UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2006
Commission
File Number: 0-24724
HEARTLAND
FINANCIAL USA, INC.
(Exact
name of Registrant as specified in its charter)
|
Delaware
|
42-1405748
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer identification number)
|
|
1398
Central Avenue, Dubuque, Iowa 52001
|
(563)
589-2100
|
|
(Address
of principal executive offices) (Zip Code)
|
(Registrant's
telephone number, including area
code)
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock $1.00 par value
|
The
Nasdaq Stock Market LLC
|
|
Preferred
Share Purchase Rights
|
The
Nasdaq Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act:
|
None
|
Indicate
by check mark if the Registrant is a well-know seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes No
X
Indicate
by check mark if the Registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act.
Yes No
X
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes X No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. ( )
The
index
to exhibits follows the signature page.
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12B-2 of the Exchange Act.
Large
accelerated filer Accelerated filer
X Non-accelerated filer
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes No
X
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the last sales price quoted on
the
Nasdaq National Market System on June
30,
2006,
the
last business day of the registrant's most recently completed second fiscal
quarter, was approximately $285,749,290.*
Such
figures include 2,065,097
shares
of the Registrant's Common Stock held in a fiduciary capacity by the trust
department of the Dubuque Bank and Trust Company, a wholly-owned subsidiary
of
the Registrant.
*
Based
on the last sales price of the Registrant's common stock on June
30,
2006,
and
reports of beneficial ownership filed by directors and executive officers
of
Registrant and by beneficial owners of more than 5% of the outstanding shares
of
common stock of Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Registrant's common stock.
As
of
March 14,
2007,
the
Registrant had issued and outstanding 16,482,443
shares
of common stock, $1.00 per value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2007 Annual Meeting of Stockholders are
incorporated by reference into Part III.
HEARTLAND
FINANCIAL USA, INC.
Form
10-K Annual Report
Table
of Contents
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Part
I
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Page
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Item
1.
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Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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3
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A.
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General
Description . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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3
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B.
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Market
Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . .
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7
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C.
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Competition
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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9
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D.
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Employees
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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9
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E.
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Internet
Access . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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9
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F.
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Supervision
and Regulation . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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|
10
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G
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Governmental
Monetary Policy and Economic Conditions . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
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15
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Item
1A.
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Risk
Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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16
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Item
1B.
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Unresolved
Staff Comments . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
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20
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Item
2.
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Properties.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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21
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Item
3.
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Legal
Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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22
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Item
4.
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Submission
of Matters to a Vote of Security Holders . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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22
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Part
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . .
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23
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Item
6.
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Selected
Financial Data . . . . . . . . . . . . . . . . . . . . . . . .
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26
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operation
.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . .
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27
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
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52
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Item
8.
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Financial
Statements and Supplementary Data . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. .
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54
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . .
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89
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Item
9A.
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Controls
and Procedures . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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89
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Item
9B.
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Other
Information . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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92
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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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. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
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92
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Item
11.
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Executive
Compensation . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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|
93
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . .
|
94
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Item
13.
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Certain
Relationships and Related Transactions, and Director Independence
. . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . .
|
94
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Item
14.
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Principal
Accountant Fees and Services . . . . . . . . . . . . . . . . .
. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
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94
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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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95
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PART
I.
ITEM
1.
BUSINESS
A. GENERAL
DESCRIPTION
Heartland
Financial USA, Inc. ("Heartland"), reincorporated in the state of Delaware
in
1993, is a multi-bank holding company registered under the Bank Holding Company
Act of 1956, as amended ("BHCA"). Heartland has nine bank
subsidiaries
in the states of Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana
and
Colorado, (collectively, the "Bank Subsidiaries"). All nine Bank Subsidiaries
are members of the Federal Deposit Insurance Corporation ("FDIC"). The Bank
Subsidiaries listed below operate a total of 54 banking locations.
|
*
|
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.
|
|
*
|
Galena
State Bank and Trust Company, Galena, Illinois, is chartered under
the
laws of the State of Illinois.
|
|
*
|
First
Community Bank, Keokuk, Iowa, is chartered under the laws of the
State of
Iowa.
|
|
*
|
Riverside
Community Bank, Rockford, Illinois, is chartered under the laws
of the
State of Illinois.
|
|
*
|
Wisconsin
Community Bank, Cottage Grove, Wisconsin, is chartered under the
laws of
the State of Wisconsin.
|
|
*
|
New
Mexico Bank & Trust, Albuquerque, New Mexico, is chartered under the
laws of the State of New Mexico.
|
|
*
|
Rocky
Mountain Bank, Billings, Montana, is chartered under the laws of
the State
of Montana.
|
|
*
|
Arizona
Bank & Trust, Chandler, Arizona, is chartered under the laws of the
State of Arizona.
|
|
*
|
Summit
Bank & Trust, Broomfield, Colorado is chartered under the laws of the
State of Colorado.
|
Heartland
has eight active non-bank subsidiaries as listed below.
|
*
|
Citizens
Finance Co. is a consumer finance company with offices in Iowa,
Illinois
and Wisconsin.
|
|
*
|
Summit
Acquisition Corporation is the one-bank holding company for Summit
Bank
& Trust in Colorado.
|
|
*
|
Heartland
Financial Statutory Trust II, Heartland Financial Capital Trust
II,
Heartland Financial Statutory Trust III, Heartland Financial Statutory
Trust IV, Heartland Financial Statutory Trust V and Rocky Mountain
Statutory Trust I are special purpose trust subsidiaries of Heartland
formed for the purpose of the offering of cumulative capital
securities.
|
All
of
Heartland’s subsidiaries are wholly-owned, except for Arizona Bank & Trust,
of which Heartland owned 91%
of the
capital stock on December
31, 2006 and Summit Acquisition Corporation, of which Heartland owned 81%
of the
capital stock on December 31, 2006. Summit Acquisition Corporation owned
99% of
Summit Bank & Trust on December 31, 2006.
The
Bank
Subsidiaries provide full service retail banking in the communities in which
they are located. Deposit products offered by the Bank Subsidiaries include
checking and other demand deposit accounts, NOW accounts, savings accounts,
money market accounts, certificates of deposit, individual retirement accounts,
health savings accounts and other time deposits. The deposits in the Bank
Subsidiaries are insured by the FDIC to the full extent permitted by law.
Loans
include commercial and industrial, agricultural, real estate mortgage, consumer,
home equity, credit cards and lines of credit. Other products and services
include VISA debit cards, automated teller machines, on-line banking, safe
deposit boxes and trust services. The principal service of the Bank Subsidiaries
consists of making loans to and accepting deposits from businesses and
individuals. These loans are made at the offices of the Bank Subsidiaries.
The
Bank Subsidiaries also engage in activities that are closely related to banking,
including investment brokerage.
Operating
Strategy
Heartland’s
operating strategy is based upon a community banking model with three major
components:
| 1. |
Develop
strong community banks:
|
|
*
|
Establish
community bank names and images
|
|
*
|
Encourage
community involvement and leadership
|
|
*
|
Maintain
active boards of directors chosen from the local
community
|
|
*
|
Retain
local presidents and
decision-making
|
|
2.
|
Provide
resources for revenue enhancement:
|
|
*
|
Develop
and implement a wide array of financial products and services for
all Bank
Subsidiaries
|
|
*
|
Improve
Bank Subsidiary funding costs by reducing higher-cost certificates
of
deposit; increasing the percentage of lower-cost transaction accounts
such
as checking, savings and money market accounts; emphasizing relationship
banking and capitalizing on cross-selling opportunities
|
|
*
|
Emphasize
greater use of non-traditional sources of income, including trust
and
investment services, insurance and consumer finance
|
|
*
|
Evaluate
and acquire state-of-the-art technology when the expected return
justifies
the cost
|
|
3.
|
Provide
customer-transparent cost savings:
|
|
*
|
Centralize
back office support functions so Bank Subsidiaries operate as efficiently
as possible
|
Management
believes the personal and professional service offered to customers provides
an
appealing alternative to the "megabanks" resulting from mergers and acquisitions
in the financial services industry. While Heartland employs a community banking
philosophy, management believes Heartland’s size, combined with its complete
line of financial products and services, is sufficient to effectively compete
in
the respective market areas. To remain price competitive, management also
believes Heartland must manage expenses and gain economies of scale by
centralizing back office support functions. Although each of Heartland’s
subsidiaries operates under the direction of its own board of directors,
Heartland has standard operating policies regarding asset/liability management,
liquidity management, investment management, lending policies, 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. During 2006, Heartland
employees purchased 26,451 shares under the plan. As of December 31, 2006,
employees, officers, and directors owned approximately 30% of Heartland’s
outstanding common stock.
Acquisition
and Expansion Strategy
Heartland’s
strategy is to increase profitability and diversify its market area and asset
base by expanding existing subsidiaries, by establishing de
novo
banks
and through acquisitions. Heartland continually seeks and evaluates
opportunities to establish branches, loan production offices, or other business
facilities as a means of expanding its presence in current or new market
areas.
Heartland acquires established financial services organizations, primarily
commercial banks or thrifts, when suitable candidates are identified and
acceptable business terms can be negotiated. Heartland has also formed
de novo
banking
institutions in locations determined to have market potential and suitable
management candidates with banking expertise and a philosophy similar to
Heartland’s.
Heartland
has focused on markets with growth potential in the Midwest 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.
Additional expansion at Arizona Bank & Trust included the acquisition of
Bank of the Southwest, a
financial institution providing retail and commercial banking services in
Phoenix and Tempe, Arizona during 2006. Heartland combined the acquired assets
and deposit accounts into Arizona Bank & Trust in May of 2006. Heartland
took another step toward expanding its Western presence in June of 2004 when
it
acquired Rocky Mountain Bancorporation, Inc., the one-bank holding company
of
Rocky Mountain Bank. Headquartered in Billings, Montana, Rocky Mountain Bank
had
assets of $439 million at December 31, 2006, with nine branch locations
throughout the state. In November of 2006, Heartland and a group of investors
opened Summit Bank & Trust, a de
novo
banking
operation in Broomfield, Colorado.
The
capital structure of Heartland’s ninth state-chartered bank was
very
similar to that used when Arizona Bank & Trust was formed. Heartland’s
initial investment was $12.0 million, or 80% of the targeted $15.0 million
initial capital. One of Heartland’s strategic goals is to expand its presence in
the Western markets to 50% of Heartland’s total assets, thereby balancing the
growth in its Western markets with the stability of the Midwestern markets.
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, consumer loans and commercial leases.
The
Bank
Subsidiaries market their services to qualified lending customers. Lending
officers actively solicit the business of new companies entering their market
areas as well as long-standing members of the Bank Subsidiaries' respective
business communities. Through professional service, competitive pricing,
and
innovative structure, the Bank Subsidiaries have been successful in attracting
new lending customers. Heartland also actively pursues consumer lending
opportunities. With convenient locations, advertising and customer
communications, the Bank Subsidiaries have been successful in capitalizing
on
the credit needs of their market areas.
Commercial
Loans
The
Bank
Subsidiaries have a strong commercial loan base, with significant growth
coming
from Dubuque Bank and Trust Company, New Mexico Bank & Trust, Wisconsin
Community Bank, and Arizona Bank & Trust. Dubuque Bank and Trust Company, in
particular, continues to be a premier commercial lender in the tri-state
area of
northeast Iowa, northwest Illinois and southwest Wisconsin. The Bank
Subsidiaries' current portfolios include, but are not limited to, loans to
wholesalers, hospitality industry, real estate developers, manufacturers,
building contractors, business services companies and retailers. The Bank
Subsidiaries provide a wide range of business loans, including lines of credit
for working capital and operational purposes and term loans for the acquisition
of equipment and real estate. Although most loans are made on a secured basis,
loans may be made on an unsecured basis where warranted by the overall financial
condition of the borrower. Terms of commercial business loans generally range
from one to five years.
Bank
Subsidiaries continue to seek opportunities to expand the production of loans
guaranteed by U.S. government agencies. Wisconsin Community Bank is designated
as a Preferred Lender by the U.S. Small Business Administration (SBA). Wisconsin
Community Bank is also the only lender in Wisconsin to be granted USDA Certified
Lender status for the USDA Rural Development Business and Industry loan program
and was one of the top ten lenders in the nation in this program for the
past
three years. Management believes that making these guaranteed loans helps
its
local communities as well as provides Heartland with a source of income and
solid future lending relationships as such businesses grow and prosper.
The
Bank
Subsidiaries’ commercial loans and leases are primarily made based on the
identified cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. The collateral support provided by the
borrower for most of these loans and leases and the probability of repayment
is
based on the liquidation of the pledged collateral and enforcement of a personal
guarantee, if any exists. The primary repayment risks of commercial loans
and
leases are that the cash flows of the borrower may be unpredictable, and
the
collateral securing these loans may fluctuate in value.
Heartland
understands the roles that sound credit skills and a common credit culture
play
in maintaining quality loan portfolios. As the credit portfolios of the Bank
Subsidiaries have continued to grow, several changes have been made in their
lending departments resulting in an overall increase in these departments'
skill
levels. In 2003, Heartland introduced the RMA Diagnostic Assessment to assess
credit skills and training needs for over 80 of its credit personnel. After
the
initial introduction of this training tool, specific individualized training
was
established for existing personnel. All new lending personnel are expected
to
complete a similar diagnostic training program. Heartland also assists all
of
the commercial and agricultural lenders of the Bank Subsidiaries in the analysis
and underwriting of credit through its staff in the credit administration
department. This staff continues to expand as the total loans under management
continue to grow.
Commercial
lenders interact with their respective boards of directors each month. Heartland
also utilizes an internal loan review function to analyze credits of the
Bank
Subsidiaries and to provide periodic reports to the respective boards of
directors. Management has attempted to identify problem loans at an early
date
and to aggressively seek resolution of these situations.
Agricultural
Loans
Agricultural
loans are emphasized by Dubuque Bank and Trust Company, Rocky Mountain Bank,
Wisconsin Community Bank’s Monroe banking center and New Mexico Bank &
Trust’s Clovis banking offices. The
Bank
Subsidiaries that emphasize agricultural loans do so because of their location
in or around rural markets. Dubuque Bank and Trust Company maintains its
status
as one of the largest agricultural lenders in the State of Iowa. Agricultural
loans remain balanced in proportion to the rest of Heartland's loan portfolio,
constituting approximately 11% of the total loan portfolio at December 31,
2006.
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 once annually. The Bank Subsidiaries also work closely
with governmental agencies, including the Farm Services Administration, to
help
agricultural customers obtain credit enhancement products such as loan
guarantees or interest assistance.
Residential
Real Estate Mortgage Loans
Mortgage
lending remains a focal point for the Bank Subsidiaries as each of them
continues to build real estate lending business. As long-term interest rates
remained at relatively low levels during 2006 and 2005, many customers elected
mortgage loans that are fixed rate with fifteen or thirty year maturities.
Heartland usually sells these loans into the secondary market but retains
servicing on the majority of sold loans. Management believes that mortgage
servicing on sold loans provides the Bank Subsidiaries with a relatively
steady
source of fee income compared to fees generated solely from mortgage origination
operations. Moreover, the retention of servicing gives the Bank Subsidiaries
the
opportunity to maintain regular contact with mortgage loan customers.
As
with
agricultural and commercial loans, Heartland encourages the Bank Subsidiaries
to
participate in lending programs sponsored by U.S. government agencies when
justified by market conditions. Beginning in 2004, Veterans Administration
and
Federal Home Administration loans were offered in all Bank Subsidiary
markets.
Consumer
Lending
The
Bank
Subsidiaries' consumer lending departments provide all types of consumer
loans
including motor vehicle, home improvement, home equity, credit cards 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 6,500 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 and Trust Company and Wisconsin
Community Bank have been offering trust and investment services in their
respective communities for many years. 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. In 2005, New Mexico Bank & Trust began
offering trust and investment services. In 2003, Arizona Bank & Trust joined
the list of banks offering trust and investment services. On August 31, 2004,
Heartland completed its acquisition of the Wealth Management Group of Colonial
Trust Company, a publicly held Arizona trust company based in Phoenix. The
Wealth Management Group, Colonial Trust Company’s personal trust division, had
trust assets of $154.0 million and projected annual revenues of $1.2 million
at
the time of the acquisition. This transaction provided a unique opportunity
for
Heartland to grow its trust business in the Southwestern marketplace. Colonial’s
seasoned management team and strong account base, combined with Heartland’s
strong support services, depth of expertise, and long track record of investment
performance proved to be a winning combination as we sought to elevate the
profile of Arizona Bank & Trust. As of December 31, 2006, total Heartland
trust assets exceeded $1.5 billion, the vast majority of which are assets
under
management. Collectively, the Bank Subsidiaries provide a full complement
of
trust and investment services for individuals and corporations. All of the
Bank
Subsidiaries have targeted their trust departments as primary areas for future
growth.
Dubuque
Bank and Trust Company is nationally recognized as a leading provider of
socially responsible investment services, and it manages investment portfolios
for religious and other non-profit organizations located throughout the United
States. Dubuque Bank and Trust Company is also Heartland’s lead bank in
providing daily valuation 401(k) plans and other retirement services, including
Heartland’s retirement plan for its employees.
Heartland
has formed a strategic alliance with Independent Financial Marketing Group,
Inc.
to operate independent securities offices at all of Heartland’s bank
subsidiaries. Through Independent Financial Marketing Group, Inc., Heartland
offers a full array of investment services including mutual funds, annuities,
retirement products, education savings products, brokerage services, employer
sponsored plans, and insurance products. A complete line of vehicle, property
and casualty, life and disability insurance and tax-free annuities are also
offered by Heartland through DB&T Insurance.
B. MARKET
AREAS
Dubuque
Bank and Trust Company
Dubuque
Bank and Trust Company and Heartland are located in Dubuque County, Iowa,
which
encompasses the city of Dubuque and a number of surrounding rural communities.
Citizens Finance Co. also operates within this market area, in addition to
operating offices in Davenport, Iowa; Cedar Rapids, Iowa; Madison, Wisconsin;
Appleton, Wisconsin; Loves Park, Illinois; Tinley Park, Illinois and Crystal
Lake, Illinois.
The
city
of Dubuque is located in northeastern Iowa, on the Mississippi River,
approximately 175 miles west of Chicago, Illinois, and approximately 200
miles
northeast of Des Moines, Iowa. It is strategically situated at the intersection
of the state borders of Iowa, Illinois and Wisconsin. Based upon the results
of
the 2000 census, the city of Dubuque had a total population of approximately
58,000.
The
principal offices of Heartland and Dubuque Bank and Trust Company’s main bank
currently occupy the same building. Due to growth in both companies, a building
was acquired directly across the street from Dubuque Bank and Trust Company’s
main office to serve as an operations center for Heartland. Renovation of
the
60,000 square foot building was completed in the second quarter of 2004.
In
addition to its main banking office, Dubuque Bank and Trust Company operates
seven branch offices, all of which are located in Dubuque County. In 2004,
Dubuque Bank and Trust Company opened a branch facility at a strategically
located intersection on the rapidly growing northwest side of Dubuque.
Additionally, during 2003, Dubuque Bank and Trust Company relocated its branch
facility in Farley, Iowa, to a newly constructed building that is more
convenient for its customers. 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 and Trust Company
Galena
State Bank and Trust Company is located in Galena, Illinois, which is less
than
five miles from the Mississippi River, approximately 20 miles east of Dubuque
and 155 miles west of Chicago. Galena operates a second office in Stockton,
Illinois. Both offices are located in Jo Daviess County, which has a
population of approximately 22,000, according to the 2000 census.
First
Community Bank
First
Community Bank’s main office is in Keokuk, Iowa, which is located in the
southeast corner of Iowa near the borders of Iowa, Missouri and Illinois.
Due to
its location, First Community Bank serves customers in the tri-county region
of
Lee County, Iowa; Hancock County, Illinois; and Clark County, Missouri. First
Community Bank has one branch office in Keokuk and another branch in the
city of
Carthage in Hancock County, Illinois. Keokuk is an industrial community with
a
population of approximately 11,000, and the population of Lee County is
approximately 38,000.
Riverside
Community Bank
Riverside
Community Bank is located on the northeast edge of Rockford, Illinois, which
is
approximately 75 miles west of Chicago in Winnebago County. In addition to
its
main banking office, Riverside Community Bank has three branch offices, all
of
which are located in the Winnebago County area. Based on the 2000 census,
the
county had a population of 278,000, and the city of Rockford had a population
of
150,000.
Wisconsin
Community Bank
Wisconsin
Community Bank’s main office is located in Cottage Grove, Wisconsin, which is
approximately 10 miles east of Madison in Dane County. Wisconsin Community
Bank
operates two branch offices in Madison suburbs. The Middleton branch opened
in
1998, and an office in Fitchburg was opened in a newly constructed building
in
March 2003. According to the 2000 census, Dane County had a population of
427,000, and the village of Cottage Grove had a population of 3,800. Wisconsin
Community Bank opened three offices in Sheboygan, DePere and Eau Claire,
Wisconsin during 1999, operating under the name of Wisconsin Business Bank.
The
Sheboygan and DePere facilities are located in the northeastern Wisconsin
counties of Sheboygan and Brown. The Eau Claire office was subsequently sold
in
the fourth quarter of 2002. During 2004, Wisconsin Business Bank changed
its
name to Heartland Business Bank in conjunction with its opening of a loan
production office in Rockland, Massachusetts. The Rockland office was
subsequently closed in 2006. Wisconsin Community Bank also acquired the Bank
One
Monroe, Wisconsin banking center in July of 1999. The city of Monroe, which
is
approximately 50 miles southwest of Madison, is located in Green County in
south
central Wisconsin.
New
Mexico Bank & Trust
New
Mexico Bank & Trust operates eight offices in or around Albuquerque, New
Mexico, in Bernalillo County. Based upon the 2000 census, the county had
a
population of 557,000, and the city had a population of 449,000. New Mexico
Bank
& Trust also operates five locations in the New Mexico communities of
Clovis, Portales, and Melrose, all located in Curry County. Clovis is located
in
east central New Mexico, approximately 220 miles from Albuquerque, 100 miles
northwest of Lubbock, Texas, and 105 miles southwest of Amarillo, Texas.
In
2003, two branch offices were opened in Santa Fe, in Santa Fe County.
Arizona
Bank & Trust
Arizona
Bank & Trust currently operates five offices; one in Phoenix which opened in
2005, one in Mesa, Arizona, which is located 15 miles east of Phoenix, one
in
Tempe and two offices including the main office in Chandler, Arizona, which
is
located in the southern portion of metropolitan Phoenix. These cities are
located in Maricopa County. Chandler’s current population is 218,000, as
provided by the City of Chandler Office of Economic Development, compared
to
177,000 reported in the 2000 census. The estimated population of Maricopa
County
in July 2001 was 3,029,000, according to the Arizona Department of Economic
Security.
Rocky
Mountain Bank
Rocky
Mountain Bank operates from nine locations throughout the state of Montana.
Rocky Mountain Bank’s main office is in Billings which is the state’s largest
city and an agricultural, retail and business center. Billings is also the
county seat of Yellowstone County within south-central Montana along
Interstate-90. Based upon the 2000 census, the county had a population of
129,000 and the city had a population of 126,000. Six of the locations are
spread primarily along the western corridor of the state of Montana.
Summit
Bank & Trust
The
main
facility for Summit Bank & Trust is in Broomfield, Colorado. The city and
county of Broomfield lies in the northwestern tier of the Denver-Aurora
Metropolitan Area. The population of Broomfield was estimated at 43,478 in
2005
by the U.S. Census Bureau. Broomfield is the 16th
most
populous city in the state of Colorado. A second location is under construction
in Thornton, just north of the Denver International Airport.
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 price, 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, 2006, Heartland employed 959 full-time equivalent employees.
Heartland places a high priority on staff development, which involves extensive
training in a variety of areas, including customer service training. New
employees are selected based upon their technical skills and customer service
capabilities. None of Heartland's employees are covered by a collective
bargaining agreement. Heartland offers a variety of employee benefits, and
management considers its employee relations to be excellent. Heartland utilizes
Predictive Index software to assist with placing potential employees in new
positions within Heartland and with evaluating current positions.
E.
INTERNET
ACCESS
Heartland
maintains an Internet site at www.htlf.com. Heartland offers its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and
other reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act free of charge from its web site as soon as reasonably
practical after meeting the electronic filing requirements of the Securities
and
Exchange Commission.
F. SUPERVISION
AND REGULATION
General
Financial
institutions, their holding companies and their affiliates are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of Heartland may be affected not only by management decisions
and
general economic conditions, but also by the requirements of federal and
state
statutes and by the regulations and policies of various bank regulatory
authorities, including the Iowa Superintendent of Banking
(the “Iowa Superintendent”), the Illinois Department of Financial and
Professional Regulation (the “Illinois DFPR”), the New Mexico
Financial Institutions Division (the “New Mexico FID”), the Montana
Financial Institution Division (the “Montana Division”), the Division of Banking
of the Wisconsin Department of Financial Institutions (the “Wisconsin DFI”), the
Arizona State Banking Department (the “Arizona Department”), the Colorado
Department of Regulatory Agencies, Division of Banking (the “Colorado
Division”), the Board of Governors of the Federal Reserve System
(the “Federal Reserve”) and the Federal Deposit Insurance
Corporation (the “FDIC”). Furthermore, taxation laws administered by the
Internal Revenue Service and state taxing authorities and securities laws
administered by the Securities and Exchange Commission (the “SEC”) and
state securities authorities have an impact on the business of Heartland.
The effect of these statutes, regulations and regulatory policies may be
significant, and cannot be predicted with a high degree of
certainty.
Federal
and state laws and regulations generally applicable to financial institutions
regulate, among other things, the scope of business, the kinds and amounts
of
investments, reserve requirements, capital levels relative to operations,
the
nature and amount of collateral for loans, the establishment of branches,
mergers and consolidations and the payment of dividends. This system of
supervision and regulation establishes a comprehensive framework for the
respective operations of Heartland and its subsidiaries and is intended
primarily for the protection of the FDIC-insured deposits and depositors
of the
Bank Subsidiaries, rather than shareholders.
The
following is a summary of the material elements of the regulatory framework
that
applies to Heartland and its subsidiaries. It does not describe all of the
statutes, regulations and regulatory policies that apply, nor does it restate
all of the requirements of those that are described. As such, the following
is
qualified in its entirety by reference to applicable law. Any change in
statutes, regulations or regulatory policies may have a material effect on
the
business of Heartland and its subsidiaries.
The
Company
General.
Heartland, as the sole shareholder of Dubuque Bank and Trust Company, New
Mexico
Bank & Trust, Rocky Mountain Bank, Wisconsin Community Bank, Galena State
Bank and Trust Company, Riverside Community Bank and First Community Bank
and
the controlling shareholder of Arizona Bank & Trust and Summit Bank &
Trust, is a bank holding company. As a bank holding company, Heartland is
registered with, and is subject to regulation by, the Federal Reserve under
the
Bank Holding Company Act of 1956, as amended (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, 2006, Heartland
had
regulatory capital in excess of the Federal Reserve’s minimum
requirements.
Dividend
Payments.
Heartland’s ability to pay dividends to its shareholders may be affected by both
general corporate law considerations and policies of the Federal Reserve
applicable to bank holding companies. As a Delaware corporation, Heartland
is
subject to the limitations of the Delaware General Corporation Law
(the “DGCL”), which allows Heartland to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the
DGCL)
or if Heartland has no such surplus, out of its net profits for the fiscal
year
in which the dividend is declared and/or the preceding fiscal year.
Additionally, policies of the Federal Reserve caution that a bank holding
company should not pay cash dividends unless its net income available to
common
shareholders over the past year has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears consistent with its
capital needs, asset quality, and overall financial condition. The Federal
Reserve also possesses enforcement powers over bank holding companies and
their
non-bank subsidiaries to prevent or remedy actions that represent unsafe
or
unsound practices or violations of applicable statutes and regulations. Among
these powers is the ability to proscribe the payment of dividends by banks
and
bank holding companies.
Federal
Securities Regulation. Heartland’s
common stock is registered with the SEC under the Securities Act of 1933,
as
amended, and the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Consequently, Heartland is subject to the information, proxy
solicitation, insider trading and other restrictions and requirements of
the SEC
under the Exchange Act.
The
Bank Subsidiaries
General.
Dubuque
Bank and Trust Company and First Community Bank are Iowa-chartered banks.
As
Iowa-chartered banks, Dubuque Bank and Trust Company and First Community
Bank
are subject to the examination, supervision, reporting and enforcement
requirements of the Iowa Superintendent, the chartering authority for Iowa
banks.
Galena
State Bank and Trust Company and Riverside Community Bank are Illinois-chartered
banks. As Illinois-chartered banks, Galena State Bank and Trust Company 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 requirement of the Montana Division, as the chartering authority
for
Montana banks.
Wisconsin
Community Bank is a Wisconsin-chartered bank. As a Wisconsin-chartered bank,
Wisconsin Community Bank is subject to the examination, supervision, reporting
and enforcement requirements of the Wisconsin DFI, the chartering authority
for
Wisconsin banks.
Summit
Bank & Trust is a Colorado-chartered bank. As a Colorado-chartered bank,
Summit Bank & Trust is subject to the examination, supervision, reporting
and enforcement requirements of the Colorado Division, the chartering authority
for Colorado banks.
Arizona
Bank & Trust is an Arizona-chartered bank. As an Arizona-chartered bank,
Arizona Bank & Trust is subject to the examination, supervision, reporting
and enforcement requirements of the Arizona Department, the chartering authority
for Arizona banks.
The
deposit accounts of the Bank Subsidiaries are insured by the FDIC’s Deposit
Insurance Fund. As FDIC-insured institutions, each of the Bank Subsidiaries
also
is subject to the examination, supervision, reporting and enforcement
requirements of the FDIC, designated by federal law as the primary federal
regulator of state-chartered FDIC-insured banks that, like the Bank
Subsidiaries, are not members of the Federal Reserve System.
Deposit
Insurance.
As
FDIC-insured institutions, the Bank Subsidiaries are required to pay deposit
insurance premium assessments to the FDIC. The FDIC has adopted a risk-based
assessment system under which insured depository institutions are assigned
to
one of four risk assessment categories based upon their respective levels
of
capital, supervisory evaluations and other financial factors. Institutions
that
are well-capitalized and exhibit minimal or no supervisory weaknesses pay
the
lowest premium while institutions that are less than adequately capitalized
and
considered of substantial supervisory concern pay the highest premium. An
institution’s risk-classification is determined by the FDIC.
For
the
past several years, FDIC insurance assessments ranged from 0% to 0.27% of
total
deposits. Pursuant to regulatory amendments adopted by the FDIC, effective
January 1, 2007, insurance assessments will range from 0.05% to 0.43% of
total
deposits (unless subsequently adjusted by the FDIC). FDIC-insured institutions
that were in existence as of December 31, 1996, and paid an FDIC-insurance
assessment prior to that date (“eligible institutions”), as well as successors
to eligible institutions, will be entitled to a credit that may be applied
to
offset insurance premium assessments due for assessment periods beginning
on and
after January 1, 2007. The amount of an eligible institution’s assessment credit
will be equal to the institution’s pro rata share (based on its assessment base
as of December 31, 1996, as compared to the aggregate assessment base of
all
eligible institutions as of December 31, 1996) of the aggregate amount the
FDIC
would have collected if it had imposed an assessment of 10.5 basis points
on the
combined assessment base of all institutions insured by the FDIC as of December
31, 2001. Subject to certain statutory limitations, an institution’s assessment
credit may be applied to offset the full amount of premiums assessed in 2007,
but may not be applied to more than 90% of the premiums assessed in 2008,
2009
or 2010. The FDIC will track the amount of an institution’s assessment credit
and automatically apply it to the institution’s premium assessment to the
maximum extent permitted by federal law.
Dubuque
Bank and Trust Company, Rocky Mountain Bank, Wisconsin Community Bank, Galena
State Bank and Trust Company, Riverside Community Bank, First Community Bank
and
New Mexico Bank & Trust are eligible institutions. In aggregate, the total
assessment credit for these Heartland banks totals $1.2 million. Arizona
Bank
& Trust and Summit Bank & Trust are neither eligible institutions nor
successors to eligible institutions and, therefore, will not be entitled
to an
assessment credit.
FICO
Assessments. The
Financing Corporation (“FICO”) is a mixed-ownership governmental corporation
chartered by the former Federal Home Loan Bank Board pursuant to the Federal
Savings and Loan Insurance Corporation Recapitalization Act of 1987 to function
as a financing vehicle for the recapitalization of the former Federal Savings
and Loan Insurance Corporation. FICO issued 30-year non-callable bonds of
approximately $8.2 billion that mature by 2019. Since 1996, federal legislation
has required that all FDIC-insured depository institutions pay assessments
to
cover interest payments on FICO’s outstanding obligations. These FICO
assessments are in addition to amounts assessed by the FDIC for deposit
insurance. During the year ended December 31, 2006, the FICO assessment
rate was approximately 0.01% of deposits.
Supervisory
Assessments.
Each of
the Bank Subsidiaries is required to pay supervisory assessments to its
respective state banking regulator to fund the operations of that agency.
In
general, the amount of the assessment is calculated on the basis of each
institution’s total assets. During the year ended December 31, 2006, the Bank
Subsidiaries paid supervisory assessments totaling $385 thousand.
Capital
Requirements.
Banks
are generally required to maintain capital levels in excess of other businesses.
Under federal regulations, the Bank Subsidiaries are subject to the following
minimum capital standards: (i) a leverage requirement consisting of a minimum
ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks
with a minimum requirement of at least 4% for all others; and (ii) a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total
risk-weighted assets of 4%. In general, the components of Tier 1 capital
and
total capital are the same as those for bank holding companies discussed
above.
The
capital requirements described above are minimum requirements. Higher capital
levels will be required if warranted by the particular circumstances or risk
profiles of individual institutions. For example, federal regulations provide
that additional capital may be required to take adequate account of, among
other
things, interest rate risk or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. The
FDIC’s approval of deposit insurance for Summit Bank & Trust is conditioned
upon Summit Bank & Trust maintaining a Tier 1 capital to assets ratio of not
less than 8% for the first three years of operation.
Further,
federal law and regulations provide various incentives for financial
institutions to maintain regulatory capital at levels in excess of minimum
regulatory requirements. For example, a financial institution that is
“well-capitalized” may qualify for exemptions from prior notice or application
requirements otherwise applicable to certain types of activities and may
qualify
for expedited processing of other required notices or applications.
Additionally, one of the criteria that determines a bank holding company’s
eligibility to operate as a financial holding company is a requirement that
all
of its financial institution subsidiaries be “well-capitalized.” Under federal
regulations, in order to be “well-capitalized” a financial institution must
maintain a ratio of total capital to total risk-weighted assets of 10% or
greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or
greater and a ratio of Tier 1 capital to total assets of 5% or
greater.
Federal
law also provides the federal banking regulators with broad power to take
prompt
corrective action to resolve the problems of undercapitalized institutions.
The
extent of the regulators’ powers depends on whether the institution in question
is “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized,” in each case as defined by
regulation. Depending upon the capital category to which an institution is
assigned, the regulators’ corrective powers include: (i) requiring the
institution to submit a capital restoration plan; (ii) limiting the
institution’s asset growth and restricting its activities; (iii) requiring the
institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions between the institution
and its affiliates; (v) restricting the interest rate the institution may
pay on deposits; (vi) ordering a new election of directors of the institution;
(vii) requiring that senior executive officers or directors be dismissed;
(viii)
prohibiting the institution from accepting deposits from correspondent banks;
(ix) requiring the institution to divest certain subsidiaries; (x) prohibiting
the payment of principal or interest on subordinated debt; and (xi) ultimately,
appointing a receiver for the institution.
As
of
December 31, 2006: (i) none of the Bank Subsidiaries was subject to a directive
from its primary federal regulator to increase its capital to an amount in
excess of the minimum regulatory capital requirements; (ii) each of the Bank
Subsidiaries exceeded its minimum regulatory capital requirements under
applicable capital adequacy guidelines; and (iii) each of the Bank Subsidiaries
was “well-capitalized,” as defined by applicable regulations. As of December 31,
2006, Summit Bank & Trust (i) met the 8% capital to assets ratio established
by the FDIC as a condition to Summit Bank & Trust’s deposit insurance; and
(ii) was “well-capitalized,” as defined by applicable regulations.
Liability
of Commonly Controlled Institutions.
Under
federal law, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC-insured depository institutions
or
any assistance provided by the FDIC to commonly controlled FDIC-insured
depository institutions in danger of default. Because Heartland controls
each of
the Bank Subsidiaries, the Bank Subsidiaries are commonly controlled for
purposes of these provisions of federal law.
Dividend
Payments.
The
primary source of funds for Heartland is dividends from the Bank Subsidiaries.
In general, the Bank Subsidiaries may only pay dividends either out of their
historical net income after any required transfers to surplus or reserves
have
been made or out of their retained earnings.
The
payment of dividends by any financial institution is affected by the requirement
to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from
paying
any dividends if, following payment thereof, the institution would be
undercapitalized. As described above, each of the Bank Subsidiaries exceeded
its
minimum capital requirements under applicable guidelines as of December 31,
2006. 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, 2006,
approximately $92.4 million was available to be paid as dividends by the
Bank
Subsidiaries. Notwithstanding the availability of funds for dividends, however,
the FDIC may prohibit the payment of any dividends by the Bank Subsidiaries.
