a
reclass of unrealized losses out of other comprehensive income to earnings of
$27 thousand. During the third and fourth quarters of 2009, the mark to market
adjustment on this collar transaction was recorded as a loss of
$69,000.
For the
year ended December 31, 2009, the change in net unrealized losses of $41,000 for
derivatives designated as cash flow hedges is separately disclosed in the
statement of changes in stockholders’ equity, before income taxes of $15,000.
For the year ended December 31, 2008, the change in net unrealized gains of $1.8
million for derivatives designated as cash flow hedges is separately disclosed
in the statement of changes in shareholders’ equity, before income taxes of
$671,000.
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 2009, the
change in net unrealized gains on cash flow hedges reflects a reclassification
of $196,000 of net unrealized losses from accumulated other comprehensive income
to interest income or interest expense. For the next twelve months, Heartland
estimates that an additional $47,000 will be reclassified from accumulated other
comprehensive income to interest income.
Cash
payments received on the two collar transactions totaled $1.1 million during
2008 and $2.0 million during 2009.
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 ASC
815.
FOURTEEN
INCOME
TAXES
Income
taxes for the years ended December 31, 2009, 2008, and 2007, were as
follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$
|
8,086
|
$
|
4,168
|
$
|
9,481
|
|||||
|
State
|
1,709
|
2,455
|
2,577
|
||||||||
|
Total
current
|
$
|
9,795
|
$
|
6,623
|
$
|
12,058
|
|||||
|
Deferred:
|
|||||||||||
|
Federal
|
$
|
(3,021
|
)
|
$
|
(2,069
|
)
|
$
|
(2,185
|
)
|
||
|
State
|
422
|
(1,242
|
)
|
621
|
|||||||
|
Total
deferred
|
$
|
(2,599
|
)
|
$
|
(3,311
|
)
|
$
|
(1,564
|
)
|
||
|
Total income tax
expense
|
$
|
7,196
|
$
|
3,312
|
$
|
10,494
|
|||||
Income
tax expense is included in the financial statements as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||
|
Income
tax from continuing operations
|
$
|
7,196
|
$
|
3,312
|
$
|
9,409
|
|||||
|
Income
tax from discontinued operations
|
-
|
-
|
1,085
|
||||||||
|
Total income tax
expense
|
$
|
7,196
|
$
|
3,312
|
$
|
10,494
|
|||||
The
income tax provisions above do not include the effects of income tax deductions
resulting from exercises of stock options and the vesting of stock awards in the
amounts of $18,000, $462,000, and $896,000 in 2009, 2008 and 2007, respectively,
which were recorded as increases to stockholders’ equity.
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, 2009 and 2008, were as follows:
|
(Dollars
in thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Tax
effect of net unrealized loss on securities available for sale reflected
in stockholders’ equity
|
$
|
-
|
$
|
1,272
|
||||
|
Securities
|
1,042
|
1,325
|
||||||
|
Allowance
for loan and lease losses
|
15,747
|
13,372
|
||||||
|
Deferred
compensation
|
1,851
|
1,940
|
||||||
|
Organization
and acquisitions costs
|
647
|
681
|
||||||
|
Net
operating loss carryforwards
|
1,606
|
1,712
|
||||||
|
Rehabilitation
tax credits
|
202
|
168
|
||||||
|
Non-accrual
loan interest
|
1,369
|
1,178
|
||||||
|
OREO
writedowns
|
2,346
|
30
|
||||||
|
Other
|
60
|
161
|
||||||
|
Gross
deferred tax assets
|
24,870
|
21,839
|
||||||
|
Valuation
allowance
|
(1,191
|
)
|
(1,090
|
)
|
||||
|
Total
deferred tax assets
|
$
|
23,679
|
$
|
20,749
|
||||
|
Deferred
tax liabilities:
|
||||||||
|
Tax
effect of net unrealized gain on derivatives reflected in stockholders’
equity
|
$
|
(632
|
)
|
$
|
(534
|
)
|
||
|
Tax
effect of net unrealized gain on securities available for sale reflected
in stockholders’ equity
|
(3,652
|
)
|
-
|
|||||
|
Premises,
furniture and equipment
|
(4,707
|
)
|
(4,662
|
)
|
||||
|
Lease
financing
|
(664
|
)
|
(1,257
|
)
|
||||
|
Tax
bad debt reserves
|
(489
|
)
|
(514
|
)
|
||||
|
Purchase
accounting
|
(3,991
|
)
|
(3,468
|
)
|
||||
|
Prepaid
expenses
|
(491
|
)
|
(615
|
)
|
||||
|
Mortgage
servicing rights
|
(3,560
|
)
|
(1,705
|
)
|
||||
|
Deferred
loan fees
|
(288
|
)
|
(372
|
)
|
||||
|
Other
|
(224
|
)
|
(217
|
)
|
||||
|
Gross
deferred tax liabilities
|
$
|
(18,698
|
)
|
$
|
(13,344
|
)
|
||
|
Net
deferred tax asset (liability)
|
$
|
4,981
|
$
|
7,405
|
The
deferred tax assets (liabilities) related to net unrealized gains (losses) on
securities available for sale and the deferred tax assets and liabilities
related to net unrealized gains (losses) on derivatives had no effect on income
tax expense as these gains and losses, net of taxes, were recorded in other
comprehensive income. Net operating loss carryforwards for state income tax
purposes were approximately $34.7 million at December 31, 2009, and $29.4
million at December 31, 2008. The associated deferred tax asset, net of federal
tax, was $1.6 million at December 31, 2009, and $1.6 million at December 31,
2008. These carryforwards expire beginning December 31, 2010, through December
31, 2029. A valuation allowance of $1.2 million and $1.1 million existed at
December 31, 2009 and December 31, 2008, respectively, against the deferred tax
asset due to the uncertainty surrounding the utilization of these state net
operating loss carryforwards. 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 its 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% to
income before income taxes) as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Computed
“expected” tax on income from continuing operations
|
$
|
4,816
|
$
|
5,111
|
$
|
11,680
|
||||||
|
Increase
(decrease) resulting from:
|
||||||||||||
|
Nontaxable
interest income
|
(2,700
|
)
|
(2,214
|
)
|
(1,988
|
)
|
||||||
|
State
income taxes, net of federal tax benefit
|
1,385
|
1,032
|
1,577
|
|||||||||
|
Nondeductible
goodwill and other intangibles
|
4,487
|
57
|
57
|
|||||||||
|
Tax
credits
|
(212
|
)
|
(643
|
)
|
(1,292
|
)
|
||||||
|
Other
|
(580
|
)
|
(31
|
)
|
(625
|
)
|
||||||
|
Income
taxes
|
$
|
7,196
|
$
|
3,312
|
$
|
9,409
|
||||||
|
Effective
tax rates
|
52.3
|
%
|
22.7
|
%
|
28.2
|
%
|
||||||
|
Effective
tax rates exclusive of goodwill impairment charge
|
27.2
|
%
|
22.7
|
%
|
28.2
|
%
|
||||||
Heartland
had investments in certain low-income housing projects totaling $5.4 million as
of December 31, 2009, $4.5 million as of December 31, 2008 and $4.7 million as
of December 31, 2007, the majority of which have been fully consolidated in the
consolidated financial statements. These investments generated federal
low-income housing tax credits of $218,000 in 2009, 2008 and 2007. For each
future year through 2013, these investments are expected to continue generating
federal low-income housing tax credits of approximately $218,000. During each of
the past several years, Dubuque Bank and Trust Company has acquired a 99.9%
ownership interest in limited liability companies that provided federal historic
rehabilitation credits. These credits totaled $570,000 in 2008 and $1.3 million
in 2007. State historic rehabilitation credits on these types of investments
totaled $250,000 during 2007.
