-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GIf8eGUqtKK/IATONfM5TV+4xUltjHMaS7Ay3me77DULCGwVsan9yvFiBu/YDGGC x50gSGyoQnHgucoVvsM88A== 0000920112-03-000051.txt : 20030814 0000920112-03-000051.hdr.sgml : 20030814 20030814141448 ACCESSION NUMBER: 0000920112-03-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEARTLAND FINANCIAL USA INC CENTRAL INDEX KEY: 0000920112 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421405748 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15393 FILM NUMBER: 03846089 BUSINESS ADDRESS: STREET 1: 1398 CENTRAL AVE CITY: DUBUQUE STATE: IA ZIP: 52001 BUSINESS PHONE: 5635892000 MAIL ADDRESS: STREET 1: 1398 CENTRAL AVE CITY: DUBUQUE STATE: IA ZIP: 52001 10-Q 1 f10q603.txt FORM 10-Q FOR THE PERIOD ENDED 6/30/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period __________ to __________ Commission File Number: 0-24724 HEARTLAND FINANCIAL USA, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 42-1405748 (I.R.S. employer identification number) 1398 Central Avenue, Dubuque, Iowa 52001 (Address of principal executive offices)(Zip Code) (563) 589-2100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of August 13, 2003, the Registrant had outstanding 10,122,504 shares of common stock, $1.00 par value per share. HEARTLAND FINANCIAL USA, INC. Form 10-Q Quarterly Report Table of Contents Part I Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Form 10-Q Signature Page PART I ITEM 1. FINANCIAL STATEMENTS HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) 6/30/03 12/31/02 (Unaudited) ----------- ---------- ASSETS Cash and due from banks $ 56,645 $ 61,106 Federal funds sold and other short- term investments 29,941 39,886 ---------- ---------- Cash and cash equivalents 86,586 100,992 Time deposits in other financial institutions 1,205 1,677 Securities: Trading, at fair value 1,030 915 Available for sale, at fair value (cost of $359,689 for 2003 and $381,398 for 2002) 371,037 389,900 Loans and leases: Held for sale 32,054 23,167 Held to maturity 1,223,364 1,152,069 Allowance for loan and lease losses (17,600) (16,091) ---------- ---------- Loans and leases, net 1,237,818 1,159,145 Assets under operating leases 31,172 30,367 Premises, furniture and equipment, net 43,315 35,591 Other real estate, net 489 452 Goodwill, net 20,167 16,050 Core deposit premium and mortgage servicing rights 3,821 4,879 Other assets 58,595 46,011 ---------- ---------- TOTAL ASSETS $1,855,235 $1,785,979 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 208,608 $ 197,516 Savings 517,545 511,979 Time 677,081 628,490 ---------- ---------- Total deposits 1,403,234 1,337,985 Short-term borrowings 136,872 161,379 Other borrowings 146,206 126,299 Accrued expenses and other liabilities 31,971 36,275 ---------- ---------- TOTAL LIABILITIES 1,718,283 1,661,938 ---------- ---------- STOCKHOLDERS' EQUITY: 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, 16,000,000 shares at June 30, 2003, and December 31, 2002; issued 10,174,476 shares at June 30, 2003, and 9,905,783 shares at December 31, 2002) 10,174 9,906 Capital surplus 20,532 16,725 Retained earnings 100,803 94,048 Accumulated other comprehensive income 5,820 4,230 Treasury stock at cost (15,483 shares at June 30, 2003, and 59,369 shares at December 31, 2002) (377) (868) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 136,952 124,041 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,855,235 $1,785,979 ========== ========== See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) Three Months Ended Six Months Ended 6/30/03 6/30/02 6/30/03 6/30/02 ------- ------- ------- ------- INTEREST INCOME: Interest and fees on loans and leases $ 21,606 $ 20,632 $ 42,742 $ 41,069 Interest on securities: Taxable 2,064 3,188 5,231 6,382 Nontaxable 986 672 1,911 1,144 Interest on federal funds sold 116 67 130 172 Interest on interest bearing deposits in other financial institutions 48 37 97 140 -------- -------- -------- -------- TOTAL INTEREST INCOME 24,820 24,596 50,111 48,907 -------- -------- -------- -------- INTEREST EXPENSE: Interest on deposits 7,072 7,994 14,105 16,358 Interest on short-term borrowings 545 517 1,178 987 Interest on other borrowings 1,996 2,096 3,862 4,305 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 9,613 10,607 19,145 21,650 -------- -------- -------- -------- NET INTEREST INCOME 15,207 13,989 30,966 27,257 Provision for loan and lease losses 922 630 2,226 1,611 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 14,285 13,359 28,740 25,646 -------- -------- -------- -------- NONINTEREST INCOME: Service charges and fees 1,449 1,697 2,756 3,144 Trust fees 858 904 1,810 1,736 Brokerage commissions 216 203 363 330 Insurance commissions 166 160 416 377 Securities gains, net 478 75 1,158 156 Gain (loss) on trading account securities 277 (214) 249 (242) Impairment loss on equity securities (22) - (170) - Rental income on operating leases 3,477 3,674 6,895 7,530 Gain on sale of loans 1,689 522 3,221 1,529 Valuation adjustment on mortgage servicing rights (694) (326) (992) (326) Other noninterest income 517 91 1,180 538 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 8,411 6,786 16,886 14,772 -------- -------- -------- -------- NONINTEREST EXPENSES: Salaries and employee benefits 8,075 6,841 15,835 13,746 Occupancy 939 763 1,856 1,526 Furniture and equipment 973 814 1,848 1,618 Depreciation on equipment under operating leases 2,825 2,879 5,612 5,909 Outside services 1,162 1,107 2,272 1,981 FDIC deposit insurance assessment 54 53 107 106 Advertising 613 383 1,086 834 Core deposit and other intangibles amortization 101 123 202 247 Other noninterst expenses 1,833 1,704 3,814 3,346 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSES 16,575 14,667 32,632 29,313 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 6,121 5,478 12,994 11,105 Income taxes 1,914 1,560 4,263 3,366 -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS 4,207 3,918 8,731 7,739 Discontinued operations: Income from operation of discontinued branch - 202 - 403 Income taxes - 79 - 158 -------- -------- -------- -------- Income from discontinued operations - 123 - 245 -------- -------- -------- -------- NET INCOME $ 4,207 $ 4,041 $ 8,731 $ 7,984 ======== ======== ======== ======== EARNINGS PER COMMON SHARE-BASIC $ 0.43 $ 0.41 $ 0.88 $ 0.82 EARNINGS PER COMMON SHARE-DILUTED $ 0.42 $ 0.41 $ 0.87 $ 0.81 CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.10 $ 0.10 $ 0.20 $ 0.20 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share data) Common Capital Retained Stock Surplus Earnings ------- ------- -------- Balance at January 1, 2002 $ 9,906 $18,116 $ 79,107 Net income - - 7,984 Unrealized gain (loss) on securities available for sale - - - Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $213 - - - Reclassification adjustment for net security gains realized in net income - - - Income taxes - - - Comprehensive income Cash dividends declared: Common, $.20 per share - - (1,965) Purchase of 76,705 shares of common stock - - - Sale of 217,629 shares of common stock - (1,332) - ------- -------- -------- Balance at June 30, 2002 $ 9,906 $16,784 $ 85,126 ======= ======= ======== Balance at January 1, 2003 $ 9,906 $16,725 $ 94,048 Net income - - 8,731 Unrealized gain (loss) on securities available for sale - - - Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $117 - - - Reclassification adjustment for net security gains realized in net income - - - Income taxes - - - Comprehensive income Cash dividends declared: Common, $.20 per share - - (1,976) Purchase of 195,411 shares of common stock - - - Issuance of 268,693 shares of common stock 268 3,805 - Sale of 136,042 shares of common stock - 2 - ------- ------- -------- Balance at June 30, 2003 $10,174 $20,532 $100,803 ======= ======= ======== Accumulated Other Comprehensive Treasury Income (Loss) Stock Total ------------- -------- -------- Balance at January 1, 2002 $ 3,565 $(3,604) $107,090 Net income - - 7,984 Unrealized gain (loss) on securities available for sale 1,939 - 1,939 Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $213 (572) - (572) Reclassification adjustment for net security gains realized in net income (156) - (156) Income taxes (412) - (412) -------- Comprehensive income 8,783 Cash dividends declared: Common, $.20 per share - - (1,965) Purchase of 76,705 shares of common stock - (1,060) (1,060) Sale of 217,629 shares of common stock - 3,468 2,136 ------- ------- -------- Balance at June 30, 2002 $ 4,364 $(1,196) $114,984 ======= ======= ======== Balance at January 1, 2003 $ 4,230 $ (868) $124,041 Net income - - 8,731 Unrealized gain (loss) on securities available for sale 3,595 - 3,595 Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $117 (198) - (198) Reclassification adjustment for net security gains realized in net income (988) - (988) Income taxes (819) - (819) -------- Comprehensive income 10,321 Cash dividends declared: Common, $.20 per share - - (1,976) Purchase of 195,411 shares of common stock - (5,469) (5,469) Issuance of 268,693 shares of common stock - 4,612 8,685 Sale of 136,042 shares of common stock - 1,348 1,350 ------- ------- -------- Balance at June 30, 2003 $ 5,820 $ (377) $136,952 ======= ======= ======== See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended 6/30/03 6/30/02 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,731 $ 7,984 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,550 8,021 Provision for loan and lease losses 2,226 1,601 Provision for income taxes less than payments 