In
addition, Summit Bank & Trust is subject to the FDIC’s prohibition on the
payment of dividends during the first three years of a bank’s operations,
allowing cash dividends to be paid only from net operating income, and
prohibiting the payment of dividends until an appropriate allowance for loan
and
lease losses has been established and overall capital is adequate.
Insider
Transactions.
The Bank
Subsidiaries are subject to certain restrictions imposed by federal law on
extensions of credit to Heartland and its subsidiaries, on investments in
the
stock or other securities of Heartland and its subsidiaries and the acceptance
of the stock or other securities of Heartland or its subsidiaries as collateral
for loans made by the Bank Subsidiaries. Certain limitations and reporting
requirements are also placed on extensions of credit by each of the Bank
Subsidiaries to its directors and officers, to directors and officers of
Heartland and its subsidiaries, to principal shareholders of Heartland and
to
“related interests” of such directors, officers and principal shareholders. In
addition, federal law and regulations may affect the terms upon which any
person
who is a director or officer of Heartland or any of its subsidiaries or a
principal shareholder of Heartland may obtain credit from banks with which
the
Bank Subsidiaries maintain correspondent relationships.
Safety
and Soundness Standards.
The
federal banking agencies have adopted guidelines that establish operational
and
managerial standards to promote the safety and soundness of federally insured
depository institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation,
fees
and benefits, asset quality and earnings.
In
general, the safety and soundness guidelines prescribe the goals to be achieved
in each area, and each institution is responsible for establishing its own
procedures to achieve those goals. If an institution fails to comply with
any of
the standards set forth in the guidelines, the institution’s primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance
plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator may
restrict the institution’s rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require
the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety
and
soundness guidelines may also constitute grounds for other enforcement action
by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
Branching
Authority.
Each of
the Bank Subsidiaries has the authority, pursuant to the laws under which
it is
chartered, to establish branches anywhere in the state in which its main
office
is located, subject to the receipt of all required regulatory
approvals.
Federal
law permits state and national banks to merge with banks in other states
subject
to: (i) regulatory approval; (ii) federal and state deposit concentration
limits; and (iii) state law limitations requiring the merging bank to have
been
in existence for a minimum period of time (not to exceed five years) prior
to
the merger. The establishment of new interstate branches or the acquisition
of
individual branches of a bank in another state (rather than the acquisition
of
an out-of-state bank in its entirety) is permitted only in those states the
laws
of which expressly authorize such expansion.
State
Bank Investments and Activities.
Each of
the Bank Subsidiaries generally is permitted to make investments and engage
in
activities directly or through subsidiaries as authorized by the laws of
the
state under which it is chartered. However, under federal law and FDIC
regulations, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in
an
amount, that are not permissible for a national bank. Federal law and FDIC
regulations also prohibit FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity
that
is not permitted for a national bank unless the bank meets, and continues
to
meet, its minimum regulatory capital requirements and the FDIC determines
the
activity would not pose a significant risk to the deposit insurance fund
of
which the bank is a member. These restrictions have not had, and are not
currently expected to have, a material impact on the operations of the Bank
Subsidiaries.
Federal
Reserve System.
Federal
Reserve regulations, as presently in effect, require depository institutions
to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), as follows: for transaction
accounts aggregating $45.8 million or less, the reserve requirement is 3%
of
total transaction accounts; and for transaction accounts aggregating in excess
of $45.8 million, the reserve requirement is $1.119 million plus 10% of the
aggregate amount of total transaction accounts in excess of $45.8 million.
The first $8.5 million of otherwise reservable balances are exempted from
the
reserve requirements. These reserve requirements are subject to annual
adjustment by the Federal Reserve. The Bank Subsidiaries are in compliance
with
the foregoing requirements.
G. GOVERNMENTAL
MONETARY POLICY AND ECONOMIC CONDITIONS
Heartland’s
earnings are affected by the policies of regulatory authorities, including
the
Federal Reserve System. The Federal Reserve System’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 System
and other authorities cannot be predicted, nor can their effect on future
earnings.
ITEM
1A.
RISK
FACTORS
In
addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
Our
business is concentrated in and dependent upon the continued growth and welfare
of the various markets that we serve.
We
operate over a wide area, including markets in Iowa, Illinois, Wisconsin,
Arizona, New Mexico, Montana and Colorado and our financial condition, results
of operations and cash flows are subject to changes in the economic conditions
in those areas. Our success depends upon the business activity, population,
income levels, deposits and real estate activity in those areas. Although
our
customers’ business and financial interests may extend well beyond our market
areas, adverse economic conditions that affect our specific market area could
reduce our growth rate, affect the ability of our customers to repay their
loans
to us and generally affect our financial condition and results of
operations.
We
may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income.
As
part
of our general growth strategy, we may acquire banks and related businesses
that
we believe provide a strategic and geographic fit with our business. To the
extent that we grow through acquisitions, we cannot assure you that we will
be
able to adequately and profitably manage this growth. Acquiring other banks
and
businesses will involve risks commonly associated with acquisitions,
including:
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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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·
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potential
diversion of our management’s time and attention;
and
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·
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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 two years for new banking facilities to first achieve
operational profitability, due to the impact of organization and overhead
expenses and the start-up phase of generating loans and deposits. To the
extent
that we undertake additional branching and de
novo
bank and
business formations, we are likely to continue to experience the effects
of
higher operating expenses relative to operating income from the new operations,
which may have an adverse effect on our levels of reported net income, return
on
average equity and return on average assets.
Our
market and growth strategy relies heavily on our management team, and the
unexpected loss of key managers may adversely affect our
operations.
Much
of
our success to date has been influenced strongly by our ability to attract
and
to retain senior management experienced in banking and financial services
and
familiar with the communities in our different market areas. Because our
service
areas are spread over such a wide geographical area, our management
headquartered in Dubuque, Iowa is dependent on the effective leadership and
capabilities of the management in our local markets for the continued success
of
Heartland. Our ability to retain executive officers, the current management
teams and loan officers of our operating subsidiaries will continue to be
important to the successful implementation of our strategy. It is also critical,
as we grow, to be able to attract and retain qualified additional management
and
loan officers with the appropriate level of experience and knowledge about
our
market area to implement our community-based operating strategy. The unexpected
loss of services of any key management personnel, or the inability to recruit
and retain qualified personnel in the future, could have an adverse effect
on
our business, financial condition and results of operations.
We
face intense competition in all phases of our business.
The
banking and financial services business in our markets is highly competitive.
Our competitors include large regional banks, local community banks, thrifts,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market mutual funds, credit unions and other non-bank
financial service providers. Increased competition in our markets may result
in
a decrease in the amounts of our loans and deposits, reduced spreads between
loan rates and deposit rates or loan terms that are more favorable to the
borrower. Any of these results could have a material adverse effect on our
ability to grow and remain profitable.
Interest
rates and other conditions impact our results of
operations.
Our
profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. Like most banking institutions, our net
interest spread and margin will be affected by general economic conditions
and
other factors, including fiscal and monetary policies of the federal government,
that influence market interest rates and our ability to respond to changes
in
such rates. At any given time, our assets and liabilities will be such that
they
are affected differently by a given change in interest rates. As a result,
an
increase or decrease in rates, the length of loan terms or the mix of adjustable
and fixed rate loans in our portfolio could have a positive or negative effect
on our net income, capital and liquidity. We measure interest rate risk under
various rate scenarios and using specific criteria and assumptions. A summary
of
this process, along with the results of our net interest income simulations
is
presented at “Quantitative and Qualitative Disclosures About Market Risk”
included under Item 7A of Part II of this Form 10-K. Although we believe
our
current level of interest rate sensitivity is reasonable and effectively
managed, significant fluctuations in interest rates may have an adverse effect
on our business, financial condition and results of operations.
We
must effectively manage our credit risk.
There
are
risks inherent in making any loan, including risks inherent in dealing with
individual borrowers, risks of nonpayment, risks resulting from uncertainties
as
to the future value of collateral and risks resulting from changes in economic
and industry conditions. We attempt to minimize our credit risk through prudent
loan application approval procedures, careful monitoring of the concentration
of
our loans within specific industries and periodic independent reviews of
outstanding loans by our credit review department. However, we cannot assure
you
that such approval and monitoring procedures will reduce these credit risks.
Commercial
loans make up a significant portion of our loan portfolio.
Commercial
loans were $1.48 billion (including $1.10 billion of commercial real estate
loans), or approximately 69% of our total loan portfolio as of December 31,
2006. 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 $1.10 billion, or approximately 74% of our total commercial loan
portfolio as of December 31, 2006. 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. Although a significant
portion of such loans are secured by real estate as a secondary form of
collateral, adverse developments affecting real estate values in one or more
of
our markets could increase the credit risk associated with our loan portfolio.
Additionally, real estate lending typically involves higher loan principal
amounts and the repayment of the loans generally is dependent, in large part,
on
sufficient income from the properties securing the loans to cover operating
expenses and debt service. 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
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 amount of security 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.
Our
commercial real estate loans also include commercial construction loans,
including land acquisition and development. Construction, land acquisition
and
development lending involve additional risks because funds are advanced based
upon estimates of costs and the estimated value of the completed project.
Because of the uncertainties inherent in estimating construction costs, as
well
as the market value of the completed project and the effects of governmental
regulation on real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value
ratio. As a result, commercial construction loans often involve the disbursement
of substantial funds with repayment dependent, in part, on the success of
the
ultimate project and the ability of the borrower to sell or lease the property,
rather than the ability of the borrower or guarantor to repay principal and
interest. If our appraisal of the value of the completed project proves to
be
overstated, we may have inadequate security for the repayment of the loan
upon
completion of construction of the project.
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, 2006, agricultural real estate loans totaled $151.7 million,
or 7%,
of our total loan and lease portfolio. Payments on agricultural real estate
loans are dependent on the profitable operation or management of the farm
property securing the loan. The success of the farm may be affected by many
factors outside the control of the borrower, including adverse weather
conditions that prevent the planting of a crop or limit crop yields (such
as
hail, drought and floods), loss of livestock due to disease or other factors,
declines in market prices for agricultural products (both domestically and
internationally) and the impact of government regulations (including changes
in
price supports, subsidies and environmental regulations). In addition, many
farms are dependent on a limited number of key individuals whose injury or
death
may significantly affect the successful operation of the farm. If the cash
flow
from a farming operation is diminished, the borrower’s ability to repay the loan
may be impaired. The primary crops in our market areas are corn, soybeans,
peanuts and wheat. Accordingly, adverse circumstances affecting these crops
could have an adverse effect on our agricultural real estate loan
portfolio.
We
also
originate agricultural operating loans. At December 31, 2006, these loans
totaled $82.0 million, or 4%, 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
one- to four-family residential mortgage loans may result in lower yields
and
profitability.
One-
to
four-family residential mortgage loans comprised $225.3 million, or 10%,
of our
loan and lease portfolio at December 31, 2006, and are secured primarily
by
properties located in the Midwest. These loans result in lower yields and
lower
profitability for us 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.
Our
consumer loans generally have a higher degree of risk of default than our
other
loans.
At
December 31, 2006, consumer loans totaled $194.7 million, or 9%, of our total
loan and lease portfolio. Consumer loans typically have shorter terms and
lower
balances with higher yields as compared to one- to four-family residential
loans, but generally carry higher risks of default. Consumer loan collections
are dependent on the borrower’s continuing financial stability, and thus are
more likely to be affected by adverse personal circumstances. Furthermore,
the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on these loans.
Citizens Finance loans totaled $37.4 million at December 31, 2006, or 19%
of the
total consumer loan portfolio.
Our
allowance for loan losses may prove to be insufficient to absorb probable
losses
in our loan portfolio.
We
established our allowance for loan losses in consultation with management
of the
Bank Subsidiaries and maintain it at a level considered adequate by management
to absorb probable loan losses that are inherent in the portfolio. The amount
of
future loan losses is susceptible to changes in economic, operating and other
conditions, including changes in interest rates, which may be beyond our
control, and such losses may exceed current estimates. At December 31,
2006, our allowance for loan losses as a percentage of total loans was 1.40%
and
as a percentage of total non-performing loans was approximately 356%. Although
management believes that the allowance for loan losses is adequate to absorb
losses on any existing loans that may become uncollectible, we cannot predict
loan losses with certainty, and we cannot assure you that our allowance for
loan
losses will prove sufficient to cover actual loan losses in the future. Loan
losses in excess of our reserves may adversely affect our business, financial
condition and results of operations.
Our
continued pace of growth may require us to raise additional capital in the
future, but that capital may not be available when it is
needed.
We
are
required by federal and state regulatory authorities to maintain adequate
levels
of capital to support our operations. We anticipate that our existing capital
resources will satisfy our capital requirements for the foreseeable future.
However, we may at some point need to raise additional capital to support
continued growth, both internally and through acquisitions. Our ability to
raise
additional capital, if needed, will depend on conditions in the capital markets
at that time, which are outside 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
Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the various state agencies where we have a bank presence.
Regulations adopted by these agencies, which are generally intended to provide
protection for depositors and customers rather than for the benefit of
stockholders, govern a comprehensive range of matters relating to ownership
and
control of our shares, our acquisition of other companies and businesses,
permissible activities for us to engage in, maintenance of adequate capital
levels and other aspects of our operations. These bank regulators possess
broad
authority to prevent or remedy unsafe or unsound practices or violations
of law.
The laws and regulations applicable to the banking industry could change
at any
time and we cannot predict the effects of these changes on our business and
profitability. Increased regulation could increase our cost of compliance
and
adversely affect profitability. For example, new legislation or regulation
may
limit the manner in which we may conduct our business, including our ability
to
offer new products, obtain financing, attract deposits, make loans and achieve
satisfactory interest spreads.
We
have a continuing need for technological change and we may not have the
resources to effectively implement new technology.
The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the needs of our
customers by using technology to provide products and services that will
satisfy
customer demands for convenience as well as to create additional efficiencies
in
our operations as we continue to grow and expand our market areas. Many of
our
larger competitors have substantially greater resources to invest in
technological improvements. As a result, they may be able to offer additional
or
superior products to those that we will be able to offer, which would put
us at
a competitive disadvantage.
System
failure or breaches of our network security could subject us to increased
operating costs as well as litigation and other
liabilities.
The
computer systems and network infrastructure we use could be vulnerable to
unforeseen problems. Our operations are dependent upon our ability to protect
our computer equipment against damage from physical theft, fire, power loss,
telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that causes
an
interruption in our operations could have a material adverse effect on our
financial condition and results of operations. Computer break-ins, phishing
and
other disruptions could also jeopardize the security of information stored
in
and transmitted through our computer systems and network infrastructure,
which
may result in significant liability to us and may cause existing and potential
customers to refrain from doing business with us. Although we, with the help
of
third-party
service
providers, intend to continue to implement security technology and establish
operational procedures to prevent such damage, there can be no assurance
that
these security measures will be successful. In addition, advances in computer
capabilities, new discoveries in the field of cryptography or other developments
could result in a compromise or breach of the algorithms we and our third-party
service providers use to encrypt and protect customer transaction data. A
failure of such security measures could have a material adverse effect on
our
financial condition and results of operations.
We
are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and
errors.
Employee
errors and employee or customer misconduct could subject us to financial
losses
or regulatory sanctions and seriously harm our reputation. Misconduct by
our
employees could include hiding unauthorized activities from us, improper
or
unauthorized activities on behalf of our customers or improper use of
confidential information. It is not always possible to prevent employee errors
and misconduct, and the precautions we take to prevent and detect this activity
may not be effective in all cases. Employee errors could also subject us
to
financial claims for negligence.
We
maintain a system of internal controls and insurance coverage to mitigate
against operational risks, including data processing system failures and
errors
and customer or employee fraud. Should our internal controls fail to prevent
or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
As
of
December 31, 2006, Heartland had no unresolved staff comments.
ITEM
2.
PROPERTIES
The
following table is a listing of Heartland’s principal operating
facilities:
|
Name
and Main Facility Address
|
Main
Facility
Square
Footage
|
Main
Facility
Owned
or Leased
|
Number
of Locations
|
|
Banking
Subsidiaries
|
|||
|
Dubuque
Bank and Trust Company
1398
Central Avenue
Dubuque,
IA 52001
|
59,500
|
Owned
|
8
|
|
Galena
State Bank and Trust Company
971
Gear Street
Galena,
IL 61036
|
18,000
|
Owned
|
3
|
|
Riverside
Community Bank
6855
E. Riverside Blvd.
Rockford,
IL 60114
|
8,000
|
Owned
|
4
|
|
First
Community Bank
320
Concert Street
Keokuk,
IA 52632
|
6,000
|
Owned
|
3
|
|
Wisconsin
Community Bank
580
North Main Street
Cottage
Grove, WI 53527
|
6,000
|
Owned
|
6
|
|
New
Mexico Bank & Trust
320
Gold NW
Albuquerque,
NM 87102
|
11,400
|
Lease
term
through
2011
|
15
|
|
Arizona
Bank & Trust
1000
N. 54th
Street
Chandler,
AZ 85226
|
8,500
|
Owned
|
5
|
|
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
|
1
|
|
Non-Bank
Subsidiaries
|
|||
|
Citizens
Finance Co.
1275
Main Street
Dubuque,
IA 52001
|
Leased
from
DB&T
|
8
|
|
The
principal office of Heartland is located in Dubuque Bank and Trust Company's
main office.
ITEM
3.
LEGAL
PROCEEDINGS
There
are
certain legal proceedings pending against Heartland and its subsidiaries
at
December 31, 2006, that are ordinary routine litigation incidental to our
business. While the ultimate outcome of current legal proceedings cannot
be
predicted with certainty, it is the opinion of management that the resolution
of
these legal actions should not have a material effect on Heartland's
consolidated financial position or results of operations.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted during the fourth quarter of 2006 to a vote of security
holders.
PART
II
ITEM
5.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Heartland's
common stock was held by approximately 1,500 stockholders of record as of
March
9, 2007, and approximately 1,600 additional stockholders held shares in street
name. The common stock of Heartland has been quoted on the Nasdaq National
Market System since May 2003 under the symbol “HTLF”. Prior to quotation on the
Nasdaq National Market System, the common stock of Heartland was traded on
the
over-the-counter market.
For
the
periods indicated, the following table shows the range of reported prices
per
share of Heartland's common stock in the Nasdaq National Market System. These
quotations represent inter-dealer prices without retail markups, markdowns,
or
commissions and do not necessarily represent actual transactions.
|
Heartland
Common Stock
|
||
|
Calendar
Quarter
|
High
|
Low
|
|
2006:
|
||
|
First
|
$
23.60
|
$
20.11
|
|
Second
|
26.67
|
22.55
|
|
Third
|
27.86
|
24.16
|
|
Fourth
|
31.08
|
25.10
|
|
2005:
|
||
|
First
|
$
21.31
|
$
18.37
|
|
Second
|
21.22
|
19.06
|
|
Third
|
20.99
|
19.04
|
|
Fourth
|
21.74
|
18.84
|
Cash
dividends have been declared by Heartland quarterly during the past two years
ending December 31, 2006. The following table sets forth the cash dividends
per
share paid on Heartland's common stock for the past two years:
|
Calendar
Quarter
|
2006
|
2005
|
|
First
|
$
.09
|
$
.08
|
|
Second
|
.09
|
.08
|
|
Third
|
.09
|
.08
|
|
Fourth
|
.09
|
.09
|
Heartland's
ability to pay dividends to stockholders is largely dependent upon the dividends
it receives from the Bank Subsidiaries, and the Bank Subsidiaries are subject
to
regulatory limitations on the amount of cash dividends they may pay. See
"Business - Supervision and Regulation - Heartland - Dividend Payments" and
"Business - Supervision and Regulation - The Bank Subsidiaries - Dividend
Payments" for a more detailed description of these limitations.
Heartland
has issued junior subordinated debentures in several private placements.
Under
the terms of the debentures, Heartland may be prohibited, under certain
circumstances, from paying dividends on shares of its common stock. Heartland’s
revolving credit agreement also contains specific covenants which, among
other
things, limit dividend payments by Heartland under certain circumstances.
None
of these circumstances currently exist.
The
following table provides information about purchases by Heartland and its
affiliated purchasers during the quarter ended December 31, 2006, 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(1)
|
|
10/01/06-
10/31/06
|
7,001
|
$27.85
|
7,001
|
$4,421,909
|
|
11/01/06-
11/30/06
|
264
|
$27.75
|
264
|
$4,455,330
|
|
12/01/06-
12/31/06
|
16,626
|
$27.82
|
16,626
|
$5,000,000
|
|
Total:
|
23,891
|
$27.83
|
23,891
|
N/A
|
| (1) |
On
October 19, 2004, Heartland’s board of directors increased the dollar
value of its common stock that management is authorized to acquire
and
hold as treasury shares from $4.0 million to $5.0 million at any
one
time.
|
The
following table and graph show a five-year comparison of cumulative total
returns for Heartland Financial USA, Inc., the Nasdaq Composite Index and
the
Nasdaq Bank Stock Index. Figures for our common stock represent inter-dealer
quotations, without retail markups, markdowns or commissions and do not
necessarily represent actual transactions. Heartland became listed on Nasdaq
in
May, 2003. The table and graph were prepared at our request by Research
Data
Group, Inc.
|
Cumulative
Total Return Performance
|
||||||
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|
|
Heartland
Financial USA, Inc.
|
$100.00
|
$138.47
|
$227.43
|
$250.16
|
$274.42
|
$370.10
|
|
Nasdaq
Stock Market (U.S.)
|
$100.00
|
$71.97
|
$107.18
|
$117.07
|
$120.50
|
$137.02
|
|
Nasdaq
Bank Index
|
$100.00
|
$59.14
|
$89.11
|
$103.85
|
$130.57
|
$166.05
|
COMPARISON
OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES
$100 INVESTED ON DECEMBER 31, 2001
*Total
return assumes reinvestment of dividends
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||||
|
For
the years ended December 31, 2006, 2005, 2004, 2003 and
2002
|
||||||||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||
|
STATEMENT
OF INCOME DATA
|
||||||||||||||||||||||
|
Interest
income
|
$
|
192,539
|
$
|
153,404
|
$
|
121,394
|
$
|
99,517
|
$
|
100,012
|
||||||||||||
|
Interest
expense
|
86,210
|
59,462
|
43,298
|
37,312
|
41,029
|
|||||||||||||||||
|
Net
interest income
|
106,329
|
93,942
|
78,096
|
62,205
|
58,983
|
|||||||||||||||||
|
Provision
for loan and lease losses
|
3,886
|
6,533
|
4,846
|
4,183
|
3,553
|
|||||||||||||||||
|
Net
interest income after provision for loan and lease losses
|
102,443
|
87,409
|
73,250
|
58,022
|
55,430
|
|||||||||||||||||
|
Noninterest
income
|
29,087
|
25,474
|
23,205
|
22,167
|
15,575
|
|||||||||||||||||
|
Noninterest
expenses
|
94,521
|
80,770
|
68,852
|
54,704
|
47,557
|
|||||||||||||||||
|
Income
taxes
|
11,989
|
9,859
|
7,718
|
7,990
|
7,279
|
|||||||||||||||||
|
Income
from continuing operations
|
25,020
|
22,254
|
19,885
|
17,495
|
16,169
|
|||||||||||||||||
|
Discontinued
operations:
|
||||||||||||||||||||||
|
Income
from discontinued operations (including gain on sale of $20 in
2006 and
$2,602 in 2002)
|
602
|
763
|
585
|
371
|
4,416
|
|||||||||||||||||
|
Income
taxes
|
520
|
291
|
218
|
147
|
1,718
|
|||||||||||||||||
|
Income
from discontinued operations
|
82
|
472
|
367
|
224
|
2,698
|
|||||||||||||||||
|
Net
income
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
$
|
17,719
|
$
|
18,867
|
||||||||||||
|
PER
COMMON SHARE DATA
|
||||||||||||||||||||||
|
Net
income - diluted
|
$
|
1.50
|
$
|
1.36
|
$
|
1.26
|
$
|
1.16
|
$
|
1.28
|
||||||||||||
|
Income
from continuing operations - diluted1
|
1.50
|
1.33
|
1.24
|
1.15
|
1.09
|
|||||||||||||||||
|
Cash
dividends
|
0.36
|
0.33
|
0.32
|
0.27
|
0.27
|
|||||||||||||||||
|
Dividend
payout ratio
|
23.53
|
%
|
23.82
|
%
|
24.87
|
%
|
23.09
|
%
|
20.81
|
%
|
||||||||||||
|
Book
value
|
$
|
12.65
|
$
|
11.46
|
$
|
10.69
|
$
|
9.29
|
$
|
8.40
|
||||||||||||
|
Weighted
average shares outstanding-diluted
|
16,734,989
|
16,702,146
|
16,084,557
|
15,258,440
|
14,783,554
|
|||||||||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||||
|
Investments
and federal funds sold
|
$
|
617,119
|
$
|
567,002
|
$
|
553,284
|
$
|
451,753
|
$
|
424,514
|
||||||||||||
|
Loans
held for sale
|
50,381
|
40,745
|
32,161
|
25,678
|
23,167
|
|||||||||||||||||
|
Total
loans and leases, net of unearned
|
2,147,845
|
1,953,066
|
1,772,954
|
1,322,549
|
1,152,069
|
|||||||||||||||||
|
Allowance
for loan and lease losses
|
29,981
|
27,791
|
24,973
|
18,490
|
16,091
|
|||||||||||||||||
|
Total
assets
|
3,058,242
|
2,818,332
|
2,629,055
|
2,018,366
|
1,785,979
|
|||||||||||||||||
|
Total
deposits
|
2,311,657
|
2,118,178
|
1,983,846
|
1,492,488
|
1,337,985
|
|||||||||||||||||
|
Long-term
obligations
|
224,523
|
220,871
|
196,193
|
173,958
|
161,379
|
|||||||||||||||||
|
Stockholders’
equity
|
209,711
|
187,812
|
175,782
|
140,923
|
124,041
|
|||||||||||||||||
|
EARNINGS
PERFORMANCE DATA
|
||||||||||||||||||||||
|
Return
on average total assets
|
0.86
|
%
|
0.84
|
%
|
0.87
|
%
|
0.95
|
%
|
1.13
|
%
|
||||||||||||
|
Return
on average stockholders’ equity
|
12.86
|
12.55
|
12.82
|
13.46
|
16.44
|
|||||||||||||||||
|
Net
interest margin ratio1,2
|
4.18
|
4.04
|
3.91
|
3.86
|
4.13
|
|||||||||||||||||
|
Earnings
to fixed charges:
|
||||||||||||||||||||||
|
Excluding
interest on deposits
|
2.60
|
x
|
2.97
|
x
|
3.19
|
x
|
3.61
|
x
|
3.44
|
x
|
||||||||||||
|
Including
interest on deposits
|
1.43
|
1.55
|
1.64
|
1.69
|
1.58
|
|||||||||||||||||
|
ASSET
QUALITY RATIOS
|
||||||||||||||||||||||
|
Nonperforming
assets to total assets
|
0.34
|
%
|
0.60
|
%
|
0.41
|
%
|
0.32
|
%
|
0.29
|
%
|
||||||||||||
|
Nonperforming
loans and leases to total loans and leases
|
0.39
|
0.77
|
0.56
|
0.42
|
0.39
|
|||||||||||||||||
|
Net
loan and lease charge-offs to average loans and leases
|
0.11
|
0.18
|
0.16
|
0.14
|
0.16
|
|||||||||||||||||
|
Allowance
for loan and lease losses to total loans and leases
|
1.40
|
1.42
|
1.41
|
1.40
|
1.40
|
|||||||||||||||||
|
Allowance
for loan and lease losses to nonperforming loans and
leases
|
356.11
|
185.37
|
251.62
|
333.11
|
358.77
|
|||||||||||||||||
|
CONSOLIDATED
CAPITAL RATIOS
|
||||||||||||||||||||||
|
Average
equity to average assets
|
6.66
|
%
|
6.68
|
%
|
6.77
|
%
|
7.03
|
%
|
6.86
|
%
|
||||||||||||
|
Total
capital to risk-adjusted assets
|
11.18
|
10.61
|
10.82
|
12.42
|
11.86
|
|||||||||||||||||
|
Tier
1 leverage
|
7.74
|
7.66
|
7.26
|
8.07
|
8.24
|
|||||||||||||||||
|
1
|
Excludes
the discontinued operations of ULTEA and the related gain on
sale in 2006
and operations of our Eau Claire branch and the related gain
on sale in
2002.
|
|||||||||||||||||||||
|
2
|
Tax
equivalent using a 35% tax rate for all periods
presented.
|
|||||||||||||||||||||
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following presents management’s discussion and analysis of the consolidated
financial condition and results of operations of Heartland Financial USA,
Inc.
("Heartland") as of the dates and for the periods indicated. This discussion
should be read in conjunction with the Selected Financial Data, Heartland’s
Consolidated Financial Statements and the Notes thereto and other financial
data
appearing elsewhere in this report. The consolidated financial statements
include the accounts of Heartland and its subsidiaries. All of Heartland’s
subsidiaries are wholly-owned except for Arizona Bank & Trust, of which
Heartland was a 91% owner on December 31, 2006, and an 86% owner on December
31,
2005 and 2004; Summit Bank & Trust, of which Heartland was an 80% owner on
December 31, 2006; and Summit Acquisition Corporation of which Heartland
was a
99% owner on December 31, 2006.
SAFE
HARBOR STATEMENT
This
document (including information incorporated by reference) contains, and
future
oral and written statements of Heartland and its management may contain,
forward-looking statements, within the meaning of such term in the Private
Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance
and
business of Heartland. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of Heartland’s management and on
information currently available to management, are generally identifiable
by the
use of words such as "believe", "expect", "anticipate", "plan", "intend",
"estimate", "may", "will", "would", "could", "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and
Heartland undertakes no obligation to update any statement in light of
new
information or future events.
Heartland’s
ability to predict results or the actual effect of future plans or strategies
is
inherently uncertain. The factors which could have a material adverse effect
on
the operations and future prospects of Heartland and its subsidiaries are
detailed in the “Risk Factors” section included under Item 1A. of Part I of this
Form 10-K. In addition to the risk factors described in that section, there
are
other factors that may impact any public company, including Heartland,
which
could have a material adverse effect on the operations and future prospects
of
Heartland and its subsidiaries. These additional factors include, but are
not
limited to, the following:
|
*
|
The
economic impact of past and any future terrorist attacks, acts
of war or
threats thereof, and the response of the United States to any
such threats
and attacks.
|
|
*
|
The
costs, effects and outcomes of existing or future
litigation.
|
|
*
|
Changes
in accounting policies and practices, as may be adopted by state
and
federal regulatory agencies, the Financial Accounting Standards
Board, the
Securities and Exchange Commission and the Public Company Accounting
Oversight Board.
|
|
*
|
The
ability of Heartland to manage the risks associated with the
foregoing as
well as anticipated.
|
These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
OVERVIEW
Heartland
is a diversified financial services holding company providing full-service
community banking through nine banking subsidiaries with a total of 54
banking
locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana and
Colorado. In addition, Heartland has separate subsidiaries in the consumer
finance, insurance and investment management businesses. Heartland's primary
strategy is to balance its focus on increasing profitability with asset
growth
and diversification through acquisitions, de
novo
bank
formations and branch openings.
Heartland’s
results of operations depend primarily on net interest income, which is
the
difference between interest income from interest earning assets and interest
expense on interest bearing liabilities. Noninterest income, which includes
service charges, fees and gains on loans and trust income, also affects
Heartland’s results of operations. Heartland’s principal operating expenses,
aside from interest expense, consist of compensation and employee benefits,
occupancy and equipment costs and provision for loan and lease
losses.
Net
income for the year ended December 31, 2006, was $25.1 million, or $1.50
per
diluted share, an increase of $2.4 million or 10% from the net income of
$22.7
million, or $1.36 per diluted share, recorded for 2005. Return on average
equity
was 12.86% and return on average assets was 0.86% for 2006, compared to
12.55%
and 0.84%, respectively, for 2005. During the first quarter of 2006, a
pre-tax
judgment of $2.4 million was recorded as noninterest expense, while a $286,000
award under a counterclaim was recorded as a loan loss recovery. The net
after
tax effect to net income for this one-time event was $1.3 million. Exclusive
of
this expense, Heartland’s net income for 2006 was $26.4 million, or $1.58 per
diluted share, an increase of $3.7 million or 16% over 2005. Because of
the
non-recurring nature of this expense, Heartland believes that this pro-forma
presentation is important for investors to understand Heartland’s financial
performance for 2006.
On
May
15, 2006, the acquisition of Bank of the Southwest was completed and the
bank
became a part of Arizona Bank & Trust, Heartland’s de
novo
bank
chartered in 2003 and located in Phoenix, Arizona. As of the acquisition
date,
total assets at Bank of the Southwest were $63.2 million, total loans were
$52.4
million and total deposits were $44.4 million. The purchase price was $18.1
million, all in cash. The resultant acquired core deposit intangible of
$540
thousand is being amortized over a period of eight years. The remaining
excess
purchase price over the fair value of tangible and identifiable intangible
assets acquired of $5.1 million was recorded as goodwill.
On
May 3,
2006, Heartland was notified by the court that a verdict was entered awarding
the plaintiff $2.4 million for its original claim and awarding Heartland
$286,000 for its counterclaim against the plaintiff in a lawsuit regarding
a
breach of contract claim relating to the 2002 sale of Wisconsin Community
Bank’s
Eau Claire branch. Heartland recorded the judgments in the quarter ended
March
31, 2006. Heartland has filed an appeal to the court ruling and the plaintiff
subsequently filed a cross-appeal. We do not expect any resolution on this
issue
for some time.
The
sale
of ULTEA Inc., Heartland’s fleet leasing subsidiary, to ALD Automotive was
completed on December 22, 2006. Total assets of ULTEA at the date of sale
were
$50.3 million. The attached financial statements reflect the results of
operations of ULTEA on the consolidated statements of income as discontinued
operations for both the current and prior periods. During 2006, income
from
operations of this discontinued subsidiary included the $20,000 pre-tax
gain
recorded as a result of the sale. This past year, Heartland also closed
the
office of HTLF Capital Corp., its investment banking subsidiary, as its
two
officers left employment with the company to join another investment bank.
These
strategic divestitures represent Heartland’s commitment to focus resources on
its core banking and consumer finance businesses.
The
improved earnings during 2006 were primarily due to the $12.4 million or
13%
growth in net interest income. Average earning assets increased $220.5
million
or 9% from $2.41 billion during 2005 to $2.63 billion during 2006. Noninterest
income increased $3.6 million or 14% during 2006 compared to 2005. The
categories experiencing the largest increases were service charges and
fees,
loan servicing income, trust fees, brokerage and insurance commissions
and
securities gains. Also contributing to the increased earnings during 2006
was a
$2.6 million or 41% reduction in the provision for loan and lease losses
resulting from the positive resolution of a significant portion of nonperforming
and nonaccrual loans, along with a $1.2 million or 34% decline in net
charge-offs. For 2006, noninterest expense increased $13.8 million or 17%
when
compared to 2005. The largest contributor to this increase was salaries
and
employee benefits, which grew by $6.1 million or 13% during this one-year
comparative period. This growth in salaries and employee benefits expense
was
primarily the result of additional staffing at Heartland’s operations center to
provide support services to the growing number of bank subsidiaries, the
addition of branches at New Mexico Bank & Trust and Arizona Bank &
Trust, the acquisition of the Bank of the Southwest, and the formation
of Summit
Bank & Trust, which began operations in October 2005 as a loan production
office under the Rocky Mountain Bank umbrella. The $2.4 million judgment
recorded during the first quarter of 2006 was also a major factor in the
increase in noninterest expense for the one-year comparative period. Exclusive
of the judgment, noninterest expense increased $11.4 million or 14% in
comparison to 2005. Costs associated with the expansion efforts have also
contributed to increases in occupancy, advertising and other noninterest
expense
during both the one-year comparative periods.
Net
income for the year ended December 31, 2005, was $22.7 million, an increase
of
$2.4 million or 12%, over the $20.3 million recorded for 2004. Earnings
per
diluted share was $1.36 for 2005, compared to $1.26 for 2004, an increase
of
$.10 or 8%. Return on average equity was 12.55% and return on average assets
was
0.84% for 2005, compared to 12.82% and 0.87%, respectively, for 2004. The
improved earnings were primarily due to the $15.7 million or 20% growth
in net
interest income. Average earning assets increased from $2.07 billion during
2004
to $2.41 billion during 2005, an increase of $341.5 million or 17%. Noninterest
income improved $2.3 million or 10%, driven primarily by service charges
and
fees, trust fees and other noninterest income. Partially offsetting these
increases was the $1.7 million or 35% additional provision for loan and
lease
losses and the $11.9 million or 17% increase in noninterest expense during
2005.
Expansion efforts completed during 2005 included the opening of one banking
location at each of the following Bank Subsidiaries: Arizona Bank & Trust,
New Mexico Bank & Trust, Rocky Mountain Bank and Riverside Community Bank.
Also contributing to the increased earnings for 2005, compared to 2004,
was a
full year of earnings at the acquired Rocky Mountain Bank. This acquisition
was
completed on June 1, 2004, therefore only seven months of their earnings
were
included in the 2004 results. Rocky Mountain Bank’s contribution to net income
during 2005 was $2.8 million compared to $2.3 million during the last seven
months of 2004.