The
amount of unrecognized tax benefits on January 1, 2007, was $1.5 million,
including $193,000 of accrued interest and penalties. On December 31, 2007, the
amount of unrecognized tax benefits was $1.9 million, including $339,000 of
accrued interest and penalties. On December 31, 2008, the amount of unrecognized
tax benefits was $2.0 million, including $457,000 of accrued interest and
penalties. On December 31, 2009, the amount of unrecognized tax benefits was
$1.1 million, including $202,000 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 years ended
December 31, 2009 and 2008, follows:
|
(Dollars
in thousands)
|
|||||||
|
2009
|
2008
|
||||||
|
Balance
at January 1
|
$
|
2,020
|
$
|
1,928
|
|||
|
Additions
for tax positions related to the current year
|
69
|
276
|
|||||
|
Additions
for tax positions related to prior years
|
266
|
160
|
|||||
|
Reductions
for tax positions related to prior years
|
(1,228
|
)
|
(344
|
)
|
|||
|
Balance
at December 31
|
$
|
1,127
|
$
|
2,020
|
|||
The tax
years ended December 31, 2009, 2008, 2007 and 2006, remain subject to
examination by the Internal Revenue Service. For state purposes, the tax years
ended December 31, 2009, 2008, 2007, 2006 and 2005, 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. In dispute
was $1.1 million of deducted expenditures. During the process of appealing the
field audit report, a settlement agreement was reached, which included a payment
of $260,000 in taxes and $90,000 in interest and penalties. In addition to the
years initially under review, the settlement included the years ended December
31, 2004, 2005, 2006 and 2007. The settlement payment was made during the first
quarter of 2009. 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 of these contributions, charged to operating
expenses, were $1.5 million, $1.4 million, and $1.9 million for 2009, 2008, and
2007, 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 $863,000, $641,000, and $614,000, for 2009, 2008,
and 2007, respectively.
SIXTEEN
COMMITMENTS
AND CONTINGENT LIABILITIES
Heartland
leases certain land and facilities under operating leases. Minimum future rental
commitments at December 31, 2009, for all non-cancelable leases were as
follows:
|
(Dollars
in thousands)
|
|||
|
2010
|
$
|
906
|
|
|
2011
|
608
|
||
|
2012
|
451
|
||
|
2013
|
315
|
||
|
2014
|
224
|
||
|
Thereafter
|
2,878
|
||
|
$
|
5,382
|
||
Rental
expense for premises and equipment leased under operating leases was $1.8
million, $1.9 million, $1.7 million, for 2009, 2008, and 2007,
respectively. Occupancy expense is presented net of rental income of $1.4
million, $1.3 million and $1.3 million for 2009, 2008, and 2007,
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, 2009
and 2008, commitments to extend credit aggregated $603.4 and $529.1 million, and
standby letters of credit aggregated $26.7 and $26.2 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, 2009 and 2008, Heartland had commitments to sell residential real estate
loans totaling $37.1 and $88.9 million, respectively. Heartland does not
anticipate any material loss as a result of the commitments and contingent
liabilities.
Heartland
has a loss reserve for unfunded commitments, including loan commitments and
letters of credit. At December 31, 2009 and 2008, the reserve for unfunded
commitments, which is included in other liabilities on the consolidated balance
sheets, was approximately $327,000 and $345,000, respectively. The adequacy of
the reserve for unfunded commitments is reviewed on a semiannual basis, based
upon changes in the amounts of commitments, loss experience and economic
conditions.
There are
certain legal proceedings pending against Heartland and its subsidiaries at
December 31, 2009, 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 ASC Topic 718, “Compensation-Stock
Compensation”, using the “modified prospective” transition method. ASC
718 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 ASC 718. 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.
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, 2009, there were 469,910 shares available for issuance under the
2005 Long-Term Incentive Plan. At December 31, 2008, there were 464,810 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, 2011, and additional compensation expense is
being recorded through 2011.
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 Stock Option Plan and 1993 Stock Option Plans as of December 31, 2009,
2008, and 2007, and changes during the years ended follows:
|
2009
Shares
|
2009
Weighted- Average Exercise Price
|
2008
Shares
|
2008
Weighted- Average Exercise Price
|
2007
Shares
|
2007
Weighted-
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
$ |
743,363
|
$
|
19.79
|
733,012
|
$
|
18.61
|
815,300
|
$
|
14.46
|
||||||||
|
Granted
|
-
|
-
|
164,400
|
18.60
|
146,750
|
29.65
|
||||||||||||
|
Exercised
|
(22,875
|
)
|
11.84
|
(137,299
|
)
|
11.41
|
(214,538
|
)
|
9.96
|
|||||||||
|
Forfeited
|
(16,017
|
)
|
21.38
|
(16,750
|
)
|
24.74
|
(14,500
|
)
|
25.24
|
|||||||||
|
Outstanding
at end of year
|
$ |
704,471
|
$
|
20.02
|
743,363
|
$
|
19.79
|
733,012
|
$
|
18.61
|
||||||||
|
Options
exercisable at end of year
|
311,771
|
$
|
16.26
|
238,713
|
$
|
14.01
|
280,804
|
$
|
11.65
|
|||||||||
|
Weighted-average
fair value of options granted during the year
|
$0.00
|
$4.81
|
$7.69
|
|||||||||||||||
At
December 31, 2009, the vested options totaled 311,771 shares with a weighted
average exercise price of $16.26 per share and a weighted average remaining
contractual life of 3.81 years. The intrinsic value for the vested options as of
December 31, 2009 was $494,000. The intrinsic value for the total of all options
exercised during the year ended December 31, 2009 was $61,000, and the total
fair value of shares vested during the year ended December 31, 2009 was
$953,000. As of December 31, 2009 and 2008, 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 5.67 and 6.00 years, respectively.
The fair
value of stock options granted was determined utilizing the Black Scholes
valuation model. Significant assumptions include:
|
2009
|
2008
|
2007
|
||||
|
Risk-free
interest rate
|
-
|
3.10%
|
4.74%
|
|||
|
Expected
option life
|
-
|
6
years
|
6
years
|
|||
|
Expected
volatility
|
-
|
26.96%
|
24.20%
|
|||
|
Expected
dividends
|
-
|
1.99%
|
1.25%
|
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 2008
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, 2009, was $271,000, with a related tax benefit of
$18,000. Cash received from options exercised for the year ended December 31,
2008, was $1.6 million, with a related tax benefit of $462,000.