1,811 2,971 Net amortization of premium on securities 3,480 2,543 Securities gains, net (1,158) (156) (Increase) decrease in trading account securities (115) 298 Loss on impairment of equity securities 170 - Loans originated for sale (219,507) (70,779) Proceeds on sales of loans 214,392 83,825 Net gain on sales of loans (3,221) (1,529) Decrease (increase) in accrued interest receivable 50 (708) (Decrease) increase in accrued interest payable (38) 120 Other, net (1,218) (790) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 13,153 33,401 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of time deposits in other financial institutions - (1,068) Proceeds on maturities of time deposits in other financial institutions 128 4 Proceeds from the sale of securities available for sale 37,078 20,889 Proceeds from the maturity of and principal paydowns on securities available for sale 96,409 84,178 Purchase of securities available for sale (113,385) (126,362) Net increase in loans and leases (72,643) (21,567) Purchase of bank-owned life insurance policies (15,000) - Increase in assets under operating leases (6,417) (2,539) Capital expenditures (9,110) (3,307) Proceeds on sale of OREO and other repossessed assets 899 273 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (82,041) (49,499) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits and savings accounts 16,658 (3,463) Net increase in time deposit accounts 48,591 26,381 Net decrease in short-term borrowings (24,507) (16,813) Proceeds from other borrowings 25,750 7,683 Repayments of other borrowings (5,843) (15,151) Purchase of treasury stock (5,469) (1,060) Proceeds from sale of common stock 1,278 1,823 Dividends (1,976) (1,965) -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 54,482 (2,565) -------- -------- Net decrease in cash and cash equivalents (14,406) (18,663) Cash and cash equivalents at beginning of year 100,992 93,550 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 86,586 $ 74,887 ======== ======== Supplemental disclosures: Cash paid for income/franchise taxes $ 2,623 $ 332 ======== ======== Cash paid for interest $ 20,141 $ 21,973 ======== ======== See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the financial statements for the fiscal year ended December 31, 2002, included in Heartland Financial USA, Inc.'s ("Heartland") Form 10- K filed with the Securities and Exchange Commission on March 26, 2003. Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted. The financial information of Heartland included herein is prepared pursuant to the rules and regulations for reporting on Form 10-Q. Such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The results of the interim periods ended June 30, 2003, are not necessarily indicative of the results expected for the year ending December 31, 2003. Basic earnings per share is determined using net income and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and six-month periods ended June 30, 2003 and 2002, are shown in the tables below: Three Months Ended (Dollars in thousands) 6/30/03 6/30/02 ------- ------- Income from continuing operations $ 4,207 $ 3,918 Discontinued operations: Income from operation of discontinued branch - 202 Income taxes - 79 ------- ------- Income from discontinued operation - 123 ------- ------- Net income $ 4,207 $ 4,041 ======= ======= Weighted average common shares outstanding for basic earnings per share (000's) 9,874 9,809 Assumed incremental common shares issued upon exercise of stock options (000's) 185 64 ------- ------- Weighted average common shares for diluted earnings per share (000's) 10,059 9,873 ======= ======= Earnings per common share - basic $ .43 $ .41 Earnings per common share - diluted .42 .41 Earnings per common share from continuing operations - basic(1) .43 .40 Earnings per common share from continuing operations - diluted(1) .42 .40 (1) Excludes the discontinued operations of our Eau Claire branch. Six Months Ended (Dollars in thousands) 6/30/03 6/30/02 ------- ------- Income from continuing operations $ 8,731 $ 7,739 Discontinued operations: Income from operation of discontinued branch - 403 Income taxes - 158 ------- ------- Income from discontinued operation - 245 ------- ------- Net income $ 8,731 $ 7,984 ======= ======= Weighted average common shares outstanding for basic earnings per share (000's) 9,883 9,770 Assumed incremental common shares issued upon exercise of stock options (000's) 188 62 ------- ------- Weighted average common shares for diluted earnings per share (000's) 10,071 9,832 ======= ======= Earnings per common share - basic $ .88 $ .82 Earnings per common share - diluted .87 .81 Earnings per common share from continuing operations - basic(1) .88 .79 Earnings per common share from continuing operations - diluted(1) .87 .79 (1) Excludes the discontinued operations of our Eau Claire branch. Heartland applies APB Opinion No. 25 in accounting for its Stock Option Plan and, accordingly, no compensation cost for its stock options has been recognized in the financial statements. 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: Three Months Six Months (Dollars in thousands, Ended Ended except per share data) 6/30/03 6/30/02 6/30/03 6/30/02 ------- ------- ------- ------- Net income as reported $ 4,207 $ 4,041 $ 8,731 $ 7,984 Pro forma 4,207 4,041 8,515 7,736 Earnings per share-basic as reported $ .43 $ .41 $ .88 $ .82 Pro forma .43 .41 .86 .79 Earnings per share-diluted as reported $ .42 $ .41 $ .87 $ .79 Pro forma .42 .41 .85 .79 Pro forma net income only reflects options granted from 1996 through 2003. 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, is not considered. Effect of New Financial Accounting Standards-In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain variable interest entities in which equity investors do not have the characteristics of a controlling interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The recognition and measurement provisions of this Interpretation are effective for newly created variable interest entities formed after January 31, 2003, and for existing variable interest entities on the first interim or annual reporting period beginning after June 15, 2003. Heartland adopted the disclosure provisions of FIN 46 effective December 31, 2002, and the provisions of FIN 46 for newly formed variable interest entities effective January 31, 2003. Heartland has no newly formed variable interest entity subject to the provisions of FIN 46. Heartland is in the process of determining whether consolidation of various affordable housing tax credit project partnerships will be necessary in the third quarter of 2003 to reflect the July 1, 2003 effective date. Consolidation of these entities, if required, is not expected to have a material effect on the consolidated financial statements of Heartland. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." In addition, SFAS No. 149 requires that contract with comparable characteristics be accounted for similarly. This statement is effective prospectively for contracts entered into or modified after June 30, 2003, except for those provisions of the Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with the respective effective dates. The impact of adopting SFAS No. 149 on Heartland's financial condition and results of operation is not expected to be material. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The impact of adopting SFAS No. 150 on Heartland's financial condition and results of operation is not expected to be material. NOTE 2: CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS The gross carrying amount of intangible assets and the associated accumulated amortization at June 30, 2003, is presented in the table below. June 30, 2003 ------------------------ Gross Carrying Accumulated (Dollars in thousands) Amount Amortization -------- ------------ Intangible assets: Core deposit premium $ 4,492 $ 2,258 Mortgage servicing rights 3,522 1,935 ------- ------- Total $ 8,014 $ 4,193 ======= ======= Unamortized intangible assets $ 3,821 ======= Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 2003. What Heartland actually experiences may be significantly different depending upon changes in mortgage interest rates and market conditions. The following table shows the estimated future amortization expense for amortized intangible assets: Core Mortgage Deposit Servicing (Dollars in thousands) Premium Rights Total --------- --------- --------- Six months ended December 31, 2003 $ 202 $ 1,379 $ 1,581 Year Ended December 31, 2004 $ 353 $ 59 $ 412 2005 353 49 402 2006 353 39 392 2007 353 29 382 2008 353 20 373 NOTE 3: ACQUISITIONS On June 30, 2003, Heartland completed the buyout of all minority stockholders of New Mexico Bank & Trust as agreed upon during its formation in 1998. The repurchase price was determined by an appraisal of the stock of New Mexico Bank & Trust. In exchange for their shares of New Mexico Bank & Trust stock, the minority stockholders received a total of 383,574 shares of Heartland common stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT This report 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. Factors which could have a material adverse effect on the operations and future prospects of Heartland and its subsidiaries include, but are not limited to, the following: - The strength of the United States economy in general and the strength of the local economies in which Heartland conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of