At
December 31, 2006, total assets exceeded $3.0 billion, an increase of $239.9
million or 9% since year-end 2005. Total loans and leases were $2.1 billion
at
December 31, 2006, an increase of $194.8 million or 10% since year-end
2005. The
May 15, 2006, acquisition of Bank of the Southwest by Arizona Bank & Trust
accounted for $50.9 million or 26% of this growth. The Heartland subsidiary
banks experiencing notable loan growth since year-end 2005 were New Mexico
Bank
& Trust, Arizona Bank & Trust and Rocky Mountain Bank. The commercial
and commercial real estate loan category grew by $179.7 million or 14%.
Exclusive of the $21.0 million in commercial and commercial real estate
loans
acquired in the Bank of the Southwest acquisition, this loan category increased
by $158.7 million or 12%. Total deposits at December 31, 2006, were $2.3
billion, an increase of $193.5 million or 9% since year-end 2005. The
acquisition of Bank of the Southwest accounted for $44.4 million or 23%
of this
growth. All of Heartland’s subsidiary banks except for First Community Bank and
Galena State Bank and Trust Company experienced growth in deposits since
year-end 2005 with 70% of the growth occurring in our banks located in
the West.
Demand deposits experienced an $18.8 million or 5% increase with the Bank
of the
Southwest acquisition contributing $17.0 million in demand deposit balances
at
closing. Savings deposit balances increased by $68.6 million or 9%. At
closing,
the Bank of the Southwest accounted for $17.4 million in savings deposit
balances. Brokered time deposits decreased $45.0 million or 31% while other
time
deposit balances increased $151.1 million or 17% since year-end 2005. The
Bank
of the Southwest acquisition contributed $10.0 million in other time deposit
balances. Of particular note is that we were able to replace a large portion
of
the maturing brokered time deposits with deposits from our local markets.
As
interest rates moved upward during the first half of the year and remained
at
those levels, many deposit customers shifted a portion of their lower yielding
deposit balances into higher yielding money market and certificate of deposit
accounts. The Heartland bank subsidiaries have priced these products
competitively to retain existing deposit customers, as well as to attract
new
customers.
At
December 31, 2005, total assets reached $2.82 billion, an increase of $189.3
million or 7% since year-end 2004. Total loans and leases were $1.95 billion
at
December 31, 2005, an increase of $180.1 million or 10% since year-end
2004. All
of Heartland’s subsidiary banks experienced loan growth since year-end 2004,
with major contributions from Dubuque Bank and Trust Company, New Mexico
Bank
& Trust, Arizona Bank & Trust and Galena State Bank and Trust Company.
All loan categories increased during 2005, with $142.0 million or 79% of
the
total loan growth in the commercial and commercial real estate category.
Total
deposits at December 31, 2005, were $2.12 billion, an increase of $134.3
million
or 7% since year-end 2004. Except for Wisconsin Community Bank and First
Community Bank, all of Heartland’s subsidiary banks increased deposits during
2005. Demand deposit balances increased by $29.7 million or 9% and time
deposit
balances increased by $101.1 million or 11% during the year. Two of Heartland’s
newer de
novo
banks,
New Mexico Bank & Trust and Arizona Bank & Trust, were the most
successful at attracting demand deposits during 2005. Also experiencing
meaningful growth in demand deposits in 2005 was Rocky Mountain Bank. Over
half
of the growth in the time deposit category occurred at Heartland’s largest
subsidiary bank, Dubuque Bank and Trust Company. All of the other Heartland
subsidiary banks, except for Wisconsin Community and First Community Bank,
experienced growth in time deposits, with more significant growth occurring
at
New Mexico Bank & Trust and Rocky Mountain Bank. Of particular note is that
substantially all of the growth in time deposits occurred in deposits from
local
markets, as total brokered deposits ended 2005 at $145.5 million, an increase
of
$4.5 million or less than 4% since year-end 2004.
CRITICAL
ACCOUNTING POLICIES
The
process utilized by Heartland to estimate the adequacy of the allowance
for loan
and lease losses is considered a critical accounting policy for Heartland.
The
allowance for loan and lease losses represents management’s estimate of
identified and unidentified losses in the existing loan portfolio. Thus,
the
accuracy of this estimate could have a material impact on Heartland’s earnings.
The adequacy of the allowance for loan and lease losses is determined using
factors that include the overall composition of the loan portfolio, general
economic conditions, types of loans, loan collateral values, past loss
experience, loan delinquencies, and potential losses from identified substandard
and doubtful credits. Nonperforming loans and large non-homogeneous loans
are
specifically reviewed for impairment and the allowance is allocated on
a loan by
loan basis as deemed necessary. Homogeneous loans and loans not specifically
evaluated are grouped into pools to which a loss percentage, based on historical
experience, is allocated. The adequacy of the allowance for loan and lease
losses is monitored on an ongoing basis by the loan review staff, senior
management and the banks’ boards of directors. Specific factors considered by
management in establishing the allowance included the following:
|
*
|
Heartland
has continued to experience growth in more complex commercial
loans as
compared to relatively lower-risk residential real estate
loans.
|
|
|
|
|
*
|
During
the last several years, Heartland has entered new markets in
which it had
little or no previous lending
experience.
|
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, 2006. 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. Even though there have been various signs of emerging strength
in
the economy, it is not certain that this strength will be sustainable.
Should
the economic climate 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 2006 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, 2006
|
$
|
29,981
|
|
|
Assuming
deterioration in credit quality:
|
|||
|
Addition
to provision
|
2,461
|
||
|
Resultant
allowance for loan and lease losses
|
$
|
32,442
|
|
|
Assuming
improvement in credit quality:
|
|||
|
Reduction
in provision
|
(974
|
)
|
|
|
Resultant
allowance for loan and lease losses
|
$
|
29,007
|
|
The
assumptions underlying this sensitivity analysis represent an attempt to
quantify theoretical changes that could occur in the total allowance for
loan
and lease losses given various economic assumptions that could impact inherent
loss in the current loan and lease portfolio. It further assumes that the
general composition of the allowance for loans and lease losses determined
through Heartland’s existing process and methodology remains relatively
unchanged. It does not attempt to encompass extreme and/or prolonged economic
downturns, systemic contractions to specific industries, or systemic shocks
to
the financial services sector. The addition to provision was calculated
based
upon the assumption that, under an economic downturn, a certain percentage
of
loan balances in each rating pool would migrate from its current loan grade
to
the next lower loan grade. The reduction in provision was calculated based
upon
the assumption that, under an economic upturn, a certain percentage of
loan
balances in each rating pool would migrate from its current loan grade
to the
next higher loan grade. The estimation of the percentage of loan balances
that
would migrate from its current rating pool to the next was based upon
Heartland’s experiences during previous periods of economic movement.
RESULTS
OF OPERATIONS
NET
INTEREST INCOME
Net
interest income is the difference between interest income earned on earning
assets and interest expense paid on interest bearing liabilities. As such,
net
interest income is affected by changes in the volume and yields on earning
assets and the volume and rates paid on interest bearing liabilities. Net
interest margin is the ratio of tax equivalent net interest income to average
earning assets.
Net
interest margin, expressed as a percentage of average earning assets, was
4.18%
during 2006 compared to 4.04% for 2005. Heartland’s continued expansion into the
Western states of New Mexico, Montana, Arizona and Colorado, where net
interest
margins tend to be higher than those earned in the Midwestern states, has
been a
contributing factor to the improvement of the net interest margin. During
2006,
40% of Heartland’s average earning assets were situated in the West compared to
37% during 2005. The tax equivalent interest rate paid on earning assets
increased 95 basis points while the interest rate paid on interest bearing
liabilities increased 93 basis points.
Net
interest margin, expressed as a percentage of average earning assets, was
4.04%
for 2005 compared to 3.91% for 2004. This improvement was also driven by
the
expansion out West, as 37% of Heartland’s average earning assets were situated
in the West during 2005 compared to 30% during 2004. Growth in average
noninterest bearing deposits was $51.9 million or 19%, primarily due to
the
deposit growth at New Mexico Bank &Trust. Also contributing to this
improvement was management’s ability to lag increases in interest rates paid on
the Bank Subsidiaries’ interest bearing deposit accounts as the federal funds
increased throughout the year. The tax equivalent interest rate paid on
earning
assets increased 50 basis points while the interest rate paid on interest
bearing liabilities increased 44 basis points.
Net
interest income, on a tax-equivalent basis, increased $12.6 million or
13%
during 2006 and $16.4 million or 20% during 2005. Fluctuations in net interest
income between years is related to changes in the volume of average earning
assets and interest bearing liabilities, combined with changes in average
yields
and rates of the corresponding assets and liabilities as demonstrated in
the
tables at the end of this section. The percentage of average loans to total
average assets increased from 68% during 2004 to 69% during 2005 and 70%
during
2006.
On
a
tax-equivalent basis, interest income was $196.1 million during 2006 compared
to
$156.7 million during 2005, an increase of $39.4 million or 25%. This increase
was primarily caused by the increase in interest rates during the first
six
months of 2006. The national prime interest rate increased at 25 basis
point
increments throughout the first six months of the year going from 7.25%
on
January 1, 2006, to 8.25% on July 1, 2006. More than half of the loans
in
Heartland’s commercial and agricultural loan portfolios are floating rate loans,
thus changes in the national prime rate have an impact on Heartland’s interest
income more quickly than if the loan portfolio consisted of more fixed
rate
loans.
Interest
income, on a tax-equivalent basis, was $156.7 million during 2005 compared
to
$124.2 million during 2004, an increase of $32.6 million or 26% during
2005.
Rocky Mountain Bank’s portion of this interest income was $22.0 million in 2005
and $12.3 million during the seven months of operations under the Heartland
umbrella during 2004. The increase in interest income resulted from the
$341.5
million or 17% growth in earning assets, as well as the steady rises that
have
occurred in the prime interest rate since the first quarter of 2004. The
national prime interest rate escalated 300 basis points during 2005, ending
the
year at 7.25%.
Interest
expense for 2006 was $86.2 million compared to $59.5 million during 2005,
an
increase of $26.7 million or 45%. As rates moved upward during the first
half of
2006 and continued at those levels during the remainder of the year, Heartland
experienced some movement in deposit balances from lower yielding accounts
into
higher yielding money market and certificate of deposit accounts. The targeted
federal funds rate increased in 25 basis point increments going from 4.25%
at
the beginning of the year to 5.25% on June 29, 2006, and remained at the
5.25%
level for the remainder of the year. Approximately 68% of Heartland’s
certificate of deposit accounts will mature within the next twelve months
at a
weighted average rate of 4.64%.
Interest
expense during 2005 was $59.5 million compared to $43.3 million during
2004, an
increase of $16.2 million or 37%. Rocky Mountain Bank’s portion of this interest
expense was $6.7 million during 2005 and $3.4 million during 2004. The
increases
in interest expense in 2005 resulted from the growth in interest-bearing
deposit
accounts, as well as the rising rate environment. The federal funds rate
began
increasing on June 30, 2004, in 25 basis points increments, from its abnormally
low rate of 1.00% 2.25% at year-end 2004. These 25 basis point incremental
increases continued throughout all of 2005 to end the year at 4.25%. Rates
on
Heartland’s deposit accounts do not immediately reprice as a result of increases
in the federal funds rate, but continual increases in the federal funds
rate, as
experienced during the last half of 2004 and throughout 2005, does place
pressure on the rates paid on these products to maintain existing
balances.
Heartland
manages its balance sheet to minimize the effect a change in interest rates
has
on its net interest margin. During 2007, Heartland
will continue to work toward improving both its earning asset and funding
mix
through targeted organic growth strategies, which we believe will result
in
additional net interest income. Our net
interest income simulations reflect an asset sensitive posture leading
to
stronger earnings performance in a rising interest rate environment. The
expected benefits associated with an inherently asset sensitive balance
sheet
will be delayed if rates continue to rise as a highly competitive environment
is
expected to place undue pressure on deposit costs. Eventually, in a rapidly
rising interest rate environment, funding costs should stabilize while
asset
yields continue to improve. Alternatively, Heartland’s net interest income would
likely decline in a falling rate environment. In order to reduce the potentially
negative impact a downward movement in interest rates would have on net
interest
income, Heartland entered into a two-year floor transaction on a notional
$100.0
million in July 2005, a five-year collar transaction on a notional $50.0
million
in September 2005 and an additional three-year collar transaction on a
notional
$50.0 million in April 2006. Additionally, in August 2006, Heartland entered
into a leverage structured wholesale repurchase agreement transaction.
This
wholesale repurchase agreement is in the amount of $50.0 million bearing
a
variable interest rate that changes quarterly to the 3-month LIBOR rate
plus
29.375 basis points. Embedded within this contract is an interest floor
option
that results when the 3-month LIBOR rate falls to 4.40% or lower. If that
situation occurs, the rate paid will be decreased by two times the difference
between the 3-month LIBOR rate and 4.40%. In no case will the rate paid
fall
below 0.00%. In order to effectuate this wholesale repurchase agreement,
a $55.0
million government agency bond was acquired. On the date of the contract,
the
interest rate on the securities was equivalent to the interest rate being
paid
on the repurchase agreement contract. Prior to implementation of these
transactions, Heartland’s interest rate risk model suggested that a 200 basis
point downward shift in rates over a two-year period would decrease Heartland’s
net interest margin by 9%. Current modeling suggests that the same 200
basis
point downward shift in interest rates would decrease Heartland’s net interest
margin by 6%.
On
February 5, 2007, Heartland entered into two interest rate cap transactions
on a
total notional amount of $45.0 million to reduce the potentially negative
impact
an upward rate environment would have on net interest income. These two-year
contracts were acquired with the counterparty as the payer on 3-month LIBOR
at a
cap strike rate of 5.50% and were designated as a cash flow hedge against
the
LIBOR based variable-rate interest payments on Heartland’s subordinated
debentures associated with two of its trust preferred capital securities.
The
cost of these derivative transactions was $90 thousand.
The
following table 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.
|
ANALYSIS
OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
1
|
|||||||||||||||||||||||||||||||
|
For
the years ended December 31, 2006, 2005, and 2004
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
Average
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||
|
EARNING
ASSETS
|
|||||||||||||||||||||||||||||||
|
Securities:
|
|||||||||||||||||||||||||||||||
|
Taxable
|
$
|
419,625
|
$
|
17,594
|
4.19
|
%
|
$
|
400,993
|
$
|
13,896
|
3.47
|
%
|
$
|
373,727
|
$
|
13,401
|
3.59
|
%
|
|||||||||||||
|
Nontaxable
1
|
131,149
|
8,843
|
6.74
|
121,227
|
8,481
|
7.00
|
98,195
|
7,037
|
7.17
|
||||||||||||||||||||||
|
Total
securities
|
550,774
|
26,437
|
4.80
|
522,220
|
22,377
|
4.28
|
471,922
|
20,438
|
4.33
|
||||||||||||||||||||||
|
Interest
bearing deposits
|
555
|
22
|
3.96
|
6,994
|
277
|
3.96
|
6,653
|
227
|
3.41
|
||||||||||||||||||||||
|
Federal
funds sold
|
12,034
|
645
|
5.36
|
13,785
|
475
|
3.45
|
10,412
|
175
|
1.68
|
||||||||||||||||||||||
|
Loans
and leases:
|
|||||||||||||||||||||||||||||||
|
Commercial
and commercial real estate 1
|
1,432,003
|
109,814
|
7.67
|
1,236,324
|
81,411
|
6.58
|
1,039,055
|
61,090
|
5.88
|
||||||||||||||||||||||
|
Residential
mortgage
|
230,043
|
15,050
|
6.54
|
233,717
|
14,223
|
6.09
|
196,267
|
11,643
|
5.93
|
||||||||||||||||||||||
|
Agricultural
and agricultural real estate 1
|
230,218
|
18,476
|
8.03
|
228,949
|
15,892
|
6.94
|
199,591
|
13,081
|
6.55
|
||||||||||||||||||||||
|
Consumer
|
188,468
|
18,743
|
9.94
|
178,142
|
15,718
|
8.82
|
150,842
|
12,324
|
8.17
|
||||||||||||||||||||||
|
Direct
financing leases, net
|
13,913
|
839
|
6.03
|
14,250
|
790
|
5.54
|
13,713
|
819
|
5.97
|
||||||||||||||||||||||
|
Fees
on loans
|
-
|
6,099
|
-
|
-
|
5,576
|
-
|
-
|
4,353
|
-
|
||||||||||||||||||||||
|
Less:
allowance for loan and lease losses
|
(29,801
|
)
|
-
|
-
|
(26,659
|
)
|
-
|
-
|
(22,221
|
)
|
-
|
-
|
|||||||||||||||||||
|
Net
loans and leases
|
2,064,844
|
169,021
|
8.19
|
1,864,723
|
133,610
|
7.17
|
1,577,247
|
103,310
|
6.55
|
||||||||||||||||||||||
|
Total
earning assets
|
2,628,207
|
196,125
|
7.46
|
2,407,722
|
156,739
|
6.51
|
2,066,234
|
124,150
|
6.01
|
||||||||||||||||||||||
|
NONEARNING
ASSETS
|
|||||||||||||||||||||||||||||||
|
Total
nonearning assets
|
301,495
|
-
|
-
|
300,774
|
-
|
-
|
266,885
|
-
|
-
|
||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
2,929,702
|
$
|
196,125
|
6.69
|
%
|
$
|
2,708,496
|
$
|
156,739
|
5.79
|
%
|
$
|
2,333,119
|
$
|
124,150
|
5.32
|
%
|
|||||||||||||
|
INTEREST
BEARING LIABILITIES
|
|||||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
|||||||||||||||||||||||||||||||
|
Savings
|
$
|
792,875
|
$
|
19,167
|
2.42
|
%
|
$
|
754,086
|
$
|
10,991
|
1.46
|
%
|
$
|
670,758
|
$
|
5,890
|
0.88
|
%
|
|||||||||||||
|
Time,
$100,000 and over
|
225,874
|
9,498
|
4.20
|
201,377
|
6,505
|
3.23
|
152,787
|
3,957
|
2.59
|
||||||||||||||||||||||
|
Other
time deposits
|
837,335
|
34,628
|
4.14
|
758,448
|
25,887
|
3.41
|
651,611
|
21,001
|
3.22
|
||||||||||||||||||||||
|
Short-term
borrowings
|
226,943
|
9,866
|
4.35
|
201,142
|
5,373
|
2.67
|
167,665
|
2,414
|
1.44
|
||||||||||||||||||||||
|
Other
borrowings
|
229,020
|
13,051
|
5.70
|
211,558
|
10,706
|
5.06
|
190,200
|
10,036
|
5.28
|
||||||||||||||||||||||
|
Total
interest bearing liabilities
|
2,312,047
|
86,210
|
3.73
|
2,126,611
|
59,462
|
2.80
|
1,833,021
|
43,298
|
2.36
|
||||||||||||||||||||||
|
NONINTEREST
BEARING LIABILITIES
|
|||||||||||||||||||||||||||||||
|
Noninterest
bearing deposits
|
351,239
|
-
|
330,379
|
-
|
278,432
|
-
|
|||||||||||||||||||||||||
|
Accrued
interest and other liabilities
|
71,292
|
-
|
70,470
|
-
|
63,753
|
-
|
|||||||||||||||||||||||||
|
Total
noninterest bearing liabilities
|
422,531
|
400,849
|
342,185
|
||||||||||||||||||||||||||||
|
STOCKHOLDERS’
EQUITY
|
195,124
|
-
|
181,036
|
-
|
157,913
|
-
|
|||||||||||||||||||||||||
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
$
|
2,929,702
|
$
|
86,210
|
2.94
|
%
|
$
|
2,708,496
|
$
|
59,462
|
2.20
|
%
|
$
|
2,333,119
|
$
|
43,298
|
1.86
|
%
|
|||||||||||||
|
Net
interest income
1
|
$
|
109,915
|
$
|
97,277
|
$
|
80,852
|
|||||||||||||||||||||||||
|
Net
interest income to total earning assets
1
|
4.18
|
%
|
4.04
|
%
|
3.91
|
%
|
|||||||||||||||||||||||||
|
Interest
bearing liabilities to earning assets
|
87.97
|
%
|
88.32
|
%
|
88.71
|
%
|
|||||||||||||||||||||||||
|
1
Tax equivalent basis is calculated using an effective tax rate
of
35%.
|
|||||||||||||||||||||||||||||||
The
following table allocates the changes in net interest income to differences
in
either average balances or average rates for earning assets and interest
bearing
liabilities. The changes have been allocated proportionately to the change
due
to volume and change due to rate. Interest income is measured on a tax
equivalent basis using a 35% tax rate.
|
ANALYSIS
OF CHANGES IN NET INTEREST INCOME
|
||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2006
Compared to 2005
|
2005
Compared to 2004
|
2004
Compared to 2003
|
||||||||||||||||||||||||||||||||||
|
Change
Due to
|
Change
Due to
|
Change
Due to
|
||||||||||||||||||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||||||||||||
|
EARNING
ASSETS / INTEREST INCOME
|
||||||||||||||||||||||||||||||||||||
|
Investment
securities:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
$
|
646
|
$
|
3,052
|
$
|
3,698
|
$
|
978
|
$
|
(483
|
)
|
$
|
495
|
$
|
1,658
|
$
|
2,643
|
$
|
4,301
|
|||||||||||||||||
|
Tax-exempt
|
694
|
(332
|
)
|
362
|
1,651
|
(207
|
)
|
1,444
|
1,303
|
(345
|
)
|
958
|
||||||||||||||||||||||||
|
Interest
bearing deposits
|
(255
|
)
|
-
|
(255
|
)
|
12
|
38
|
50
|
(19
|
)
|
72
|
53
|
||||||||||||||||||||||||
|
Federal
funds sold
|
(60
|
)
|
230
|
170
|
57
|
243
|
300
|
(247
|
)
|
67
|
(180
|
)
|
||||||||||||||||||||||||
|
Loans
and leases
|
14,339
|
21,072
|
35,411
|
18,830
|
11,470
|
30,300
|
24,099
|
(6,878
|
)
|
17,221
|
||||||||||||||||||||||||||
|
TOTAL
EARNING ASSETS
|
15,364
|
24,022
|
39,386
|
21,528
|
11,061
|
32,589
|
26,794
|
(4,441
|
)
|
22,353
|
||||||||||||||||||||||||||
|
LIABILITIES
/ INTEREST EXPENSE
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
565
|
7,611
|
8,176
|
732
|
4,369
|
5,101
|
1,251
|
(159
|
)
|
1,092
|
||||||||||||||||||||||||||
|
Time,
$100,000 and over
|
791
|
2,202
|
2,993
|
1,258
|
1,290
|
2,548
|
316
|
(79
|
)
|
237
|
||||||||||||||||||||||||||
|
Other
time deposits
|
2,693
|
6,048
|
8,741
|
3,443
|
1,443
|
4,886
|
4,522
|
(2,766
|
)
|
1,756
|
||||||||||||||||||||||||||
|
Short-term
borrowings
|
689
|
3,804
|
4,493
|
482
|
2,477
|
2,959
|
352
|
185
|
537
|
|||||||||||||||||||||||||||
|
Other
borrowings
|
884
|
1,461
|
2,345
|
1,127
|
(457
|
)
|
670
|
3,035
|
(671
|
)
|
2,364
|
|||||||||||||||||||||||||
|
TOTAL
INTEREST BEARING LIABILITIES
|
5,622
|
21,126
|
26,748
|
7,042
|
9,122
|
16,164
|
9,476
|
(3,490
|
)
|
5,986
|
||||||||||||||||||||||||||
|
NET
INTEREST INCOME
|
$
|
9,742
|
$
|
2,896
|
$
|
12,638
|
$
|
14,486
|
$
|
1,939
|
$
|
16,425
|
$
|
17,318
|
$
|
(951
|
)
|
$
|
16,367
|
|||||||||||||||||
PROVISION
FOR LOAN AND LEASE LOSSES
The
allowance for loan and lease losses is established through a provision
charged
to expense to provide, in Heartland management’s opinion, an adequate allowance
for loan and lease losses. The
adequacy of the allowance for loan and lease losses is determined by management
using factors that include the overall composition of the loan portfolio,
general economic conditions, types of loans, loan collateral values, past
loss
experience, loan delinquencies, substandard credits, and doubtful credits.
For
additional details on the specific factors considered, refer to the critical
accounting policies and allowance for loan and lease losses sections of
this
report.
The
provision for loan losses during 2006 was $3.9 million compared to $6.5
million
in 2005, a decrease of $2.6 million or 41%. The
positive resolution of a significant portion of our nonperforming and nonaccrual
loans, along with a $1.2 million or 34% decline in net charge-offs during
2006
compared to 2005, contributed to the reduction in the provision for loan
losses
during 2006. The
provision for loan losses was $6.5 million during 2005 compared to $4.8
million
in 2004, an increase of $1.7 million or 35%. This increase
resulted
from the loan growth experienced along with the downgrading of a few large
credits and higher than historical charge-offs at Citizens Finance Co.
as a
result of the change in bankruptcy laws.
|
NONINTEREST
INCOME
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2006
|
2005
|
2004
|
2006/
2005
|
2005/
2004
|
||||||||||||||
|
Service
charges and fees, net
|
$
|
11,199
|
$
|
9,323
|
$
|
8,666
|
20
|
8
|
||||||||||
|
Loan
servicing income
|
4,279
|
3,093
|
2,585
|
38
|
20
|
|||||||||||||
|
Trust
fees
|
7,258
|
6,530
|
4,968
|
11
|
31
|
|||||||||||||
|
Brokerage
and insurance commissions
|
1,871
|
1,401
|
1,857
|
34
|
(25
|
)
|
||||||||||||
|
Securities
gains, net
|
553
|
198
|
1,861
|
179
|
(89
|
)
|
||||||||||||
|
Gain
(loss) on trading account securities
|
141
|
(11
|
)
|
54
|
1382
|
(120
|
)
|
|||||||||||
|
Impairment
loss on equity securities
|
(76
|
)
|
-
|
-
|
-
|
-
|
||||||||||||
|
Gains
on sale of loans
|
2,289
|
2,572
|
2,186
|
(11
|
)
|
18
|
||||||||||||
|
Valuation
adjustment on mortgage servicing rights
|
-
|
39
|
92
|
(100
|
)
|
(58
|
)
|
|||||||||||
|
Income
on bank-owned life insurance
|
1,151
|
1,022
|
1,112
|
13
|
(8
|
)
|
||||||||||||
|
Other
noninterest income
|
422
|
1,307
|
(176
|
)
|
(68
|
)
|
843
|
|||||||||||
|
Total
noninterest income
|
$
|
29,087
|
$
|
25,474
|
$
|
23,205
|
14
|
10
|
||||||||||
The
table
shows Heartland’s noninterest income for the years indicated. Total noninterest
income increased $3.6 million or 14% during 2006 and $2.3 million or 10%
during
2005.
The
noninterest income categories contributing significantly to the improvement
during 2006 were service charges and fees, loan servicing income and trust
fees. Recorded
in other noninterest income during the third quarter of 2005 was the forgiveness
of $500,000 in debt as Heartland fulfilled the job creation requirements
of its
Community Development Block Grant Loan Agreement with the City of Dubuque.
Exclusive of this one-time income item, noninterest income increased $4.1
million or 16% during 2006. The noninterest income categories reflecting
significant improvement during 2005 were service charges and fees, loan
servicing income, trust fees and other noninterest income, while securities
gains were significantly reduced. Rocky Mountain Bank recorded noninterest
income of $2.5 million during 2005 and $1.5 million during its seven months
of
operations under the Heartland umbrella of community banks during 2004.
Service
charges and fees increased $1.9 million or 20% during 2006 and $657 thousand
or
8% during 2005. Rocky Mountain Bank recorded services charges and fees
of $1.3
million during 2005 compared to $683 thousand during the seven months of
2004 of
operations under the Heartland umbrella. During 2004, an overdraft privilege
feature was added to our retail checking account product line. Early in
2006,
this same feature was added to our business checking account product line.
The
expansion of this feature into the business product line, along with growth
in
the number of checking accounts, resulted in the increase of overdraft
fees.
Overdraft fees were $5.3 million during 2006 compared to $4.3 million during
2005 and $4.0 million during 2004. Also included in service charges and
fees
were the fees recorded at HTLF Capital Corp., which were $502 thousand
during
2006 compared to $181 thousand during 2005 and $255 thousand during 2004.
These
fees were recorded when transactions closed and, as a result, could vary
significantly from any one reporting period to the next. In June of 2006,
the
officers of HTLF Capital Corp. left employment with Heartland to join an
investment bank. Subsequently, management decided to close the operations
of
this subsidiary.
Loan
servicing income increased $1.2 million or 38% during 2006 and $508 thousand
or
20% during 2005. Servicing fees on commercial loans totaled $2.5 million
during
2006, $1.7 million during 2005 and $1.1 million during 2004. Included
in this category are service fees collected on the mortgage loans Heartland
sold
into the secondary market, while retaining servicing. Heartland’s mortgage loan
servicing portfolio grew from $575.2 million at December 31, 2004, to $582.7
million at December 31, 2005, and $602.7 million at December 31, 2006,
generating mortgage loan servicing fees of $1.5 million for 2006 and 2005
and
$1.4 million for 2004.
Trust
fees increased $728 thousand or 11% during 2006 and $1.6 million or 31%
during
2005. During the second quarter of 2006, the fee schedule for trust services
was
adjusted upward. Additionally, the market value of trust assets, upon which
a
large portion of trust fees are based, increased from $1.2 billion at year-end
2004 to $1.4 billion at year-end 2005 and $1.6 billion at year-end 2006.
The
growth in trust fees during 2005 was also attributable to the accounts
acquired
from the Wealth Management Group of Colonial Trust Company on August 31,
2004.
During
2006, brokerage and insurance commissions increased $470 thousand or 34%
as a
new sales representative was hired at Dubuque Bank and Trust Company and
many of
Heartland’s other Bank Subsidiaries began to promote brokerage and insurance
services. Also contributing to the additional commissions during 2006 was
Heartland’s change in the fall of 2005 to a different third party marketer of
alternative investment products. This change to Independent Financial Marketing
Group, Inc., IFMG, greatly enhanced the product offerings Heartland is
able to
provide its customers. Brokerage and insurance commissions declined $456
thousand or 25% during 2005 as Dubuque Bank and Trust Company experienced
the
loss of one sales representative and a reduction in the hours devoted to
sales
by another sales representative.
Securities
gains were $553 thousand, $198 thousand and $1.9 million during 2006, 2005
and
2004, respectively. Nearly
$1.0 million of the gains during 2004 were recorded during the first quarter
due
to the active management of our bond portfolio. As the yield curve steepened,
agency securities nearing maturity were sold at a gain and replaced with
a
combination of like-term and longer-term agency securities that provided
enhanced yields. Additionally, the
partial liquidation of the available for sale equity securities portfolio
resulted in $542 thousand of securities gains during the first quarter
of 2004.
Management elected to liquidate a majority of this portfolio and redirect
those
funds to its expansion efforts.
The
equity securities trading portfolio recorded gains of $141 thousand during
2006
compared to losses of $11 thousand during 2005 and gains of $54 thousand
during
2004. The gains and losses recorded on this portfolio were generally reflective
of the overall activity in the stock market.
Impairment
losses on equity securities deemed to be other than temporary totaled $76
thousand during 2006. This loss was related to the decline in market value
of
one of the issues of common stock held in Heartland’s available for sale equity
securities portfolio. As of December 31, 2006, the market value on this
particular issue of common stock was $69 thousand.
Gains
on
sale of loans were $2.3 million during 2006, $2.6 million during 2005 and
$2.2
million during 2004. During low rate environments, customers frequently
elect to
take fifteen- and thirty-year, fixed-rate mortgage loans, which Heartland
usually elects to sell into the secondary market.
The
total
valuation adjustment on mortgage servicing rights resulted in net impairment
recoveries of previously recorded impairment provision totaling $39 thousand
during 2005 and $92 thousand during 2004. Heartland utilizes the services
of an
independent third-party to perform a valuation analysis of its servicing
portfolio each quarter. At December 31, 2006 and December 31, 2005, there
was no
valuation allowance.
Total
other noninterest income was $422 thousand during 2006 and $1.3 million
during
2005. The forgiveness of $500 thousand in debt as Heartland fulfilled the
job
creation requirements of its Community Development Block Grant Loan Agreement
with the City of Dubuque was recorded in other noninterest income in 2005.
During 2004, Dubuque Bank and Trust Company acquired a 99.9% ownership
interest
in a limited liability company that owned certified historic structures
for
which historic rehabilitation tax credits applied. Amortization of the
investment in this limited liability company was recorded in the amount
of $978
thousand during 2004, which resulted in the net noninterest income of $176
thousand expense.
|
NONINTEREST
EXPENSE
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
For
the years ended December 31,
|
%
Change
|
|||||||||||||||||
|
2006
|
2005
|
2004
|
2006/
2005
|
2005/
2004
|
||||||||||||||
|
Salaries
and employee benefits
|
$
|
51,321
|
$
|
45,247
|
$
|
38,362
|
13
|
18
|
||||||||||
|
Occupancy
|
7,320
|
5,913
|
4,879
|
24
|
21
|
|||||||||||||
|
Furniture
and equipment
|
6,763
|
6,199
|
5,290
|
9
|
17
|
|||||||||||||
|
Outside
services
|
9,414
|
8,312
|
7,058
|
13
|
18
|
|||||||||||||
|
Advertising
|
4,293
|
3,240
|
2,631
|
33
|
23
|
|||||||||||||
|
Core
deposit premium amortization
|
987
|
1,014
|
764
|
(3)
|
33
|
|||||||||||||
|
Other
noninterest expenses
|
14,423
|
10,845
|
9,868
|
33
|
10
|
|||||||||||||
|
Total
noninterest expense
|
$
|
94,521
|
$
|
80,770
|
$
|
68,852
|
17
|
17
|
||||||||||
|
Efficiency
ratio1
|
68.26
|
%
|
65.91
|
%
|
67.37
|
%
|
||||||||||||
|
1
Noninterest
expense divided by the sum of net interest income and noninterest
income
less security gains.
|
||||||||||||||||||
The
table
shows Heartland’s noninterest expense for the years indicated. Noninterest
expense increased $13.8 million or 17% in 2006 and $11.9 million or 17%
in 2005.
Contributing
to the increases in these costs during both years were expenses associated
with
expansion efforts. Additionally, the $2.4 million judgment against Heartland
and
a bank subsidiary recorded during the first quarter of 2006 was a factor
in the
increase in noninterest expense for 2006. Exclusive of the judgment, noninterest
expense increased $11.4 million or 14% in comparison to 2005. Noninterest
expense at Rocky Mountain Bank totaled $11.7 million during the twelve
months of
2005 and $6.7 million during its seven months of operations under the Heartland
umbrella in 2004 and also contributed to the increase in 2005.
Salaries
and employee benefits, the largest component of noninterest expense, increased
$6.1 million or 13% for 2006 and $6.9 million or 18% for 2005. This growth
in
salaries and employee benefits expense was primarily the result of additional
staffing at Heartland’s operations center to provide support services to the
growing number of Bank Subsidiaries, the addition of branches at New Mexico
Bank
& Trust and Arizona Bank & Trust, the acquisition of the Bank of the
Southwest, and the formation of Summit Bank & Trust, which began operations
in October 2005 as a loan production office under the Rocky Mountain Bank
umbrella. At Rocky Mountain Bank, salaries and employee benefits totaled
$5.8
million during 2005 and $3.5 million during its first seven months as a
subsidiary of Heartland in 2004. Total full-time equivalent employees increased
to 959 at year-end 2006 from 909 at year-end 2005 and 853 at year-end 2004.
In
addition to staffing increases at the holding company to provide support
services to the growing number of Bank Subsidiaries, these increases were
also
attributable to the opening of the new locations previously mentioned.
Occupancy
and furniture and equipment expense, in aggregate, increased $2.0 million
or 16%
during 2006 and $1.9 million or 19% during 2005. These increases were primarily
the result of the expansion efforts. Rocky Mountain Bank recorded $1.9
million
of occupancy and furniture and equipment expense during 2005 compared to
$1.0
million during its first seven months as a subsidiary of Heartland in
2004.
Advertising
expense, which includes public relations expense, increased $1.1 million
or 33%
during 2006 and $609 thousand or 23% during 2005. Rocky Mountain Bank recorded
advertising expense of $524 thousand during 2005 and $232 thousand during
its
first seven months as a subsidiary of Heartland in 2004. Other increases
in this
category are partially the result of Heartland’s expansion efforts. Advertising
expense during 2006 also increased as a result of a demand deposit acquisition
program by a third party provider, which cost approximately $250 thousand
each
quarter. Management discontinued this program during the fourth quarter
of
2006.
Other
intangibles amortization increased $250 thousand or 33% during 2005, primarily
as a result of the acquisition of Rocky Mountain Bank.
Other
noninterest expenses increased $3.6 million or 33% during 2006 and $1.0
million
or 10% during 2005. Exclusive of the $2.4 million judgment recorded during
the
first quarter of 2006, other noninterest expense increased $1.2 million
or 11%
during 2006. Remaining unamortized issuance cost on the $25.0 million 9.60%
trust preferred securities redeemed on September 30, 2004, totaled $959
thousand
and were fully expensed during the third quarter of 2004. Rocky Mountain
Bank
had other noninterest expenses of $1.4 million during 2005 and $671 thousand
during the seven months of operations as a Heartland subsidiary in 2004.