Total
compensation costs recorded for stock options and restricted stock awards were
$862,000, $851,000, and $1.4 million for 2009, 2008 and 2007, respectively. As
of December 31, 2009, there was $1.5 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 2012. In
addition, for the years ended December 31, 2009, 2008 and 2007, the shares of
stock awarded to Heartland directors in return for services performed were
5,000, 5,917, and 1,400, respectively. The related compensation expense recorded
was $84,000, $74,000, and $26,000 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 permits 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, 2009,
Heartland approved a purchase price of 100% of fair market value as determined
by the closing price on December 31, 2008. For the year ended December 31, 2008,
Heartland approved a purchase price of 100% of fair market value as determined
by the closing price on December 31, 2007. At December 31, 2009, 433 shares were
purchased under the 2006 ESPP and at December 31, 2008, 11,682 shares were
purchased under the 2006 ESPP. Under ASC Topic 718, compensation expense of
$93,000 was recorded in 2009 and $56,000 was recorded in 2008, 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, 2009, 2008 and 2007, Heartland acquired
shares for use in the 2005 Long-Term Incentive Plan, 2003 Stock Option Plan and
the 2006 ESPP. Shares acquired totaled 16,021, 345,627, and 407,245 for 2009,
2008 and 2007, 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 stockholders, 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
CAPITAL
ISSUANCE
On
December 19, 2008, Heartland issued $81.7 million of securities to the Treasury
under the TARP, consisting of Fixed Rate Cumulative Perpetual Preferred Stock,
Series B and a common stock warrant, all of which were classified as Tier I
capital for regulatory purposes. Of the $81.7 million purchase price, $75.4
million was assigned to the Preferred Stock and $6.3 million was assigned, based
on estimated fair value, to the warrant.
The
preferred shares carry an aggregate liquidation preference of $81.7
million, plus any accrued and unpaid dividends, and cumulative dividends at a
rate of 5% per year for the first five years, and at a rate of 9% per
year after the fifth year and rank senior to the common stock. All preferred
stock dividends were paid as scheduled in 2009. The preferred shares may be
redeemed at any time pending approval from the banking regulatory authorities.
The warrant entitles Treasury to purchase approximately 610,000 shares of
Heartland common stock at an initial exercise per share price of $20.10 (based
on the trailing 20 day average Heartland common stock price as of December 5,
2008, the date of Treasury approval.)
In
conjunction with participation in the TARP, Heartland is subject to certain
limitations. Heartland may not pay dividends on its common stock unless all
dividends on the preferred shares have been paid and may not increase the
dividend payments in excess of the current quarterly dividend of $0.10 per
share, or repurchase its common stock, except for issuances under benefit plans.
In addition, there are certain limits placed on executive compensation and
Heartland is not allowed to redeem any equity securities, or to prepay any of
its trust preferred debt securities, until the earlier of December 19, 2011, or
the date Treasury no longer owns any of the preferred shares.
TWENTY
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, 2009 and 2008, that
the Heartland banks met all capital adequacy requirements to which they were
subject.
As of
December 31, 2009 and 2008, 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, 2009
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
427,523
|
15.20
|
%
|
$
|
224,943
|
8.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
103,687
|
12.76
|
64,992
|
8.0
|
81,240
|
10.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
23,436
|
13.33
|
14,062
|
8.0
|
17,577
|
10.0
|
||||||||||||
|
First
Community Bank
|
11,276
|
14.11
|
6,393
|
8.0
|
7,991
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
25,531
|
13.80
|
14,799
|
8.0
|
18,499
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
44,144
|
13.49
|
26,186
|
8.0
|
32,733
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
70,706
|
11.78
|
48,023
|
8.0
|
60,029
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
20,820
|
11.54
|
14,435
|
8.0
|
18,043
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
43,619
|
13.12
|
26,593
|
8.0
|
33,241
|
10.0
|
||||||||||||
|
Summit
Bank & Trust
|
10,170
|
14.37
|
5,662
|
8.0
|
7,077
|
10.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
14,236
|
45.21
|
2,519
|
8.0
|
3,149
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
380,334
|
13.53
|
%
|
$
|
112,471
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
93,512
|
11.51
|
32,496
|
4.0
|
48,744
|
6.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
21,408
|
12.18
|
7,031
|
4.0
|
10,546
|
6.0
|
||||||||||||
|
First
Community Bank
|
10,266
|
12.85
|
3,196
|
4.0
|
4,794
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
23,202
|
12.54
|
7,400
|
4.0
|
11,100
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
40,011
|
12.22
|
13,093
|
4.0
|
19,640
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
63,186
|
10.53
|
24,011
|
4.0
|
36,017
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
18,512
|
10.26
|
7,217
|
4.0
|
10,826
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
39,426
|
11.86
|
13,296
|
4.0
|
19,945
|
6.0
|
||||||||||||
|
Summit
Bank & Trust
|
9,285
|
13.12
|
2,831
|
4.0
|
4,246
|
6.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
13,924
|
44.22
|
1,260
|
4.0
|
1,889
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
380,334
|
9.64
|
%
|
$
|
157,831
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
93,512
|
7.88
|
47,446
|
4.0
|
59,308
|
5.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
21,408
|
7.40
|
11,574
|
4.0
|
14,467
|
5.0
|
||||||||||||
|
First
Community Bank
|
10,266
|
8.37
|
4,904
|
4.0
|
6,130
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
23,202
|
8.32
|
11,151
|
4.0
|
13,938
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
40,011
|
9.23
|
17,345
|
4.0
|
21,682
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
63,186
|
7.79
|
32,441
|
4.0
|
40,551
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
18,512
|
6.98
|
10,602
|
4.0
|
13,252
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
39,426
|
8.38
|
18,816
|
4.0
|
23,520
|
5.0
|
||||||||||||
|
Summit
Bank & Trust
|
9,285
|
9.38
|
3,958
|
4.0
|
4,947
|
5.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
13,924
|
34.05
|
1,636
|
4.0
|
2,045
|
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, 2008
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
413,913
|
14.91
|
%
|
$
|
222,035
|
8.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
95,256
|
12.17
|
62,626
|
8.0
|
78,282
|
10.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
17,775
|
11.28
|
12,610
|
8.0
|
15,763
|
10.0
|
||||||||||||
|
First
Community Bank
|
11,104
|
12.21
|
7,275
|
8.0
|
9,094
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
19,535
|
10.92
|
14,310
|
8.0
|
17,888
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
36,107
|
11.09
|
26,048
|
8.0
|
32,560
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
61,655
|
10.74
|
45,930
|
8.0
|
57,413
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
24,238
|
13.24
|
14,647
|
8.0
|
18,309
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
40,560
|
11.00
|
29,497
|
8.0
|
36,871
|
10.0
|
||||||||||||
|
Summit
Bank & Trust
|
12,323
|
17.22
|
5,726
|
8.0
|
7,158
|
10.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
15,263
|
92.13
|
1,325
|
8.0
|
1,657
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
368,101
|
13.26
|
%
|
$
|
111,017
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
85,851
|
10.97
|
31,313
|
4.0
|
46,969
|
6.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
15,804
|
10.03
|
6,305
|
4.0
|
9,458
|
6.0
|
||||||||||||
|
First
Community Bank
|
9,979
|
10.97
|
3,638
|
4.0
|
5,456
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
17,297
|
9.67
|
7,155
|
4.0
|
10,733
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,035
|
9.84
|
13,024
|
4.0
|
19,536
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
54,736
|
9.53
|
22,965
|
4.0
|
34,448
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
21,941
|
11.98
|
7,323
|
4.0
|
10,985
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,951
|
9.75
|
14,749
|
4.0
|
22,123
|
6.0
|
||||||||||||
|
Summit
Bank & Trust
|
11,441
|
15.98
|
2,863
|
4.0
|
4,295
|
6.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
15,099
|
91.14
|
663
|
4.0
|
994
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
368,101
|
10.68
|
%
|
$
|
137,917
|
4.0
|
%
|
$
|
N/A
|
||||||||
|
Dubuque
Bank and Trust Company
|
85,851
|
8.42
|
40,771
|
4.0
|
50,964
|
5.0
|
%
|
|||||||||||
|
Galena
State Bank & Trust Co.