Heartland's assets. - The economic impact of past and any future terrorist threats and attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks. - The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. - The effects of changes in interest rates (including the effects of changes in the rate of prepayments of Heartland's assets) and the policies of the Board of Governors of the Federal Reserve System. - The ability of Heartland to compete with other financial institutions as effectively as Heartland currently intends due to increases in competitive pressures in the financial services sector. - The inability of Heartland to obtain new customers and to retain existing customers. - The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. - Technological changes implemented by Heartland and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to Heartland and its customers. - The ability of Heartland to develop and maintain secure and reliable electronic systems. - The ability of Heartland to retain key executives and employees and the difficulty that Heartland may experience in replacing key executives and employees in an effective manner. - Consumer spending and saving habits which may change in a manner that affects Heartland's business adversely. - Business combinations and the integration of acquired businesses may be more difficult or expensive than expected. - 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 and the Financial Accounting Standards 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. Additional information concerning Heartland and its business, including other factors that could materially affect Heartland's financial results, is included in Heartland's filings with the Securities and Exchange Commission. GENERAL Heartland's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges, fees and gains on loans, rental income on operating leases 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, depreciation on equipment under operating leases and provision for loan and lease losses. Total net income for the second quarter of 2003 was $4.2 million, or $.42 on a diluted earnings per common share basis, compared to $4.0 million, or $.41 on a diluted earnings per common share basis, during the same quarter in 2002, a $166 thousand or 4% increase. On an annualized basis, return on average common equity was 13.15% and return on average assets was .92% for the second quarter of 2003. For the same period in 2002, annualized return on average equity was 14.44% and annualized return on average assets was .99%. These results are particularly gratifying in light of continued softness in the economy and Heartland's continued investment in the growth of its franchise. Earnings from continuing operations for the second quarter of 2003 increased $289 thousand or 7%. Net income from continuing operations totaled $4.2 million, or $.42 on a diluted earnings per common share basis, for the second quarter of 2003 compared to $3.9 million, or $.40 on a diluted earnings per common share basis, during the same quarter in 2002. The Eau Claire branch of Wisconsin Community Bank, a bank subsidiary of Heartland, was sold effective December 15, 2002. The effect of this discontinued operation on net income during the second quarter of 2002 was a gain of $123 thousand, or $.01 on a diluted earnings per common share basis. This branch sale allowed Heartland to redirect assets to markets where the assets can be more productively and profitably employed. Contributing to the improved earnings during the second quarter of 2003 was the $1.2 million or 9% growth in net interest income due primarily to growth in earning assets. Average earning assets went from $1.46 billion during the second quarter of 2002 to $1.65 billion during the same quarter in 2003, a change of $190.9 million or 13%. Gains on sale of loans and activities within the available for sale and trading portfolios contributed to a $1.6 million or 24% increase in noninterest income. These improvements in noninterest income were partially offset by a valuation adjustment on mortgage servicing rights and an increase in amortization on these mortgage servicing rights as a result of prepayments experienced within Heartland's mortgage servicing portfolio. Noninterest expense increased $l.9 million or 13%, a portion of which was attributable to the implementation of imaging technology across all the bank subsidiaries, the addition of HTLF Capital Corp. and expansion into the Santa Fe, New Mexico and Phoenix, Arizona markets. For the six-month period ended June 30, 2003, total net income increased 9% to $8.7 million, or $.87 per diluted share, compared to total net income of $8.0 million, or $0.81 per diluted share in the same period in 2002. Return on average equity was 13.84%, and return on average assets was .98% for the six-month period in 2003 compared to 14.56% and .99%, respectively, for the same period in 2002. The improved earnings during the first six months of 2003 was largely due to the $3.7 million or 14% growth in net interest income as a result of the growth in earning assets. Average earning assets went from $1.46 billion during the first half of 2002 to $1.62 billion during the same period in 2003, an increase of $159.5 million or 11%. Noninterest income increased $2.1 million or 14%, primarily as a result of gains on sale of loans and activities within the available for sale and trading portfolios and would have been more significant had it not been for the valuation adjustment on mortgage servicing rights recorded during the second quarter of 2003 and the increased amortization on mortgage servicing rights as a result of prepayments experienced in the mortgage servicing portfolio. Noninterest expense increased $3.3 million or 11%, due primarily to the implementation of imaging technology and the expansion efforts mentioned previously. Management remains focused on expanding the customer base in the markets served and continues to look for opportunities to enter new markets. New Mexico Bank & Trust's branch in Santa Fe attracted deposits in excess of $10 million during its first six months of operations. Plans for additional branch locations in this market are underway. Arizona Bank & Trust, Heartland's de novo bank in Mesa, Arizona, is scheduled to open on August 18, 2003. While expansion efforts can initially be a drag on current earnings, they will provide a firm foundation for future success. Total assets at June 30, 2003, increased by 12% since June 30, 2002, and by 4% since December 31, 2002. Total loans and leases grew 13% to $1.26 billion compared to June 30, 2002, and deposits increased 14% to $1.40 billion over the same period. In the first six months of 2003, total loans and leases and total deposits increased by 7% and 5%, respectively. Commercial and commercial real estate loan volume alone grew by over $50 million since year-end and $100 million since last June. Deposits showed strong increases in the latest six month and twelve month periods, demonstrating continued strong customer response to Heartland's products despite the very low interest rate environment. 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 practice 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, past loss experience, loan delinquencies, and potential substandard and doubtful credits. The adequacy of the allowance for loan and lease losses is monitored on an ongoing basis by the loan review staff, senior management and the board of directors. Factors considered by the loan review committee included the following: - Heartland has continued to experience growth in more- complex commercial loans as compared to relatively lower- risk residential real estate loans. - The nation has continued in a period of economic slowdown. - During the last several years, Heartland has entered new markets in which it had little or no previous lending experience. - Heartland has continued to experience an increase in watch and problem loan exposure. There can be no assurances that the allowance for loan and lease losses will be adequate to cover all losses, but management believes that the allowance for loan and lease losses was adequate at June 30, 2003. While management uses available information to provide for loan and lease losses, the ultimate collectibility of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions. Along with other financial institutions, management shares a concern for the outlook of the economy during the remainder of 2003. Even though there have been various signs of emerging strength, it is not certain that this strength will be sustainable. Consumer confidence plunged to a nine-year low during 2002. Should this economic climate continue, 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. NET INTEREST INCOME Net interest margin, expressed as a percentage of average earning assets, was 3.82% during the second quarter of 2003 compared to 3.94% for the same period in 2002 and 4.12% for the first quarter of 2003. For the first six months of 2003, net interest margin was 3.99%, compared to 3.86% in the same period one year ago. A flat yield curve led to further compression of Heartland's net interest margin, but management believes its disciplined approach to asset and liability pricing has served to mitigate the effects of margin pressure to a significant degree. Management has been successful in the utilization of floors on its commercial loan portfolio to minimize the effect downward rates have on Heartland's