The
remaining increases in other noninterest expenses during 2006 and 2005
were
primarily a result of Heartland’s expansion efforts and included such items as
supplies, telephone, software maintenance, software amortization, continuing
education and other staff expense.
INCOME
TAXES
Income
tax expense from continuing operations during 2006 increased $2.1 million
or 22%
when compared to 2005, resulting in an effective tax rate of 32.4% for
2006
compared to 30.7% for 2005. The higher effective tax rate during 2006 was
attributable to a reduction in the amount of tax-exempt interest income
as a
percentage of pre-tax income and a reduction in the amount of low-income
housing
credits. The tax-equivalent adjustment for tax-exempt interest income was
$3.6
million during 2006 compared to $3.3 million during 2005. Tax-exempt interest
income as a percentage of pre-tax income from continuing operations was
18.0%
during 2006 compared to 19.3% during 2005. Income taxes recorded during
2005
included low-income housing tax credits totaling $412 thousand. During
2006,
these credits decreased to $218 thousand for the year.
Income
tax expense from continuing operations during 2005 increased $2.1 million
or 28%
when compared to 2004, resulting in an effective tax rate of 30.7% for
2005
compared to 28.0% for 2004. The lower effective rate during 2004 was the
result
of federal historic rehabilitation tax credits of $675 thousand and state
historic rehabilitation tax credits of $843 thousand. No historic rehabilitation
tax credits were earned by Heartland during 2005. Additionally, low-income
housing credits totaled $412 thousand during 2005 compared to $485 thousand
during 2004. The tax-equivalent adjustment for tax-exempt interest income
was
$3.3 million during 2005 compared to $2.8 million during 2004. Tax-exempt
interest income as a percentage of pre-tax income from continuing operations
was
19.3% of pre-tax income during 2005 compared to 18.5% during 2004. This
increase
in tax-exempt interest income partially mitigated the impact reduced tax
credits
had on income taxes recorded during 2005.
During
2006, income taxes from discontinued operations included a $282 thousand
tax
provision to reflect taxes associated with the disposition of goodwill
and life
insurance policies at ULTEA that had not been previously recorded, as these
items were appropriately treated as permanent tax differences in prior
periods.
FINANCIAL
CONDITION
LENDING
ACTIVITIES
Heartland’s
major source of income is interest on loans and leases. The table below
presents
the composition of Heartland’s loan portfolio at the end of the years
indicated.
|
LOAN
PORTFOLIO
|
|||||||||||||||||||||||||||||||||||
|
December
31, 2006, 2005, 2004, 2003 and 2002
|
|||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||||||||||||
|
Commercial
and commercial real estate
|
$
|
1,483,738
|
68.95
|
%
|
$
|
1,304,080
|
66.65
|
%
|
$
|
1,162,103
|
65.42
|
%
|
$
|
860,552
|
64.93
|
%
|
$
|
733,324
|
63.49
|
%
|
|||||||||||||||
|
Residential
mortgage
|
225,343
|
10.47
|
219,671
|
11.23
|
212,842
|
11.98
|
148,376
|
11.19
|
133,435
|
11.55
|
|||||||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
233,748
|
10.86
|
230,357
|
11.77
|
217,860
|
12.27
|
166,182
|
12.54
|
155,383
|
13.45
|
|||||||||||||||||||||||||
|
Consumer
|
194,652
|
9.05
|
181,019
|
9.25
|
167,109
|
9.41
|
136,601
|
10.31
|
120,591
|
10.44
|
|||||||||||||||||||||||||
|
Lease
financing, net
|
14,359
|
0.67
|
21,586
|
1.10
|
16,284
|
0.92
|
13,621
|
1.03
|
12,308
|
1.07
|
|||||||||||||||||||||||||
|
Gross
loans and leases
|
2,151,840
|
100.00
|
%
|
1,956,713
|
100.00
|
%
|
1,776,198
|
100.00
|
%
|
1,325,332
|
100.00
|
%
|
1,155,041
|
100.00
|
%
|
||||||||||||||||||||
|
Unearned
discount
|
(1,875
|
)
|
(1,870
|
)
|
(1,920
|
)
|
(1,836
|
)
|
(2,161
|
)
|
|||||||||||||||||||||||||
|
Deferred
loan fees
|
(2,120
|
)
|
(1,777
|
)
|
(1,324
|
)
|
(947
|
)
|
(811
|
)
|
|||||||||||||||||||||||||
|
Total
loans and leases
|
2,147,845
|
1,953,066
|
1,772,954
|
1,322,549
|
1,152,069
|
||||||||||||||||||||||||||||||
|
Allowance
for loan and lease losses
|
(29,981
|
)
|
(27,791
|
)
|
(24,973
|
)
|
(18,490
|
)
|
(16,091
|
)
|
|||||||||||||||||||||||||
|
Loans
and leases, net
|
$
|
2,117,864
|
$
|
1,925,275
|
$
|
1,747,981
|
$
|
1,304,059
|
$
|
1,135,978
|
|||||||||||||||||||||||||
The
table
below sets forth the remaining maturities by loan and lease category, including
loans held for sale.
|
MATURITY
AND RATE SENSITIVITY OF LOANS AND LEASES
1
|
||||||||||||||||||
|
As
of December 31, 2006
|
||||||||||||||||||
|
(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
|
$
|
638,151
|
$
|
424,825
|
$
|
269,877
|
$
|
76,554
|
$
|
102,696
|
$
|
1,512,103
|
||||||
|
Residential
mortgage
|
100,562
|
26,471
|
23,914
|
41,902
|
53,585
|
246,434
|
||||||||||||
|
Agricultural
and agricultural real estate
|
109,045
|
50,266
|
35,201
|
8,851
|
30,385
|
233,748
|
||||||||||||
|
Consumer
|
38,911
|
63,495
|
12,455
|
18,222
|
62,494
|
195,577
|
||||||||||||
|
Lease
financing, net
|
4,538
|
9,139
|
-
|
682
|
-
|
14,359
|
||||||||||||
|
Total
|
$
|
891,207
|
$
|
574,196
|
$
|
341,447
|
$
|
146,211
|
$
|
249,160
|
$
|
2,202,221
|
||||||
|
1
Maturities based upon contractual
dates
|
||||||||||||||||||
Heartland
experienced growth in total loans and leases during both 2006 and 2005.
This
growth was $194.8 million or 10% in 2006 and $180.1 million or 10% in 2005.
The
May
15, 2006, acquisition of Bank of the Southwest by Arizona Bank & Trust
accounted for $50.9 million or 26% of this growth in 2006. The Heartland
subsidiary banks experiencing notable loan growth during 2006 were New
Mexico
Bank & Trust, Arizona Bank & Trust and Rocky Mountain Bank. During 2005,
major contributors to the loan growth were Dubuque Bank and Trust Company,
New
Mexico Bank & Trust, Arizona Bank & Trust and Galena State Bank and
Trust Company. During both years, all of the loan categories increased,
with the
commercial and commercial real estate loan category comprising $179.7 million
or
92% of the total loan growth during 2006 and $142.0 million or 79% of the
total
loan growth during 2005.
Commercial
and commercial real estate loans increased 14% during 2006 and 12% during
2005.
Exclusive
of the $21.0 million in commercial and commercial real estate loans acquired
in
the Bank of the Southwest acquisition, this loan category increased by
$158.7
million or 12%.
Agricultural
and agricultural real estate loans outstanding increased $3.4 million or
1%
during 2006 and $12.5 million or 6% during 2005. During 2006, growth in
this
category occurred at Dubuque Bank and Trust Company and Wisconsin Community
Bank
while the New Mexico Bank & Trust office in Clovis, New Mexico experienced
payoffs on a few large credits. Nearly all of the growth during 2005 occurred
at
Dubuque Bank and Trust Company.
Residential
mortgage loans experienced an increase of $5.7 million or 3% during 2006
and
$6.8 million or 3% during 2005. We do not anticipate continued growth in
our
residential mortgage loan portfolio, as many of the loans made, especially
the
15- and 30-year fixed-rate mortgage loans, are usually sold into the secondary
market. Servicing is retained on a portion of these loans so that the Heartland
bank subsidiaries have an opportunity to continue providing their customers
the
excellent service they expect.
Consumer
loans increased $13.6 million or 8% during 2006 and $13.9 million or 8%
during
2005. During both years, a majority of the growth was in home equity lines
of
credit. During 2006, the Western banks of New Mexico Bank & Trust, Arizona
Bank & Trust and Rocky Mountain Bank were most successful at growing this
product line. During 2005, Arizona Bank & Trust, Wisconsin Community Bank
and Rocky Mountain Bank were most successful at growing this product line.
Also
contributing to the growth in both years was Citizens Finance Co., which
experienced an increase of $3.7 million or 11% during 2006 and $5.8 million
or
21% during 2005. Citizens Finance Co.’s total loans comprised 19% of Heartland’s
total consumer loan portfolio as of December 31, 2006 and 2005. Heartland
has
continued to pursue opportunities to expand its Citizens Finance Co. subsidiary,
as evidenced by the December 2004 opening of an office in Crystal Lake,
Illinois; May 2006 opening of an office in Tinley Park, Illinois; October
2006
opening of an office in Cedar Rapids, Iowa and the January 2007 opening
of an
office in Davenport, Iowa.
Loans
held for sale increased $9.6 million or 24% during 2006 and $8.6 million
or 27%
during 2005. Activity in 15- and 30-year fixed-rate mortgage loans, which
are
usually sold into the secondary market, made up a portion of the change
during
both years. The remainder of the growth in loans held for sale was commercial
and commercial real estate loans at Wisconsin Community Bank that were
structured to meet the USDA and SBA loan guaranty program requirements.
Although
the risk of nonpayment for any reason exists with respect to all loans,
specific
risks are associated with each type of loan. The primary risks associated
with
commercial and agricultural loans are the quality of the borrower’s management
and the impact of national and regional economic factors. Additionally,
risks
associated with commercial and agricultural real estate loans include
fluctuating property values and concentrations of loans in a specific type
of
real estate. Repayment on loans to individuals, including those on residential
real estate, are dependent on the borrower’s continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances and
deteriorating economic conditions. These risks are described in more detail
in
Item 1.A. “Risk Factors” of this Form 10-K. Heartland monitors its loan
concentrations and does not believe it has excessive concentrations in
any
specific industry.
Heartland’s
strategy with respect to the management of these types of risks, whether
loan
demand is weak or strong, is to encourage the Heartland banks to follow
tested
and prudent loan policies and underwriting practices which include: (i)
granting
loans on a sound and collectible basis; (ii) ensuring that primary and
secondary
sources of repayment are adequate in relation to the amount of the loan;
(iii)
administering loan policies through a board of directors; (iv) developing
and
maintaining adequate diversification of the loan portfolio as a whole and
of the
loans within each loan category; and (v) ensuring that each loan is properly
documented and, if appropriate, guaranteed by government agencies and that
insurance coverage is adequate.
NONPERFORMING
LOANS AND LEASES AND
OTHER
NONPERFORMING ASSETS
The
table
below sets forth the amounts of nonperforming loans and leases and other
nonperforming assets on the dates indicated.
|
NONPERFORMING
ASSETS
|
|||||||||||||||||||||
|
December
31, 2006, 2005, 2004, 2003 and 2002
|
|||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||
|
Nonaccrual
loans and leases
|
$
|
8,104
|
$
|
14,877
|
$
|
9,837
|
$
|
5,092
|
$
|
3,944
|
|||||||||||
|
Loans
and leases contractually past due 90 days or more
|
315
|
115
|
88
|
458
|
541
|
||||||||||||||||
|
Total
nonperforming loans and leases
|
8,419
|
14,992
|
9,925
|
5,550
|
4,485
|
||||||||||||||||
|
Other
real estate
|
1,575
|
1,586
|
425
|
599
|
452
|
||||||||||||||||
|
Other
repossessed assets
|
349
|
471
|
313
|
285
|
279
|
||||||||||||||||
|
Total
nonperforming assets
|
$
|
10,343
|
$
|
17,049
|
$
|
10,663
|
$
|
6,434
|
$
|
5,216
|
|||||||||||
|
Nonperforming
loans and leases to total loans and leases
|
0.39
|
%
|
0.77
|
%
|
0.56
|
%
|
0.42
|
%
|
0.39
|
%
|
|||||||||||
|
Nonperforming
assets to total loans and leases plus repossessed property
|
0.48
|
%
|
0.87
|
%
|
0.60
|
%
|
0.48
|
%
|
0.45
|
%
|
|||||||||||
|
Nonperforming
assets to total assets
|
0.34
|
%
|
0.60
|
%
|
0.41
|
%
|
0.32
|
%
|
0.29
|
%
|
|||||||||||
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. This emphasis on quality is reflected in Heartland’s credit
quality figures. Heartland’s nonperforming assets to total assets was 0.34% and
0.60% at December 31, 2006 and 2005, respectively. Peer
data
in the Bank Holding
Company Performance Reports published by the Federal Reserve Board for
bank
holding companies with total assets of $1 to $3 billion reported nonperforming
assets to total assets of 0.44% and 0.46% for September 30, 2006, and December
31, 2005, respectively.
Nonperforming
loans, defined as nonaccrual loans, restructured loans and loans past due
ninety
days or more, were $8.4 million or 0.39% of total loans and leases at December
31, 2006, compared to $15.0 million or 0.77% of total loans and leases
at
December 31, 2005. The decrease in these loans was primarily attributable
to the
completion of workout plans on a few of the large credits, the majority
of which
were repaid and resulted in no charge-offs. Contributing to the increase
during
2005 was a $3.4 million loan at Rocky Mountain Bank and two $1.2 million
loans
at New Mexico Bank & Trust. The increase during 2005 was not felt to be an
indication of a trend developing and the resolution of those three credits
during 2006 confirmed that fact. The nonperforming loan at Rocky Mountain
Bank
was not unexpected as it had been identified as a potential problem loan
prior
to completion of the acquisition in 2004. Because of the net realizable
value of
collateral, guarantees and other factors, anticipated losses on Heartland’s
nonperforming loans are not expected to be significant and have been
specifically provided for in the allowance for loan and lease losses. The
allowance for loan and lease losses related to total nonperforming loans
and
leases was $301 thousand and $1.2 million at December 31, 2006 and 2005,
respectively.
Other
real estate owned increased from $425 thousand at December 31, 2004, to
$1.6
million at December 31, 2005. This increase primarily resulted from the
repossession of one property at New Mexico Bank & Trust. That property was
sold during 2006 and an additional property at nearly the same value was
repossessed at Dubuque Bank and Trust Company. A sale of this property
is
expected to occur during 2007.
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 increased by $2.2 million or 8% during
2006
and $2.8 million or 11% during 2005. The allowance for loan and lease losses
at
year-end 2006 was 1.40% of loans and 356% of nonperforming loans and leases
compared to 1.42% of loans and 185% of nonperforming loans and leases at
year-end 2005. A portion of the growth in the allowance for loan and lease
losses occurred as a result of the expansion of the loan portfolio during
both
years, particularly in the more complex commercial loan category and in
the new
markets Heartland entered in which Heartland had little or no previous
lending
experience.
The
amount of net charge-offs recorded by Heartland was $2.3 million during
2006 and
$3.4 million during 2005. As a percentage of average loans and leases,
net
charge-offs were 0.11% during 2006 and 0.18% during 2005. Citizens Finance
Co.,
Heartland's consumer finance subsidiary, experienced net charge-offs of
$1.2
million during both 2006 and 2005. Net losses as a percentage of average
gross
loans at Citizens was 3.61% for 2006 compared to 3.94% for 2005 and 3.44%
for
2004. Loans with payments past due for more than thirty days at Citizens
was
4.92% of gross loans at year-end 2006 compared to 5.32% of gross loans
at
year-end 2005 and 4.09% at year-end 2004. The
change in bankruptcy laws in 2005 adversely impacted Citizens Finance Co.
as
more customers elected to declare bankruptcy prior to year-end
2005.
|
ANALYSIS
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||
|
December
31, 2006, 2005, 2004, 2003 and 2002
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||
|
Allowance
at beginning of year
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
$
|
16,091
|
$
|
14,660
|
||||||||||||
|
Charge-offs:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
1,494
|
2,203
|
1,736
|
499
|
795
|
|||||||||||||||||
|
Residential
mortgage
|
227
|
75
|
104
|
108
|
38
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
148
|
160
|
78
|
6
|
279
|
|||||||||||||||||
|
Consumer
|
2,120
|
2,141
|
1,699
|
1,779
|
2,085
|
|||||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
6
|
|||||||||||||||||
|
Total
charge-offs
|
3,989
|
4,579
|
3,617
|
2,392
|
3,203
|
|||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||||
|
Commercial
and commercial real estate
|
1,031
|
544
|
345
|
112
|
836
|
|||||||||||||||||
|
Residential
mortgage
|
95
|
1
|
35
|
2
|
8
|
|||||||||||||||||
|
Agricultural
and agricultural real estate
|
62
|
141
|
188
|
29
|
177
|
|||||||||||||||||
|
Consumer
|
545
|
466
|
437
|
465
|
389
|
|||||||||||||||||
|
Lease
financing
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
recoveries
|
1,733
|
1,152
|
1,005
|
608
|
1,410
|
|||||||||||||||||
|
Net
charge-offs 1
|
2,256
|
3,427
|
2,612
|
1,784
|
1,793
|
|||||||||||||||||
|
Provision
for loan and lease losses from continuing operations
|
3,886
|
6,533
|
4,846
|
4,183
|
3,553
|
|||||||||||||||||
|
Provision
for loan and lease losses from discontinued operations
|
(8
|
)
|
31
|
-
|
-
|
(329
|
)
|
|||||||||||||||
|
Additions
related to acquisitions
|
591
|
-
|
4,249
|
-
|
-
|
|||||||||||||||||
|
Reduction
related to discontinued operations
|
(23
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Adjustment
for transfer to other liabilities for unfunded commitments
|
-
|
(319
|
)
|
-
|
-
|
-
|
||||||||||||||||
|
Allowance
at end of year
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
$
|
16,091
|
||||||||||||
|
Net
charge-offs to average loans and leases
|
0.11
|
%
|
0.18
|
%
|
0.16
|
%
|
0.14
|
%
|
0.16
|
%
|
||||||||||||
|
1
|
Includes
net charge-offs at Citizens Finance, Heartland’s consumer finance company,
of $1,215 for 2006; $1,185 for 2005; $789 for 2004; $808 for
2003 and
$1,182 for 2002.
|
|||||||||||||||||||||
The
table
above summarizes activity in the allowance for loan and lease losses for
the
years indicated, including amounts of loans and leases charged off, amounts
of
recoveries, additions to the allowance charged to income, additions related
to
acquisitions and the ratio of net charge-offs to average loans and leases
outstanding.
The
table
below shows Heartland’s allocation of the allowance for loan and lease losses by
types of loans and leases and the amount of unallocated reserves.
|
ALLOCATION
OF ALLOWANCE FOR LOAN AND LEASE LOSSES
|
||||||||||||||||||||||||||||||
|
December
31, 2006, 2005, 2004, 2003 and 2002
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||||||||||||||||
|
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
|
$
|
18,612
|
68.95
|
%
|
$
|
17,478
|
66.65
|
%
|
$
|
15,463
|
65.42
|
%
|
$
|
9,776
|
64.93
|
%
|
$
|
8,408
|
63.49
|
%
|
||||||||||
|
Residential
mortgage
|
1,688
|
10.47
|
1,593
|
11.23
|
1,357
|
11.98
|
1,224
|
11.19
|
1,328
|
11.55
|
||||||||||||||||||||
|
Agricultural
and agricultural real estate
|
2,075
|
10.86
|
2,526
|
11.77
|
2,857
|
12.27
|
2,926
|
12.54
|
2,239
|
13.45
|
||||||||||||||||||||
|
Consumer
|
3,008
|
9.05
|
2,893
|
9.25
|
2,190
|
9.41
|
2,351
|
10.31
|
2,083
|
10.44
|
||||||||||||||||||||
|
Lease
financing
|
192
|
0.67
|
149
|
1.10
|
103
|
0.92
|
121
|
1.03
|
140
|
1.07
|
||||||||||||||||||||
|
Unallocated
|
4,406
|
3,152
|
3,003
|
2,092
|
1,893
|
|||||||||||||||||||||||||
|
Total
allowance for loan and lease losses
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
$
|
16,091
|
||||||||||||||||||||
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 20%
and 19%
of total assets at December 31, 2006 and 2005, respectively. Total available
for
sale securities as of December 31, 2006, were $614.0 million, an increase
of
$86.7 million or 16% from December 31, 2005. The majority of this increase
was
the result of the purchase of $55.0 million in agency securities in the
third
quarter of 2006 for the sole purpose of entering into the leveraged structured
wholesale repurchase agreement discussed in the net interest income section
of
this report. As the yield curve flattened during 2005 and to provide protection
in a downward interest rate environment, a portion of the securities portfolio
was shifted into longer-term agency securities and higher-yielding and
longer-term municipal securities.
Because
the decline in market value on Heartland’s debt securities portfolio are
attributable to changes in interest rates and not credit quality, and because
Heartland has the ability 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, 2006.
The
tables below present the composition and maturities of the securities portfolio
by major category. All of our U.S. government corporations and agencies
securities and a majority of our mortgage-backed securities are issuances
of
government-sponsored enterprises.
|
SECURITIES
PORTFOLIO COMPOSITION
|
||||||||||||||||||
|
December
31, 2006, 2005 and 2004
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
Amount
|
%
of
Portfolio
|
|||||||||||||
|
U.S.
government corporations and agencies
|
$
|
296,823
|
48.23
|
%
|
$
|
234,021
|
44.38
|
%
|
$
|
219,670
|
39.74
|
%
|
||||||
|
Mortgage-backed
securities
|
134,057
|
21.78
|
130,334
|
24.73
|
164,580
|
29.78
|
||||||||||||
|
Obligations
of states and political subdivisions
|
137,203
|
22.29
|
132,958
|
25.21
|
123,624
|
22.36
|
||||||||||||
|
Other
securities
|
47,389
|
7.70
|
29,939
|
5.68
|
44,889
|
8.12
|
||||||||||||
|
Total
|
$
|
615,472
|
100.00
|
%
|
$
|
527,252
|
100.00
|
%
|
$
|
552,763
|
100.00
|
%
|
||||||
|
SECURITIES
AVAILABLE FOR SALE PORTFOLIO MATURITIES
|
||||||||||||||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||||||||||||
|
(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
|
$
|
84,192
|
3.66
|
%
|
$
|
212,631
|
5.13
|
%
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
$
|
296,823
|
4.20
|
%
|
||||||||||
|
Mortgage-backed
securities
|
17,136
|
5.03
|
103,524
|
3.62
|
8,393
|
5.83
|
5,004
|
5.78
|
134,057
|
4.98
|
||||||||||||||||||||
|
Obligations
of states and political subdivisions 1
|
5,793
|
6.21
|
27,046
|
5.71
|
64,808
|
6.20
|
38,034
|
7.22
|
135,681
|
6.39
|
||||||||||||||||||||
|
Corporate
debt securities
|
22,080
|
3.57
|
-
|
-
|
-
|
-
|
-
|
-
|
22,080
|
3.57
|
||||||||||||||||||||
|
Total
|
$
|
129,201
|
3.94
|
%
|
$
|
343,201
|
4.72
|
%
|
$
|
73,201
|
6.16
|
%
|
$
|
43,038
|
7.05
|
%
|
$
|
588,641
|
4.86
|
%
|
||||||||||
|
1
|
Rates
on obligations of states and political subdivisions have been
adjusted to
tax equivalent yields using a 34%
tax.
|
|
SECURITIES
HELD TO MATURITY PORTFOLIO MATURITIES
|
||||||||||||||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||||||||||||
|
(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
|
|||||||||||||||||||||
|
Obligations
of states and political subdivisions 1
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
1,522
|
8.33
|
%
|
$
|
1,522
|
8.33
|
%
|
||||||||||||||||
|
Total
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
1,522
|
8.33
|
%
|
$
|
1,522
|
8.33
|
%
|
|||||||||||||
|
1
|
Rates
on obligations of states and political subdivisions have been
adjusted to
tax equivalent yields using a 34%
tax.
|
DEPOSITS
AND BORROWED FUNDS
Total
average deposits experienced an increase of $163.0 million or 8% during
2006 and
$290.7 million or 17% during 2005. Exclusive of $27.8 million attributable
to
deposits at Bank of the Southwest, growth in average deposits during 2006
was
$135.2 million or 7%. Exclusive of brokered deposits, total average deposits
increased $165.0 million or 9% during 2006 and $245.9 million or 15% during
2005. All of the Bank Subsidiaries experienced growth in nonbrokered deposits
during both years, except for First Community Bank and Galena State Bank
and
Trust Company, which experienced a decrease during 2005. The addition of
new
banking locations in both the West and Midwest have contributed to the
growth in
deposits, as well as, an increased focus on attracting new deposit customers
in
all of the markets served by the Bank Subsidiaries. Nearly 70% of the growth
experienced during both years occurred at our banks located in the West.
The
percentage of total average deposits in the West was 29% during 2004, 36%
during
2005 and 39% during 2006.
Average
demand deposits increased $20.9 million or 6% during 2006, with the Bank
of the
Southwest acquisition responsible for $10.6 million of this increase. Even
though the companywide deposit acquisition program initiated early in 2006
has
not generated the results hoped for, the number of demand deposit accounts
has
grown, primarily as a result of a continued focus on growth in these deposits.
Management will continue to focus efforts on growing demand deposit account
balances with internally developed acquisition programs. We recently introduced
a remote deposit capture service targeted at attracting business demand
deposit
accounts. This new desktop service converts checks to electronic images
and
transmits the images directly to the bank for deposit, thus providing our
business customers with greater convenience and cost savings. During 2005,
average demand deposits increased $51.9 million or 19%. The Rocky Mountain
Bank
acquisition was responsible for $23.5 million or 45% of that growth. The
other
major contributors to the growth in 2005 were New Mexico Bank & Trust and
Arizona Bank & Trust. The percentage of average demand deposits in the West
increased from 45% in 2004 to 54% in 2005 and 57% in 2006.
Average
savings deposit balances increased by $38.8 million or 5% during 2006,
with the
Bank of the Southwest acquisition responsible for $10.9 million of this
increase. The banks experiencing more significant growth in these deposits
during 2006 were Arizona Bank & Trust, Galena State Bank and Trust Company
and Wisconsin Community Bank. During 2005, average savings deposit balances
increased by $83.3 million or 12% with significant growth occurring at
Wisconsin
Community Bank, New Mexico Bank & Trust, Arizona Bank & Trust and Rocky
Mountain Bank. The percentage of average savings deposits balances in the
West
increased from 29% in 2004 to 36% in 2005 and 39% in 2006.
Average
time deposits increased $105.4 million or 13% during 2006 and $110.6 million
or
15% during 2005. The Bank of the Southwest acquisition was responsible
for $6.3
million of the growth in these deposits during 2006. As interest rates
rose
during 2005 and remained at those levels throughout most of 2006, many
deposit
customers shifted a portion of their lower yielding deposit balances into
higher
yielding money market and certificate of deposit accounts. The Heartland
bank
subsidiaries have priced these products competitively to retain existing
deposit
customers, as well as to attract new customers. During 2006, the majority
of the
growth in time deposits occurred at Dubuque Bank and Trust Company, New
Mexico
Bank & Trust, Rocky Mountain Bank and Arizona Bank & Trust. Exclusive of
Arizona Bank & Trust, these same banks were the largest contributors to the
growth in this deposit category during 2005. The percentage of average
time
deposits in the West increased from 22% in 2004 to 29% in 2005 and 32%
in
2006.
Average
brokered time deposits as a percentage of total average deposits was 6%
during
2006 compared to 7% during 2005 and 5% during 2004. The reliance on brokered
time deposits had increased during 2005 as loan growth outpaced core deposit
growth.
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
|
|||||||||||||||||||||||||||
|
For
the years ended December 31, 2006, 2005 and 2004
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
|
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
|
$
|
351,239
|
15.91
|
%
|
0.00
|
%
|
$
|
330,379
|
16.16
|
%
|
0.00
|
%
|
$
|
278,432
|
15.88
|
%
|
0.00
|
%
|
|||||||||
|
Savings
|
792,875
|
35.92
|
2.42
|
754,086
|
36.89
|
1.46
|
670,758
|
38.25
|
0.88
|
||||||||||||||||||
|
Time
deposits less than $100,000
|
705,266
|
31.96
|
4.09
|
624,391
|
30.54
|
3.40
|
562,385
|
32.07
|
3.25
|
||||||||||||||||||
|
Time
deposits of $100,000 or more
|
225,874
|
10.23
|
4.20
|
201,377
|
9.85
|
3.23
|
152,787
|
8.71
|
2.59
|
||||||||||||||||||
|
Brokered
deposits
|
132,069
|
5.98
|
4.37
|
134,057
|
6.56
|
3.46
|
89,226
|
5.09
|
3.04
|
||||||||||||||||||
|
Total
deposits
|
$
|
2,207,323
|
100.00
|
%
|
$
|
2,044,290
|
100.00
|
%
|
$
|
1,753,588
|
100.00
|
%
|
|||||||||||||||
The
following table sets forth the amount and maturities of time deposits of
$100,000 or more at December 31, 2006.
|
TIME
DEPOSITS $100,000 AND OVER
|
|||
|
(Dollars
in thousands)
|
|||
|
December
31, 2006
|
|||
|
3
months or less
|
$
|
47,366
|
|
|
Over
3 months through 6 months
|
62,545
|
||
|
Over
6 months through 12 months
|
63,388
|
||
|
Over
12 months
|
62,369
|
||
|
$
|
235,668
|
||
Short-term
borrowings generally include federal funds purchased, treasury tax and
loan note
options, securities sold under agreement to repurchase and short-term FHLB
advances. These funding alternatives are utilized in varying degrees depending
on their pricing and availability. At year-end 2006, short-term borrowings
were
$275.7 million compared to $255.6 million at year-end 2005.
All
of
the Bank Subsidiaries provide repurchase agreements to their customers
as a cash
management tool, sweeping excess funds from demand deposit accounts into
these
agreements. This source of funding does not increase the individual bank’s
reserve requirements, nor does it create an expense relating to FDIC premiums
on
deposits. Although the aggregate balance of repurchase agreements is subject
to
variation, the account relationships represented by these balances are
principally local. During 2006, these balances had increased $43.9 million
or
24% from $182.0 million to $225.9 million, with a majority of this growth
occurring at Dubuque Bank and Trust Company and New Mexico Bank & Trust. The
activity at Dubuque Bank and Trust Company was the result of a few accounts
that
had purposefully accumulated balances for payout during the first quarter
of
2007. The growth at New Mexico Bank & Trust resulted from the one large
municipal account. Typically,
the balances in this account increase during the last quarter of the year
and
then decline during the first quarter of the next year as tax proceeds
are
dispersed. During 2005, repurchase
agreement balances had increased $12.5 million or 7%, primarily due to
the
large
municipal account at New Mexico Bank & Trust.
Also
included in short-term borrowings is the revolving credit line Heartland
has
with four unaffiliated banks. Under this unsecured revolving credit line,
Heartland may borrow up to $75.0 million at any one time. This credit line
was
established primarily to provide working capital to the nonbanking subsidiaries
and replace similar sized lines currently in place at those subsidiaries.
At
December 31, 2006, a total of $35.0 million was outstanding on this credit
line
compared to $60.8 million at December 31, 2005. Additional borrowings were
needed during 2005 to provide funding for the growth at Citizens Finance
Co.,
the purchase of additional assets for operating leases at ULTEA and treasury
stock purchases. As a result of the sale of ULTEA, the borrowings on this
credit
line was reduced by $25.0 million.
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,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at end of period
|
$
|
275,694
|
$
|
255,623
|
$
|
231,475
|
|||
|
Maximum
month-end amount outstanding
|
277,604
|
266,194
|
231,475
|
||||||
|
Average
month-end amount outstanding
|
258,844
|
233,051
|
187,046
|
||||||
|
Weighted
average interest rate at year-end
|
4.71%
|
3.68%
|
1.88%
|
||||||
|
Weighted
average interest rate for the year
|
4.35%
|
2.67%
|
1.44%
|
||||||
Other
borrowings include all debt arrangements Heartland and its subsidiaries
have
entered into with original maturities that extend beyond one year. These
borrowings were $224.5 million at December 31, 2006, compared to $220.9
million
at December 31, 2005. Other
borrowings includes the $50.0 structured wholesale repurchase agreement
entered
into in August of 2006 and the balances outstanding on trust preferred
capital
securities issued by Heartland. On January 31, 2006, Heartland completed
an
offering of $20.0 million of variable rate cumulative trust preferred securities
representing undivided beneficial interests in Heartland Statutory Trust
V. The
proceeds from the offering were used by the trust to purchase junior
subordinated debentures from Heartland. The proceeds have been used as
a
permanent source of funding for Heartland’s nonbanking subsidiaries and for
general corporate purposes, including future acquisitions. Interest is
payable
quarterly on April 7, July 7, October 7 and January 7 of each year. The
debentures will mature and the trust preferred securities must be redeemed
on
January 31, 2036. Heartland has the option to shorten the maturity date
to a
date not earlier than January 31, 2011. For regulatory purposes, $1.6 million
qualifies as Tier 1 capital and $18.4 million qualifies as Tier 2
capital.
A
schedule of Heartland’s trust preferred offerings outstanding as of December 31,
2006, is as follows:
(Dollars
in thousands)
|
Amount
Issued
|
Issuance
Date
|
Interest
Rate
|
Interest
Rate as of 12/31/06
|
Maturity
Date
|
Callable
Date
|
||||||
|
$
|
5,000
|
08/07/00
|
10.60%
|
10.60%
|
09/07/30
|
09/07/10
|
|||||
|
8,000
|
12/18/01
|
3.60%
over Libor
|
8.96%
|
12/18/31
|
03/18/07
|
||||||
|
5,000
|
06/27/02
|
3.65%
over Libor
|
9.02%
|
06/30/32
|
06/30/07
|
||||||
|
20,000
|
10/10/03
|
8.25%
|
8.25%
|
10/10/33
|
10/10/08
|
||||||
|
25,000
|
03/17/04
|
2.75%
over Libor
|
8.11%
|
03/17/34
|
03/17/09
|
||||||
|
20,000
|
01/31/06
|
1.33%
over Libor
|
6.70%
|
01/31/36
|
01/31/11
|
||||||
|
$
|
83,000
|
||||||||||
Also
in
other borrowings are the Bank Subsidiaries’ borrowings from the FHLB. All of the
Bank Subsidiaries own FHLB stock in either
Chicago, Dallas, Des Moines, Seattle or San Francisco, enabling them to
borrow
funds from their respective FHLB for short- or long-term purposes under
a
variety of programs. Total FHLB borrowings at December 31, 2006, totaled
$81.3
million, a decrease of $69.8 million or 46% from the December 31, 2005,
FHLB
borrowings of $151.0 million. As FHLB advances matured during the year,
replacement advances were not needed as deposit growth outpaced loan growth
for
a good portion of the year. During 2005, these borrowings had increased
$27.6
million or 22% over the December 31, 2004, total FHLB borrowings of $123.5
million. These advances were used to fund a portion of the fixed-rate commercial
and residential loan growth experienced.
The
following table summarizes significant contractual obligations and other
commitments as of December 31, 2006:
|
(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
|
$
|
1,117,277
|
$
|
754,436
|
$
|
338,410
|
$
|
23,551
|
$
|
880
|
|||||
|
Long-term
debt obligations
|
224,523
|
9,801
|
75,408
|
29,887
|
109,427
|
||||||||||
|
Operating
lease obligations
|
6,396
|
870
|
1,480
|
675
|
3,371
|
||||||||||
|
Purchase
obligations
|
4,220
|
3,792
|
428
|
-
|
-
|
||||||||||
|
Other
long-term liabilities
|
2,319
|
109
|
218
|
218
|
1,774
|
||||||||||
|
Total
contractual obligations
|
$
|
1,354,735
|
$
|
769,008
|
$
|
415,944
|
$
|
54,331
|
$
|
115,452
|
|||||
|
Other
commitments:
|
|||||||||||||||
|
Lines
of credit
|
$
|
651,339
|
$
|
532,578
|
$
|
77,761
|
$
|
19,295
|
$
|
21,705
|
|||||
|
Standby
letters of credit
|
35,823
|
30,764
|
2,615
|
482
|
1,962
|
||||||||||
|
Total
other commitments
|
$
|
687,162
|
$
|
563,342
|
$
|
80,376
|
$
|
19,777
|
$
|
23,667
|
|||||
CAPITAL
RESOURCES
Heartland’s
risk-based capital ratios, which take into account the different credit
risks
among banks’ assets, met all capital adequacy requirements over the past three
years. Tier 1 and total risk-based capital ratios were 9.32% and 11.18%,
respectively, on December 31, 2006, compared to 9.28% and 10.61%, respectively,
on December 31, 2005, and 9.23% and 10.82%, respectively, on December 31,
2004.