|
15,804
|
6.98
|
9,052
|
4.0
|
11,315
|
5.0
|
||||||||||||
|
First
Community Bank
|
9,979
|
8.08
|
4,937
|
4.0
|
6,172
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
17,297
|
7.01
|
9,876
|
4.0
|
12,345
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,035
|
7.82
|
16,381
|
4.0
|
20,477
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
54,736
|
7.51
|
29,146
|
4.0
|
36,432
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
21,941
|
10.28
|
8,539
|
4.0
|
10,673
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,951
|
7.96
|
18,068
|
4.0
|
22,585
|
5.0
|
||||||||||||
|
Summit
Bank & Trust
|
11,441
|
15.38
|
2,975
|
4.0
|
3,719
|
5.0
|
||||||||||||
|
Minnesota
Bank & Trust
|
15,099
|
68.98
|
876
|
4.0
|
1,095
|
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 $94.5 million as of December 31, 2009, under the
most restrictive minimum capital requirements. Retained earnings that could be
available for the payment of dividends to Heartland totaled approximately $59.8
million as of December 31, 2009, under the capital requirements to remain well
capitalized.
TWENTY-ONE
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, Heartland adopted ASC 820 for fair value measurements of
certain of its financial instruments. The provisions of ASC 825 which permit an
entity to choose to measure eligible financial instruments and other items at
fair value, also became effective January 1, 2008. Heartland has not made any
fair value elections under ASC 825 as of December 31, 2009.
As
discussed in Note 1 above, ASC 820 defines fair value, establishes a framework
for measuring fair value and expands the required disclosure about fair value
measurements. Heartland utilizes fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine fair value
disclosures. Securities available for sale, trading securities and derivatives
are recorded at fair value on a recurring basis. Additionally, from time to
time, Heartland may be required to record at fair value other assets on a
non-recurring basis such as loans held for sale, loans held to maturity and
certain other assets including, but not limited to, mortgage servicing rights.
These nonrecurring fair value adjustments typically involve application of lower
of cost or market accounting or write-downs of individual assets.
Fair
Value Hierarchy
Under ASC
820, assets and liabilities are grouped at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability
of the assumptions used to determine fair value. These levels are:
Level 1 -
Valuation is based upon quoted prices for identical instruments in active
markets.
Level 2 -
Valuation is based upon quoted prices for similar instruments in active markets,
or similar instruments in markets that are not active, and model-based valuation
techniques for all significant assumptions are observable in the
market.
Level 3 -
Valuation is generated from model-based techniques that use at least one
significant assumption not observable in the market. These unobservable
assumptions reflect estimates of assumptions that market participants would use
in pricing the asset or liability. Valuation techniques include use of option
pricing models, discounted cash flow models and similar techniques.
The
following is a description of valuation methodologies used for assets recorded
at fair value and for estimation of fair value for financial instruments not
recorded at fair value.
Assets
Securities
Available for Sale
Securities
available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other
model-based valuation techniques such as the present value of future cash flows,
adjusted for the security’s credit rating, prepayment assumptions and other
factors such as credit loss assumptions. Level 1 securities include those traded
on an active exchange, such as the New York Stock Exchange, as well as U.S.
Treasury and other U.S. government and agency securities that are traded by
dealers or brokers in active over-the-counter markets. Level 2 securities
include agency mortgage-backed securities and private collateralized mortgage
obligations, municipal bonds and corporate debt securities. The Level 3
securities consist primarily of $1.4 million of Z tranche assets.
Trading
Assets
Trading
assets are recorded at fair value and consist of securities held for trading
purposes. The valuation method for trading securities is the same as the
methodology used for securities classified as available for
sale.
Loans
Held for Sale
Loans
held for sale are carried at the lower of cost or fair value. The fair value of
loans held for sale is based on what secondary markets are currently offering
for portfolios with similar characteristics. As such, Heartland classifies loans
held for sale subjected to nonrecurring fair value adjustments as Level
2.
Loans
Held to Maturity
Heartland
does not record loans at fair value on a recurring basis. However, from time to
time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment in accordance with ASC 310, “Accounting by Creditors for
Impairment of a Loan”. 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.
Heartland’s allowance methodology requires specific reserves for all impaired
loans. At December 31, 2009, substantially all of the total impaired loans were
based on the fair value of the collateral. In accordance with ASC 820, impaired
loans where an allowance is established based on the fair value of collateral
require classification in the fair value hierarchy. Heartland classifies the
impaired loans as nonrecurring Level 3.
Derivative
Financial Instruments
Currently,
Heartland uses interest rate caps, floors and collars to manage its interest
rate risk. The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative. This analysis reflects the contractual
terms of the derivatives, including the period to maturity, and uses observable
market-based inputs, including interest rate curves and implied volatilities.
The fair values of interest rate options are determined using the market
standard methodology of discounting the future expected cash receipts that
would occur if variable interest rates fell below (rise above) the strike rate
of the floors (caps). The variable interest rates used in the calculation of
projected receipts on the floor (cap) are based on an expectation of future
interest rates derived from observable market interest rate curves and
volatilities. To comply with the provisions of ASC 820, Heartland
incorporates credit valuation adjustments to appropriately reflect both its own
nonperformance risk and the respective counterparty’s nonperformance risk in the
fair value measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, Heartland has considered the impact of
netting any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
Although
Heartland has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties. However, as of December 31, 2009,
Heartland has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, Heartland has determined that
its derivative valuations in their entirety are classified in Level 2 of the
fair value hierarchy.