interest income. If rates begin to edge upward, Heartland will not see a corresponding increase in its interest income until rates have moved above the floors in place on these loans. On a tax-equivalent basis, interest income as a percentage of average earning assets was 6.37% during the first six months of 2003 compared to 6.85% during the first six months of 2002, a decline of 48 basis points. On the liability side of the balance sheet, management has continued to look for opportunities to lock in some funding in three- to five-year maturities as rates have been at historical low levels. Interest expense as a percentage of average earning assets was 2.38% during the first half of 2003 compared to 2.99% during the first half of 2002, a decline of 61 basis points. For the three-month period ended June 30, 2003, interest income increased $224 thousand or 1% when compared to the same period in 2002. This increase was attributable to the growth in earning assets. Average earning assets were $1.65 billion during the second quarter of 2003 compared to $1.46 billion during the second quarter of 2002. For the six-month period ended June 30, 2003, interest income increased $1.2 million or 2% when compared to the same period in 2002. This increase was attributable to the growth in earning assets. Average earning assets were $1.62 billion during the second half of 2003 compared to $1.46 billion during the second half of 2002. This growth in earning assets offset the effect of a further decline in the national prime rate. During the second quarter of 2003, the national prime rate was further reduced from 4.25% to 4.00% compared to 4.75% during the first half of 2002. For the three-month period ended June 30, 2003, interest expense decreased $1.0 million or 9% when compared to the same period in 2002. For the six-month period ended June 30, 2003, interest expense decreased $2.5 million or 12% when compared to the same period in 2002. The decline in interest expense outpaced the decline in interest income, primarily as a result of the decline in rates and the maturity of higher-rate certificate of deposit accounts. Management continues to focus efforts on improving the mix of its funding sources to minimize its interest costs. On June 25, 2003, the Federal Open Market Committee decided to lower its target for the federal funds rate by 25 basis points to 1.00%, the lowest target interest rate on overnight loans between banks since 1961. Correspondingly, national prime declined to 4.00%. The continuation of these historically low interest rates may have a negative impact on Heartland's net interest margin. Even though a majority of Heartland's floating rate commercial loan portfolio has floors in place, at these historically low interest rate levels, there will be pressure to lower these floors or refinance to fixed rate products. Additionally, the rates paid on deposit products have been driven to significantly low levels during the past year and, in many cases, there is little room to lower these rates another 50 basis points. 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's opinion, an adequate allowance for loan and lease losses. The provision for loan losses during the second quarter of 2003 was $922 thousand, an increase of $292 thousand or 46% when compared to the same quarter in 2002. During the first six months of 2003, the provision for loan losses was $2.2 million, an increase of $615 thousand or 38% when compared to the same period in 2002. These increases resulted primarily from the growth experienced in the loan portfolio and an increase in watch and problem loan exposure. The adequacy of the allowance for loan and lease losses is determined by management using factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, past loss experience, loan delinquencies, and potential substandard and doubtful credits. A weak economy will inevitably result in increased problem loans, but Heartland expects the problems to be manageable and of a lesser scope for Heartland than for the industry as a whole. 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. NONINTEREST INCOME Total noninterest income increased $1.6 million or 24% during the second quarter of 2003 when compared to the same quarter in 2002. On a year-to-date comparative basis, total noninterest income increased $2.1 million or 14%. The noninterest income categories reflecting significant improvement during the quarter and six months were securities gains and gains on sale of loans. Service charges and fees decreased $248 thousand or 15% during the quarters under comparison and $388 thousand or 12% during the six-month periods under comparison. Included in this category are service fees collected on the mortgage loans Heartland sold into the secondary market, while retaining servicing. Even though Heartland's servicing portfolio grew to $464.0 million at June 30, 2003, from $395.1 million at year-end 2002, the amortization on the mortgage servicing rights associated with the servicing portfolio increased $519 thousand for the quarters and $929 thousand for the six months under comparison, as a result of increased prepayments in the portfolio. Offsetting a portion of these increases was an additional $144 thousand in service charges on checking accounts during the first six months of 2003, a 7% increase. The addition of an overdraft privilege feature to our checking account product line in late 2001, along with growth in the number of checking accounts, resulted in the generation of additional service charge revenue related to activity fees charged to these accounts. Checking account balances grew from $153.8 million at June 30, 2002, to $208.6 million at June 30, 2003, a $54.8 million or 36% increase. Also contributing to the increase in service charges and fees was the $93 thousand or 18% growth in fees collected for the processing of activity on our automated teller machines during the first six months of 2003. Beginning in the summer of 2002, the state of Iowa began to allow financial institutions to charge a fee for the use of automated teller machines. Gains on sale of loans increased by $1.2 million or 224% for the quarters and $1.7 million or 111% for the six months under comparison. The volume of mortgage loans sold into the secondary market during the first half of 2003 was greater than those sold during the same period in 2002, primarily as a result of the historically low rate environment during 2003. 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. Mortgage rates began to move upward recently and if that trend continues, the present level of gains on sale of loans will not continue throughout the balance of the year. During the second quarter of 2003, securities gains were $478 thousand compared to $75 thousand during the second quarter of 2002. During the first six months of 2003, securities gains were $1.2 million compared to $156 thousand during the first six months of 2002. During the first quarter of 2003, Heartland's interest rate forecast changed to a rising rate bias on the long end of the yield curve, and therefore, longer-term agency securities were sold at a gain to shorten the portfolio. The proceeds were invested in well-seasoned mortgage-backed securities that were projected to outperform the agency securities in a rising rate environment. Heartland began classifying some of its new equity securities purchases as trading during the first quarter of 2001. This portfolio recorded gains of $277 thousand during the second quarter of 2003 compared to losses of $214 thousand during the same quarter in 2002. This improvement is indicative of the overall rise in the stock markets. Impairment losses on equity securities deemed to be other than temporary totaled $22 thousand during the second quarter of 2003 and $170 thousand for the first six months of 2003. A majority of these losses were related to the decline in market value on the common stock of three companies held in Heartland's available for sale equity securities portfolio. The carrying value of these stocks on Heartland's balance sheet at June 30, 2003, was $42 thousand. Additionally, during the first quarter of 2003, an impairment loss on equity securities totaling $20 thousand was recorded on Heartland's investment in a limited partnership. The fair value of the remaining portion of Heartland's investment in this partnership at quarter-end was $80 thousand. During the second quarter of 2003, a $694 thousand loss was recorded as a valuation adjustment on mortgage servicing rights compared to a $326 thousand loss during the same quarter in 2002. For the six-month period ended on June 30, the loss totaled $992 thousand during 2003 and $326 thousand during 2002. The valuation of Heartland's mortgage servicing rights declined since year-end as a result of the further drop in mortgage loan interest rates. Heartland utilizes the services of an independent third-party to perform a valuation analysis of its servicing portfolio each quarter. Rental income on operating leases decreased $197 thousand or 5% during the second quarter of 2003 and $635 thousand or 8% during the first half of 2003. These decreases resulted from a decline in the number of vehicles being replaced at our vehicle leasing and fleet management subsidiary, ULTEA. As the economy weakened, many companies elected to continue operations with their current fleet of vehicles instead of the replacement of three or four year old vehicles, as had typically been the norm. Total