At December 31, 2006, Heartland’s leverage ratio, the ratio of Tier 1 capital to
total average assets, was 7.74% compared to 7.66% and 7.26% at December
31, 2005
and 2004, respectively. Heartland
and its bank
subsidiaries have been, and will continue to be, managed so they meet the
well-capitalized requirements under the regulatory framework for prompt
corrective action. To be categorized as well capitalized under the regulatory
framework, bank holding companies and banks must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 10%, 6% and
5%,
respectively. The most recent notification from the FDIC categorized Heartland
and each of its bank subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since
that notification that management believes have changed each institution’s
category.
Heartland’s
capital ratios are detailed in the table below.
|
RISK-BASED
CAPITAL RATIOS 1
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
December
31,
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
232,702
|
9.32
|
%
|
$
|
209,968
|
9.28
|
%
|
$
|
187,424
|
9.23
|
%
|
||||||
|
Tier
1 capital minimum requirement
|
99,878
|
4.00
|
%
|
90,514
|
4.00
|
%
|
81,251
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
132,824
|
5.32
|
%
|
$
|
119,454
|
5.28
|
%
|
$
|
106,173
|
5.23
|
%
|
||||||
|
Total
capital
|
$
|
279,112
|
11.18
|
%
|
$
|
240,152
|
10.61
|
%
|
$
|
219,839
|
10.82
|
%
|
||||||
|
Total
capital minimum requirement
|
199,757
|
8.00
|
%
|
181,028
|
8.00
|
%
|
162,503
|
8.00
|
%
|
|||||||||
|
Excess
|
$
|
79,355
|
3.18
|
%
|
$
|
59,124
|
2.61
|
%
|
$
|
57,336
|
2.82
|
%
|
||||||
|
Total
risk-adjusted assets
|
$
|
2,496,960
|
$
|
2,262,854
|
$
|
2,031,286
|
||||||||||||
|
1
|
Based
on the risk-based capital guidelines of the Federal Reserve,
a bank
holding company is required to maintain a Tier 1 to risk-adjusted
assets
ratio of 4.00% and total capital to risk-adjusted assets ratio
of
8.00%
|
|
LEVERAGE
RATIOS 1
|
||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||
|
December
31,
|
||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Ratios:
|
||||||||||||||||||
|
Tier
1 capital
|
$
|
232,702
|
7.74
|
%
|
$
|
209,968
|
7.66
|
%
|
$
|
187,424
|
7.26
|
%
|
||||||
|
Tier
1 capital minimum requirement 2
|
120,255
|
4.00
|
%
|
109,637
|
4.00
|
%
|
103,164
|
4.00
|
%
|
|||||||||
|
Excess
|
$
|
112,447
|
3.74
|
%
|
$
|
100,331
|
3.66
|
%
|
$
|
84,260
|
3.26
|
%
|
||||||
|
Average
adjusted assets
|
$
|
3,006,374
|
$
|
2,740,922
|
$
|
2,580,626
|
||||||||||||
|
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 1.00%.
|
Commitments
for capital expenditures are an important factor in evaluating capital
adequacy.
In August of 2005, Heartland announced the addition of a loan production
office
in Denver, Colorado with the intention to use this office as a springboard
to
opening a full-service state chartered bank in this market. All
necessary regulatory approvals were received this fall and the bank began
operations as Summit Bank & Trust on November 1, 2006. The
capital structure of this new bank
is very
similar to that used when Arizona Bank & Trust was 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 investor's 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
minimum amount payable is the amount originally paid by the minority
shareholders plus a compounded annual return of 6%. The maximum amount
payable
will be based on the greater of the fair value of those shares based upon
an
appraisal performed by an independent third party or a predetermined range
of
multiples of the bank’s trailing twelve month earnings. Through December 31,
2006, Heartland accrued the amount due to the minority shareholders at
6%. The
obligation to repay the original investment is payable in cash or Heartland
stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders
is
payable in cash or Heartland stock or a combination of cash and stock at
the
option of Heartland.
In
February of 2003, Heartland entered into an agreement with a group of Arizona
business leaders to establish a new bank in Mesa. The
new
bank began operations on August 18, 2003, as Arizona Bank & Trust.
Heartland’s initial investment in Arizona Bank & Trust was $12.0 million,
which reflected an ownership percentage of 86%. After completion of the
Bank of
the Southwest acquisition, Heartland’s ownership percentage had increased to
91%. All minority stockholders have entered into a stock transfer agreement
that
imposes certain restrictions on the investor's sale, transfer or other
disposition of their shares and requires Heartland to repurchase the shares
from
the investors in 2008. The minimum amount payable is the amount originally
paid
by the minority shareholders plus a compounded annual return of 6%. The
maximum
amount payable will be based on the greater of the fair value of those
shares
based upon an appraisal performed by an independent third party or a
predetermined range of multiples of the bank’s trailing twelve month earnings.
Through December 31, 2006, Heartland accrued the amount due to the minority
shareholders at 6%. The obligation to repay the original investment is
payable
in cash or Heartland stock or a combination of cash and stock at the option
of
the minority shareholder. The remainder of the obligation to the minority
shareholders is payable in cash or Heartland stock or a combination of
cash and
stock at the option of Heartland.
Expansion
projects have been initiated with completion scheduled during 2007. New
Mexico
Bank & Trust began construction of its third location in Santa Fe with
opening targeted for the first quarter of 2007. Plans are underway for
an
additional Arizona Bank & Trust site in Gilbert, Arizona for completion
during the second quarter of 2007. Additionally, Rocky Mountain Bank is
developing plans for a new location in Billings, Montana. Summit Bank &
Trust hopes to open an additional location in the community of Thornton,
Colorado sometime in the second quarter of 2007. Expansion in the West
is
consistent with our long-range goal to have at least 50% of our assets
in this
fast growing region of the United States. Additionally,
in the Midwest, we began construction on a branch location in Madison,
Wisconsin
under the Wisconsin Community Bank umbrella with completion targeted for
the
first quarter of 2007. Costs related to the construction of these facilities
are
anticipated to be approximately $13 million in the aggregate with $6 million
already expended during 2006.
Heartland
continues to explore opportunities to expand its umbrella of independent
community banks through mergers and acquisitions as well as de novo and
branching opportunities. 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.
Net
cash
outflows from investing activities were $221.5 million during 2006 compared
to
$201.6 million during 2005 and $263.0 million during 2004. Included in
those
totals were net cash inflows of $36.5 million during 2006 and net cash
outflows
of $25.8 million and $14.9 million during 2005 and 2004, respectively,
as a
result of the activities at ULTEA, which was sold in December of 2006 and
has
been classified on the financial statements as discontinued operations
during
all the years presented. The proceeds from securities sales, paydowns and
maturities was $106.6 million during 2006 compared to $156.2 million during
2005
and $208.5 million during 2004. Purchases of securities used cash of $184.5
million during 2006 while $139.8 million was used for securities purchases
during 2005 and $265.2 million during 2004. A large portion of the change
in
2006 was the purchase of $55.0 million in agency securities to facilitate
the
structured wholesale repurchase agreement entered into in August of 2006.
The
net increase in loans and leases was $153.7 million during 2006 compared
to
$175.8 million during 2005 and $173.1 million during 2004. Also contributing
to
the increase in cash outflows from investing activities during 2006 was
the
$15.0 million net cash and cash equivalents paid in the acquisition of
Bank of
the Southwest. As
the
yield curve steepened during the first quarter of 2004, agency securities
nearing maturity were sold and replaced with a combination of like-term
and
longer-term agency securities that provided enhanced yields. Additionally,
management purchased some longer-term municipal securities to take advantage
of
the unusually steep slope in the yield curve and the spread of the
tax-equivalent yield on municipal securities over the yield on agency securities
with the same maturities. During 2005, a portion of the proceeds from securities
sales, paydowns and maturities was used to fund loan growth.
Financing
activities provided cash of $159.6 million during 2006 compared to $174.0
million during 2005 and $225.0 million during 2004. Included in these totals
was
net cash used totaling $40.6 million during 2006 compared to net cash provided
totaling $15.1 million and $182 thousand during 2005 and 2004, respectively,
from the operations of ULTEA. During 2006, there was a net increase in
deposit
accounts of $149.0 million compared to $134.3 million during 2005 and $205.4
million during 2004. Like many banks, Heartland has had difficulty maintaining
a
consistent level of deposit growth from year to year as the competition
for
deposit balances grows. Activity in short-term borrowings provided cash
of $54.2
million during 2006 compared to $5.6 million during 2005 and $28.5 million
during 2004. Cash proceeds from other borrowings were $74.8 million during
2006
compared to $60.0 million during 2005 and $48.0 million during 2006. A
portion
of the change during 2006 was attributable to the $50.0 million wholesale
repurchase agreement entered into in August of 2006. Repayments on other
borrowings used cash of $69.9 million during 2006 compared to $31.9 million
during 2005 and $48.6 million during 2004.
Total
cash provided by operating activities was $30.1 million during 2006 compared
to
$34.9 million during 2005 and $39.9 million during 2004. Of these totals,
the
discontinued operations at ULTEA was responsible for $11.9 million, $12.7
million and $11.5 million during 2006, 2005 and 2004, respectively.
Management
of investing and financing activities, and market conditions, determine
the
level and the stability of net interest cash flows. Management attempts
to
mitigate the impact of changes in market interest rates to the extent possible,
so that balance sheet growth is the principal determinant of growth in
net
interest cash flows.
Heartland’s
short-term borrowing balances are dependent on commercial cash management
and
smaller correspondent bank relationships and, as such, will normally fluctuate.
Heartland believes these balances, on average, to be stable sources of
funds;
however, it intends to rely on deposit growth and additional FHLB borrowings
in
the future.
In
the
event of short-term liquidity needs, the Bank Subsidiaries may purchase
federal
funds from each other or from correspondent banks and may also borrow from
the
Federal Reserve Bank. Additionally, the subsidiary banks' FHLB memberships
give
them the ability to borrow funds for short- and long-term purposes under
a
variety of programs.
At
December 31, 2006, Heartland’s revolving credit agreement with third-party banks
provided a maximum borrowing capacity of $75.0 million, of which $35.0
million
had been borrowed. A portion of this line provides funding for the operations
of
Citizens. At December 31, 2006, the borrowings on this line for Citizens
were
$15.5 million. The revolving credit agreement contains specific covenants
which,
among other things, limit dividend payments and restrict the sale of assets
by
Heartland under certain circumstances. Also contained within the agreement
are
certain financial covenants, including the maintenance by Heartland of
a maximum
nonperforming assets to total loans ratio, minimum return on average assets
ratio and maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well capitalized,
as
defined from time to time by the federal banking regulators. At December
31,
2006, Heartland was in compliance with the covenants contained in the credit
agreement.
The
ability of Heartland to pay dividends to its stockholders is partially
dependent
upon dividends paid by its subsidiaries. The Heartland banks are subject
to
certain statutory and regulatory restrictions on the amount they may pay
in
dividends. To maintain acceptable capital ratios in the Heartland banks,
certain
portions of their retained earnings are not available for the payment of
dividends. Additionally, as described above, Heartland’s revolving credit
agreement requires our Bank Subsidiaries to remain well capitalized. Retained
earnings that could be available for the payment of dividends to Heartland
totaled approximately $42.7 million as of December 31, 2006, under the
capital
requirements to remain well capitalized.
EFFECTS
OF INFLATION
Consolidated
financial data included in this report has been prepared in accordance
with
accounting principles generally accepted in the United States of America.
Presently, these principles require reporting of financial position and
operating results in terms of historical dollars, except for available
for sale
securities, trading securities and derivative instruments, which require
reporting at fair value. Changes in the relative value of money due to
inflation
or recession are generally not considered.
In
management’s opinion, changes in interest rates affect the financial condition
of a financial institution to a far greater degree than changes in the
inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not change at the same rate or in the same magnitude as the
inflation rate. Rather, interest rate volatility is based on changes in
the
expected rate of inflation, as well as on changes in monetary and fiscal
policies. A financial institution’s ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform
in
today’s volatile economic environment. Heartland seeks to insulate itself from
interest rate volatility by ensuring that rate-sensitive assets and
rate-sensitive liabilities respond to changes in interest rates in a similar
time frame and to a similar degree.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk is the risk of loss arising from adverse changes in market prices
and
rates. Heartland’s market risk is comprised primarily of interest rate risk
resulting from its core banking activities of lending and deposit gathering.
Interest rate risk measures the impact on earnings from changes in interest
rates and the effect on current fair market values of Heartland’s assets,
liabilities and off-balance sheet contracts. The objective is to measure
this
risk and manage the balance sheet to avoid unacceptable potential for economic
loss.
Management
continually develops and applies strategies to mitigate market risk. Exposure
to
market risk is reviewed on a regular basis by the asset/liability committees
at
the Bank Subsidiaries and, on a consolidated basis, by the Heartland board
of
directors. Darling Consulting Group, Inc. has been engaged to provide
asset/liability management position assessment and strategy formulation
services
to Heartland and the Bank Subsidiaries. At least quarterly, a detailed
review of
Heartland’s and each of the Bank Subsidiaries’ balance sheet risk profile is
performed. Included in these reviews are interest rate sensitivity analyses,
which simulate changes in net interest income in response to various interest
rate scenarios. This analysis considers current portfolio rates, existing
maturities, repricing opportunities and market interest rates, in addition
to
prepayments and growth under different interest rate assumptions. Selected
strategies are modeled prior to implementation to determine their effect
on
Heartland’s interest rate risk profile and net interest income. Although
management has entered into derivative financial instruments to mitigate
the
exposure of Heartland’s net interest margin in a downward rate environment, it
does not believe that Heartland’s primary market risk exposures and how those
exposures were managed in 2006 have changed significantly when compared
to
2005.
The
core
interest rate risk analysis utilized by Heartland examines the balance
sheet
under rates up/down scenarios that are neither too modest nor too extreme.
All
rate changes are ramped over a 12-month horizon based upon a parallel yield
curve shift and then maintained at those levels over the remainder of the
simulation horizon. Using this approach, management is able to see the
effect
that both a gradual change of rates (year 1) and a rate shock (year 2 and
beyond) could have on Heartland’s net interest margin. Starting balances in the
model reflect actual balances on the “as of” date, adjusted for material and
significant transactions. Pro-forma balances remain static. This enables
interest rate risk embedded within the existing balance sheet structure
to be
isolated as growth assumptions can make interest rate risk. The most recent
reviews at year-end 2006 and 2005 provided the following
results:
|
2006
|
2005
|
||||||||||||
|
Net
Interest
Margin
(in
thousands)
|
%
Change
From
Base
|
Net
Interest
Margin
(in
thousands)
|
%
Change
From
Base
|
||||||||||
|
Year
1:
|
|||||||||||||
|
Down
200 Basis Points
|
$
|
101,323
|
(3.20
|
)
|
%
|
$
|
93,756
|
(4.61
|
)
|
%
|
|||
|
Base
|
$
|
104,673
|
|
$
|
98,289
|
||||||||
|
Up
200 Basis Points
|
$
|
103,443
|
(1.17
|
)
|
%
|
$
|
98,783
|
0.50
|
%
|
||||
|
|
|||||||||||||
|
Year
2:
|
|||||||||||||
|
Down
200 Basis Points
|
$
|
97,887
|
(6.48
|
)
|
%
|
$
|
89,170
|
(9.28
|
)
|
%
|
|||
|
Base
|
$
|
106,617
|
1.86
|
%
|
$
|
101,958
|
3.73
|
%
|
|||||
|
Up
200 Basis Points
|
$
|
104,471
|
(0.19
|
)
|
%
|
$
|
102,856
|
4.65
|
%
|
||||
Heartland’s
use of derivative financial instruments in managing the risks associated
with
changes in interest rates will affect its future interest income or interest
expense. Heartland is exposed to credit-related losses in the event of
nonperformance by the counterparties to its derivative instruments, which
has
been minimized by entering into the contracts with large, stable financial
institutions. The estimated fair market values of these derivative instruments
are presented in Note 13 to the consolidated financial statements.
Heartland
does enter into financial instruments with off balance sheet risk in the
normal
course of business to meet the financing needs of its customers. These
financial
instruments include commitments to extend credit and standby letters of
credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance
sheets.
Commitments to extend credit are agreements to lend to a customer as long
as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from the
borrower. Standby letters of credit are conditional commitments issued
by
Heartland to guarantee the performance of a customer to a third party up
to a
stated amount and with specified terms and conditions. These commitments
to
extend credit and standby letters of credit are not recorded on the balance
sheet until the instrument is exercised.
The
table
below summarizes the scheduled maturities of market risk sensitive assets
and
liabilities as of December 31, 2006.
|
HEARTLAND
FINANCIAL USA, INC.
|
|||||||||||||||||||||||||||
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|||||||||||||||||||||||||||
|
Table
of Market Risk Sensitive Instruments
|
|||||||||||||||||||||||||||
|
December
31, 2006 (Dollars in thousands)
|
|||||||||||||||||||||||||||
|
MATURING
IN:
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
TOTAL
|
Average
Interest Rate
|
Estimated
Fair Value
|
||||||||||||||||||
|
ASSETS
|
|||||||||||||||||||||||||||
|
Fed
funds sold and other short-term investments
|
$
|
1,390
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,390
|
5.06
|
%
|
$
|
1,390
|
|||||||||
|
Trading
|
-
|
-
|
-
|
-
|
-
|
1,568
|
1,568
|
-
|
1,568
|
||||||||||||||||||
|
Securities
available for sale
|
129,201
|
113,578
|
122,722
|
50,665
|
56,236
|
141,548
|
613,950
|
4.86
|
613,950
|
||||||||||||||||||
|
Securities
held to maturity
|
1,522
|
1,522
|
8.33
|
1,513
|
|||||||||||||||||||||||
|
Loans
and leases(1):
|
|||||||||||||||||||||||||||
|
Fixed
rate loans
|
282,428
|
193,306
|
165,166
|
119,686
|
96,038
|
146,211
|
1,002,835
|
7.52
|
990,195
|
||||||||||||||||||
|
Variable
rate loans
|
604,784
|
150,706
|
67,912
|
63,685
|
59,144
|
249,160
|
1,195,391
|
8.24
|
1,190,734
|
||||||||||||||||||
|
Loans
and leases
|
887,212
|
344,012
|
233,078
|
183,371
|
155,182
|
395,371
|
2,198,226
|
2,180,929
|
|||||||||||||||||||
|
Total
Market Risk Sensitive Assets
|
$
|
1,017,803
|
$
|
457,590
|
$
|
355,800
|
$
|
234,036
|
$
|
211,418
|
$
|
540,009
|
$
|
2,816,656
|
$
|
2,799,350
|
|||||||||||
|
LIABILITIES
|
|||||||||||||||||||||||||||
|
Savings
|
$
|
822,915
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
822,915
|
2.16
|
%
|
$
|
822,915
|
|||||||||
|
Time
deposits:
|
|||||||||||||||||||||||||||
|
Fixed
rate time certificates less than $100,000
|
573,320
|
175,936
|
66,163
|
33,283
|
18,493
|
422
|
867,617
|
4.55
|
867,617
|
||||||||||||||||||
|
Variable
rate time certificates less than $100,000
|
7,817
|
6,175
|
-
|
-
|
-
|
-
|
13,992
|
3.96
|
13,992
|
||||||||||||||||||
|
Time
deposits less than $100,000
|
581,137
|
182,111
|
66,163
|
33,283
|
18,493
|
422
|
881,609
|
881,609
|
|||||||||||||||||||
|
Time
deposits of $100,000 or more
|
173,299
|
40,018
|
9,922
|
6,913
|
5,058
|
458
|
235,668
|
4.70
|
235,668
|
||||||||||||||||||
|
Federal
funds purchases, securities sold under repurchase agreements
and other
short-term borrowings
|
275,694
|
-
|
-
|
-
|
-
|
-
|
275,694
|
4.71
|
275,694
|
||||||||||||||||||
|
Other
borrowings:
|
|||||||||||||||||||||||||||
|
Fixed
rate borrowings
|
9,801
|
24,876
|
532
|
23,442
|
6,445
|
49,631
|
114,727
|
5.01
|
110,724
|
||||||||||||||||||
|
Variable
rate borrowings
|
-
|
-
|
50,000
|
-
|
-
|
59,796
|
109,796
|
7.82
|
109,796
|
||||||||||||||||||
|
Other
borrowings
|
9,801
|
24,876
|
50,532
|
23,442
|
6,445
|
109,427
|
224,523
|
220,520
|
|||||||||||||||||||
|
Total
Market Risk Sensitive Liabilities
|
$
|
1,862,846
|
$
|
247,005
|
$
|
126,617
|
$
|
63,638
|
$
|
29,996
|
$
|
110,307
|
$
|
2,440,409
|
$
|
2,436,406
|
|||||||||||
(1)
Includes loans held for sale
ITEM
8.
|
HEARTLAND
FINANCIAL USA, INC.
|
||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||
|
December
31,
|
December
31,
|
|||||||||
|
Notes
|
2006
|
2005
|
||||||||
|
ASSETS
|
||||||||||
|
Cash
and due from banks
|
4
|
$
|
47,753
|
$
|
40,422
|
|||||
|
Federal
funds sold and other short-term investments
|
1,390
|
40,599
|
||||||||
|
Cash
and cash equivalents
|
49,143
|
81,021
|
||||||||
|
Securities:
|
5
|
|||||||||
|
Trading,
at fair value
|
1,568
|
515
|
||||||||
|
Available
for sale, at fair value (cost of $612,440 for 2006 and $528,647
for
2005)
|
613,950
|
527,252
|
||||||||
|
Held
to maturity-at cost (fair value of $1,513 for 2006 and $0 for
2005)
|
1,522
|
-
|
||||||||
|
Loans
held for sale
|
50,381
|
40,745
|
||||||||
|
Gross
loans and leases:
|
6
|
|||||||||
|
Held
to maturity
|
2,147,845
|
1,953,066
|
||||||||
|
Allowance
for loan and lease losses
|
7
|
(29,981
|
)
|
(27,791
|
)
|
|||||
|
Loans
and leases, net
|
2,117,864
|
1,925,275
|
||||||||
|
Assets
under operating leases
|
-
|
40,644
|
||||||||
|
Premises,
furniture and equipment, net
|
8
|
108,567
|
92,769
|
|||||||
|
Other
real estate, net
|
1,575
|
1,586
|
||||||||
|
Goodwill
|
39,817
|
35,398
|
||||||||
|
Other
intangible assets, net
|
9
|
9,010
|
9,159
|
|||||||
|
Cash
surrender value on life insurance
|
33,371
|
32,804
|
||||||||
|
Other
assets
|
31,474
|
31,164
|
||||||||
|
TOTAL
ASSETS
|
$
|
3,058,242
|
$
|
2,818,332
|
||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
LIABILITIES:
|
||||||||||
|
Deposits:
|
10
|
|||||||||
|
Demand
|
$
|
371,465
|
$
|
352,707
|
||||||
|
Savings
|
822,915
|
754,360
|
||||||||
|
Time
|
1,117,277
|
1,011,111
|
||||||||
|
Total
deposits
|
2,311,657
|
2,118,178
|
||||||||
|
Short-term
borrowings
|
11
|
275,694
|
255,623
|
|||||||
|
Other
borrowings
|
12
|
224,523
|
220,871
|
|||||||
|
Accrued
expenses and other liabilities
|
36,657
|
35,848
|
||||||||
|
TOTAL
LIABILITIES
|
2,848,531
|
2,630,520
|
||||||||
|
STOCKHOLDERS’
EQUITY:
|
17,
18, 19
|
|||||||||
|
Preferred
stock (par value $1 per share; authorized, 184,000 shares, none
issued or
outstanding)
|
-
|
-
|
||||||||
|
Series
A Junior Participating preferred stock (par value $1 per share;
authorized, 16,000 shares, none issued or outstanding)
|
-
|
-
|
||||||||
|
Common
stock (par value $1 per share; authorized, 20,000,000 shares
at December
31, 2006 and at December 31, 2005; issued 16,572,080 shares at
December
31, 2006 and 16,547,482 at December 31, 2005)
|
16,572
|
16,547
|
||||||||
|
Capital
surplus
|
37,963
|
40,256
|
||||||||
|
Retained
earnings
|
154,308
|
135,112
|
||||||||
|
Accumulated
other comprehensive income (loss)
|
868
|
(1,011
|
)
|
|||||||
|
Treasury
stock at cost (0 shares at December 31, 2006 and 157,067 shares
at
December 31, 2005, respectively)
|
-
|
(3,092
|
)
|
|||||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
209,711
|
187,812
|
||||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
3,058,242
|
$
|
2,818,332
|
||||||
|
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
|
2006
|
2005
|
2004
|
|||||||||||
|
INTEREST
INCOME:
|
||||||||||||||
|
Interest
and fees on loans and leases
|
6
|
$
|
168,496
|
$
|
133,244
|
$
|
103,018
|
|||||||
|
Interest
on securities:
|
||||||||||||||
|
Taxable
|
17,593
|
13,896
|
13,400
|
|||||||||||
|
Nontaxable
|
5,783
|
5,512
|
4,574
|
|||||||||||
|
Interest
on federal funds sold
|
645
|
475
|
175
|
|||||||||||
|
Interest
on interest bearing deposits in other financial
institutions
|
22
|
277
|
227
|
|||||||||||
|
TOTAL
INTEREST INCOME
|
192,539
|
153,404
|
121,394
|
|||||||||||
|
INTEREST
EXPENSE:
|
||||||||||||||
|
Interest
on deposits
|
10
|
63,293
|
43,383
|
30,848
|
||||||||||
|
Interest
on short-term borrowings
|
11
|
9,866
|
5,373
|
2,414
|
||||||||||
|
Interest
on other borrowings
|
12
|
13,051
|
10,706
|
10,036
|
||||||||||
|
TOTAL
INTEREST EXPENSE
|
86,210
|
59,462
|
43,298
|
|||||||||||
|
NET
INTEREST INCOME
|
106,329
|
93,942
|
78,096
|
|||||||||||
|
Provision
for loan and lease losses
|
7
|
3,886
|
6,533
|
4,846
|
||||||||||
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES
|
102,443
|
87,409
|
73,250
|
|||||||||||
|
NONINTEREST
INCOME:
|
||||||||||||||
|
Service
charges and fees, net
|
11,199
|
9,323
|
8,666
|
|||||||||||
|
Loan
servicing income
|
4,279
|
3,093
|
2,585
|
|||||||||||
|
Trust
fees
|
7,258
|
6,530
|
4,968
|
|||||||||||
|
Brokerage
and insurance commissions
|
1,871
|
1,401
|
1,857
|
|||||||||||
|
Securities
gains, net
|
553
|
198
|
1,861
|
|||||||||||
|
Gain
(loss) on trading account securities
|
141
|
(11
|
)
|
54
|
||||||||||
|
Impairment
loss on equity securities
|
(76
|
)
|
-
|
-
|
||||||||||
|
Gains
on sale of loans
|
2,289
|
2,572
|
2,186
|
|||||||||||
|
Valuation
adjustment on mortgage servicing rights
|
-
|
39
|
92
|
|||||||||||
|
Income
on bank-owned life insurance
|
1,151
|
1,022
|
1,112
|
|||||||||||
|
Other
noninterest income
|
422
|
1,307
|
(176
|
)
|
||||||||||
|
TOTAL
NONINTEREST INCOME
|
29,087
|
25,474
|
23,205
|
|||||||||||
|
NONINTEREST
EXPENSES:
|
||||||||||||||
|
Salaries
and employee benefits
|
15
|
51,321
|
45,247
|
38,362
|
||||||||||
|
Occupancy
|
16
|
7,320
|
5,913
|
4,879
|
||||||||||
|
Furniture
and equipment
|
8
|
6,763
|
6,199
|
5,290
|
||||||||||
|
Outside
services
|
9,414
|
8,312
|
7,058
|
|||||||||||
|
Advertising
|
4,293
|
3,240
|
2,631
|
|||||||||||
|
Intangible
assets amortization
|
9
|
987
|
1,014
|
764
|
||||||||||
|
Other
noninterest expenses
|
14,423
|
10,845
|
9,868
|
|||||||||||
|
TOTAL
NONINTEREST EXPENSES
|
94,521
|
80,770
|
68,852
|
|||||||||||
|
INCOME
BEFORE INCOME TAXES
|
37,009
|
32,113
|
27,603
|
|||||||||||
|
Income
taxes
|
14
|
11,989
|
9,859
|
7,718
|
||||||||||
|
INCOME
FROM CONTINUING OPERATIONS
|
25,020
|
22,254
|
19,885
|
|||||||||||
|
Discontinued
operations:
|
3
|
|||||||||||||
|
Income
from operation of discontinued subsidiary
|
602
|
763
|
585
|
|||||||||||
|
Income
taxes
|
520
|
291
|
218
|
|||||||||||
|
INCOME
FROM DISCONTINUED OPERATIONS
|
82
|
472
|
367
|
|||||||||||
|
NET
INCOME
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
||||||||
|
EARNINGS
PER COMMON SHARE - BASIC
|
$
|
1.52
|
$
|
1.38
|
$
|
1.28
|
||||||||
|
EARNINGS
PER COMMON SHARE - DILUTED
|
$
|
1.50
|
$
|
1.36
|
$
|
1.26
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING OPERATIONS-BASIC
|
$
|
1.52
|
$
|
1.36
|
$
|
1.25
|
||||||||
|
EARNINGS
PER COMMON SHARE FROM CONTINUING
OPERATIONS-DILUTED
|
$
|
1.50
|
$
|
1.33
|
$
|
1.24
|
||||||||
|
CASH
DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.36
|
$
|
0.33
|
$
|
0.32
|
||||||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
||||||||||||||
| HEARTLAND FINANCIAL USA, INC. | |||||||||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOW | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) |
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||||||||||||||
|
Cash
Flows From Operating Activities:
|
|||||||||||||||||||||||||||||||||||||||
|
Net
income
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
|||||||||||||||||||||||||||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||||||||||||||||||||||||||||||
|
Depreciation
and amortization
|
8,283
|
7,311
|
5,894
|
||||||||||||||||||||||||||||||||||||
|
Provision
for loan and lease losses
|
3,886
|
6,533
|
4,846
|
||||||||||||||||||||||||||||||||||||
|
Provision
for deferred taxes
|
(7,895
|
)
|
(327
|
)
|
(781
|
)
|
|||||||||||||||||||||||||||||||||
|
Net
amortization of premium on securities
|
868
|
2,950
|
3,211
|
||||||||||||||||||||||||||||||||||||
|
Securities
gains, net
|
(553
|
)
|
(198
|
)
|
(1,861
|
) | |||||||||||||||||||||||||||||||||
|
(Increase)
decrease in trading account securities
|
(1,053
|
)
|
6
|
552
|
|||||||||||||||||||||||||||||||||||
|
Loss
on impairment of equity securities
|
76
|
-
|
-
|
||||||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
925
|
-
|
-
|
||||||||||||||||||||||||||||||||||||
|
Loans
originated for sale
|
(311,068
|
)
|
(273,750
|
)
|
(243,992
|
) | |||||||||||||||||||||||||||||||||
|
Proceeds
on sales of loans
|
303,721
|
267,738
|
239,695
|
||||||||||||||||||||||||||||||||||||
|
Net
gain on sales of loans
|
(2,289
|
)
|
(2,572
|
)
|
(2,186
|
)
|
|||||||||||||||||||||||||||||||||
|
Increase
in accrued interest receivable
|
(5,245
|
)
|
(2,507
|
)
|
(716
|
) | |||||||||||||||||||||||||||||||||
|
Increase
in accrued interest payable
|
3,730
|
1,474
|
1,172
|
||||||||||||||||||||||||||||||||||||
|
Other,
net
|
(320
|
)
|
(7,176
|
)
|
2,369
|
||||||||||||||||||||||||||||||||||
|
Net
cash provided by operating activities from continuing
operations
|
18,168
|
22,208
|
28,455
|
||||||||||||||||||||||||||||||||||||
|
Net
cash provided by operating activities from discontinued
operations
|
11,884
|
12,740
|
11,468
|
||||||||||||||||||||||||||||||||||||
|
Net
cash provided by operating activities
|
30,052
|
34,948
|
39,923
|
||||||||||||||||||||||||||||||||||||
|
Cash
Flows From Investing Activities:
|
|||||||||||||||||||||||||||||||||||||||
|
Proceeds
on maturities of time deposits
|
-
|
1,178
|
-
|
||||||||||||||||||||||||||||||||||||
|
Proceeds
from the sale of securities available for sale
|
22,498
|
25,662
|
116,069
|
||||||||||||||||||||||||||||||||||||
|
Proceeds
from the maturity of and principal paydowns on securities available
for
sale
|
84,055
|
130,524
|
92,399
|
||||||||||||||||||||||||||||||||||||
|
Purchase
of securities available for sale
|
(182,954
|
)
|
(139,797
|
)
|
(265,197
|
) | |||||||||||||||||||||||||||||||||
|
Purchase
of securities held to maturity
|
(1,522
|
)
|
-
|
-
|
|||||||||||||||||||||||||||||||||||
|
Net
increase in loans and leases
|
(153,736
|
)
|
(175,800
|
)
|
(173,103
|
) | |||||||||||||||||||||||||||||||||
|
Capital
expenditures
|
(22,624
|
)
|
(19,726
|
)
|
(18,883
|
) | |||||||||||||||||||||||||||||||||
|
Net
cash and cash equivalents received in acquisition of subsidiaries,
net of
cash paid
|
(15,015
|
)
|
-
|
2,174
|
|||||||||||||||||||||||||||||||||||
|
Net
cash and cash equivalents received from sale of discontinued
operation
|
9,194
|
-
|
-
|
||||||||||||||||||||||||||||||||||||
|
Net
cash and cash equivalents paid in acquisition of trust
assets
|
-
|
-
|
(2,125
|
) | |||||||||||||||||||||||||||||||||||
|
Proceeds
on sale of OREO and other repossessed assets
|
2,060
|
2,141
|
570
|
||||||||||||||||||||||||||||||||||||
|
Net
cash used by investing activities from continuing
operations
|
(258,044
|
)
|
(175,818
|
)
|
(248,096
|
) | |||||||||||||||||||||||||||||||||
|
Net
cash provided (used) by discontinued operations
|
36,525
|
(25,825
|
)
|
(14,912
|
) | ||||||||||||||||||||||||||||||||||
|
Net
cash used by investing activities
|
(221,519
|
)
|
(201,643
|
)
|
(263,008
|
) | |||||||||||||||||||||||||||||||||
|
Cash
Flows From Financing Activities:
|
|||||||||||||||||||||||||||||||||||||||
|
Net
increase in demand deposits and savings accounts
|
52,914
|
33,183
|
110,840
|
||||||||||||||||||||||||||||||||||||
|
Net
increase in time deposit accounts
|
96,112
|
101,149
|
94,521
|
||||||||||||||||||||||||||||||||||||
|
Net
increase in short-term borrowings
|
54,164
|
5,648
|
28,522
|
||||||||||||||||||||||||||||||||||||
|
Proceeds
from other borrowings
|
74,827
|
59,974
|
47,993
|
||||||||||||||||||||||||||||||||||||
|
Repayments
of other borrowings
|
(69,945
|
)
|
(31,931
|
)
|
(48,617
|
) | |||||||||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(4,022
|
)
|
(5,784
|
)
|
(5,254
|
) | |||||||||||||||||||||||||||||||||
|
Proceeds
from issuance of common stock
|
1,516
|
2,007
|
1,814
|
||||||||||||||||||||||||||||||||||||
|
Excess
tax benefits on exercised stock options
|
559
|
-
|
-
|
||||||||||||||||||||||||||||||||||||
|
Dividends
paid
|
(5,906
|
)
|
(5,414
|
)
|
(5,036
|
) | |||||||||||||||||||||||||||||||||
|
Net
cash provided by financing activities from continuing
operations
|
200,219
|
158,832
|
224,783
|
||||||||||||||||||||||||||||||||||||
|
Net
cash provided (used) by financing activities from discontinued
operations
|
(40,630
|
)
|
15,135
|
182
|
|||||||||||||||||||||||||||||||||||
|
Net
cash provided by financing activities
|
159,589
|
173,967
|
224,965
|
||||||||||||||||||||||||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(31,878
|
)
|
7,272
|
1,880
|
|||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
81,021
|
73,749
|
71,869
|
||||||||||||||||||||||||||||||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$
|
49,143
|
$
|
81,021
|
$
|
73,749
|
|||||||||||||||||||||||||||||||||
|
Supplemental
disclosure:
|
|||||||||||||||||||||||||||||||||||||||
|
Cash
paid for income/franchise taxes
|
$
|
10,921
|
$
|
11,298
|
$
|
2,263
|
|||||||||||||||||||||||||||||||||
|
Cash
paid for interest
|
$
|
82,480
|
$
|
59,661
|
$
|
40,336
|
|||||||||||||||||||||||||||||||||
|
Acquisitions:
|
|||||||||||||||||||||||||||||||||||||||
|
Net
assets acquired
|
$
|
13,061
|
$
|
--
|
$
|
19,961
|
|||||||||||||||||||||||||||||||||
|
Cash
paid for purchase of stock
|
$
|
18,081
|
$
|
-
|
|
|
$
|
10,416
|
|||||||||||||||||||||||||||||||
|
Cash
acquired
|
$
|
3,066
|
$
|
-
|
|
|
$
|
12,590
|
|||||||||||||||||||||||||||||||
|
Net
cash received (paid) for acquisition
|
$
|
(15,015
|
)
|
$
|
-
|
|
|
$
|
2,174
|
||||||||||||||||||||||||||||||
|
Common
stock issued for acquisition
|
$
|
-
|
$
|
-
|
|
|
$
|
24,082
|
|||||||||||||||||||||||||||||||
|
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)
|
||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Capital
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Treasury
Stock
|
Total
|
|||||||||||||||||||||||||||||||||
|
Balance
at January 1, 2004
|
$
|
15,262
|
$
|
20,065
|
$
|
102,584
|
$
|
4,794
|
$
|
(1,782
|
)
|
$
|
140,923
|
|||||||||||||||||||||||||
|
Net
Income
|
20,252
|
20,252
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
(2,035
|
)
|
(2,035
|
)
|
||||||||||||||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(1,861
|
)
|
(1,861
|
)
|
||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period net of realized
losses of $773
|
853
|
853
|
||||||||||||||||||||||||||||||||||||
|
Income
taxes
|
1,138
|
1,138
|
||||||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
18,347
|
|||||||||||||||||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||||||||||||||||
|
Common,
$.32 per share
|
(5,036
|
)
|
(5,036
|
)
|
||||||||||||||||||||||||||||||||||
|
Purchase
of 290,994 shares of common stock
|
(5,254
|
)
|
(5,254
|
)
|
||||||||||||||||||||||||||||||||||
|
Issuance
of 1,568,549 shares of common stock
|
1,285
|
20,381
|
5,136
|
26,802
|
||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2004
|
$
|
16,547
|
$
|
40,446
|
$
|
117,800
|
$
|
2,889
|
$
|
(1,900
|
)
|
$
|
175,782
|
|||||||||||||||||||||||||
|
Net
Income
|
22,726
|
22,726
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
(6,374
|
)
|
(6,374
|
)
|
||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period net of realized
losses of $289
|
337
|
337
|
||||||||||||||||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(198
|
)
|
(198
|
)
|
||||||||||||||||||||||||||||||||||
|
Income
taxes
|
2,335
|
2,335
|
||||||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
18,826
|
|||||||||||||||||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||||||||||||||||
|
Common,
$.33 per share
|
(5,414
|
)
|
(5,414
|
)
|
||||||||||||||||||||||||||||||||||
|
Purchase
of 290,651 shares of common stock
|
(5,784
|
)
|
(5,784
|
)
|
||||||||||||||||||||||||||||||||||
|
Issuance
of 240,009 shares of common stock
|
(683
|
)
|
4,592
|
3,909
|
||||||||||||||||||||||||||||||||||
|
Commitments
to issue common stock
|
493
|
493
|
||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
$
|
16,547
|
$
|
40,256
|
$
|
135,112
|
$
|
(1,011
|
)
|
$
|
(3,092
|
)
|
$
|
187,812
|
||||||||||||||||||||||||
|
Net
Income
|
25,102
|
25,102
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on securities available for sale
|
3,382
|
3,382
|
||||||||||||||||||||||||||||||||||||
|
Unrealized
gain (loss) on derivatives arising during the period, net of
realized
losses of $118
|
104
|
104
|
||||||||||||||||||||||||||||||||||||
|
Reclassification
adjustment for net security gains realized in net income
|
(477
|
)
|
(477
|
)
|
||||||||||||||||||||||||||||||||||
|
Income
taxes
|
(1,130
|
)
|
(1,130
|
)
|
||||||||||||||||||||||||||||||||||
|
Comprehensive
income
|
26,981
|
|||||||||||||||||||||||||||||||||||||
|
Cash
dividends declared:
|
||||||||||||||||||||||||||||||||||||||
|
Common,
$.36 per share
|
(5,906
|
)
|
(5,906
|
)
|
||||||||||||||||||||||||||||||||||
|
Purchase
of 166,259 shares of common stock
|
(4,022
|
)
|
(4,022
|
)
|
||||||||||||||||||||||||||||||||||
|
Issuance
of 347,924 shares of common stock
|
25
|
(3,218
|
)
|
7,114
|
3,921
|
|||||||||||||||||||||||||||||||||
|
Commitments
to issue common stock
|
925
|
925
|
||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
$
|
16,572
|
$
|
37,963
|
$
|
154,308
|
$
|
868
|
$
|
-
|
$
|
209,711
|
||||||||||||||||||||||||||
|
See
accompanying Notes to Consolidated Financial
Statements.
|
||||||||||||||||||||||||||||||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
ONE
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations -
Heartland
Financial USA, Inc. ("Heartland") is a multi-bank holding company primarily
operating full-service retail banking offices serving communities in and
around
Dubuque and Lee Counties in Iowa; Jo Daviess, Hancock and Winnebago Counties
in
Illinois; Dane, Green, Sheboygan and Brown Counties in Wisconsin; Bernalillo,
Curry and Santa Fe Counties in New Mexico; Maricopa County in Arizona;
Flathead,
Gallatin, Jefferson, Powder River, Ravalli, Sanders, Sheridan and Yellowstone
Counties in Montana; and Broomfield County in Colorado. The principal services
of Heartland, through its subsidiaries, are FDIC-insured deposit accounts
and
related services, and loans to businesses and individuals. The loans consist
primarily of commercial and commercial real estate, agricultural and
agricultural real estate and residential real estate.