Mortgage
Servicing Rights
Mortgage
servicing rights are subject to impairment testing. The carrying values of these
rights are reviewed quarterly for impairment based upon the calculation of fair
value as performed by an outside third party. For purposes of measuring
impairment, the rights are stratified into certain risk characteristics
including note type, note rate, prepayment trends and external market factors.
If the valuation model reflects a value less than the carrying value, mortgage
servicing rights are adjusted to fair value through a valuation allowance. As
such, Heartland classifies mortgage servicing rights subjected to nonrecurring
fair value adjustments as Level 2.
Other
Real Estate Owned
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. Heartland considers
third party appraisals as well as independent fair value assessments from
realtors or persons involved in selling OREO in determining the fair value of
particular properties. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. Heartland also periodically reviews
OREO to determine whether the property continues to be carried at the lower of
its recorded book value or fair value of the property, less disposal costs. OREO
is classified as nonrecurring Level 3.
The table
below presents, Heartland’s assets and liabilities that are measured at fair
value on a recurring basis as of December 31, 2009, aggregated by the level in
the fair value hierarchy within which those measurements fall:
(Dollars
in thousands)
|
Total
Fair Value
Dec.
31, 2009
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Trading
securities
|
$
|
695
|
$
|
695
|
$
|
-
|
$
|
-
|
||||||||
|
Available-for-sale
securities
|
1,135,468
|
279,441
|
854,492
|
1,535
|
||||||||||||
|
Derivative
assets
|
2,530
|
-
|
2,530
|
-
|
||||||||||||
|
Total
assets at fair value
|
$
|
1,138,693
|
$
|
280,136
|
$
|
857,022
|
$
|
1,535
|
||||||||
The
changes in Level 3 assets that are measured at fair value on a recurring basis
are summarized in the following table:
(Dollars
in thousands)
|
Fair
Value
|
|||
|
Balance
at January 1, 2009
|
$
|
120
|
|
|
Purchases
|
219
|
||
|
Assets
acquired through acquisition
|
141
|
||
|
Redemptions
|
(72
|
)
|
|
|
Impairment
loss
|
(40
|
)
|
|
|
Market
value appreciation
|
1,167
|
||
|
Balance
at December 31, 2009
|
$
|
1,535
|
The table
below presents Heartland’s assets measured at fair value on a nonrecurring
basis:
(Dollars
in thousands)
|
Carrying
Value at December 31, 2009
|
Year
Ended December 31, 2009
|
||||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
Losses
|
|||||||||||||||
|
Impaired
loans
|
$
|
124,791
|
$
|
-
|
$
|
-
|
$
|
124,791
|
$
|
28,384
|
|||||||||
|
OREO
|
30,568
|
-
|
-
|
30,568
|
8,137
|
||||||||||||||
The table
below is a summary of the estimated fair value of Heartland’s financial
instruments as of December 31, 2009 and 2008 as defined by ASC 825. The carrying
amounts in the following table are recorded in the balance sheet under the
indicated captions. In accordance with ASC 825, the assets and liabilities that
are not financial instruments are not included in the disclosure, such as the
value of the mortgage servicing rights, premises, furniture and equipment,
goodwill and other intangibles and other liabilities.
Heartland
does not believe that the estimated information presented herein is
representative of the earnings power or value of Heartland. The following
analysis, which is inherently limited in depicting fair value, also does not
consider any value associated with existing customer relationships nor the
ability of Heartland to create value through loan origination, deposit gathering
or fee generating activities. Many of the estimates presented herein are based
upon the use of highly subjective information and assumptions and, accordingly,
the results may not be precise. Management believes that fair value estimates
may not be comparable between financial institutions due to the wide range of
permitted valuation techniques and numerous estimates which must be made.
Furthermore, because the disclosed fair value amounts were estimated as of the
balance sheet date, the amounts actually realized or paid upon maturity or
settlement of the various financial instruments could be significantly
different.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$
|
182,410
|
$
|
182,410
|
$
|
51,303
|
$
|
51,303
|
||||
|
Trading
securities
|
695
|
695
|
1,694
|
1,694
|
||||||||
|
Securities
available for sale
|
1,135,468
|
1,135,468
|
871,686
|
871,686
|
||||||||
|
Securities
held to maturity
|
39,054
|
37,477
|
30,325
|
26,326
|
||||||||
|
Loans
and leases, net of unearned
|
2,380,312
|
2,408,506
|
2,424,696
|
2,559,564
|
||||||||
|
Derivatives
|
2,530
|
2,530
|
2,698
|
2,698
|
||||||||
|
Financial
Liabilities:
|
||||||||||||
|
Demand
deposits
|
$
|
460,645
|
$
|
460,645
|
$
|
383,061
|
$
|
383,061
|
||||
|
Savings
deposits
|
1,554,358
|
1,554,358
|
1,128,312
|
1,128,312
|
||||||||
|
Time
deposits
|
1,035,386
|
1,035,386
|
1,128,859
|
1,136,933
|
||||||||
|
Short-term
borrowings
|
162,349
|
162,349
|
210,184
|
210,184
|
||||||||
|
Other
borrowings
|
451,429
|
438,102
|
437,833
|
448,037
|
||||||||
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 using a historical or replacement cost basis concept (i.e.