other noninterest income was $517 thousand during the second quarter of 2003 compared to $91 thousand during the same quarter in 2002. For the six-month period ended on June 30, total other noninterest income was $1.2 million in 2003 and $538 thousand in 2002. Contributing to the increases during 2003 were the following: - During the second quarter of 2003, Heartland purchased an additional $15 million in bank-owned life insurance policies and the corresponding increase in cash surrender value on these policies was $100 thousand. - During the first quarter of 2003, a $178 thousand gain was realized on the sale of one parcel of repossessed real estate. - In April of 2002, Dubuque Bank and Trust acquired a 99.9% ownership in a limited liability company that owns a certified historic structure for which historic rehabilitation tax credits applied to the 2002 tax year. Amortization of the investment in this limited liability company recorded during the first six months of 2002 was $178 thousand. NONINTEREST EXPENSE Total noninterest expense increased $1.9 million or 13% during the second quarter of 2003 when compared to the same quarter in 2002. On a six-month comparative basis, total noninterest expense increased $3.3 million or 11%. A large portion of this increase was attributable to expansion efforts, as well as, to the implementation of imaging technology across all of Heartland's bank subsidiaries. Salaries and employee benefits, the largest component of noninterest expense, increased $1.2 million or 18% for the quarters under comparison and $2.1 million or 15% for the six months under comparison. This category made up more than 60% of the total increase in noninterest expense. In addition to normal merit increases, these increases were also attributable to the opening of new branches in Santa Fe, New Mexico and Fitchburg, Wisconsin, the formation of HTLF Capital Corp. and preparations for the opening of a de novo bank in Phoenix, Arizona. The number of full-time equivalent employees employed by Heartland increased from 584 at June 30, 2002, to 642 at June 30, 2003. The noninterest expense categories experiencing increases during the quarters and six-month periods under review due to the expansion efforts mentioned above were occupancy, furniture and equipment, outside services, advertising and other noninterest expense. These expenses in aggregate grew by $749 thousand or 16% during the quarters under comparison and $1.6 million or 17% for the six-month periods under comparison. The implementation of imaging technology across all the Heartland bank subsidiaries also contributed to the increases in these categories. Consistent with the lack of vehicle replacement activity occurring at ULTEA, the depreciation on equipment under operating leases decreased $54 thousand or 2% during second three months of 2003 and $297 thousand or 5% during the first six months of 2003. INCOME TAX EXPENSE Income tax expense for the second quarter of 2003 increased $275 thousand or 17% when compared to the same period in 2002. On a six-month comparative basis, income tax expense increased $739 thousand or 21%. These increases reflected the continued growth in pre-tax earnings. Heartland's effective tax rate increased to 31.27% during the second quarter of 2003 compared to 28.86% for the second quarter of 2002. For the six-month periods ended June 30, 2003 and 2002, the effective tax rate was 32.81% and 30.62%, respectively. Historic rehabilitation tax credits were applied to the 2002 tax year as a result of the previously mentioned ownership in a limited liability company that owns a certified historic structure. Tax-exempt interest income was 16% of pre-tax income during the first six months of 2003 compared to 12% for the same period in 2002. FINANCIAL CONDITION LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES Total loans and leases increased $80.2 million, an increase of 7% since year-end 2002. A majority of this growth occurred in the commercial and commercial real estate category, which grew $53.8 million or 7%. All of the banks experienced growth in this category, principally as a result of continued calling efforts. Agricultural and agricultural real estate loans grew $6.0 million or 4% during the first half of 2003. Nearly all this growth occurred at Dubuque Bank and Trust Company, Heartland's flagship bank in Dubuque, Iowa. Residential mortgage loans experienced an increase of $19.7 million or 14%, nearly half of which occurred in the loans held for sale. The remaining increase was primarily due to management's election to retain a portion of the fifteen-year fixed rate loans in its own portfolio. Customers have continued to refinance their mortgage loans into fifteen- and thirty-year fixed rate loans, which Heartland usually sells into the secondary market. Servicing is retained on a majority of these loans so that the Heartland bank subsidiaries have an opportunity to continue providing their customers the excellent service they expect. Heartland's servicing portfolio was $395.1 million at year-end 2002 and $464.0 million at June 30, 2003. Consumer loans increased $2.4 million or 2% during the first half of 2003, primarily in home equity lines of credit at Riverside Community Bank. The table below presents the composition of the loan portfolio as of June 30, 2003, and December 31, 2002. LOAN PORTFOLIO (Dollars in thousands) June 30, December 31, 2003 2002 Amount Percent Amount Percent ---------- ------- ---------- ------- Commercial and commercial real estate $ 797,282 63.37% $ 743,520 63.10% Residential mortgage 165,647 13.17 145,931 12.39 Agricultural and agricultural real estate 161,551 12.84 155,596 13.21 Consumer 123,226 9.80 120,853 10.26 Lease financing, net 10,365 .82 12,308 1.04 ---------- ------- ---------- ------- Gross loans and leases 1,258,071 100.00% 1,178,208 100.00% ======= ======= Unearned discount (1,944) (2,161) Deferred loan fees (709) (811) ---------- ---------- Total loans and leases 1,255,418 1,175,236 Allowance for loan and lease losses (17,600) (16,091) ---------- ---------- Loans and leases, net $1,237,818 $1,159,145 ========== ========== The process utilized by Heartland to estimate 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 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 $1.5 million or 9% during the first six months of 2003. The allowance for loan and lease losses at June 30, 2003, was 1.40% of loans and 327% of nonperforming loans, compared to 1.37% of loans and 359% of nonperforming loans, at year-end 2002. Nonperforming loans increased slightly to .43% of total loans and leases compared to ..38% of total loans and leases at year-end 2002. During the first six months of 2003, Heartland recorded net charge offs of $717 thousand compared to $852 thousand for the same period in 2002. Citizens Finance Co., Heartland's consumer finance subsidiary, experienced an improvement in net charge- offs. For the first six months of 2003, Citizens recorded net charge-offs of $310 thousand or 43% of total net charge-offs compared to $493 thousand or 58% of total net charge-offs during the same period in 2002. The table below presents the changes in the allowance for loan and lease losses during the periods indicated: ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands) Six Months Ended June 30, 2003 2002 ------- ------- Balance at beginning of period $16,091 $14,660 Provision for loan and lease losses from continuing operations 2,226 1,611 Provision for loan and lease losses from discontinued operations - (10) Recoveries on loans and leases previously charged off 323 415 Loans and leases charged off (1,040) (1,267) ------- ------- Balance at end of period $17,600 $15,409 ======= ======= Net charge offs to average loans and leases 0.06% 0.08% The table below presents the amounts of nonperforming loans and leases and other nonperforming assets on the dates indicated: NONPERFORMING ASSETS (Dollars in thousands) As Of As Of June 30, December 31, 2003 2002 2002 2001 ------------------------------ Nonaccrual loans and leases $4,727 $6,918 $3,944 $7,269 Loan and leases contractually past due 90 days or more 649 728 541 500 Restructured loans and leases - - - 354 ------ ------ ------ ------ Total nonperforming loans and leases 5,376 7,646 4,485 8,123 Other real estate 488 108 452 130 Other repossessed assets 287 241 279 343 ------ ------ ------ ------ Total nonperforming assets $6,151 $7,995 $5,216 $8,596 ====== ====== ====== ====== Nonperforming loans and leases to total loans and leases 0.43% 0.69% 0.38% 0.73% Nonperforming assets to total assets 0.33% 0.48% 0.29% 0.52% 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% of total assets at June 30, 2003, and 22% of total assets at December 31, 2002. A portion of the proceeds from the maturity and principal paydowns of securities was used to fund the loan growth experienced thus far in 2003. During the first six months of 2003, management elected to shift a portion of the securities portfolio into mortgage-backed securities from U.S. government agencies. Tightly structured tranches in well-seasoned mortgage-backed securities were purchased to enhance the performance of the portfolio given a rise in interest rates. 