Principles
of Presentation
- The
consolidated financial statements include the accounts of Heartland and
its
subsidiaries: Dubuque Bank and Trust Company; Galena State Bank and Trust
Company; First Community Bank; Riverside Community Bank; Wisconsin Community
Bank; New Mexico Bank & Trust; Arizona Bank & Trust; Rocky Mountain
Bank; Summit Acquisition Corporation, the one-bank holding company which
owns
Summit Bank & Trust; Citizens Finance Co.; DB&T Insurance, Inc.;
DB&T Community Development Corp.; Heartland Community Development, Inc.;
Heartland Financial Capital Trust II; Heartland Financial Statutory Trust
II;
Heartland Financial Statutory Trust III; Heartland Financial Statutory
Trust IV;
Heartland Financial Statutory Trust V; and Rocky Mountain Statutory Trust
I. All
of Heartland’s subsidiaries are wholly-owned except for Arizona Bank &
Trust, of which Heartland was a 91% owner on December 31, 2006 and Summit
Acquisition Corporation, of which Heartland was an 81% owner on December
31,
2006. Summit Acquisition Corporation owned 99% of Summit Bank & Trust as of
December 31, 2006. All significant intercompany balances and transactions
have
been eliminated in consolidation. The minority interest in the majority-owned
subsidiaries is immaterial and included in other liabilities on the consolidated
balance sheets and in other noninterest income on the consolidated statements
of
income. Heartland’s fleet leasing subsidiary ULTEA, Inc. was sold in 2006, and
the consolidated statements of income include the results of ULTEA, Inc.
as
discontinued operations for all periods presented.
The
operations of HTLF Capital Corp., Heartland’s investment banking firm
specializing in municipal financing, were closed in the third quarter of
2006.
The
consolidated financial statements have been prepared in accordance with
U.S.
generally accepted accounting principles and prevailing practices within
the
banking industry. In preparing such financial statements, management is
required
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities as of the
date
of the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates. A material estimate that
is
particularly susceptible to significant change relates to the determination
of
the allowance for loan and lease losses.
Heartland
and its subsidiaries operate primarily in one segment, banking, which
constitutes most of its consolidated results of operations and assets.
Accordingly, the results of operations and assets for separate business
segments
are not presented.
Cash
and Cash Equivalents -
For
purposes of reporting cash flows, cash and cash equivalents include cash
on
hand, amounts due from banks, federal funds sold and other short-term
investments. Generally, federal funds are purchased and sold for one-day
periods.
Trading
Securities
-
Trading securities represent those securities Heartland intends to actively
trade and are stated at fair value with changes in fair value reflected
in
noninterest income.
Securities
Available for Sale
-
Available for sale securities consist of those securities not classified
as held
to maturity or trading, which management intends to hold for indefinite
periods
of time or that may be sold in response to changes in interest rates,
prepayments or other similar factors. Such securities are stated at fair
value
with any unrealized gain or loss, net of applicable income tax, reported
as a
separate component of stockholders’ equity. Security premiums and discounts are
amortized/accreted using the interest method over the period from the purchase
date to the expected maturity or call date of the related security. Gains
or
losses from the sale of available for sale securities are determined based
upon
the adjusted cost of the specific security sold. Unrealized losses determined
to
be other than temporary are charged to operations.
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
operations.
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. The policy of Heartland is to discontinue the accrual of interest
income on any loan or lease when, in the opinion of management, there is
a
reasonable doubt as to the timely collection of the interest and principal,
normally when a loan is 90 days past due. When interest accruals are deemed
uncollectible, interest credited to income in the current year is reversed
and
interest accrued in prior years is charged to the allowance for loan and
lease
losses. Nonaccrual loans and leases are returned to an accrual status when,
in
the opinion of management, the financial position of the borrower indicates
that
there is no longer any reasonable doubt as to the timely payment of interest and
principal.
Under
Heartland’s credit policies, all nonaccrual and restructured loans are defined
as impaired loans. Loan impairment is measured based on the present value
of
expected future cash flows discounted at the loan’s effective interest rate,
except where more practical, at the observable market price of the loan
or the
fair value of the collateral if the loan is collateral dependent.
Net
nonrefundable loan and lease origination fees and certain direct costs
associated with the lending process are deferred and recognized as a yield
adjustment over the life of the related loan or lease.
Loans
Held for Sale -
Loans
held for sale are stated at the lower of cost or market on an aggregate
basis.
Gains or losses on sales are recorded in noninterest income. Direct loan
origination costs and fees are deferred at origination of the loan. These
deferred costs and fees are recognized in noninterest income as part of
the gain
or loss on sales of loans upon sale of the loan.
Mortgage
Servicing and Transfers of Financial Assets
-
Heartland regularly sells residential mortgage loans to others on a non-recourse
basis. Sold loans are not included in the accompanying consolidated financial
statements. Heartland generally retains the right to service the sold loans
for
a fee. At December 31, 2006 and 2005, Heartland was servicing loans for
others
with aggregate unpaid principal balances of $602.7
million and $582.7 million, respectively.
Allowance
for Loan and Lease Losses -
The
allowance for loan and lease losses is maintained at a level estimated
by
management to provide for known and inherent risks in the loan and lease
portfolios. The allowance is based upon a continuing review of past loan
and
lease loss experience, current economic conditions, volume growth, the
underlying collateral value of the loans and leases and other relevant
factors.
Loans and leases which are deemed uncollectible are charged off and deducted
from the allowance. Provisions for loan and lease losses and recoveries
on
previously charged-off loans and leases are added to the allowance.
Reserve
for Unfunded Commitments—This
reserve is maintained at a level that, in the opinion of management, is
adequate
to absorb probable losses associated with Heartland’s commitment to lend funds
under existing agreements such as letters or lines of credit. Management
determines the adequacy of the reserve for unfunded commitments based upon
reviews of individual credit facilities, current economic conditions, the
risk
characteristics of the various categories of commitments and other relevant
factors. The reserve is based on estimates, and ultimate losses may vary
from
the current estimates. These estimates are evaluated on a regular basis
and, as
adjustments become necessary, they are reported in earnings in the periods
in
which they become known. Draws on unfunded commitments that are considered
uncollectible at the time funds are advanced are charged to the allowance.
Provisions for unfunded commitment losses, and recoveries on loans previously
charged off, are added to the reserve for unfunded commitments, which is
included in the Other Liabilities section of the consolidated balance sheets.
Prior
to
June 30, 2005, the reserve for unfunded commitments was included in the
allowance for loan losses. During the second quarter of 2005, approximately
$319
thousand of the allowance was reclassified to establish the reserve for
unfunded
commitments. Prior to January 1, 2005, there was not any specific component
of the allowance for loan losses ascribed to unfunded commitments, therefore
this reclassification was not applied to periods prior to 2005.
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.
Assets
under Operating Leases
- Assets
under operating leases, generally automobiles, were provided through ULTEA,
Inc.
These assets were stated at cost less accumulated depreciation. The provision
for depreciation of assets under operating leases was recorded on a
straight-line basis over the life of the lease taking into account the
estimated
residual value. These leases were cancelable any time after the first twelve
months. Rental income on these operating leases was recognized on a
straight-line basis with a reset every twelve months. At December 31, 2005,
gross balances of assets under operating leases were $61.9 million and
accumulated depreciation on these assets was $21.3 million. Additional
information about the discontinued operations of ULTEA, Inc. is included
in
footnote three.
Intangible
Assets
-
Intangible assets consist of goodwill, core deposit premiums, customer
relationship intangibles and mortgage servicing rights. Goodwill represents
the
excess of the purchase price of acquired subsidiaries’ net assets over their
fair value. Heartland assesses goodwill for impairment annually, and more
frequently in the presence of certain circumstances. Impairment exists
when the
carrying amount of the goodwill exceeds its implied fair value. No impairment
was recorded for the years ended December 31, 2006, 2005 or 2004.
Core
deposit premiums are amortized over eight to ten years on an accelerated
basis.
Customer relationship intangibles are amortized over 22 years on an accelerated
basis. Periodically, Heartland reviews the intangible assets for events
or
circumstances that may indicate a change in the recoverability of the underlying
basis, except mortgage servicing rights which are reviewed
quarterly.
Mortgage
servicing rights associated with loans originated and sold, where servicing
is
retained, are capitalized. The values of these capitalized servicing rights
are
amortized in relation to the servicing revenue expected to be earned. The
carrying values of these rights are reviewed quarterly for impairment based
on
the calculation of their fair value as performed by an outside third party.
For
purposes of measuring impairment, the rights are stratified into certain
risk
characteristics including loan type, note rate, prepayment trends and external
market factors. No valuation allowance was required as of December 31,
2006 and
2005.
Bank-Owned
Life Insurance
-
Heartland and its subsidiaries have purchased life insurance policies on
the
life of certain officers. The one-time premiums paid for the policies,
which
coincide with the initial cash surrender value, are recorded as an asset.
Increases or decreases in the cash surrender value, other than proceeds
from
death benefits, are recorded as noninterest income. Proceeds from death
benefits
first reduce the cash surrender value attributable to the individual policy
and
then any additional proceeds are recorded as noninterest income.
Income
Taxes -
Heartland
and its subsidiaries file a consolidated federal income tax return. Heartland
and its subsidiaries file 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 pay a tax liability to, or receive 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. 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. Under Statement of Financial
Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended and interpreted, derivatives used to hedge the exposure to variability
in expected future cash flows can be designated as cash flow hedges provided
that certain documentation requirements are met at the inception of the
hedge,
and that the derivative financial instrument is highly effective in offsetting
cash flows with the hedged item.
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 earnings 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 earnings. Heartland
assesses the effectiveness of each hedging relationship by comparing the
changes
in cash flows of the derivative hedging instrument with the changes in
cash
flows of the designated hedged item or transaction.
Heartland
had no fair value hedging relationships at December 31, 2006 or 2005.
Derivatives not qualifying for hedge accounting, classified as free-standing
derivatives, have all changes in the fair value recorded on the income
statement
through noninterest income.
Heartland
does not use derivatives for trading or speculative purposes. Derivatives
not
designated as hedges are not speculative and are used to manage Heartland’s
exposure to interest rate movements and other identified risks, but do
not meet
the strict hedge accounting requirements of Statement 133.
Treasury
Stock -
Treasury
stock is accounted for by the cost method, whereby shares of common stock
reacquired are recorded at their purchase price. When treasury stock is
reissued, any difference between the sales proceeds, or fair value when
issued
for business combinations, and the cost is recognized as a charge or credit
to
capital surplus.
Trust
Department Assets -
Property
held for customers in fiduciary or agency capacities is not included in
the
accompanying consolidated balance sheets, as such items are not assets
of the
Heartland banks.
Earnings
Per Share
-
Amounts used in the determination of basic and diluted earnings per share
for
the years ended December 31, 2006, 2005 and 2004 are shown in the table
below:
|
(Dollars
and number of shares in thousands)
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Income
from continuing operations
|
$
|
25,020
|
$
|
22,254
|
$
|
19,885
|
|||
|
Discontinued
operations
|
|||||||||
|
Income
from operations of discontinued subsidiary
|
602
|
763
|
585
|
||||||
|
Income
taxes
|
520
|
291
|
218
|
||||||
|
Income
from discontinued operations
|
82
|
472
|
367
|
||||||
|
Net
income
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
|||
|
Weighted
average common shares outstanding for basic earnings per share
1
|
16,508
|
16,415
|
15,869
|
||||||
|
Assumed
incremental common shares issued upon exercise of stock options
1
|
227
|
287
|
216
|
||||||
|
Weighted
average common shares for diluted earnings per share
1
|
16,735
|
16,702
|
16,085
|
||||||
|
Earnings
per common share-basic
|
$
|
1.52
|
$
|
1.38
|
$
|
1.28
|
|||
|
Earnings
per common share-diluted
|
1.50
|
1.36
|
1.26
|
||||||
|
Earnings
per share from continuing operations-basic
|
1.52
|
1.36
|
1.25
|
||||||
|
Earnings
per share from continuing operations-diluted
|
1.50
|
1.33
|
1.24
|
||||||
|
1
|
In
thousands.
|
Stock-Based
Compensation
-
Effective January 1, 2006, Heartland adopted the provisions of Statement
of
Financial Accounting Standards No. 123 (revised 2004) (“FAS 123R”), Share-Based
Payment,
using
the “modified prospective” transition method. FAS 123R requires the measurement
of the cost of employee services received in exchange for an award of equity
instruments based upon the fair value of the award on the grant date. The
cost
of the award is recognized in the income statement over the vesting period
of
the award. Under the “modified prospective” transition method, awards that are
granted, modified or settled beginning at the date of adoption are measured
and
accounted for in accordance with FAS 123R. In addition, expense must be
recognized in the income statement for unvested awards that were granted
prior
to the date of adoption. The expense is based on the fair value determined
at
the grant date. The impact of the adoption of FAS 123R on Heartland’s
consolidated financial statements for the year ending December 31, 2006,
was a
reduction in net income of $351 thousand or diluted earnings per share
of $0.02.
Additional information is provided in footnote 17.
Prior
to
January 1, 2006, Heartland applied APB Opinion No. 25 in accounting for
its
stock options and, accordingly, no compensation cost for its stock options
was
recognized in the financial statements prior to 2006. Had Heartland determined
compensation cost based on the fair value at the grant date for its stock
options under FAS No. 123, Heartland’s net income would have been reduced to the
pro forma amounts indicated below:
|
(Dollars
in thousands, except earnings per share data)
|
||||||
|
2005
|
2004
|
|||||
|
Net
income as reported
|
$
|
22,726
|
$
|
20,252
|
||
|
Additional
compensation expense
|
210
|
200
|
||||
|
Pro
forma
|
$
|
22,516
|
$
|
20,052
|
||
|
Earnings
per share-basic as reported
|
$
|
1.38
|
$
|
1.28
|
||
|
Pro
forma
|
1.37
|
1.26
|
||||
|
Earnings
per share-diluted as reported
|
1.36
|
1.26
|
||||
|
Pro
forma
|
1.35
|
1.25
|
||||
Pro
forma
net income only reflects options granted in the years from 1996 through
2005.
Therefore, the full impact of calculating compensation cost for stock options
under FAS 123 is not reflected in the pro forma net income amounts presented
above because compensation is reflected over the options’ vesting period, and
compensation cost for options granted prior to January 1, 1996, was not
considered.
Effect
of New Financial Accounting Standards -
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections
(“FAS
154”), replacing APB Opinion No. 20, Accounting
for Changes,
and
Statement of Financial Accounting Standards No. 3, Reporting
Accounting Changes in Interim Financial Statements.
Unless
specified in an accounting standard, FAS 154 requires retrospective application
to prior periods’ financial statements for changes in accounting principle and
correction of errors. APB Opinion No. 20 previously provided that most
changes
in accounting principle be recognized by including in net income the cumulative
effect of changing to the new principle in the period of adoption. FAS
154 is
effective for fiscal years beginning after December 15, 2005. Heartland’s
adoption of FAS 154 on January 1, 2006, did not have a material effect
on the
consolidated financial statements.
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155, Accounting
for Certain Hybrid Financial Instruments (“FAS
155”), an amendment to Statement of Financial Accounting Standards No. 133
and
140. FAS 155 provides the framework for fair value remeasurement of any
hybrid
financial instrument that contains an embedded derivative that otherwise
would
require bifurcation. It also clarifies which interest-only strips and
principal-only strips are not subject to the requirements of FAS 133 and
establishes a requirement to evaluate interests in securitized financial
assets
to identify interests that contain an embedded derivative requiring bifurcation.
FAS 155 is effective for all financial instruments acquired or issued after
the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted as of the beginning of an entity’s fiscal year,
provided the entity has not yet issued financial statements, including
financial
statements for any interim period for that fiscal year. Heartland adopted
the
provisions of FAS 155 on January 1, 2007, and the adoption did not have
a
material impact on its consolidated financial statements.
In
March
2006, the FASB issued Statement of Financial Accounting Standards No. 156
(“FAS
156”), Accounting
for Servicing of Financial Assets,
an
amendment of FASB Statement No. 140 (“FAS 140”), Accounting
for Transfers and Extinguishments of Liabilities.
FAS 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits
the
entity to elect either the fair value measurement method with changes in
fair
value reflected in earnings or the amortization method as defined in FAS
140 for
subsequent measurements. The subsequent measurement of separately recognized
servicing assets and servicing liabilities at fair value eliminates the
necessity for entities that manage the risks inherent in servicing assets
and
servicing liabilities with derivatives to qualify for hedge accounting
treatment
and eliminates the characterization of declines in fair value as impairments
or
direct write-downs. FAS 156 is effective as of the beginning of an entity’s
first fiscal year that begins after September 15, 2006. Earlier adoption
is
permitted as of the beginning of an entity’s fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements
for any period of that fiscal year. Heartland adopted FAS 156 on January
1,
2007, and the adoption of this statement did not have a material impact
on its
consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN
48”), which is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes.
This
interpretation prescribes the minimum recognition threshold a tax position
must
meet before being recognized in the financial statements. FIN 48 also provides
guidance on the derecognition, measurement, classification, interest and
penalties, accounting in interim periods and disclosure requirements for
uncertain tax positions. FIN 48 is effective as of the beginning of an
entity’s
first fiscal year that begins after December 15, 2006. Differences between
the
amounts recognized in the statements of financial position prior to the
adoption
of FIN 48 and the amounts reported after adoption should be accounted for
as a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. The cumulative effect adjustment would not apply to those items
that
would not have been recognized in earnings, such as the effect of adopting
FIN
48 on tax positions related to business combinations. Heartland adopted
FIN 48
on January 1, 2007, and the adoption did not have a material impact on
its
consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (“FAS 157”), Fair
Value Measurements,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about
fair
value measurements. The provisions of FAS 157 apply to other accounting
pronouncements that require or permit fair value measurements. FAS 157
is
effective for all financial statements issued for fiscal years beginning
after
November 15, 2007, and interim periods within those fiscal years. Earlier
adoption is permitted provided the entity has not yet issued financial
statements, including financial statements for any interim period for that
fiscal year. Heartland is evaluating if it will choose to early adopt FAS
157
and is assessing the impact of the adoption of this statement on its
consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”),
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements,
which
expresses the SEC’s views regarding the process of quantifying misstatements in
financial statements. The effects of prior year uncorrected errors include
the
potential accumulation of improper amounts that may result in a material
misstatement on the balance sheet or the reversal of prior period errors
in the
current period that result in material misstatement of the current period
income
statement amounts. Adjustments to current or prior period financial statements
would be required in the event that, after application of various approaches
for
assessing materiality of a misstatement in current period financial statements
and consideration of all relevant quantitative and qualitative factors,
a
misstatement is determined to be material. SAB 108 is applicable to all
financial statements issued after November 15, 2006. The adoption of SAB
108 did
not have an impact on its consolidated financial statements.
In
September 2006, the Emerging Issues Task Force Issue 06-4 (“EITF 06-4”),
Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements,
was
ratified. EITF 06-4 addresses accounting for separate agreements which
split
life insurance policy benefits between an employer and employee and requires
the
employer to recognize a liability for future benefits payable to the employee
under these agreements. The effects of applying EITF 06-4 must be recognized
through either a change in accounting principle through an adjustment to
equity
or through the retrospective application to all prior periods. For calendar
year
companies, EITF 06-4 is effective beginning January 1, 2008. Heartland
is
assessing the impact of the adoption of this issue on its consolidated
financial
statements.
In
September 2006, the Emerging Issues Task Force Issue 06-5 (“EITF 06-5”),
Accounting
for Purchases of Life Insurance - Determining the Amount That Could Be
Realized
in Accordance with FASB Technical Bulleting No. 85-4,
was
ratified. EITF 06-5 requires that a policyholder should consider any additional
amounts included in the contractual terms of the policy in determining
the
amount that could be realized under the insurance contract on a policy
by policy
basis. EITF 06-5 is effective for fiscal years beginning after December
15,
2006, and requires that recognition of the effects of adoption should be
by a
change in accounting principle through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption or a change
in
accounting principle through retrospective application to all prior periods.
Heartland is assessing the impact of the adoption of this issue on its
consolidated financial statements.
Reclassifications
-
Certain reclassifications have been made to prior periods’ consolidated
financial statements to present them on a basis comparable with the current
period’s consolidated financial statements.
TWO
ACQUISITIONS
Heartland
regularly explores opportunities for acquisitions of financial institutions
and
related businesses. Generally, management does not make a public announcement
about an acquisition opportunity until a definitive agreement has been
signed.
On
January 12, 2006, Heartland announced the signing of a definitive agreement
to
acquire Bank of the Southwest, a financial institution with offices in
Phoenix
and Tempe, Arizona. On May 15, 2006, Heartland’s acquisition of Bank of the
Southwest was completed. Immediately upon completion, the acquired entity
became
a part of Arizona Bank & Trust, Heartland’s de
novo
bank
chartered in 2003. As of the acquisition date, total assets at Bank of
the
Southwest were $63.2 million, total loans were $52.4 million and total
deposits
were $44.4 million. The purchase price was $18.1 million, all in cash.
The
resultant acquired core deposit intangible of $540 thousand, as determined
by an
independent third party consultant, is being amortized over a period of
eight
years. The remaining excess purchase price over the fair value of tangible
and
identifiable intangible assets acquired of $5.1 million was recorded as
goodwill. The results of operations of Bank of the Southwest are included
in the
consolidated financial statements from the date of acquisition. As a result
of
the Bank of the Southwest acquisition, Heartland’s ownership percentage in
Arizona Bank & Trust increased from 86% to 91%. Additional information on
Heartland’s required repurchase of the Arizona Bank & Trust stock held by
minority shareholders is included in footnote 12.
In
April
of 2006, Heartland entered into an agreement with a group of Colorado business
leaders to establish a new bank in Broomfield, Colorado. Summit Bank & Trust
opened on November 1, 2006, and Heartland funded its $12.0 million initial
investment through use of its revolving credit line.
Additional information on Heartland’s required repurchase of the Summit Bank
& Trust stock held by minority shareholders is included in footnote 12.
THREE
DISCONTINUED
OPERATIONS
On
October 24, 2006, Heartland announced its intention to sell its fleet leasing
subsidiary, ULTEA, Inc., to ALD International Group Holdings GmbH, a wholly
owned subsidiary of Société Générale Group, in order to focus efforts on its
core banking and consumer finance businesses. On December 22, 2006, Heartland
completed the sale transaction. Total assets of ULTEA at closing were $50.3
million. Under the terms of the agreement, Heartland received proceeds
of $9.2
million and assumed the deferred tax liability of $5.4 million related
to ULTEA.
Heartland recorded a pre-tax gain of $20 thousand that is included in the
line
item “income from discontinued operations” on the consolidated statements of
income. ULTEA’s results of operations for all prior periods presented are also
reflected in this line item.
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, 2006 and 2005 were $5.2 and $5.5 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, 2006 and 2005 are summarized
as
follows:
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2006
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
299,671
|
$
|
1,010
|
$
|
(3,858
|
)
|
$
|
296,823
|
|||||||
|
Mortgage-backed
securities
|
135,008
|
551
|
(1,502
|
)
|
134,057
|
|||||||||||
|
Obligations
of states and political subdivisions
|
130,671
|
5,247
|
(237
|
)
|
135,681
|
|||||||||||
|
Corporate
debt securities
|
22,076
|
4
|
-
|
22,080
|
||||||||||||
|
Total
debt securities
|
587,426
|
6,812
|
(5,597
|
)
|
588,641
|
|||||||||||
|
Equity
securities
|
25,014
|
402
|
(107
|
)
|
25,309
|
|||||||||||
|
Total
|
$
|
612,440
|
$
|
7,214
|
$
|
(5,704
|
)
|
$
|
613,950
|
|||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|||||||||||||
|
2005
|
||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
239,486
|
$
|
-
|
$
|
(5,465
|
)
|
$
|
234,021
|
|||||||
|
Mortgage-backed
securities
|
131,809
|
134
|
(1,609
|
)
|
130,334
|
|||||||||||
|
Obligations
of states and political subdivisions
|
127,576
|
5,784
|
(402
|
)
|
132,958
|
|||||||||||
|
Corporate
debt securities
|
2,159
|
-
|
(27
|
)
|
2,132
|
|||||||||||
|
Total
debt securities
|
501,030
|
5,918
|
(7,503
|
)
|
499,445
|
|||||||||||
|
Equity
securities
|
27,617
|
371
|
(181
|
)
|
27,807
|
|||||||||||
|
Total
|
$
|
528,647
|
$
|
6,289
|
$
|
(7,684
|
)
|
$
|
527,252
|
|||||||
The
amortized cost, gross unrealized gains and losses and estimated fair values
of
held to maturity securities as of December 31, 2006 are summarized as
follows:
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
||||||||||||||
|
2006
|
|||||||||||||||||
|
Securities
held to maturity:
|
|||||||||||||||||
|
Obligations
of states and political subdivisions
|
$
|
1,522
|
$
|
4
|
$
|
(13
|
)
|
$
|
1,513
|
||||||||
|
Total
|
$
|
1,522
|
$
|
4
|
$
|
(13
|
)
|
$
|
1,513
|
||||||||
All
of
our U.S. government corporations and agencies securities and a majority
of our
mortgage-backed securities are issuances of government-sponsored
enterprises.
Included
in the equity securities at December 31, 2006 and 2005, were shares of
stock in
the Federal Home Loan Banks of Des Moines, Chicago, Dallas, San Francisco
and
Seattle at an amortized cost of $12.3 million and $17.2 million, respectively.
There were no unrealized gains or losses recorded on these securities as
they
are not readily marketable.
The
amortized cost and estimated fair value of debt securities available for
sale at
December 31, 2006, 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
|
$
|
130,180
|
$
|
129,201
|
||
|
Due
in 1 to 5 years
|
345,895
|
343,200
|
||||
|
Due
in 5 to 10 years
|
71,399
|
73,201
|
||||
|
Due
after 10 years
|
39,952
|
43,039
|
||||
|
Total
|
$
|
587,426
|
$
|
588,641
|
||
The
amortized cost and estimated fair value of debt securities held to maturity
at
December 31, 2006, 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
after 10 years
|
$
|
1,522
|
$
|
1,513
|
||
|
Total
|
$
|
1,522
|
$
|
1,513
|
||
As
of
December 31, 2006, securities with a fair value of $419.9 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, 2006, 2005 and 2004, are summarized as follows:
|
(Dollars
in thousands)
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Securities
sold:
|
|||||||||
|
Proceeds
from sales
|
$
|
22,498
|
$
|
25,662
|
$
|
116,069
|
|||
|
Gross
security gains
|
697
|
376
|
2,115
|
||||||
|
Gross
security losses
|
144
|
178
|
254
|
||||||
During
the years ended December 31, 2006, 2005 and 2004, Heartland incurred other
than
temporary impairment losses of $76, $0 and $0 thousand, respectively, on
equity
securities available for sale.
The
following tables summarize the amount of unrealized losses, defined as
the
amount by which cost or amortized cost exceeds fair value, and the related
fair
value of investments with unrealized losses in Heartland’s securities portfolio
as of December 31, 2006 and 2005. 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, 2006 and
2005,
respectively. The unrealized losses in the debt security portfolio are
the
result of changes in interest rates and are not related to credit downgrades
of
the securities. Therefore, Heartland has deemed the impairment as temporary.
Unrealized
Losses on Securities Available for Sale
|
December
31, 2006
|
|||||||||||||||||||||
|
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||
|
U.S.
government corporations and agencies
|
$
|
14,866
|
$
|
(39
|
)
|
$
|
197,192
|
$
|
(3,819
|
)
|
$
|
212,058
|
$
|
(3,858
|
)
|
||||||
|
Mortgage-backed
securities
|
20,525
|
(225
|
)
|
71,029
|
(1,277
|
)
|
91,554
|
(1,502
|
)
|
||||||||||||
|
Obligations
of states and political subdivisions
|
5,431
|
(57
|
)
|
18,117
|
(180
|
)
|
23,548
|
(237
|
)
|
||||||||||||
|
Total
debt securities
|
40,822
|
(321
|
)
|
286,338
|
(5,276
|
)
|
327,160
|
(5,597
|
)
|
||||||||||||
|
Equity
securities
|
732
|
(26
|
)
|
2,776
|
(81
|
)
|
3,508
|
(107
|
)
|
||||||||||||
|
Total
temporarily impaired securities
|
$
|
41,554
|
$
|
(347
|
)
|
$
|
289,114
|
$
|
(5,357
|
)
|
$
|
330,668
|
$
|
(5,704
|
)
|
||||||
Unrealized
Losses on Securities Available for Sale
|
December
31, 2005
|
|||||||||||||||||||||
|
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
|
$
|
234,021
|
$
|
(5,465
|
)
|
$
|
-
|
$
|
-
|
$
|
234,021
|
$
|
(5,465
|
)
|
|||||||
|
Mortgage-backed
securities
|
114,122
|
(1,609
|
)
|
-
|
-
|
114,122
|
(1,609
|
)
|
|||||||||||||
|
Obligations
of states and political subdivisions
|
32,311
|
(402
|
)
|
-
|
-
|
32,311
|
(402
|
)
|
|||||||||||||
|
Other
debt securities
|
2,132
|
(27
|
)
|
-
|
-
|
2,132
|
(27
|
)
|
|||||||||||||
|
Total
debt securities
|
382,586
|
(7,503
|
)
|
-
|
-
|
382,586
|
(7,503
|
)
|
|||||||||||||
|
Equity
securities
|
5,032
|
(181
|
)
|
-
|
-
|
5,032
|
(181
|
)
|
|||||||||||||
|
Total
temporarily impaired securities
|
$
|
387,618
|
$
|
(7,684
|
)
|
$
|
-
|
$
|
-
|
$
|
387,618
|
$
|
(7,684
|
)
|
|||||||
SIX
LOANS
AND LEASES
Loans
and
leases as of December 31, 2006 and 2005, were as follows:
|
(Dollars
in thousands)
|
||||||||
|
2006
|
2005
|
|||||||
|
Commercial
and commercial real estate
|
$
|
1,483,738
|
$
|
1,304,080
|
||||
|
Residential
mortgage
|
225,343
|
219,671
|
||||||
|
Agricultural
and agricultural real estate
|
233,748
|
230,357
|
||||||
|
Consumer
|
194,652
|
181,019
|
||||||
|
Loans,
gross
|
2,137,481
|
1,935,127
|
||||||
|
Unearned
discount
|
(1,875
|
)
|
(1,870
|
)
|
||||
|
Deferred
loan fees
|
(2,120
|
)
|
(1,777
|
)
|
||||
|
Loans,
net
|
2,133,486
|
1,931,480
|
||||||
|
Direct
financing leases:
|
||||||||
|
Gross
rents receivable
|
12,268
|
20,418
|
||||||
|
Estimated
residual value
|
3,770
|
3,996
|
||||||
|
Unearned
income
|
(1,679
|
)
|
(2,828
|
)
|
||||
|
Direct
financing leases, net
|
14,359
|
21,586
|
||||||
|
Allowance
for loan and lease losses
|
(29,981
|
)
|
(27,791
|
)
|
||||
|
Loans
and leases, net
|
$
|
2,117,864
|
$
|
1,925,275
|
||||
Direct
financing leases receivable are generally short-term equipment leases.
Future
minimum lease payments as of December 31, 2006, were as follows: $5.3 million
for 2007, $4.6 million for 2008, $3.0 million for 2009, $1.9 million for
2010,
$644 thousand for 2011 and $494 thousand thereafter.
Nearly
58% of the loan portfolio is concentrated in the Midwest States of Iowa,
Illinois and Wisconsin. The remaining portion of the loan portfolio is
concentrated in the Western States of New Mexico, Arizona, Montana and
Colorado.
Loans
and
leases on a nonaccrual status amounted to $8.1 million and $14.9 million
at
December 31, 2006 and 2005, respectively. The allowance for loan and lease
losses related to these nonaccrual loans was $301 thousand and $1.2 million,
respectively. The average balances of nonaccrual loans for the years ended
December 31, 2006, 2005 and 2004 were $12.6 million, $13.8 million and
$7.3
million, respectively. For the years ended December 31, 2006, 2005 and
2004,
interest income which would have been recorded under the original terms
of these
loans and leases amounted to approximately $592 thousand, $1.1 million
and $485
thousand, respectively, and interest income actually recorded amounted
to
approximately $225 thousand, $68 thousand and $88 thousand,
respectively.