an entrance price concept). 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-TWO
PARENT
COMPANY ONLY FINANCIAL INFORMATION
Condensed
financial information for Heartland Financial USA, Inc. is as
follows:
BALANCE
SHEETS
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets:
|
||||||||
|
Cash
and interest bearing deposits
|
$
|
6,161
|
$
|
3,486
|
||||
|
Trading
securities
|
695
|
1,694
|
||||||
|
Securities
available for sale
|
13,740
|
41,024
|
||||||
|
Investment
in subsidiaries
|
399,734
|
351,379
|
||||||
|
Other
assets
|
14,527
|
15,629
|
||||||
|
Due
from subsidiaries
|
4,750
|
15,500
|
||||||
|
Total
assets
|
$
|
439,607
|
$
|
428,712
|
||||
|
Liabilities
and stockholders’ equity:
|
||||||||
|
Short-term
borrowings
|
$
|
5,000
|
$
|
-
|
||||
|
Other
borrowings
|
116,295
|
117,087
|
||||||
|
Accrued
expenses and other liabilities
|
6,031
|
6,022
|
||||||
|
Total
liabilities
|
127,326
|
123,109
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock
|
77,224
|
75,578
|
||||||
|
Common
stock
|
16,612
|
16,612
|
||||||
|
Capital
surplus
|
44,284
|
43,827
|
||||||
|
Retained
earnings
|
172,487
|
177,753
|
||||||
|
Accumulated
other comprehensive income (loss)
|
7,107
|
(1,341
|
)
|
|||||
|
Treasury
stock
|
(5,433
|
)
|
(6,826
|
)
|
||||
|
Total
stockholders’ equity
|
312,281
|
305,603
|
||||||
|
Total
liabilities & stockholders’ equity
|
$
|
439,607
|
$
|
428,712
|
||||
INCOME
STATEMENTS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
revenues:
|
||||||||||||
|
Dividends
from subsidiaries
|
$
|
12,000
|
$
|
18,500
|
$
|
25,500
|
||||||
|
Securities
gains, net
|
2,405
|
-
|
35
|
|||||||||
|
Gain
(loss) on trading account securities
|
211
|
(998
|
)
|
(105
|
)
|
|||||||
|
Impairment
loss on equity securities
|
(40
|
)
|
(4,972
|
)
|
-
|
|||||||
|
Other
|
1,734
|
975
|
1,464
|
|||||||||
|
Total
operating revenues
|
16,310
|
13,505
|
26,894
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Interest
|
6,104
|
8,684
|
9,510
|
|||||||||
|
Salaries
and benefits
|
957
|
740
|
1,590
|
|||||||||
|
Professional
fees
|
547
|
784
|
971
|
|||||||||
|
Other
operating expenses
|
717
|
852
|
1,494
|
|||||||||
|
Total
operating expenses
|
8,325
|
11,060
|
13,565
|
|||||||||
|
Equity
in undistributed earnings (loss)
|
(3,055
|
)
|
3,002
|
8,278
|
||||||||
|
Income
before income tax benefit
|
4,930
|
5,447
|
21,607
|
|||||||||
|
Income
tax benefit
|
1,632
|
5,845
|
4,026
|
|||||||||
|
Net
income
|
6,562
|
11,292
|
25,633
|
|||||||||
|
Preferred
dividends and discount
|
(5,344
|
)
|
(178
|
)
|
-
|
|||||||
|
Net
income available to common stockholders
|
$
|
1,218
|
$
|
11,114
|
$
|
25,633
|
||||||
STATEMENTS
OF CASH FLOWS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$
|
6,562
|
$
|
11,292
|
$
|
25,633
|
||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Undistributed
loss (earnings) of subsidiaries
|
3,055
|
(3,002
|
)
|
(8,278
|
)
|
|||||||
|
Security
gains, net
|
(2,405
|
)
|
-
|
(35
|
)
|
|||||||
|
Impairment
loss on securities
|
40
|
4,972
|
-
|
|||||||||
|
Decrease
in due from subsidiaries
|
10,750
|
-
|
-
|
|||||||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
9
|
548
|
(4,503
|
)
|
||||||||
|
(Increase)
decrease in other assets
|
1,227
|
(373
|
)
|
(5,830
|
)
|
|||||||
|
(Increase)
decrease in trading account securities
|
997
|
194
|
(320
|
)
|
||||||||
|
Other,
net
|
987
|
1,612
|
508
|
|||||||||
|
Net
cash provided by operating activities
|
21,222
|
15,243
|
7,175
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital contributions to
subsidiaries
|
(43,720
|
)
|
(19,700
|
)
|
(3,162
|
)
|
||||||
|
Purchases of available for sale
securities
|
(2,919
|
)
|
(45,428
|
)
|
-
|
|||||||
|
Proceeds from the maturity of and
principal paydowns on securities available for sale
|
33,332
|
560
|
-
|
|||||||||
|
Proceeds from sales of available
for sale securities
|
-
|
-
|
310
|
|||||||||
|
Net cash used by investing
activities
|
(13,307
|
)
|
(64,568
|
)
|
(2,852
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net change in short-term
borrowings
|
5,000
|
(15,000
|
)
|
(20,000
|
)
|
|||||||
|
Proceeds from other
borrowings
|
-
|
563
|
41,902
|
|||||||||
|
Repayments of other
borrowings
|
(792
|
)
|
(4,195
|
)
|
(13,403
|
)
|
||||||
|
Proceeds from preferred stock and
warrant
|
-
|
81,698
|
-
|
|||||||||
|
Cash dividends
paid
|
(10,182
|
)
|
(6,461
|
)
|
(6,050
|
)
|
||||||
|
Purchase of treasury
stock
|
(236
|
)
|
(6,978
|
)
|
(9,821
|
)
|
||||||
|
Proceeds from issuance of common
stock
|
970
|
2,358
|
2,828
|
|||||||||
|
Net
cash provided (used) by financing activities
|
(5,240
|
)
|
51,985
|
(4,544
|
)
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
2,675
|
2,660
|
(221
|
)
|
||||||||
|
Cash
and cash equivalents at beginning of year
|
3,486
|
826
|
1,047
|
|||||||||
|
Cash
and cash equivalents at end of year
|
$
|
6,161
|
$
|
3,486
|
$
|
826
|
||||||
TWENTY-THREE
SUMMARY
OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
(Dollars
in thousands, except per share data)
|
|||||||||||||
|
2009
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
34,726
|
$
|
34,582
|
$
|
32,378
|
$
|
31,077
|
|||||
|
Provision
for loan and lease losses
|
10,775
|
11,896
|
10,041
|
6,665
|
|||||||||
|
Net
interest income after provision for loan and lease losses
|
23,951
|
22,686
|
22,337
|
24,412
|
|||||||||
|
Noninterest
income
|
13,370
|
11,908
|
14,664
|
12,762
|
|||||||||
|
Noninterest
expense
|
43,434
|
30,323
|
30,477
|
28,286
|
|||||||||
|
Income
taxes
|
1,762
|
803
|
1,812
|
2,819
|
|||||||||
|
Net
income (loss)
|
(7,875
|
)
|
3,468
|
4,712
|
6,069
|
||||||||
|
Net
income available to noncontrolling interest, net of tax.