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. The table below presents the composition of the available for sale securities portfolio by major category as of June 30, 2003, and December 31, 2002. AVAILABLE FOR SALE SECURITIES PORTFOLIO (Dollars in thousands) June 30, December 31, 2003 2002 Amount Percent Amount Percent -------- ------- -------- ------- U.S. Treasury securities $ 499 .14% $ 498 .13% U.S. government agencies 71,670 19.32 100,841 25.86 Mortgage-backed securities 178,187 48.02 187,318 48.04 States and political subdivisions 89,916 24.23 71,391 18.31 Other securities 30,765 8.29 29,852 7.66 -------- ------- -------- ------- Total available for sale securities $371,037 100.00% $389,900 100.00% ======== ======= ======== ======= DEPOSITS AND BORROWED FUNDS Total deposits experienced an increase of $65.2 million or 5% during the first six months of 2003. Increases in total deposits occurred at all the bank subsidiaries except for First Community Bank. All the deposit categories experienced an increase during the six-month period. Demand deposit balances grew $11.1 million or 6% with the most significant occurring in the Riverside Community Bank and Wisconsin Community Bank markets. Savings deposit account balances grew by $5.6 million or 1%, primarily in the money market products offered by all the bank subsidiaries. Certificate of deposit account balances grew by $48.6 million or 8% during the first six months of 2003. With the continued instability in the equity markets, many customers have elected to keep funds on deposit in financial institutions. Additionally, as long-term rates have continued at all-time lows, efforts were focused at attracting customers into certificates of deposit with a maturity exceeding two years. Short-term borrowings generally include federal funds purchased, treasury tax and loan note options, securities sold under agreement to repurchase and short-term Federal Home Loan Bank ("FHLB") advances. These funding alternatives are utilized in varying degrees depending on their pricing and availability. Over the six-month period ended June 30, 2003, the amount of short-term borrowings decreased $24.5 million or 15%. 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 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. Repurchase agreement balances declined $2.8 million or 3% since year-end 2002. Also included in short-term borrowings are the credit lines Heartland entered into with two unaffiliated banks. Under the unsecured credit lines, Heartland may borrow up to $50.0 million. At June 30, 2003, and December 31, 2002, a total of $25.0 million was outstanding on these credit lines. Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year. These borrowings were $146.2 million on June 30, 2003, compared to $126.3 million on December 31, 2002. The change in these account balances primarily resulted from activity in the bank subsidiaries' borrowings from the FHLB. All of the Heartland banks own stock in the FHLB of Des Moines, Chicago or Dallas, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at June 30, 2003, had increased to $94.5 million from $72.5 million at December 31, 2002. Substantially all of these borrowings are fixed-rate advances for original terms between three and five years. To fund a portion of the fixed-rate commercial and residential loan growth experienced, Heartland entered into three-, five- and seven-year FHLB advances. Additionally, balances outstanding on capital securities issued by Heartland are included in total other borrowings. The issuance in October of 1999 for $25.0 million bears an annual rate of 9.60% and matures on September 30, 2029. A private placement offering for $8.0 million was completed in December of 2001. This variable rate issuance matures on December 18, 2031 and bears interest at the rate of 3.60% per annum over the three-month LIBOR rate, as calculated each quarter. An additional private placement offering for $5.0 million was completed in June of 2002. This additional variable rate issuance matures on June 30, 2032 and bears interest at the rate of 3.65% per annum over the three-month LIBOR rate, as calculated each quarter. CAPITAL RESOURCES Bank regulatory agencies have adopted capital standards by which all bank holding companies will be evaluated. Under the risk- based method of measurement, the resulting ratio is dependent upon not only the level of capital and assets, but also the composition of assets and capital and the amount of off-balance sheet commitments. Heartland 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 4%, 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 were as follows for the dates indicated: CAPITAL RATIOS (Dollars in thousands) June 30, December 31, 2003 2002 Amount Ratio Amount Ratio ------ ----- ------ ----- Risk-Based Capital Ratios:(1) Tier 1 capital $ 145,001 10.17% $ 141,918 10.65% Tier 1 capital minimum requirement 57,028 4.00% 53,298 4.00% ---------- ------ ---------- ------ Excess $ 87,973 6.17% $ 88,620 6.65% ========== ====== ========== ====== Total capital $ 162,600 11.40% $ 158,010 11.86% Total capital minimum requirement 114,057 8.00% 106,596 8.00% ---------- ------ ---------- ------ Excess $ 48,543 3.40% $ 51,414 3.86% ========== ====== ========== ====== Total risk-adjusted assets $1,425,708 $1,332,451 ========== ========== Leverage Capital Ratios:(2) Tier 1 capital $ 145,001 7.97% $ 141,918 8.24% Tier 1 capital minimum requirement(3) 72,764 4.00% 68,883 4.00% ---------- ------ ---------- ------ Excess $ 72,237 3.97% $ 73,035 4.24% ========== ====== ========== ====== Average adjusted assets (less goodwill and other intangible assets) $1,819,088 $1,722,077 ========== ========== (1) Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 capital to risk-adjusted assets ratio of 4.00% and total capital to risk-adjusted assets ratio of 8.00%. (2) The leverage ratio is defined as the ratio of Tier 1 capital to average adjusted assets. (3) Management of Heartland has established a minimum target leverage ratio of 4.00%. Based on Federal Reserve guidelines, a bank holding company generally is required to maintain a leverage ratio of 3.00% plus additional capital of at least 100 basis points. Commitments for capital expenditures are an important factor in evaluating capital adequacy. In April of 2003, HTLF Capital Corp., an investment banking subsidiary of Heartland was formed. This advisory firm specializes in taxable and tax-exempt municipal leasing, hospital financing, college and university financing, project financing and 501(c)3 private-activity funding. The firm also prides itself on being one of the few in the country prepared to do Indian tribal private placements. Heartland's initial investment in this subsidiary was $500 thousand. 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 is expected to begin operations on August 18, 2003. Heartland's portion of the $15.0 million initial capital investment is $12.0 million, of which $3.0 million has already been advanced. Heartland intends to fund this transaction through its revolving credit line. As a result of the acquisition of National Bancshares, Inc. on January 1, 2000, the one-bank holding company of First National Bank of Clovis, remaining requisite cash payments under the notes payable total $637 thousand in 2004, plus interest at 7.00%. Immediately following the closing of the acquisition, the bank was merged into New Mexico Bank & Trust. On June 30, 2003, Heartland completed the buyout of all minority stockholders of New Mexico Bank & Trust as agreed upon during its formation in 1998. In exchange for their shares of New Mexico Bank & Trust stock, the minority stockholders received a total of 383,574 shares of Heartland common stock. Heartland has an incentive compensation agreement with certain employees of one of the bank subsidiaries, none of whom is an executive officer of Heartland, that requires a total payment of $3.6 million to be made no later than February 29, 2004, to those who remain employed with the subsidiary on December 31, 2003. Additionally, each employee is bound by a confidentiality and non- competition agreement. One-third of the payment will be made in cash and the remaining two-thirds in shares of Heartland's common stock. The obligation is being accrued over the performance period. On June 27, 2002, Heartland completed a private placement offering of $5.0 million of variable rate cumulative capital securities representing undivided beneficial interests in Heartland Financial Capital Trust II, a special purpose trust subsidiary formed for the sole purpose of this offering. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds were used by Heartland for general corporate purposes. The debentures will mature and the capital securities must be redeemed on June 30, 2032. Heartland has the option to shorten the maturity date to a date not earlier than June 30, 2007. All of these securities qualified as Tier 1 capital for regulatory purposes as of June 30, 2003. On December 18, 2001, Heartland completed a private placement offering of $8.0 million of variable rate cumulative capital securities representing undivided beneficial interests in Heartland Financial Statutory Trust II, a special purpose trust subsidiary formed for the sole purpose of this offering. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds were used by Heartland for general corporate purposes. The debentures will mature and the capital securities must be redeemed on December 18, 2031. Heartland has the option to shorten the maturity date to a date not earlier than December 18, 2006. All of these securities qualified as Tier 1 capital for regulatory purposes as of June 30, 2003. In October of 1999, Heartland completed an offering of $25.0 million of 9.60% cumulative capital securities representing undivided beneficial interests in Heartland Capital Trust I, a special purpose trust subsidiary formed for the sole purpose of this offering. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds were used by Heartland for general corporate purposes. The debentures will mature and the capital securities must be redeemed on September 30, 2029. Heartland has the option to shorten the maturity date to a date not earlier than September 30, 2004. All of these securities continued to qualify as Tier 1 capital for regulatory purposes as of June 30, 2003. Plans for the renovation and construction of a 50,000 square foot facility to accommodate the operations and support functions of Heartland are underway. Property in downtown Dubuque, Iowa, across the street from Dubuque Bank and Trust's main facility, has been purchased. The $4.5 million project has begun with completion anticipated in the spring of 2004. A reduction in overall costs on this project will result from tax credits and other incentives made available on the project as it includes the rehabilitation of two historical structures and the creation of new jobs. 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 these efforts are not estimable at this time. LIQUIDITY Liquidity measures the ability of Heartland to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows. In the event of short-term liquidity needs, the bank subsidiaries may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs. Heartland's revolving credit agreements provide a maximum borrowing capacity of $50.0 million. As of June 30, 2003, these credit agreements provided an additional borrowing capacity of $25.0 million. These agreements contain specific covenants which, among other things, limit dividend payments and restrict the sale of assets by Heartland under certain circumstances. Also contained within the agreements are certain financial covenants, including the maintenance by Heartland of a maximum nonperforming assets to total loans ratio, minimum return on average assets ratio and maximum funded debt to total equity capital ratio. In addition, Heartland and each of its bank subsidiaries must remain well capitalized, as defined from time to time by the federal banking regulators. At June 30, 2003, Heartland was in compliance with the covenants contained in these credit agreements. ITEM 3. 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 banks and, on a consolidated basis, by the Heartland board of directors. Management does not believe that Heartland's primary market risk exposures and how those exposures have been managed to-date in 2003 changed significantly when compared to 2002. Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Heartland's use of derivative financial instruments relates to the management of the risk that changes in interest rates will affect its future interest payments. Heartland utilizes an interest rate swap contract to effectively convert a portion of its variable interest rate debt to fixed interest rate debt. Under the interest rate swap contract, Heartland agrees to pay an amount equal to a fixed rate of interest times a notional principal amount, and to receive in return an amount equal to a specified variable rate of interest times the same notional principal amount. The notional amounts are not exchanged and payments under the interest rate swap contract are made monthly. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap contract, which has been minimized by entering into the contract with a large, stable financial institution. As of June 30, 2003, Heartland had an interest rate swap contract to pay a fixed rate of interest and receive a variable rate of interest on $25.0 million of indebtedness. This contract expires on November 1, 2006. The fair market value of the interest rate swap contract was recorded as a liability in the amount of $2.1 million on June 30, 2003. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of Heartland's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2003. 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. There have been no significant changes in Heartland's internal controls or in other factors that could significantly affect internal controls. PART II ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Registrant or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of stockholders was held on May 21, 2003. At the meeting, Lynn B. Fuller and John W. Cox, Jr. were elected to serve as Class I directors (term expires in 2006). Continuing as Class II directors (term expires in 2004) are Mark C. Falb, John K. Schmidt and Robert Woodward. Continuing as Class III directors (term expires in 2005) are James F. Conlan and Thomas L. Flynn. The stockholders approved the adoption of the Heartland Financial USA, Inc. 2003 Stock Option Plan and the appointment of KPMG LLP as the Company's independent public accountants for the year ending December 31, 2003. There were 9,927,755 issued and outstanding shares of common stock entitled to vote at the annual meeting. The voting results on the above described items were as follows: For Withheld --- -------- Election of Directors Lynn B. Fuller 8,331,158 151,612 John W. Cox, Jr. 8,428,251 54,519 Broker For Against Abstain Non-Votes --- ------- ------- --------- Adoption of the 2003 Stock Option Plan 7,458,091 367,909 656,770 0 Appointment of KPMG LLP 8,415,141 51,393 16,236 0 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 10.1 Change of Control Agreements including Golden Parachute Payment Adjustments and Restrictive Covenants between Heartland Financial USA, Inc. and Executive Officers dated January 1, 2003. 10.2 Change of Control Agreements between Heartland Financial USA, Inc. and Executive Officers dated January 1, 2003. 10.3 Sixth Amendment to Second Amended and Restated Credit Agreement between Heartland Financial USA, Inc. and The Northern Trust Company dates as of April 17, 2003. 10.4 See Exhibit 10.3 for substantially the same form of a Sixth Amendment to Credit Agreement between Heartland Financial USA, Inc. and Harris Trust and Savings Bank dated as of April 17, 2003. 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. Reports on Form 8-K On April 17, 2003, the Registrant filed a report on Form 8-K pursuant to Item 12 that a press release announcing earnings for the quarter ended on March 31, 2003, was issued. On May 12, 2003, the Registrant filed a report on Form 8-K pursuant to Item 12 that its quarterly newsletter to shareholders was mailed on or about May 12, 2003. On May 15, 2003, the Registrant filed a report on Form 8-K pursuant to Item 5 that a press release announcing that its common shares would begin trading on the Nasdaq Market System effective May 15, 2003. On July 18, 2003, the Registrant filed a report on Form 8-K pursuant to Item 12 that a press release announcing earnings for the quarter ended on June 30, 2003, was issued. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. HEARTLAND FINANCIAL USA, INC. (Registrant) Principal Executive Officer /s/ Lynn B. Fuller ----------------------- By: Lynn B. Fuller President Principal Financial and Accounting Officer /s/ John K. Schmidt ----------------------- By: John K. Schmidt Executive Vice President and Chief Financial Officer Dated: August 14, 2003 EX-10 3 ex1010603q.txt EXHIBIT 10.1 - CHANGE OF CONTROL W/ GOLDEN PARACHUTE Exhibit 10.1 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is made as of the 1st day of January, 2003, (the "Effective Date") by and between HEARTLAND FINANCIAL USA, INC., an Iowa corporation, (the "Company") and (See Attachment to Exhibit 10.1)(the "Employee"). RECITALS A. The Employee is currently serving as an employee of the Company or one of its Affiliates. B. The Company desires to continue to employ the Employee as an employee of the Company or one of its Affiliates and the Employer is willing to continue such employment. C. The Company recognizes that circumstances may arise in which a change of control of the Company through acquisition or otherwise may occur thereby causing uncertainty of employment without regard to the competence or past contributions of the Employee, which uncertainty may result in the loss of valuable services of the Employee, and the Company and the Employee wish to provide reasonable security to the Employee against changes in the employment relationship in the event of any such change of control. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: 1. Payment of Severance Amount. If the Employee's employment by the Company, or any Affiliate or successor of the Company, shall be subject to a Termination within the Covered Period, then the Company shall pay the Employee an amount equal to the applicable Severance Amount, payable within fifteen (15) days after the Employee's termination that is related to the Change of Control. 