There
were no loans and leases on a restructured status at December 31, 2006
and 2005.
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, 2006 and 2005,
were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
|
2006
|
2005
|
||||||
|
Balance
at beginning of year
|
$
|
28,379
|
$
|
35,467
|
||||
|
Advances
|
43,938
|
11,936
|
||||||
|
Repayments
|
(21,299
|
)
|
(19,024
|
)
|
||||
|
Balance,
end of year
|
$
|
51,018
|
$
|
28,379
|
||||
SEVEN
ALLOWANCE
FOR
LOAN
AND LEASE LOSSES
Changes
in the allowance for loan and lease losses for the years ended December
31,
2006, 2005 and 2004, were as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2006
|
2005
|
2004
|
|||||||||
|
Balance
at beginning of year
|
$
|
27,791
|
$
|
24,973
|
$
|
18,490
|
|||||
|
Provision
for loan and lease losses from continuing operations
|
3,886
|
6,533
|
4,846
|
||||||||
|
Provision
for loan and lease losses from discontinued operations
|
(8
|
)
|
31
|
-
|
|||||||
|
Recoveries
on loans and leases previously charged off
|
1,733
|
1,152
|
1,005
|
||||||||
|
Loans
and leases charged off
|
(3,989
|
)
|
(4,579
|
)
|
(3,617
|
)
|
|||||
|
Adjustment
for transfer to other liabilities for unfunded commitments
|
-
|
(319
|
)
|
-
|
|||||||
|
Additions
related to acquired bank
|
591
|
-
|
4,249
|
||||||||
|
Reduction
related to sale of discontinued operation
|
(23
|
)
|
-
|
-
|
|||||||
|
Balance
at end of year
|
$
|
29,981
|
$
|
27,791
|
$
|
24,973
|
|||||
EIGHT
PREMISES,
FURNITURE AND EQUIPMENT
Premises,
furniture and equipment as of December 31, 2006 and 2005, were as
follows:
|
(Dollars
in thousands)
|
||||||||
|
2006
|
2005
|
|||||||
|
Land
and land improvements
|
$
|
22,782
|
$
|
20,059
|
||||
|
Buildings
and building improvements
|
82,455
|
70,773
|
||||||
|
Furniture
and equipment
|
38,481
|
36,812
|
||||||
|
Total
|
143,718
|
127,644
|
||||||
|
Less
accumulated depreciation
|
(35,151
|
)
|
(34,875
|
)
|
||||
|
Premises,
furniture and equipment, net
|
$
|
108,567
|
$
|
92,769
|
||||
Depreciation
expense on premises, furniture and equipment was $6.5 million, $5.8 million
and
$4.8 million for 2006, 2005, and 2004, respectively.
NINE
INTANGIBLE
ASSETS
The
gross
carrying amount of intangible assets and the associated accumulated amortization
at December 31, 2006 and 2005, are presented in the tables below.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2006
|
December
31, 2005
|
|||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||
|
Amortized
intangible assets
|
||||||||||||
|
Core
deposit intangibles
|
$
|
9,757
|
$
|
5,095
|
$
|
9,217
|
$
|
4,163
|
||||
|
Mortgage
servicing rights
|
5,546
|
1,986
|
4,685
|
1,422
|
||||||||
|
Customer
relationship intangible
|
917
|
129
|
|
917
|
75
|
|||||||
|
Total
|
$
|
16,220
|
$
|
7,210
|
$
|
14,819
|
$
|
5,660
|
||||
|
Unamortized
intangible assets
|
$
|
9,010
|
$
|
9,159
|
||||||||
The
following table shows the estimated future amortization expense related
to
intangible assets:
|
Core
Deposit
Intangibles
|
Mortgage
Servicing
Rights
|
Customer
Relationship Intangible
|
Total
|
|||||||||
|
Year
ended:
|
||||||||||||
|
2007
|
$
|
906
|
$
|
1,179
|
$
|
53
|
$
|
2,138
|
||||
|
2008
|
886
|
680
|
51
|
1,617
|
||||||||
|
2009
|
787
|
567
|
50
|
1,404
|
||||||||
|
2010
|
505
|
454
|
49
|
1,008
|
||||||||
|
2011
|
489
|
340
|
47
|
876
|
||||||||
|
Thereafter
|
1,089
|
340
|
538
|
1,967
|
The
following table summarizes the changes in capitalized mortgage servicing
rights:
|
(Dollars
in thousands)
|
||||||||
|
2006
|
2005
|
|||||||
|
Balance,
beginning of year
|
$
|
3,263
|
$
|
3,252
|
||||
|
Originations
|
1,309
|
956
|
||||||
|
Amortization
|
(1,012
|
)
|
(984
|
)
|
||||
|
Valuation
adjustment
|
-
|
39
|
||||||
|
Balance,
end of year
|
$
|
3,560
|
$
|
3,263
|
||||
Mortgage
loans serviced for others were $602.7 million and $582.7 million as of
December
31, 2006 and 2005, respectively. Custodial escrow balances maintained in
connection with the mortgage loan servicing portfolio were approximately
$2.9
million and $2.6 million as of December 31, 2006 and 2005, respectively.
The
fair value of Heartland’s mortgage servicing rights was estimated at $6.0
million and $5.9 million at December 31, 2006 and 2005,
respectively.
TEN
DEPOSITS
The
aggregate amount of time certificates of deposit in denominations of $100,000
or
more as of December 31, 2006 and 2005 were $235.7 million and $217.7 million,
respectively. At December 31, 2006, the scheduled maturities of time
certificates of deposit were as follows:
|
(Dollars
in thousands)
|
|||
|
2007
|
$
|
754,436
|
|
|
2008
|
222,129
|
||
|
2009
|
76,085
|
||
|
2010
|
40,196
|
||
|
2011
|
23,551
|
||
|
Thereafter
|
880
|
||
|
$
|
1,117,277
|
||
Interest
expense on deposits for the years ended December 31, 2006, 2005 and 2004,
was as
follows:
|
(Dollars
in thousands)
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Savings
and money market accounts
|
$
|
19,167
|
$
|
10,991
|
$
|
5,890
|
|||
|
Time
certificates of deposit in denominations of $100,000 or
more
|
9,498
|
6,505
|
3,957
|
||||||
|
Other
time deposits
|
34,628
|
25,887
|
21,001
|
||||||
|
Interest
expense on deposits
|
$
|
63,293
|
$
|
43,383
|
$
|
30,848
|
|||
ELEVEN
SHORT-TERM
BORROWINGS
Short-term
borrowings as of December 31, 2006 and 2005, were as follows:
|
(Dollars
in thousands)
|
||||||
|
2006
|
2005
|
|||||
|
Securities
sold under agreement to repurchase
|
$
|
225,880
|
$
|
181,984
|
||
|
Federal
funds purchased
|
11,550
|
7,725
|
||||
|
U.S.
Treasury demand note
|
3,264
|
5,164
|
||||
|
Notes
payable to unaffiliated banks
|
35,000
|
60,750
|
||||
|
Total
|
$
|
275,694
|
$
|
255,623
|
||
Heartland
has a credit agreement with four unaffiliated banks under a revolving credit
line. Under the unsecured revolving credit line, Heartland may borrow up
to
$75.0 million at any one time. This credit line was established primarily
to
provide working capital to the nonbanking subsidiaries and replace similar
sized
lines currently in place at those subsidiaries. At December 31, 2006 and
December 31, 2005, $35.0 million and $60.8 million was outstanding on the
revolving credit line respectively. The
revolving credit agreement contains specific covenants which, among other
things, limit dividend payments and restrict the sale of assets by Heartland
under certain circumstances. Also contained within the agreement are certain
financial covenants, including the maintenance by Heartland of a maximum
nonperforming assets to total loans ratio, minimum return on average assets
ratio and maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well capitalized,
as
defined from time to time by the federal banking regulators. At December
31,
2006, Heartland was in compliance with the covenants contained in the credit
agreement.
All
retail repurchase agreements as of December 31, 2006 and 2005, were due
within
twelve months.
Average
and maximum balances and rates on aggregate short-term borrowings outstanding
during the years ended December 31, 2006, 2005 and 2004, were as
follows:
|
(Dollars
in thousands)
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Maximum
month-end balance
|
$
|
277,604
|
$
|
266,194
|
$
|
231,475
|
|||
|
Average
month-end balance
|
258,844
|
233,051
|
187,046
|
||||||
|
Weighted
average interest rate for the year
|
4.35%
|
2.67%
|
1.44%
|
||||||
|
Weighted
average interest rate at year-end
|
4.71%
|
3.68%
|
1.88%
|
||||||
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 $229.4 million at December
31,
2006, and $263.3 million at December 31, 2005. No borrowings were utilized
under
the Discount Window Program during either year.
TWELVE
OTHER
BORROWINGS
Other
borrowings at December 31, 2006 and 2005, were as follows:
|
(Dollars
in thousands)
|
|||||||
|
2006
|
2005
|
||||||
|
Advances
from the FHLB; weighted average maturity dates at December 31,
2006 and
2005 were February 2011 and October 2008, respectively; and weighted
average interest rates were 4.23% and 3.96%, respectively
|
$
|
81,264
|
$
|
151,046
|
|||
|
Wholesale
repurchase agreements
|
50,000
|
-
|
|||||
|
Notes
payable on leased assets with interest rates varying from 2.36%
to
6.49%
|
-
|
1,230
|
|||||
|
Trust
preferred securities
|
85,570
|
64,951
|
|||||
|
Obligations
to repurchase minority interest shares of Arizona Bank & Trust and
Summit Bank & Trust
|
6,350
|
2,234
|
|||||
|
Community
Development Block Grant Loan Program with the City of Dubuque
at 3.00% due
January 2014
|
300
|
300
|
|||||
|
Contracts
payable for purchase of real estate
|
1,039
|
1,110
|
|||||
|
Total
|
$
|
224,523
|
$
|
220,871
|
|||
The
Heartland banks are members of the Federal Home Loan Bank ("FHLB") of Des
Moines, Chicago, Dallas, San Francisco and Seattle. The advances from the
FHLB
are collateralized by the banks’ investment in FHLB stock of $6.6 and $9.0
million at December 31, 2006 and 2005, respectively. Additional collateral
is
provided by the banks’ one-to-four unit residential mortgages, commercial and
agricultural mortgages and securities pledged totaling $964.8 million at
December 31, 2006 and $715.7 million at December 31, 2005. Callable advances
from the FHLB totaled $13.0 million as of December 31, 2006, at a weighted
average rate of 3.39% with call dates during 2007. At December 31, 2005,
callable advances from the FHLB totaled $24.0 million at a weighted average
rate
of 4.03% with $11.0 million callable during 2006.
In
August
2006, Heartland entered into a leverage structured wholesale repurchase
agreement transaction. This wholesale repurchase agreement is in the amount
of
$50.0 million bearing a variable interest rate that changes quarterly to
the
3-month LIBOR rate plus 29.375 basis points. Embedded within this contract
is an
interest floor option that results when the 3-month LIBOR rate falls to
4.40% or
lower. If that situation occurs, the rate paid will be decreased by two
times
the difference between the 3-month LIBOR rate and 4.40%. In no case will
the
rate paid fall below 0.00%. In order to effectuate this wholesale repurchase
agreement, a $55.0 million government agency bond was acquired. On the
date of
the contract, the interest rate on the securities was equivalent to the
interest
rate being paid on the repurchase agreement contract.
On
September 30, 2004, Heartland Financial Capital Trust I, a trust subsidiary
of
Heartland, redeemed all of its $25.0 million 9.60% trust preferred securities
and its 9.60% common securities at a redemption price equal to the $25.00
liquidation amount of each security plus all accrued and unpaid interest
per
security. The redeemed trust preferred securities were originally issued
in 1999
and were listed on the American Stock Exchange under the symbol “HFT”.
Remaining
unamortized issuance costs associated with these securities of $959 thousand
were expensed under the noninterest expense category upon
redemption.
Heartland
currently has six wholly-owned trust subsidiaries that were formed to issue
trust preferred securities. The
proceeds from the offerings were used to purchase junior subordinated debentures
from Heartland. The proceeds are being used for general corporate purposes.
Heartland has the option to shorten the maturity date to a date not earlier
than
the callable dates listed in the schedule below. Heartland may not shorten
the
maturity date without prior approval of the Board of Governors of the Federal
Reserve System, if required. Prior redemption is permitted under certain
circumstances, such as changes in tax or regulatory capital rules. In connection
with these offerings, the balance of deferred issuance costs included in
other
assets was $663 thousand as of December 31, 2006. 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,
2006, is as follows:
|
(Dollars
in thousands)
|
||||||
|
Name
|
Amount
Issued
|
Interest
Rate
|
Interest
Rate as of 12/31/06
|
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 II
|
8,248
|
3.60%
over Libor
|
8.96%
|
12/18/2031
|
03/18/2007
|
|
|
Heartland
Financial Capital Trust II
|
5,155
|
3.65%
over Libor
|
9.02%
|
06/30/2032
|
06/30/2007
|
|
|
Heartland
Financial Statutory Trust III
|
20,619
|
8.25%
|
8.25%
|
10/10/2033
|
10/10/2008
|
|
|
Heartland
Financial Statutory Trust IV
|
25,774
|
2.75%
over Libor
|
8.11%
|
03/17/2034
|
03/17/2009
|
|
|
Heartland
Financial Statutory Trust V
|
20,619
|
1.33%
over Libor
|
6.70%
|
01/31/2036
|
01/31/2011
|
|
|
$
|
85,570
|
|||||
For
regulatory purposes, $69.6 and $62.9 million of the capital securities
qualified
as Tier 1 capital for regulatory purposes as of December 31, 2006 and 2005,
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 minimum amount payable is the amount originally paid by the minority
shareholders plus a compounded annual return of 6%. The maximum amount
payable
will be based on the greater of the fair value of those shares based upon
an
appraisal performed by an independent third party or a predetermined range
of
multiples of the bank’s trailing twelve month earnings. Through December 31,
2006, Heartland accrued the amount due to the minority shareholders at
6%. The
obligation to repay the original investment is payable in cash or Heartland
stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders
is
payable in cash or Heartland stock or a combination of cash and stock at
the
option of Heartland. Additionally, the minority shareholders may put their
shares to Heartland at any time through November 1, 2011, at an amount
equal to
the amount originally paid plus 6% compounded annually. The amount of the
obligation as of December 31, 2006, included in other borrowings is $3.0
million.
Heartland
has an irrevocable obligation to repurchase the common shares of Arizona
Bank
& Trust owned by minority shareholders on August 18, 2008. The minority
shareholders are obligated to sell their shares to Heartland on that same
date.
The minimum amount payable is the amount originally paid by the minority
shareholders plus a compounded annual return of 6%. The maximum amount
payable
will be based on the greater of the fair value of those shares based upon
an
appraisal performed by an independent third party or a predetermined range
of
multiples of the bank’s trailing twelve month earnings. Through December 31,
2006, Heartland accrued the amount due to the minority shareholders at
6%. The
obligation to repay the original investment is payable in cash or Heartland
stock or a combination of cash and stock at the option of the minority
shareholder. The remainder of the obligation to the minority shareholders
is
payable in cash or Heartland stock or a combination of cash and stock at
the
option of Heartland. Additionally, the minority shareholders may put their
shares to Heartland at any time through August 18, 2008, at an amount equal
to
the amount originally paid plus 6% compounded annually. The amount of the
obligation as of December 31, 2006, included in other borrowings is $3.3
million.
Future
payments at December 31, 2006, for all other borrowings follow in the table
below. Callable FHLB advances are included in the table at their maturity
date.
|
(Dollars
in thousands)
|
|||
|
2007
|
$
|
9,801
|
|
|
2008
|
24,876
|
||
|
2009
|
50,532
|
||
|
2010
|
23,442
|
||
|
2011
|
6,445
|
||
|
Thereafter
|
109,427
|
||
|
$
|
224,523
|
||
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. On April 4, 2006, Heartland entered into a three-year interest
rate
collar transaction on a notional amount of $50.0 million to further reduce
the
potentially negative impact a downward movement in interest rates would
have on
its net interest income. The collar was effective on April 4, 2006, and
matures
on April 4, 2009. This collar transaction is 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 Heartland prime-based loans
that
reset with changes in the prime rate. Heartland is the payer on prime at
a cap
strike rate of 8.95% and the counterparty is the payer on prime at a floor
strike rate of 7.00%. As of December 31, 2006, the fair market value of
this
collar transaction was recorded as an asset of $59 thousand and was accounted
for as a cash flow hedge.
On
September 19, 2005, Heartland entered into a five-year interest rate collar
transaction on a notional amount of $50.0 million to reduce the potentially
negative impact a downward movement in interest rates would have on its
net
interest income. The collar has an effective date of September 21, 2005,
and a
maturity date of September 21, 2010. This collar transaction is 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 Heartland
prime-based loans that reset whenever prime changes. 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, 2006, the fair market
value
of this collar transaction was recorded as a liability of $43 thousand
and was
accounted for as a cash flow hedge.
Heartland
also had an interest rate swap contract to effectively convert $25.0 million
of
its variable interest rate debt to fixed interest rate debt. As of December
31,
2005, Heartland had an interest rate swap contract with a notional amount
of
$25.0 million to pay a fixed interest rate of 4.35% and receive a variable
interest rate of 4.09% based on $25.0 million of indebtedness. Payments
under
the interest rate swap contract were made monthly. This contract expired
on
November 1, 2006. The interest rate swap contract was accounted for as
a cash
flow hedge.
There
was
no material amount of ineffectiveness recognized on these three cash flow
hedge
transactions for the years ending December 31, 2006, 2005 or 2004. All
components of the derivative instruments’ gain or loss were included in the
assessment of hedge effectiveness.
On
July
8, 2005, Heartland entered into a two-year interest rate floor transaction
on
prime at a strike level of 5.5% on a notional amount of $100.0 million.
All
changes in the fair market value of this hedge transaction of $43 thousand
flowed through Heartland’s income statement under the other noninterest income
category since it is accounted for as a free-standing derivative. The floor
contract had no fair market value as of December 31, 2006.
By
using
derivatives, Heartland is exposed to credit risk if counterparties to derivative
instruments do not perform as expected. Heartland minimizes this risk by
entering into derivative contracts with large, stable financial institutions
and
Heartland has not experienced any losses from counterparty nonperformance
on
derivative instruments.
FOURTEEN
INCOME
TAXES
Income
taxes for the years ended December 31, 2006, 2005 and 2004, were as
follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2006
|
2005
|
2004
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$
|
17,344
|
$
|
9,396
|
$
|
7,690
|
|||||
|
State
|
841
|
1,081
|
1,027
|
||||||||
|
Total
current
|
$
|
18,185
|
$
|
10,477
|
$
|
8,717
|
|||||
|
Deferred:
|
|||||||||||
|
Federal
|
$
|
(6,114
|
)
|
$
|
(1,490
|
)
|
$
|
(802
|
)
|
||
|
State
|
438
|
1,163
|
21
|
||||||||
|
Total
deferred
|
$
|
(5,676
|
)
|
$
|
(327
|
)
|
$
|
(781
|
)
|
||
|
Total
income tax expense
|
$
|
12,509
|
$
|
10,150
|
$
|
7,936
|
|||||
Income
tax expense is included in the financial statements as follows:
|
(Dollars
in thousands)
|
|||||||||||
|
2006
|
2005
|
2004
|
|||||||||
|
Income
tax from continuing operations
|
$
|
11,989
|
$
|
9,859
|
$
|
7,718
|
|||||
|
Income
tax from discontinued operations
|
520
|
291
|
218
|
||||||||
|
Total
income tax expense
|
$
|
12,509
|
$
|
10,150
|
$
|
7,936
|
|||||
The
income tax provisions above do not include the effects of income tax deductions
resulting from exercises of stock options in the amounts of $559 thousand,
$476
thousand and $463 thousand in 2006, 2005 and 2004, respectively, which
were
recorded as increases to stockholders’ equity. Additionally, the income tax
provisions do not include federal rehabilitation tax credits of $313 thousand
in
2005 and $1.1 million in 2004, state rehabilitation tax credits of $392
thousand
in 2005 and $1.4 million in 2004 and a state investment tax credit of $400
thousand in 2004, all of which were recorded as a reduction in the depreciable
basis of the capitalized asset. A deferred tax asset had been recorded
for the
$1.4 million ($915 thousand, net of federal tax) state rehabilitation tax
credits as they initially were not available until tax years 2011 and 2013.
During 2005, state legislation provided for earlier availability of these
credits with $489 thousand available in tax year 2005 and the remaining
$1.3
million available in tax year 2006. Additionally, during 2004, $70 thousand
of
the $400 thousand investment tax credit was recorded as a deferred tax
asset as
the amount of estimated tax in the applicable state did not allow for full
utilization of this credit. For tax year 2005, the amount of tax in the
applicable state provided for utilization of $70 thousand of the investment
tax
credits and $405 thousand of the state rehabilitation credits. Temporary
differences between the amounts reported in the financial statements and
the tax
basis of assets and liabilities result in deferred taxes. No valuation
allowance
was required for deferred tax assets at December 31, 2006 and 2005. Based
upon
Heartland’s level of historical taxable income and anticipated future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that Heartland will realize
the
benefits of these deductible differences. Deferred tax assets and liabilities
at
December 31, 2006 and 2005, were as follows:
|
(Dollars
in thousands)
|
||||||||
|
2006
|
2005
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Tax
effect of net unrealized loss on derivatives reflected in stockholders’
equity
|
$
|
45
|
$
|
86
|
||||
|
Tax
effect of net unrealized loss on securities available for sale
reflected
in stockholders’ equity
|
-
|
528
|
||||||
|
Allowance
for loan and lease losses
|
10,880
|
10,157
|
||||||
|
Deferred
compensation
|
1,189
|
1,336
|
||||||
|
Organization
and acquisitions costs
|
463
|
526
|
||||||
|
Net
operating loss carryforwards
|
805
|
596
|
||||||
|
State
rehabilitation tax credits
|
747
|
1,577
|
||||||
|
Other
|
88
|
33
|
||||||
|
Gross
deferred tax assets
|
$
|
14,217
|
$
|
14,839
|
||||
|
Deferred
tax liabilities:
|
||||||||
|
Tax
effect of net unrealized gain on securities available for sale
reflected
in stockholders’ equity
|
$
|
(573
|
)
|
$
|
-
|
|||
|
Securities
|
(902
|
)
|
(965
|
)
|
||||
|
Premises,
furniture and equipment
|
(3,101
|
)
|
(9,255
|
)
|
||||
|
Lease
financing
|
(2,247
|
)
|
(2,495
|
)
|
||||
|
Tax
bad debt reserves
|
(515
|
)
|
(517
|
)
|
||||
|
Purchase
accounting
|
(3,168
|
)
|
(3,424
|
)
|
||||
|
Prepaid
expenses
|
(472
|
)
|
(651
|
)
|
||||
|
Mortgage
servicing rights
|
(1,330
|
)
|
(1,218
|
)
|
||||
|
Other
|
(140
|
)
|
(143
|
)
|
||||
|
Gross
deferred tax liabilities
|
$
|
(12,447
|
)
|
$
|
(18,668
|
)
|
||
|
Net
deferred tax asset (liability)
|
$
|
1,770
|
$
|
(3,830
|
)
|
The
deferred tax liabilities related to net unrealized gains(losses) on securities
available for sale and the deferred tax assets related to net unrealized
losses
on derivatives had no effect on income tax expense as these gains and losses,
net of taxes, were recorded in other comprehensive income. Also, the $1.1
million deferred tax asset recorded during 2006 as a result of the Bank
of the
Southwest acquisition had no effect on income tax expense.
The
actual income tax expense from continuing operations differs from the expected
amounts (computed by applying the U.S. federal corporate tax rate of 35%
for
2006, 2005 and 2004, to income before income taxes) as follows:
|
(Dollars
in thousands)
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Computed
“expected” tax on income from continuing operations
|
$
|
12,953
|
$
|
11,240
|
$
|
9,661
|
||||||
|
Increase
(decrease) resulting from:
|
||||||||||||
|
Nontaxable
interest income
|
(1,948
|
)
|
(1,923
|
)
|
(1,684
|
)
|
||||||
|
State
income taxes, net of federal tax benefit
|
1,611
|
1,422
|
654
|
|||||||||
|
Nondeductible
goodwill and other intangibles
|
57
|
57
|
77
|
|||||||||
|
Tax
credits
|
(218
|
)
|
(412
|
)
|
(525
|
)
|
||||||
|
Other
|
(466
|
)
|
(525
|
)
|
(465
|
)
|
||||||
|
Income
taxes
|
$
|
11,989
|
$
|
9,859
|
$
|
7,718
|
||||||
|
Effective
tax rates
|
32.4
|
%
|
30.7
|
%
|
28.0
|
%
|
||||||
Heartland
had investments in certain low-income housing projects totaling $5.1 million
as
of December 31, 2006, $5.4 million as of December 31, 2005, and $5.8 million
as
of December 31, 2004, the majority of which have been fully consolidated
in the
consolidated financial statements. These investments are expected to generate
federal income tax credits of approximately $225 thousand for each year
through
2014. A 99.9% ownership in a limited liability company was acquired in
2004 that
provided a federal historic rehabilitation credit totaling $675 thousand
for the
tax year 2004 and state historic rehabilitation credits totaling $843 thousand
for the tax years 2004, 2005 and 2007. In 2002, Heartland had acquired
a 99.9%
ownership in a similarly structured limited liability company that provided
a
federal historic rehabilitation credit totaling $389 thousand for the 2002
tax
year and state historic rehabilitation credits totaling $450 thousand for
the
tax years 2002 and 2006.
FIFTEEN
EMPLOYEE
BENEFIT PLANS
Heartland
sponsors a defined contribution retirement plan covering substantially
all
employees. Contributions to this plan are subject to approval by the Heartland
Board of Directors. The Heartland subsidiaries fund and record as an expense
all
approved contributions. Costs charged to operating expenses were $2.9 million,
$2.7 million, and $2.1 million for 2006, 2005, and 2004, 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
$578 thousand, $532 thousand, and $396 thousand for 2006, 2005, and 2004,
respectively.
SIXTEEN
COMMITMENTS
AND CONTINGENT LIABILITIES
Heartland
leases certain land and facilities under operating leases. Minimum future
rental
commitments at December 31, 2006, for all non-cancelable leases were as
follows:
|
(Dollars
in thousands)
|
|||
|
2007
|
$
|
870
|
|
|
2008
|
801
|
||
|
2009
|
679
|
||
|
2010
|
425
|
||
|
2011
|
250
|
||
|
Thereafter
|
3,371
|
||
|
$
|
6,396
|
||
Rental
expense for premises and equipment leased under operating leases was $1.6
million, $1.7 million, and $1.3 million for 2006, 2005, and 2004, respectively.
Occupancy expense is presented net of rental income of $1.2 million, $1.0
million and $829 thousand for 2006, 2005 and 2004, 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,
2006
and 2005, commitments to extend credit aggregated $651.3 and $556.9 million,
and
standby letters of credit aggregated $35.8 and $25.7 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, 2006 and 2005, Heartland had commitments to sell residential real estate
loans totaling $4.7 and $6.5 million, respectively. Heartland does not
anticipate any material loss as a result of the commitments and contingent
liabilities.
Heartland
established a loss reserve for unfunded commitments, including loan commitments
and letters of credit, during 2005 by reclassifying $319 thousand of the
allowance for loan losses. At December 31, 2006 and 2005, the reserve for
unfunded commitments, which is included in other liabilities on the consolidated
balance sheets, was approximately $424 and $340 thousand, respectively.
The
adequacy of the reserve for unfunded commitments is reviewed on a quarterly
basis, based upon changes in the amounts of commitments, loss experience
and
economic conditions.
There
are
certain legal proceedings pending against Heartland and its subsidiaries
at
December 31, 2006, that are ordinary routine litigation incidental to business.
While the ultimate outcome of current legal proceedings cannot be predicted
with
certainty, it is the opinion of management that the resolution of these
legal
actions should not have a material effect on Heartland's consolidated financial
position or results of operations.
SEVENTEEN
STOCK
PLANS
Effective
January 1, 2006, Heartland adopted the provisions of FAS 123R using the
“modified prospective” transition method. FAS 123R requires the measurement of
the cost of employee services received in exchange for an award of equity
instruments based upon the fair value of the award on the grant date. The
cost
of the award is recognized in the income statement over the vesting period
of
the award. Under the “modified prospective” transition method, awards that are
granted, modified or settled beginning at the date of adoption are measured
and
accounted for in accordance with FAS 123R. In addition, expense must be
recognized in the income statement for unvested awards that were granted
prior
to the date of adoption. The expense is based on the fair value determined
at
the grant date. The impact of the adoption of FAS 123R on Heartland’s
consolidated financial statements for the year ending December 31, 2006,
was a
reduction in net income of $351 thousand or diluted earnings per share
of
$0.02.
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 will be 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, 2006, there
were
746,110 shares available for issuance under the 2005 Long-Term Incentive
Plan.
At December 31, 2005, there were 866,710 shares available for issuance
under the
2003 Stock Option Plan. Shares available for options forfeited under the
2003
Option Plan are transferable to shares available under the 2005 Long-Term
Incentive Plan. Shares available for options forfeited under the 1993 Stock
Option Plan are not transferable to shares available under the 2003 Stock
Option
Plan or the 2005 Long-Term Incentive Plan.
Under
the
2005 Long-Term Incentive Plan, SARS may also be granted. A SAR entitles
the
participant to receive stock equal in value to the amount by which the
fair
market value of a specified number of shares on the exercise date exceeds
the
exercise price as established by the Compensation Committee. SARS may be
exercisable for up to ten years after the date of grant. No SARS have been
granted under the 2005 Long-Term Incentive Plan, the 2003 Stock Option
Plan or
the 1993 Stock Option Plan.
Under
the
2005 Long-Term Incentive Plan, stock awards may be granted as determined
by the
Compensation Committee. In 2005, stock awards totaling 136,500 were granted
to
key policy-making employees. These stock awards were granted at no cost
to the
employees. These awards are contingent upon the achievement of performance
objectives through December 31, 2010, and additional compensation expense
will
be recorded through 2010.
Options
have been granted with an exercise price equal to the fair market value
of
Heartland stock on the date of grant and expire ten years after the date
of
grant. Vesting is generally over a five-year service period with portions
of a
grant becoming exercisable at three years, four years and five years after
the
date of grant. A summary of the status of the 2005 Long-Term Incentive
Plan, the
2003 and 1993 Stock Option Plans as of December 31, 2006, 2005 and 2004,
and
changes during the years ended follows:
|
Shares
|
2006
Weighted- Average Exercise Price
|
Shares
|
2005
Weighted- Average Exercise Price
|
Shares
|
2004
Weighted-
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
796,650
|
$
|
12.70
|
808,375
|
$
|
11.12
|
831,750
|
$
|
9.83
|
|||||||||
|
Granted
|
130,750
|
21.60
|
105,750
|
21.00
|
97,250
|
19.25
|
||||||||||||
|
Exercised
|
(94,450
|
)
|
8.97
|
(112,875
|
)
|
8.14
|
(119,125
|
)
|
8.69
|
|||||||||
|
Forfeited
|
(17,650
|
)
|
17.33
|
(4,600
|
)
|
19.66
|
(1,500
|
)
|
17.78
|
|||||||||
|
Outstanding
at end of year
|
815,300
|
$
|
14.46
|
796,650
|
$
|
12.70
|
808,375
|
$
|
11.12
|
|||||||||
|
Options
exercisable at end of year
|
409,425
|
$
|
10.34
|
430,694
|
$
|
10.06
|
474,875
|
$
|
9.66
|
|||||||||
|
Weighted-average
fair value of options granted during the year
|
$5.65
|
$6.13
|
$5.68
|
|||||||||||||||
At
December 31, 2006, the vested options totaled 409,425 shares with a weighted
average exercise price of $10.34 per share and a weighted average remaining
contractual life of 2.59 years. The intrinsic value for the vested options
as of
December 31, 2006 was $7.6 million. The intrinsic value for the total of
all
options exercised during the year ended December 31, 2006 was $1.9 million,
and
the total fair value of shares vested during the year ended December 31,
2006
was $491 thousand. As of December 31, 2006 and 2005, options outstanding
under
the 2005 Long-Term Incentive Plan and the 2003 and 1993 Stock Option Plans
had
exercise prices ranging from $8 to $21.60 per share and a weighted-average
remaining contractual life of 5.15 and 5.04 years, respectively.
The
fair
value of stock options granted was determined utilizing the Black Scholes
valuation model. Significant assumptions include:
|
2006
|
2005
|
2004
|
||||
|
Risk-free
interest rate
|
4.52%
|
4.00%
|
4.13%
|
|||
|
Expected
option life
|
7
years
|
10
years
|
10
years
|
|||
|
Expected
volatility
|
22.00%
|
19.75%
|
20.67%
|
|||
|
Expected
dividends
|
2.00%
|
1.52%
|
1.66%
|
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 2006 risk free interest rate reflects
the
yield on the 7 year zero coupon U.S. Treasury bond. Cash received from
options
exercised for the year ended December 31, 2006, was $736 thousand, with
a
related tax benefit of $559 thousand.
Total
compensation costs recorded for stock options and restricted stock awards
were
$856 thousand for the year ended December 31, 2006. For the year ended
December
31, 2005, total compensation costs recorded for restricted stock awards
were
$493 thousand. As of December 31, 2006 there was $3.1 million of total
unrecognized compensation costs related to the 2005 Long-Term Incentive
Plan for
stock options and restricted stock awards which is expected to be recognized
through 2011. In addition, in 2006, 1,500 shares of stock were awarded
to
Heartland directors in returned for services performed, and $45 thousand
was
recorded as compensation expense in 2006. In 2005, 1,390 shares of stock
were
awarded to Heartland directors in return for services performed, and $30
thousand was recorded as compensation expense.
At
Heartland’s annual meeting of stockholders on May 18, 2005, the 2006 Employee
Stock Purchase Plan (the “2006 ESPP”), was adopted, effective January 1, 2006.
The 2006 ESPP replaced the 1996 Employee Stock Purchase Plan (the “1996 ESPP”)
continuing to permit all eligible employees to purchase shares of Heartland
common stock at a price of not less than 85% of the fair market value on
the
determination date (as determined by the Committee). A maximum of 500,000
shares
is available for sale under the 2006 ESPP. For the years ended December
31, 2006
and 2005, Heartland approved a purchase price of 100% of fair market value
as
determined by averaging the closing price of the last five trading days
in 2005
and 2004, respectively. At December 31, 2006, 26,451 shares were purchased
under
the 2006 ESPP at a charge of $69 thousand to Heartland’s earnings. As a result
of the adoption of FAS 123R, compensation expense was recorded in 2006,
because
the price of the share purchases are set at the beginning of the year for
purchase at the end of the year. At December 31, 2005, 14,268 shares were
purchased under the 2006 ESPP at no charge to Heartland’s earnings.
During
each of the years ended December 31, 2006, 2005 and 2004, Heartland acquired
shares for use in the 2005 Long-Term Incentive Plan, 2003 Stock Option
Plan, the
2006 ESPP and the 1996 ESPP. Shares acquired totaled 166,259, 290,651 and
290,994 for 2006, 2005 and 2004, respectively.
EIGHTEEN
STOCKHOLDER
RIGHTS PLAN
On
June
7, 2002, Heartland adopted a stockholders’ rights plan (the "Rights Plan").
Under the terms of the Rights Plan, on June 26, 2002, the Board of Directors
distributed one purchase right for each share of common stock outstanding
as of
June 24, 2002. Upon becoming exercisable, each right entitles the registered
holder thereof, under certain limited circumstances, to purchase one-thousandth
of a share of Series A Junior Participating preferred stock at an exercise
price
of $85.00. Rights do not become exercisable until ten business days after
any
person or group has acquired, commenced, or announced its intention to
commence
a tender or exchange offer to acquire 15% or more of Heartland’s common stock.
If the rights become exercisable, holders of each right, other than the
acquirer, upon payment of the exercise price, will have the right to purchase
Heartland’s common stock (in lieu of preferred shares) having a value equal to
two times the exercise price. If Heartland is acquired in a merger, share
exchange or other business combination or 50% or more of its consolidated
assets
or earning power are sold, rights holders, other than the acquiring or
adverse
person or group, will be entitled to purchase the acquirer’s shares at a similar
discount. If the rights become exercisable, Heartland may also exchange
rights,
other than those held by the acquiring or adverse person or group, in whole
or
in part, at an exchange ratio of one share of Heartland’s common stock per right
held. Rights are redeemable by Heartland at any time until they are exercisable
at the exchange rate of $.01 per right. Issuance of the rights has no immediate
dilutive effect, does not currently affect reported earnings per share,
is not
taxable to Heartland or its shareholders, and will not change the way in
which
Heartland’s shares are traded. The rights expire on June 7, 2012.
In
connection with the Rights Plan, Heartland designated 16,000 shares, par
value
$1.00 per share, of Series A Junior Participating preferred stock. These
shares,
if issued, will be entitled to receive quarterly dividends and a liquidation
preference. There are no shares issued and outstanding and Heartland does
not
anticipate issuing any shares of Series A Junior Participating preferred
stock
except as may be required under the Rights Plan.