|
41
|
44
|
44
|
59
|
|||||||||
|
Net
income (loss) attributable to Heartland
|
(7,834
|
)
|
3,512
|
4,756
|
6,128
|
||||||||
|
Preferred
stock dividends and discount
|
(1,336
|
)
|
(1,336
|
)
|
(1,336
|
)
|
(1,336
|
)
|
|||||
|
Net
income (loss) available to common stockholders
|
|
(9,170
|
)
|
|
2,176
|
|
3,420
|
|
4,792
|
||||
|
Per
share:
|
|||||||||||||
|
Earnings
(loss) per share-basic
|
$
|
(.56
|
)
|
$
|
0.13
|
$
|
0.21
|
$
|
0.29
|
||||
|
Earnings
(loss) per share-diluted
|
(.56
|
)
|
0.13
|
0.21
|
0.29
|
||||||||
|
Cash
dividends declared on common stock
|
0.10
|
0.10
|
0.10
|
0.10
|
|||||||||
|
Book
value per common share
|
14.38
|
15.23
|
14.62
|
14.50
|
|||||||||
|
Market
price – high
|
15.29
|
16.98
|
15.93
|
20.81
|
|||||||||
|
Market
price – low
|
12.04
|
12.56
|
11.51
|
8.51
|
|||||||||
|
Weighted
average common shares outstanding
|
16,324,039
|
16,311,454
|
16,298,242
|
16,276,064
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,345,095
|
16,340,092
|
16,323,724
|
16,296,839
|
|||||||||
|
Ratios:
|
|||||||||||||
|
Return
on average assets
|
-0.92
|
%
|
0.22
|
%
|
0.36
|
%
|
0.53
|
%
|
|||||
|
Return
on average equity
|
-14.76
|
3.54
|
5.74
|
8.26
|
|||||||||
|
Net
interest margin
|
4.04
|
4.06
|
3.92
|
3.94
|
|||||||||
|
Efficiency
ratio
|
92.19
|
65.55
|
66.4
|
67.48
|
|||||||||
|
(Dollars
in thousands, except per share data)
|
|||||||||||||
|
2008
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
29,227
|
$
|
29,886
|
$
|
28,835
|
$
|
27,738
|
|||||
|
Provision
for loan and lease losses
|
15,106
|
7,083
|
5,369
|
1,761
|
|||||||||
|
Net
interest income after provision for loan and lease losses
|
14,121
|
22,803
|
23,466
|
25,977
|
|||||||||
|
Noninterest
income
|
5,524
|
7,880
|
8,318
|
8,474
|
|||||||||
|
Noninterest
expense
|
24,158
|
26,737
|
25,580
|
25,764
|
|||||||||
|
Income
taxes
|
(1,769
|
)
|
1,018
|
1,643
|
2,420
|
||||||||
|
Net
income (loss)
|
(2,744
|
)
|
2,928
|
4,561
|
6,267
|
||||||||
|
Net
income available to noncontrolling interest,
net of tax
|
61
|
77
|
142
|
-
|
|||||||||
|
Net
income (loss) attributable to Heartland
|
(2,683
|
)
|
3,005
|
4,703
|
6,267
|
||||||||
|
Preferred
stock dividends and discount
|
(178
|
)
|
-
|
-
|
-
|
||||||||
|
Net
income (loss) available to common stockholders
|
|
(2,861
|
)
|
|
3,005
|
|
4,703
|
|
6,267
|
||||
|
Per
share:
|
|||||||||||||
|
Earnings
(loss) per share-basic
|
$
|
(0.17
|
)
|
$
|
0.18
|
$
|
0.29
|
$
|
0.38
|
||||
|
Earnings
(loss) per share-diluted
|
(0.18
|
)
|
0.18
|
0.29
|
0.38
|
||||||||
|
Cash
dividends declared on common stock
|
0.10
|
0.10
|
0.10
|
0.10
|
|||||||||
|
Book
value per common share
|
14.13
|
13.86
|
13.99
|
14.46
|
|||||||||
|
Market
price – high
|
25.00
|
25.06
|
23.40
|
22.40
|
|||||||||
|
Market
price – low
|
16.70
|
18.40
|
18.19
|
16.78
|
|||||||||
|
Weighted
average common shares outstanding
|
16,252,652
|
16,264,032
|
16,316,529
|
16,378,394
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,324,106
|
16,355,393
|
16,388,885
|
16,465,985
|
|||||||||
|
Ratios:
|
|||||||||||||
|
Return
on average assets
|
-0.33
|
%
|
0.35
|
%
|
0.56
|
%
|
0.77
|
%
|
|||||
|
Return
on average equity
|
-5.12
|
5.26
|
8.08
|
10.72
|
|||||||||
|
Net
interest margin
|
3.79
|
3.96
|
3.92
|
3.88
|
|||||||||
|
Efficiency
ratio
|
68.37
|
68.79
|
67.92
|
70.02
|
|||||||||
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, 2009 and 2008,
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, 2009. 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, 2009 and 2008, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009, 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, 2009, 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 16, 2010 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Des
Moines, Iowa
March 16,
2010
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, 2009. 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 ensuring that
information required to be disclosed by Heartland in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms and that such information is accumulated and communicated to
management, including Heartland’s Chief Executive Officer and Chief Financial
Officer, in a manner that allows timely decisions regarding required
disclosure.
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, 2009.
KPMG LLP,
the independent registered public accounting firm that audited Heartland’s
consolidated financial statements as of and for the year ended December 31,
2009, 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, 2009, that materially affected, or are reasonably
likely, to affect Heartland’s internal control over financial
reporting.
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 internal control over financial
reporting as of December 31, 2009, based on Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Heartland Financial USA, Inc.’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 Heartland Financial USA, Inc.'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 on 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,
2009, based on 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, 2009 and 2008, 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, 2009, and our
report dated March 16, 2010 expressed an unqualified opinion on those
consolidated financial statements.
Des
Moines, Iowa
March 16,
2010
ITEM
9B.
OTHER
INFORMATION
None.
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information in the Proxy Statement for Heartland’s 2010 Annual Meeting of
Stockholders to be held on May 19, 2010 (the "2010 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
in Part I of this report.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information in our 2010 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 2010 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, 2009 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
|
704,471
|
$20.02
|
931,094
|
|
Equity
compensation plans
not
approved by security
holders
|
-
|
-
|
-
|
|
Total
|
704,471
|
$20.02
|
931,094 1
|
|
1
Includes 469,910 shares available for use under the Heartland 2005
Long-Term Incentive Plan and 461,184 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 2010 Proxy Statement under the caption "Transactions with
Management" is incorporated by reference.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information in the 2010 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 16, 2010.
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
16, 2010
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 16, 2010.
/s/ Lynn
B.
Fuller
/s/ John K. Schmidt
-----------------------------
-----------------------------
Lynn B.
Fuller
John K. Schmidt
President,
CEO,
Chairman
Executive Vice President, CFO
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. (incorporated by
reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q
filed on November 7, 2008).
|
|
|
3.2
|
Amendment
to Certificate of Incorporation of Heartland Financial USA, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly
Report on Form 10-Q filed on August 10, 2009).
|
|
|
3.3
|
Certificate
of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series
B (incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K filed on December 22, 2008).
|
|
|
3.4
|
Bylaws
of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.2
to the Registrant’s Annual Report on Form 10-K filed on March 15,
2004).
|
|
|
4.1
|
Form
of Specimen Stock Certificate for Heartland Financial USA, Inc. common
stock (incorporated by reference to Exhibit 4.1 to Registrant’s
Registration Statement on Form S-4 (File No. 33-76228) filed on May 4,
1994).
|
|
|
4.2
|
Rights
Agreement, dated as of June 7, 2002, between Heartland Financial USA, Inc.
and Dubuque Bank and Trust Company, as Rights Agent (incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K
filed on June 11, 2002).
|
|
|
4.3
|
Warrant
to purchase up to 609,687 shares of common stock, issued on
December 19, 2008 (incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed on December 22,
2008).
|
|
|
4.4
|
Form
of Preferred Share Certificate for Fixed Rate Cumulative Perpetual
Preferred Stock, Series B (incorporated by reference to Exhibit 4.2
to the Registrant’s Current Report on Form 8-K filed on December 22,
2008).