NINETEEN
REGULATORY
CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY
DIVIDENDS
The
Heartland banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct
material effect on the Heartland banks’ financial statements. The regulations
prescribe specific capital adequacy guidelines that involve quantitative
measures of a bank’s assets, liabilities and certain off balance sheet items as
calculated under regulatory accounting practices. Capital classification
is also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Heartland banks to maintain minimum amounts and ratios (set forth in the
table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average
assets (as defined). Management believes, as of December 31, 2006 and 2005,
that
the Heartland banks met all capital adequacy requirements to which they
were
subject.
As
of
December 31, 2006 and 2005, 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, 2006
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
279,112
|
11.18
|
%
|
$
|
199,757
|
8.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
75,378
|
10.96
|
55,044
|
8.0
|
$
|
68,806
|
10.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
20,903
|
12.55
|
13,329
|
8.0
|
16,662
|
10.0
|
||||||||||||
|
First
Community Bank
|
10,801
|
12.09
|
7,147
|
8.0
|
8,934
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
17,142
|
11.26
|
12,179
|
8.0
|
15,224
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
36,312
|
11.48
|
25,297
|
8.0
|
31,621
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
49,465
|
10.04
|
39,415
|
8.0
|
49,269
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
27,921
|
13.72
|
16,281
|
8.0
|
20,352
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
39,485
|
11.12
|
28,403
|
8.0
|
35,504
|
10.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,854
|
62.38
|
1,777
|
8.0
|
2,221
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
232,702
|
9.32
|
%
|
$
|
99,878
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
68,008
|
9.88
|
27,522
|
4.0
|
$
|
41,283
|
6.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
18,833
|
11.30
|
6,665
|
4.0
|
9,997
|
6.0
|
||||||||||||
|
First
Community Bank
|
9,682
|
10.84
|
3,574
|
4.0
|
5,360
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
15,370
|
10.10
|
6,090
|
4.0
|
9,134
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,350
|
10.23
|
12,648
|
4.0
|
18,972
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
44,018
|
8.93
|
19,708
|
4.0
|
29,561
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,742
|
12.65
|
8,141
|
4.0
|
12,211
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,390
|
9.97
|
14,201
|
4.0
|
21,302
|
6.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,660
|
61.51
|
888
|
4.0
|
1,332
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
232,702
|
7.74
|
%
|
$
|
120,255
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
68,008
|
8.14
|
33,406
|
4.0
|
$
|
41,758
|
5.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
18,833
|
8.41
|
8,954
|
4.0
|
11,193
|
5.0
|
||||||||||||
|
First
Community Bank
|
9,682
|
8.13
|
4,765
|
4.0
|
5,957
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
15,370
|
7.72
|
7,967
|
4.0
|
9,958
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
32,350
|
7.95
|
16,267
|
4.0
|
20,334
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
44,018
|
7.40
|
23,778
|
4.0
|
29,722
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
25,742
|
11.75
|
8,761
|
4.0
|
10,951
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,390
|
8.36
|
16,943
|
4.0
|
21,178
|
5.0
|
||||||||||||
|
Summit
Bank & Trust
|
13,660
|
106.01
|
515
|
4.0
|
644
|
5.0
|
||||||||||||
|
(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, 2005
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
240,152
|
10.61
|
%
|
$
|
181,028
|
8.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
71,477
|
10.80
|
52,969
|
8.0
|
$
|
66,212
|
10.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
19,739
|
10.68
|
14,787
|
8.0
|
18,484
|
10.0
|
||||||||||||
|
First
Community Bank
|
10,372
|
11.41
|
7,271
|
8.0
|
9,088
|
10.0
|
||||||||||||
|
Riverside
Community Bank
|
16,451
|
11.02
|
11,937
|
8.0
|
14,922
|
10.0
|
||||||||||||
|
Wisconsin
Community Bank
|
33,895
|
11.11
|
24,400
|
8.0
|
30,500
|
10.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
41,749
|
10.41
|
32,096
|
8.0
|
40,120
|
10.0
|
||||||||||||
|
Arizona
Bank & Trust
|
13,647
|
11.97
|
9,123
|
8.0
|
11,404
|
10.0
|
||||||||||||
|
Rocky
Mountain Bank
|
35,564
|
11.35
|
25,063
|
8.0
|
31,328
|
10.0
|
||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
209,968
|
9.28
|
%
|
$
|
90,514
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
63,987
|
9.66
|
26,485
|
4.0
|
$
|
39,727
|
6.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
17,535
|
9.49
|
7,394
|
4.0
|
11,091
|
6.0
|
||||||||||||
|
First
Community Bank
|
9,235
|
10.16
|
3,635
|
4.0
|
5,453
|
6.0
|
||||||||||||
|
Riverside
Community Bank
|
14,755
|
9.89
|
5,969
|
4.0
|
8,953
|
6.0
|
||||||||||||
|
Wisconsin
Community Bank
|
30,041
|
9.85
|
12,200
|
4.0
|
18,300
|
6.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
37,178
|
9.27
|
16,048
|
4.0
|
24,072
|
6.0
|
||||||||||||
|
Arizona
Bank & Trust
|
12,445
|
10.91
|
4,561
|
4.0
|
6,842
|
6.0
|
||||||||||||
|
Rocky
Mountain Bank
|
31,647
|
10.10
|
12,531
|
4.0
|
18,797
|
6.0
|
||||||||||||
|
Tier
1 Capital (to Average Assets)
|
||||||||||||||||||
|
Consolidated
|
$
|
209,968
|
7.66
|
%
|
$
|
109,637
|
4.0
|
%
|
N/A
|
|||||||||
|
Dubuque
Bank and Trust Company
|
63,987
|
7.80
|
32,795
|
4.0
|
$
|
40,993
|
5.0
|
%
|
||||||||||
|
Galena
State Bank and Trust Company
|
17,535
|
7.34
|
9,562
|
4.0
|
11,952
|
5.0
|
||||||||||||
|
First
Community Bank
|
9,235
|
7.69
|
4,806
|
4.0
|
6,007
|
5.0
|
||||||||||||
|
Riverside
Community Bank
|
14,755
|
7.52
|
7,850
|
4.0
|
9,813
|
5.0
|
||||||||||||
|
Wisconsin
Community Bank
|
30,041
|
7.85
|
15,314
|
4.0
|
19,142
|
5.0
|
||||||||||||
|
New
Mexico Bank & Trust
|
37,178
|
7.12
|
20,900
|
4.0
|
26,125
|
5.0
|
||||||||||||
|
Arizona
Bank & Trust
|
12,445
|
9.74
|
5,113
|
4.0
|
6,392
|
5.0
|
||||||||||||
|
Rocky
Mountain Bank
|
31,647
|
8.34
|
15,185
|
4.0
|
18,981
|
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 $92.4 million as of December 31, 2006, under the most restrictive minimum capital requirements. Heartland’s revolving credit agreement requires our bank subsidiaries to remain well capitalized. Retained earnings that could be available for the payment of dividends to Heartland totaled approximately $42.7 million as of December 31, 2006, under the capital requirements to remain well capitalized.
TWENTY
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Following
are disclosures of the estimated fair value of Heartland’s financial
instruments. The estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data
to
develop the estimates of fair value. Accordingly, the estimates presented
herein
are not necessarily indicative of the amounts Heartland could realize in
a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value
amounts.
|
(Dollars
in thousands)
|
||||||||||||
|
December
31, 2006
|
December
31, 2005
|
|||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
||||||||||||
|
Cash
and cash equivalents
|
$
|
49,143
|
$
|
49,143
|
$
|
81,021
|
$
|
81,021
|
||||
|
Trading
securities
|
1,568
|
1,568
|
515
|
515
|
||||||||
|
Securities
available for sale
|
613,950
|
613,950
|
527,252
|
527,252
|
||||||||
|
Securities
held to maturity
|
1,522
|
1,513
|
-
|
-
|
||||||||
|
Loans
and leases, net of unearned
|
2,198,226
|
2,180,929
|
1,993,811
|
1,992,933
|
||||||||
|
Derivatives
|
59
|
59
|
56
|
56
|
||||||||
|
Financial
Liabilities:
|
||||||||||||
|
Demand
deposits
|
$
|
371,465
|
$
|
371,465
|
$
|
352,707
|
$
|
352,707
|
||||
|
Savings
deposits
|
822,915
|
822,915
|
754,360
|
754,360
|
||||||||
|
Time
deposits
|
1,117,277
|
1,117,277
|
1,011,111
|
1,011,111
|
||||||||
|
Short-term
borrowings
|
275,694
|
275,694
|
255,623
|
255,623
|
||||||||
|
Other
borrowings
|
224,523
|
220,520
|
220,871
|
220,584
|
||||||||
|
Derivatives
|
43
|
43
|
143
|
143
|
||||||||
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 available for sale or trading, fair value equals quoted
market
price if available. If a quoted market price is not available, fair value
is
estimated using quoted market prices for similar securities.
Loans
and
Leases
- The
fair
value of loans is estimated by discounting the future cash flows using
the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. The fair value of
loans
held for sale is estimated using quoted market prices.
Deposits
- The fair value of demand deposits, savings accounts and certain money
market
deposits is the amount payable on demand at the reporting date. The fair
value
of fixed maturity certificates of deposit is estimated using the rates
currently
offered for deposits of similar remaining maturities. If the fair value
of the
fixed maturity certificates of deposits is calculated at less than the
carrying
amount, the carrying value of these deposits is reported as the fair
value.
Short-term
and Other Borrowings
- Rates
currently available to Heartland for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
Commitments
to Extend Credit, Unused Lines of Credit and Standby Letters of Credit
- Based
upon management’s analysis of the off balance sheet financial instruments, there
are no significant unrealized gains or losses associated with these financial
instruments based upon our review of the fees currently charged to enter
into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties.
Derivatives
- The fair value of all derivatives was estimated based on the amount that
Heartland would pay or would be paid to terminate the contract or agreement,
using current rates and, when appropriate, the current creditworthiness
of the
counter-party.
TWENTY-ONE
PARENT
COMPANY ONLY FINANCIAL INFORMATION
Condensed
financial information for Heartland Financial USA, Inc. is as
follows:
BALANCE
SHEETS
|
(Dollars
in thousands)
|
||||||||
|
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
Assets:
|
||||||||
|
Cash
and interest bearing deposits
|
$
|
1,047
|
$
|
508
|
||||
|
Trading
securities
|
1,568
|
515
|
||||||
|
Securities
available for sale
|
1,430
|
2,164
|
||||||
|
Investment
in subsidiaries
|
317,937
|
267,751
|
||||||
|
Other
assets
|
9,426
|
13,518
|
||||||
|
Due
from subsidiaries
|
15,500
|
35,000
|
||||||
|
Total
assets
|
$
|
346,908
|
$
|
319,456
|
||||
|
Liabilities
and stockholders’ equity:
|
||||||||
|
Short-term
borrowings
|
$
|
35,000
|
$
|
60,750
|
||||
|
Other
borrowings
|
92,220
|
67,485
|
||||||
|
Accrued
expenses and other liabilities
|
9,977
|
3,409
|
||||||
|
Total
liabilities
|
137,197
|
131,644
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock
|
16,572
|
16,547
|
||||||
|
Capital
surplus
|
37,963
|
40,256
|
||||||
|
Retained
earnings
|
154,308
|
135,112
|
||||||
|
Accumulated
other comprehensive income (loss)
|
868
|
(1,011
|
)
|
|||||
|
Treasury
stock
|
-
|
(3,092
|
)
|
|||||
|
Total
stockholders’ equity
|
209,711
|
187,812
|
||||||
|
Total
liabilities & stockholders’ equity
|
$
|
346,908
|
$
|
319,456
|
||||
INCOME
STATEMENTS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Operating
revenues:
|
||||||||||||
|
Dividends
from subsidiaries
|
$
|
15,050
|
$
|
12,250
|
$
|
11,912
|
||||||
|
Securities
gains (losses), net
|
150
|
(5
|
)
|
711
|
||||||||
|
Gain
(loss) on trading account securities
|
141
|
(11
|
)
|
54
|
||||||||
|
Impairment
loss on equity securities
|
(76
|
)
|
-
|
-
|
||||||||
|
Other
|
2,326
|
2,197
|
865
|
|||||||||
|
Total
operating revenues
|
17,591
|
14,431
|
13,542
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Interest
|
10,121
|
7,505
|
7,153
|
|||||||||
|
Salaries
and benefits
|
376
|
798
|
48
|
|||||||||
|
Outside
services
|
1,357
|
806
|
667
|
|||||||||
|
Other
operating expenses
|
943
|
663
|
1,534
|
|||||||||
|
Minority
interest expense
|
181
|
119
|
120
|
|||||||||
|
Total
operating expenses
|
12,978
|
9,891
|
9,522
|
|||||||||
|
Equity
in undistributed earnings
|
17,465
|
15,667
|
13,811
|
|||||||||
|
Income
before income tax benefit
|
22,078
|
20,207
|
17,831
|
|||||||||
|
Income
tax benefit
|
3,024
|
2,519
|
2,421
|
|||||||||
|
Net
income
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
||||||
STATEMENTS
OF CASH FLOWS
|
(Dollars
in thousands)
|
||||||||||||
|
For
the years ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$
|
25,102
|
$
|
22,726
|
$
|
20,252
|
||||||
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
||||||||||||
|
Undistributed
earnings of subsidiaries
|
(17,465
|
)
|
(15,667
|
)
|
(13,811
|
)
|
||||||
|
(Increase)
decrease in due from subsidiaries
|
19,500
|
(10,600
|
)
|
(11,400
|
)
|
|||||||
|
Increase
(decrease) in accrued expenses and other liabilities
|
6,568
|
(1,589
|
)
|
(386
|
)
|
|||||||
|
(Increase)
decrease in other assets
|
4,092
|
(5,681
|
)
|
979
|
||||||||
|
(Increase)
decrease in trading account securities
|
(1,053
|
)
|
6
|
552
|
||||||||
|
Other,
net
|
1,294
|
2,336
|
1,093
|
|||||||||
|
Net
cash provided (used) by operating activities
|
38,038
|
(8,469
|
)
|
(2,721
|
)
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
contributions to subsidiaries
|
(24,882
|
)
|
-
|
(12,701
|
)
|
|||||||
|
Purchases
of available for sale securities
|
(541
|
)
|
(1,093
|
)
|
(30
|
)
|
||||||
|
Proceeds
from sales of available for sale securities
|
1,467
|
200
|
3,451
|
|||||||||
|
Net
cash used by investing activities
|
(23,956
|
)
|
(893
|
)
|
(9,280
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
change in short-term borrowings
|
(25,750
|
)
|
17,750
|
18,000
|
||||||||
|
Proceeds
from other borrowings
|
20,619
|
-
|
26,074
|
|||||||||
|
Repayments
of other borrowings
|
-
|
-
|
(30,907
|
)
|
||||||||
|
Cash
dividends paid
|
(5,906
|
)
|
(5,414
|
)
|
(5,036
|
)
|
||||||
|
Purchase
of treasury stock
|
(4,022
|
)
|
(5,784
|
)
|
(5,254
|
)
|
||||||
|
Proceeds
from issuance of common stock
|
1,516
|
2,007
|
1,814
|
|||||||||
|
Net
cash provided (used) by financing activities
|
(13,543
|
)
|
8,559
|
4,691
|
||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
539
|
(803
|
)
|
(7,310
|
)
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
508
|
1,311
|
8,621
|
|||||||||
|
Cash
and cash equivalents at end of year
|
$
|
1,047
|
$
|
508
|
$
|
1,311
|
||||||
TWENTY-TWO
SUMMARY
OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
(Dollars
in thousands, except per share data)
|
|||||||||||||
|
2006
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
27,297
|
$
|
27,225
|
$
|
26,543
|
$
|
25,264
|
|||||
|
Provision
for loan and lease losses
|
(157
|
)
|
1,381
|
1,487
|
1,175
|
||||||||
|
Net
interest income after provision for loan and lease losses
|
27,454
|
25,844
|
25,056
|
24,089
|
|||||||||
|
Noninterest
income
|
7,482
|
7,538
|
7,149
|
6,918
|
|||||||||
|
Noninterest
expense
|
23,168
|
23,298
|
23,165
|
24,890
|
|||||||||
|
Income
taxes
|
4,052
|
3,304
|
2,886
|
1,747
|
|||||||||
|
Income
from continuing operations
|
7,716
|
6,780
|
6,154
|
4,370
|
|||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from operations of discontinued subsidiary
|
175
|
151
|
110
|
166
|
|||||||||
|
Income
taxes
|
(358
|
)
|
57
|
42
|
63
|
||||||||
|
Income
(loss) from discontinued operations
|
(183
|
)
|
94
|
68
|
103
|
||||||||
|
Net
income
|
7,533
|
6,874
|
6,222
|
4,473
|
|||||||||
|
Per
share:
|
|||||||||||||
|
Earnings
per share-basic
|
$
|
0.46
|
$
|
0.42
|
$
|
0.38
|
$
|
0.27
|
|||||
|
Earnings
per share-diluted
|
0.45
|
0.41
|
0.37
|
0.27
|
|||||||||
|
Earnings
per share from continuing operations-basic
|
0.47
|
0.41
|
0.37
|
0.27
|
|||||||||
|
Earnings
per share from continuing operations-diluted
|
0.46
|
0.40
|
0.37
|
0.26
|
|||||||||
|
Cash
dividends declared on common stock
|
0.09
|
0.09
|
0.09
|
0.09
|
|||||||||
|
Book
value per common share
|
12.65
|
12.22
|
11.59
|
11.49
|
|||||||||
|
Market
price - high
|
31.08
|
27.86
|
26.67
|
23.60
|
|||||||||
|
Market
price - low
|
25.10
|
24.16
|
22.55
|
20.11
|
|||||||||
|
Weighted
average common shares outstanding
|
16,531,998
|
16,521,527
|
16,540,587
|
16,430,504
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,784,656
|
16,775,749
|
16,798,654
|
16,638,458
|
|||||||||
|
Ratios:
|
|||||||||||||
|
Return
on average assets
|
0.98
|
% |
0.91
|
%
|
|
0.87
|
%
|
|
0.65
|
% | |||
|
Return
on average equity
|
14.62
|
|
|
13.93
|
|
|
13.10
|
|
|
9.56
|
|||
|
Net
interest margin
|
|
|
4.06
|
4.17
|
|
|
4.27
|
|
|
4.23
|
|||
|
Efficiency
ratio
|
65.16
|
|
|
65.45
|
|
|
67.39
|
|
|
75.61
|
|||
|
2005
|
Dec.
31
|
Sept.
30
|
June
30
|
March
31
|
|||||||||
|
Net
interest income
|
$
|
24,495
|
$
|
23,847
|
$
|
23,321
|
$
|
22,279
|
|||||
|
Provision
for loan and lease losses
|
2,171
|
1,375
|
1,623
|
1,364
|
|||||||||
|
Net
interest income after provision for loan and lease losses
|
22,324
|
22,472
|
21,698
|
20,915
|
|||||||||
|
Noninterest
income
|
6,453
|
6,971
|
6,040
|
6,010
|
|||||||||
|
Noninterest
expense
|
20,936
|
20,506
|
19,915
|
19,413
|
|||||||||
|
Income
taxes
|
2,170
|
2,828
|
2,554
|
2,307
|
|||||||||
|
Income
from continuing operations
|
5,671
|
6,109
|
5,269
|
5,205
|
|||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from operations of discontinued subsidiary
|
147
|
298
|
223
|
95
|
|||||||||
|
Income
taxes
|
54
|
115
|
86
|
36
|
|||||||||
|
Income
(loss) from discontinued operations
|
93
|
183
|
137
|
59
|
|||||||||
|
Net
income
|
5,764
|
6,292
|
5,406
|
5,264
|
|||||||||
|
Per
share:
|
|||||||||||||
|
Earnings
per share-basic
|
$
|
0.35
|
$
|
0.38
|
$
|
0.33
|
$
|
0.32
|
|||||
|
Earnings
per share-diluted
|
0.34
|
0.38
|
0.32
|
0.32
|
|||||||||
|
Earnings
per share from continuing operations-basic
|
0.35
|
0.37
|
0.32
|
0.32
|
|||||||||
|
Earnings
per share from continuing operations-diluted
|
0.34
|
0.37
|
0.32
|
0.31
|
|||||||||
|
Cash
dividends declared on common stock
|
0.09
|
0.08
|
0.08
|
0.08
|
|||||||||
|
Book
value per common share
|
11.46
|
11.31
|
11.11
|
10.68
|
|||||||||
|
Market
price - high
|
21.74
|
20.99
|
21.22
|
21.31
|
|||||||||
|
Market
price - low
|
18.84
|
19.04
|
19.06
|
18.37
|
|||||||||
|
Weighted
average common shares outstanding
|
16,367,210
|
16,398,747
|
16,420,073
|
16,479,244
|
|||||||||
|
Weighted
average diluted common shares outstanding
|
16,659,995
|
16,693,661
|
16,722,383
|
16,704,808
|
|||||||||
|
Ratios:
|
|||||||||||||
|
Return
on average assets
|
0.82
|
%
|
|
0.91
|
%
|
|
0.81
|
%
|
|
0.81
|
% | ||
|
Return
on average equity
|
12.35
|
|
|
13.65
|
|
|
12.12
|
|
|
12.06
|
|||
|
Net
interest margin
|
4.04
|
|
|
4.03
|
|
|
4.07
|
|
|
4.02
|
|||
|
Efficiency
ratio
|
65.97
|
|
|
64.90
|
|
|
65.92
|
|
|
66.91
|
|||
KPMG
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Heartland
Financial USA, Inc.:
We
have
audited the accompanying consolidated balance sheets of Heartland Financial
USA,
Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and
the
related consolidated statements of income, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2006. 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, 2006 and 2005, and the results
of their
operations and their cash flows for each of the years in the three-year
period
ended December 31, 2006, 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), the effectiveness of Heartland Financial
USA,
Inc.’s internal control over financial reporting as of December 31, 2006, 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 12, 2007 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/
KPMG LLP
Des
Moines, Iowa
March
12,
2007
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, 2006. Based on that evaluation, Heartland’s management, including
the Chief Executive Officer and Chief Financial Officer, concluded that
Heartland’s disclosure controls and procedures were effective in providing
reasonable assurances that material information required to be disclosed
is
included on a timely basis in the reports we file with the Securities and
Exchange Commission.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Heartland’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Heartland’s internal control system was
designed to provide reasonable assurance to Heartland’s management, board of
directors and stockholders regarding the reliability of financial reporting
and
the preparation and fair presentation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
All
internal control systems, no matter how well designed have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Heartland’s management, under the supervision and with the
participation of Heartland’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of Heartland’s internal control over
financial reporting based upon the framework set forth by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control -Integrated Framework.
Based
on our assessment, Heartland’s internal control over financial reporting was
effective as of December 31, 2006.
KPMG
LLP,
the independent registered public accounting firm that audited Heartland’s
consolidated financial statements as of and for the year ended December
31,
2006, included herein, has issued an attestation report on management’s
assessment of 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, 2006, that materially affected, or are reasonably
likely, to affect Heartland’s internal control over financial reporting.
KPMG
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Heartland
Financial USA, Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Annual Report
on
Internal Control over Financial Reporting, that Heartland Financial USA,
Inc.
(the Company) maintained effective internal control over financial reporting
as
of December 31, 2006, based on criteria established in
Internal Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The
Company's management is responsible for maintaining effective internal
control
over financial reporting and for its assessment of the effectiveness of
internal
control over financial reporting. Our responsibility is to express an opinion
on
management's assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and 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, management’s assessment that Heartland Financial USA, Inc. maintained
effective internal control over financial reporting as of December 31,
2006, is
fairly stated, in all material respects, based on criteria established
in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also, in our opinion, Heartland Financial USA, Inc. maintained, in all
material
respects, effective internal control over financial reporting as of December
31,
2006, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Heartland
Financial USA, Inc. and subsidiaries as of December 31, 2006 and 2005,
and the
related consolidated statements of income, changes in stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2006, and our report dated March 12, 2007 expressed
an
unqualified opinion on those consolidated financial statements.
/s/
KPMG LLP
Des
Moines, Iowa
March
12,
2007
ITEM
9B.
OTHER
INFORMATION
None
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information in the Heartland Proxy Statement for the 2007 Annual Meeting
of
Stockholders to be held on May 16, 2007 (the "2007 Proxy Statement") under
the
captions "Election of Directors", "Security Ownership of Directors and
Executive
Officers and Certain Beneficial Owners", “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
included pursuant to Instruction 3 to Item 401 (b) and (c) of Regulation
S-K and
is noted below.
EXECUTIVE
OFFICERS
The
term
of office for the executive officers of Heartland is from the date of election
until the next annual organizational meeting of the board of directors.
The
names and ages of the executive officers of Heartland as of December 31,
2006,
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
|
57
|
Chairman,
President and Chief Executive Officer of Heartland; Vice Chairman
of
Dubuque Bank and Trust Company, Wisconsin Community Bank, New
Mexico Bank
& Trust, Arizona Bank & Trust, Rocky Mountain Bank, and Summit
Bank & Trust; Chairman of Citizens Finance Co.
|
|
John
K. Schmidt
|
47
|
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 and Trust Company, First Community
Bank
and Riverside Community Bank; Director and Treasurer of Citizens
Finance
Co.
|
|
Kenneth
J. Erickson
|
55
|
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
|
55
|
Senior
Vice President, Operations and Retail Banking, of Heartland;
Senior Vice
President, Operations and Retail Banking of Dubuque Bank and
Trust
Company
|
|
Douglas
J. Horstmann
|
53
|
Senior
Vice President, Lending, of Heartland; Director, President and
Chief
Executive Officer of Dubuque Bank and Trust Company
|
|
Paul
J. Peckosh
|
61
|
Senior
Vice President, Wealth Management Group, of Heartland; Executive
Vice
President, Manager Wealth Management Group, of Dubuque Bank and
Trust
Company
|
Mr.
Lynn
B. Fuller is the brother-in-law of Mr. James F. Conlan, who is a director
of
Heartland. There are no other family relationships among any of the directors
or
executive officers of Heartland.
Lynn
B.
Fuller has been a Director of Heartland and of Dubuque Bank and Trust Company
since 1984 and has been President of Heartland since 1987. Until 2004,
Mr.
Fuller had been a Director of Galena State Bank and Trust Company since
its
acquisition by Heartland in 1992, First Community Bank since the merger
in 1994
and Riverside Community Bank since the opening of this de
novo
operation in 1995. He has been a Director of Wisconsin Community Bank since
the
purchase of Cottage Grove State Bank in 1997, New Mexico Bank & Trust since
the opening of this de
novo
bank in
1998, Arizona Bank & Trust since the opening of this de
novo
bank in
2003 and Summit Bank & Trust since the opening of this de
novo
bank in
2006. Mr. Fuller joined Dubuque Bank and Trust Company in 1971 as a consumer
loan officer and was named Dubuque Bank and Trust Company's Executive Vice
President and Chief Executive Officer in 1985. Mr. Fuller was President
of
Dubuque Bank and Trust Company from 1987 until 1999 at which time he was
named
Chief Executive Officer of Heartland.
John
K.
Schmidt has been a Director of Heartland since 2001. Mr. Schmidt has been
Heartland's Executive Vice President and Chief Financial Officer since
1991. 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 and Trust Company, First Community Bank
and
Riverside Community Bank in 2004. He is a certified public accountant and
worked
at KPMG LLP in Des Moines, Iowa, from 1982 until 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 appointed as Senior Vice President of Heartland in 1996. Mr.
Everts
has been employed by Dubuque Bank and Trust Company as Senior Vice President,
Operations and Retail Banking since 1992. Prior to his service with Dubuque
Bank
and Trust Company, Mr. Everts was Vice President and Lead Retail Banking
Manager
of First Bank, Duluth, Minnesota.
Douglas
J. Horstmann was named Senior Vice President of Heartland in 1999. 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 appointed Senior Vice President of Heartland in 1999. Mr. Peckosh
has been employed by Dubuque Bank and Trust Company since 1975, was appointed
Assistant Vice President, Trust, in 1975, Vice President, Trust in 1980,
Senior
Vice President, Trust in 1991 and Executive Vice President, Trust in 2000.
Mr.
Peckosh is an attorney and graduated from the Marquette University of Law
School
in 1970.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information in our 2007 Proxy Statement, under the captions “Compensation
Discussion and Analysis” 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 2007 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, 2006 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.
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
|
797,650
|
$12.82
|
1,365,710
|
|
Equity
compensation plans
not
approved by security
holders
|
-
|
-
|
-
|
|
Total
|
797,650
|
$12.82
|
1,365,7101
|
|
1
Includes
865,710 shares available for use under the Heartland Long-Term
Incentive
Plan and 500,000 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 2007 Proxy Statement under the caption "Transactions
with
Management" is incorporated by reference.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information in the 2007 Proxy Statement under the caption “Relationship with
Independent Auditors” 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 15, 2007.
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
15,
2007
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 15, 2007.
/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
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/
Ronald A. Larson
-----------------------------
Ronald
A.
Larson
Director
|
INDEX
OF EXHIBITS
|
||
|
3.1
|
Certificate
of Incorporation of Heartland Financial USA, Inc. (Filed as Exhibit
3.1 to
the Registrant’s Form 10-K filed on March 15, 2004, and incorporated by
reference herein.)
|
|
|
3.2
|
Bylaws
of Heartland Financial USA, Inc. (Filed as Exhibit 3.2 to the
Registrant’s
Form 10-K filed on March 15, 2004, and incorporated by reference
herein.)
|
|
|
4.1
|
Specimen
Stock Certificate of Heartland Financial USA, Inc. (Filed as
Exhibit 4.1
to the Registration Statement on Form S-4 filed with the Commission
May 4,
1994, as amended (SEC File No. 33-76228) and incorporated by
reference
herein.)
|
|
|
10.1
|
Form
of Split-Dollar Life Insurance Plan effective November 13, 2001,
between
the Heartland subsidiaries and their selected officers who have
met the
three years of service requirement. These plans are in place
at Dubuque
Bank and Trust Company, Galena State Bank and Trust Company,
First
Community Bank, Riverside Community Bank, Wisconsin Community
Bank and New
Mexico Bank & Trust (Filed as Exhibit 10.4 to the Registrant’s Form
10-K filed on March 26, 2003, and incorporated by reference
herein.)
|
|
|
10.2
|
Indenture
between Heartland Financial USA, Inc. and State Street Bank and
Trust
Company of Connecticut, National Association, dated as of December
18,
2001. (Filed as Exhibit 10.17 to Registrant’s Form 10-K filed on March 29,
2002, and incorporated by reference herein.)
|
|
|
10.3
|
Indenture
between Heartland Financial USA, Inc. and Wells Fargo Bank, National
Association, dated as of June 27, 2002. (Filed as Exhibit 10.1
to the
Registrant’s second quarter Form 10-Q filed on August 14, 2002, and
incorporated by reference herein.)
|
|
|
10.4
|
Dividend
Reinvestment Plan dated as of January 24, 2002. (Filed as Form
S-3D on
January 25, 2002, and incorporated by reference
herein.)
|
|
|
10.5
|
Stockholder
Rights Agreement between Heartland Financial USA, Inc., and Dubuque
Bank
and Trust Company, as Rights Agent, dated as of June 7, 2002.
(Filed as
Form 8-K on June 11, 2002, and incorporated by reference
herein.)
|
|
|
10.6
|
Agreement
to Organize and Stockholder Agreement between Heartland Financial
USA,
Inc. and Investors in the Proposed Arizona Bank dated February
1, 2003.
(Filed as Exhibit 10.24 to Registrant’s Form 10-K filed on March 26, 2003,
and incorporated by reference herein.)
|
|
|
10.7
|
Supplemental
Initial Investor Agreement between Heartland Financial USA, Inc.
and
Initial Investors in the Proposed Arizona Bank dated February
1, 2003.
(Filed as Exhibit 10.25 to Registrant’s Form 10-K filed on March 26, 2003,
and incorporated by reference herein.)
|
|
|
10.8
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association, dated as of October 10, 2003. (Filed as Exhibit
10.1 to the
Registrant’s third quarter Form 10-Q filed on November 13, 2003, and
incorporated by reference herein.)
|
|
|
10.9
|
Form
of Executive Supplemental Life Insurance Plan effective January
20, 2004,
between the Heartland subsidiaries and their selected officers.
These
plans are in place at Dubuque Bank and Trust Company, Galena
State Bank
and Trust Company, First Community Bank, Riverside Community
Bank,
Wisconsin Community Bank, New Mexico Bank & Trust, Arizona Bank &
Trust, Rocky Mountain Bank and Citizens Finance Co. (Filed as
Exhibit
10.16 to the Registrant’s Form 10-K filed on March 15, 2004, and
incorporated by reference herein.)
|
|
|
10.10
|
Credit
Agreement among Heartland Financial USA, Inc., The Northern Trust
Company,
Harris Trust and Savings Bank and U.S. Bank National Association,
dated as
of January 31, 2004. (Filed as Exhibit 10.17 to the Registrant’s Form 10-K
filed on March 15, 2004, and incorporated by reference
herein.)
|
|
|
10.11
|
First
Amendment to Credit Agreement among Heartland Financial USA,
Inc., The
Northern Trust Company, Harris Trust and Savings Bank and U.S.
Bank
National Association, dated as of March 9, 2004. (Filed as Exhibit
10.11
to the Registrant’s Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.12
|
Indenture
by and between Heartland Financial USA, Inc. and U.S. Bank National
Association dated as of March 17, 2004.
|
|
|
10.13
|
Second
Amendment to Credit Agreement among Heartland Financial USA,
Inc., The
Northern Trust Company, Harris Trust and Savings Bank and U.S.
Bank
National Association, dated as of July 1, 2004. (Filed as Exhibit
10.12 to
the Registrant’s Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.14
|
Third
Amendment to Credit Agreement among Heartland Financial USA,
Inc., The
Northern Trust Company, Harris Trust and Savings Bank and U.S.
Bank
National Association, dated as of January 30, 2005. (Filed as
Exhibit
10.13 to the Registrant’s Form 10-K filed on March 10, 2006, and
incorporated herein.)
|
|
|
10.15
|
Heartland
Financial USA, Inc. Policy on Director Fees and Policy on Expense
Reimbursement For Directors.
|
|
|
10.16
|
Fourth
Amendment and Waiver to Credit Agreement among Heartland Financial
USA,
Inc., Harris Trust and Savings Bank and U.S. Bank National Association,
dated as of March 1, 2005. (Filed as Exhibit 10.15 to Registrant’s Form
10-K filed on March 15, 2005, and incorporated by reference
herein.)
|
|
|
10.17
|
Heartland
Financial USA, Inc. 2005 Long-Term Incentive Plan. (Filed as
Exhibit 10.01
to Registrant’s Form 8-K filed on May 19, 2005, and incorporated by
reference herein.)
|
|
|
10.18
|
Heartland
Financial USA, Inc. 2006 Employee Stock Purchase Plan effective
January 1,
2006. (Filed as Exhibit 10.02 to Registrant’s Form 8-K filed on May 19,
2005, and incorporated by reference herein.)
|
|
|
10.19
|
Fifth
Amendment and Waiver to Credit Agreement among Heartland Financial
USA,
Inc., Harris Trust and Savings Bank and U.S. Bank National Association,
dated as of July 18, 2005. (Filed as Exhibit 10.18 to the Registrant’s
Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.20
|
Indenture
by and between Heartland Financial USA, Inc. and Wells Fargo
Bank,
National Association, dated as of January 31, 2006. (Filed as
Exhibit
10.19 to the Registrant’s Form 10-K filed on March 10, 2006, and
incorporated herein.)
|
|
|
|
||
|
10.21
|
Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive
Plan Non-Qualified Stock Option Awards. (Filed as Exhibit 10.1
to
Registrant’s Form 8-K filed on February 10, 2006, and incorporated by
reference herein.)
|
|
|
10.22
|
Form
of Agreement for Heartland Financial USA, Inc. 2005 Long-Term
Incentive
Plan Performance Restricted Stock Agreement. (Filed as Exhibit
10.21 to
the Registrant’s Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.23
|
Sixth
Amendment and Waiver to Credit Agreement among Heartland Financial
USA,
Inc., Harris Trust and Savings Bank and U.S. Bank National Association,
dated as of February 28, 2006. (Filed as Exhibit 10.22 to the
Registrant’s
Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.24
|
Seventh
Amendment and Waiver to Credit Agreement among Heartland Financial
USA,
Inc., Harris Trust and Savings Bank and U.S. Bank National Association,
dated as of March 10, 2006. (Filed as Exhibit 10.23 to the Registrant’s
Form 10-K filed on March 10, 2006, and incorporated
herein.)
|
|
|
10.25
|
Agreement
to Organize and Stockholder Agreement between Heartland Financial
USA,
Inc. and Investors in Summit Acquisition Corporation and Summit
Bank &
Trust dated as of April 1, 2006. (Filed as Exhibit 10.10 to Registrant’s
second quarter Form 10-Q filed on August 9, 2006, and incorporated
by
reference herein.)
|
|
|
10.26
|
Eighth
Amendment and Waiver to Credit Agreement among Heartland Financial
USA,
Inc., Harris Trust and Savings Bank and U.S. Bank National Association,
dated as of October 17, 2006.
|
|
|
11
|
Statement
re Computation of Per Share Earnings
|
|
|
21.1
|
Subsidiaries
of the Registrant
|
|
|
23.1
|
Consent
of KPMG LLP
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|