|
|
|
4.5
|
Form
of Indenture between Heartland Financial USA, Inc. and U.S. Bank National
Association, as Trustee, to be used in connection with the issuance of
senior debt securities (incorporated by reference to Exhibit 4.3 to the
Registrant’s Registration Statement on Form S-3 filed on May 15,
2009).
|
|
|
4.6
|
Form
of Indenture between Heartland Financial USA, Inc. and U.S. Bank National
Association, as Trustee, to be used in connection with the issuance of
subordinated debt securities (incorporated by reference to Exhibit 4.4 to
the Registrant’s Registration Statement on Form S-3 filed on May 15,
2009).
|
|
|
10.1(1)
|
Heartland
Financial USA, Inc. 1993 Stock Option Plan dated as of May 12, 1993
(incorporated by reference to Exhibit 10.1 to the Registrant’s
Registration Statement on Form S-4 filed on March 10,
1994).
|
|
|
10.2
|
Heartland
Financial USA, Inc. Dividend Reinvestment Plan dated as of January 24,
2002 (incorporated by reference to the Registrant’s Registration Statement
on Form S-3 filed on January 25, 2002).
|
|
|
10.3(1)
|
Heartland
Financial USA, Inc. 2003 Stock Option Plan dated as of May 21, 2003
(incorporated by reference to Exhibit B to the Registrant’s Proxy
Statement on Form DEF14A filed on April 7, 2003).
|
|
|
10.4
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association, dated as of October 10, 2003 (incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on
November 13, 2003).
|
|
|
10.5
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association dated as of March 17, 2004 (incorporated by reference to
Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed on
March 14, 2007).
|
|
|
10.6
|
Indenture
by and between Heartland Financial USA, Inc. and Wells Fargo Bank,
National Association, dated as of January 31, 2006 (incorporated by
reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K
filed on March 10, 2006).
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10.7(1)
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Heartland
Financial USA, Inc. 2005 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.01 to the Registrant’s Current Report on Form 8-K
filed on May 19, 2005).
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10.8
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Heartland
Financial USA, Inc. 2006 Employee Stock Purchase Plan effective January 1,
2006 (incorporated by reference to Exhibit 10.02 to the Registrant’s
Current Report on Form 8-K filed on May 19, 2005).
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10.9(1)
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Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term Incentive
Plan Non-Qualified Stock Option Awards (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
February 10, 2006).
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10.10(1)
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Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive Plan Performance Restricted Stock Agreement (incorporated by
reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K
filed on March 10, 2006).
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10.11
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Indenture
between Heartland Financial USA, Inc. and Wilmington Trust Company dated
as of June 26, 2007 (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q filed on August 9,
2007).
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10.12
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Indenture
between Heartland Financial USA, Inc. and Wilmington Trust Company dated
as of June 26, 2007 (incorporated by reference to Exhibit 10.3 to the
Registrant’s Quarterly Report on Form 10-Q filed on August 9,
2007).
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10.13(1)
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Change
of Control Agreements between Heartland Financial USA, Inc. and Executive
Officers dated September 7, 2007 (incorporated by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on September 7,
2007).
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10.14
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Subscription
and Shareholder Agreement between Heartland Financial USA, Inc. and
Investors in Minnesota Bank & Trust dated as of September 21, 2007
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q filed on November 9, 2007).
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10.15(1)
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Heartland
Financial USA, Inc. Policy on Director Fees and Policy on Expense
Reimbursement For Directors (incorporated by reference to Exhibit 99.1 to
the Registrant’s Current Report on Form 8-K filed on December 5,
2007).
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10.16(1)
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Form
of Split-Dollar Life Insurance Plan effective November 13, 2001, between
the subsidiaries of Heartland Financial USA, Inc. and their selected
officers, including four subsequent amendments effective January 1, 2002,
May 1, 2002, September 16, 2003 and December 31, 2007. 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 (incorporated by reference to Exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 12,
2008).
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10.17(1)
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Form
of Executive Supplemental Life Insurance Plan effective January 1, 2005,
between the subsidiaries of Heartland Financial USA, Inc. and their
selected officers, including a subsequent amendment effective December 31,
2007. 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
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q filed on May 12, 2008).
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10.18(1)
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Form
of Executive Life Insurance Bonus Plan effective December 31, 2007,
between Heartland Financial USA, Inc. and selected officers of Heartland
Financial USA, Inc. and its subsidiaries, including a subsequent amendment
effective December 31, 2007 (incorporated by reference to Exhibit 10.18 to
the Registrant’s Annual Report on Form 10-K filed on March 16,
2009).
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10.19(1)
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Form
of Split-Dollar Agreement effective November 1, 2008, between the
subsidiaries of Heartland Financial USA, Inc. 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 and Citizens Finance Co. (incorporated by reference to Exhibit 10.19
to the Registrant’s Annual Report on Form 10-K filed on March 16,
2009).
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10.20
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Letter
Agreement, dated December 19, 2008, including the Securities Purchase
Agreement — Standard Terms, between the Company and the United States
Department of the Treasury (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed on December 22,
2008).
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10.21
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Form
of Waiver, executed by each Messrs. Lynn B. Fuller, John K. Schmidt,
Kenneth J. Erickson, Douglas J. Horstmann and Edward H. Everts
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed on December 22, 2008).
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10.22(1)
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Form
of Consent, executed by each Messrs. Lynn B. Fuller, John K. Schmidt,
Kenneth J. Erickson, Douglas J. Horstmann and Edward H. Everts as to
adoption of amendments to Benefit Plans as required by Section 111(b) of
EESA (incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on December 22, 2008).
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10.23(1)(2)
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Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive Plan Performance Restricted Stock Unit Agreement with those
individuals subject to settlement restrictions due to Heartland’s
participation in the United States Treasury’s Troubled Asset Relief
Program.
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10.24(1)(2)
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Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive Plan Performance Restricted Stock Unit Agreement with those
individuals not subject to settlement restrictions due to Heartland’s
participation in the United States Treasury’s Troubled Asset Relief
Program..
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11(2)
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Statement
re Computation of Per Share Earnings.
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21.1(2)
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Subsidiaries
of the Registrant.
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23.1(2)
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Consent
of KPMG LLP.
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31.1(2)
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Certification
of Chief Executive Officer pursuant to Rule 13a-15.
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31.2(2)
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Certification
of Chief Financial Officer pursuant to Rule 13a-15.
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32.1(2)
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Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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32.2(2)
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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.
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99.1(2)
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First
Fiscal Year Certification of Chief Executive Officer pursuant to Section
111(b) of the Emergency Economic Stabilization Act of
2008.
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99.2(2)
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First
Fiscal Year Certification of Chief Financial Officer pursuant to Section
111(b) of the Emergency Economic Stabilization Act of
2008.
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(1)
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Management
contracts or compensatory plans or
arrangements.
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(2)
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Filed
herewith.
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