2. Definitions. As used throughout this Agreement, all of the terms defined in this paragraph 2 shall have the meanings given below. A. An "Affiliate" shall mean any entity which owns or controls, is owned by or is under common ownership or control with, the Company. B. "Base Annual Salary" shall mean the amount equal to the sum of (i) the greater of Employee's then-current annual salary or the Employee's annual salary as of the date one (1) day prior to the Change of Control; (ii) the average of the three (3) most recent bonuses paid to the Employee; and (iii) the average of the three (3) most recent contributions made by the Company on behalf of the Employee to the Company's tax-qualified retirement plans (which, as of the date hereof, includes the profit sharing plan, the money purchase pension plan and the 401(k) plan). C. A "Change of Control" shall mean: (i) the consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty-one percent (51%) or more of the combined voting power of the then outstanding Voting Securities of the Company; or (ii) the individuals who, as of the date hereof, are members of the Board of Directors of the Company (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (iii) approval by stockholders of the Company of: (1) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty-one percent (51%) of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because fifty-one percent (51%) or more of the combined voting power of the then outstanding securities of the Company are acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. D. "Covered Period" shall mean the period beginning six (6) months prior to a Change of Control and ending twelve (12) months after a Change of Control. E. "Termination" shall mean termination of the Employee's employment either: (i) by the Company or its successor, as the case may be, during the Covered Period, other than a Termination for Cause or any termination as a result of death, disability, or normal retirement pursuant to a retirement plan to which the Employee was subject prior to any Change of Control; or (ii) by the Employee, for any reason, during the period beginning ten (10) days prior to a Change of Control and ending ten (10) days after a Change of Control. F. "Severance Amount" shall mean the sum of all amounts earned or accrued through the Termination Date, including Base Annual Salary, deferred compensation plan accruals and vacation pay, plus (See Attachment to Exhibit 10.11) times the Employee's Base Annual Salary. G. "Termination for Cause" shall mean only a termination by the Company as a result of the Employee's fraud, misappropriation of or intentional material damage to the property or business of the Company (including its Affiliates), substantial and material failure by the Employee to fulfill the duties and responsibilities of his or her regular position and/or comply with the Company's or its Affiliates' policies, rules or regulations, or the Employee's conviction of a felony. H. "Termination Date" shall mean the date of employment termination indicated in the written notice provided by the Company or the Employee to the other. I. "Voting Securities" shall mean any securities which ordinarily possess the power to vote in the election of directors without the happening of any pre-condition or contingency. 3. Golden Parachute Payment Adjustment. It is the intention of the parties that the Severance Amount payments under this Agreement shall not constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and any regulations thereunder. If the independent accountants acting as auditors for the Company on the date of a Change of Control (or another accounting firm designated by the parties) determine, in consultation with legal counsel acceptable to the parties, that any amount payable to the Employee by the Company under this Agreement, or any other plan or agreement under which the Employee participates or is a party, would constitute an excess parachute payment within the meaning of Section 280G of the Code and be subject to the "excise tax" imposed by Section 4999 of the Code, then the Company shall pay to the Employee the amount of such excise tax and all federal and state income or other taxes with respect to the payment of the amount of such excise tax, including all such taxes with respect to any such additional amount. If at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the excise tax which is greater than that which was determined at the time such amounts were paid, the Company shall pay to the Employee the amount of such excise tax plus any interest, penalties and professional fees or expenses, incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Company shall withhold from any amounts paid under this Agreement the amount of any excise tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any supplemental compensation paid under this subparagraph shall be made by the independent public accountants then regularly retained by the Company, in consultation with legal counsel acceptable to the parties. The Company shall pay all accountant and legal counsel fees and expenses. 4. Medical and Dental Benefits. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, then to the extent that the Employee or any of the Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any Affiliate) for active employees immediately prior to the termination, the Company will provide the Employee and those dependents with equivalent coverages for a period not to exceed twenty-four (24) months from the Termination Date. The coverages may be procured directly by the Company (or any Affiliate, if appropriate) apart from, and outside of the terms of the plans themselves; provided that the Employee and the Employee's dependents comply with all of the conditions of the medical or dental plans. In the event the Employee or any of the Employee's dependents become eligible for coverage under the terms of any other medical and/or dental plan of a subsequent employer which plan benefits are comparable to Company (or any Affiliate) plan benefits, coverage under Company (or any Affiliate) plans will cease for the eligible Employee and/or dependent. The Employee and Employee's dependents must notify the Company (or any Affiliate) of any subsequent employment and provide information regarding medical and/or dental coverage available. In the event the Company (or any Affiliate) discovers that the Employee and/or dependent has become employed and not provided the above notification, all payments and benefits under this Agreement will cease. 5. Out-Placement Counseling. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, the Company will provide out-placement counseling assistance in the form of reimbursement of the expenses incurred for such assistance within the twelve (12) month period following the Termination Date, such reimbursement amount not to exceed one-quarter (1/4) of the Employee's Base Annual Salary on the Termination Date. 6. A. Restrictive Covenant. The Company and the Employee have jointly reviewed the customer lists and operations of the Company and have agreed that the primary service area of the lending and deposit taking functions of the Company in which the Employee has actively participated extends to an area encompassing a fifty (50) mile radius from the main office of Dubuque Bank and Trust Company (DB&T). Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the Severance Amount, the Employee hereby agrees that, except with the express prior written consent of the Company, for a period of two (2) years after the termination of the Employee's employment with the Company (the "Restrictive Period"), he will not directly or indirectly compete with the business of the Company, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Company to terminate employment and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a bank, savings and loan association, credit union or similar financial institution (a "Financial Institution") within a fifty (50) mile radius of DB&T's main office (the "Restrictive Covenant"). If the Employee violates the Restrictive Covenant and the Company brings legal action for injunctive or other relief, the Company shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this paragraph computed from the date the relief is granted but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Employee. The foregoing Restrictive Covenant shall not prohibit the Employee from owning directly or indirectly capital stock or similar securities which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System. Notwithstanding the above, the Restrictive Covenant will be unenforceable in the event the Company terminates the employment of the Employee for other than Cause at or after the end of the Covered Period. B. Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this paragraph are reasonable and necessary for the protection of the legitimate business interests of the Company, that any violation of these restrictions would cause substantial injury to the Company and such interests, that the Company would not have entered into this Agreement with the Employee without receiving the additional consideration offered by the Employee in binding himself to these restrictions and that such restrictions were a material inducement to the Company to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Company, in addition to and not in limitation of, any other rights, remedies or damages available to the Company under this Agreement or otherwise at law or in equity, shall be entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by the Employee and any and all persons directly or indirectly acting for or with him, as the case may be. 7. Notices. Notices and all other communications under this Agreement shall be in writing and shall be deemed given when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company to: Heartland Financial USA, Inc. Attention: President 1398 Central Avenue Box 778 Dubuque, Iowa 52004-0778 If to the Employee to: (See Attachment to Exhibit 10.1) or to such other address as either party may furnish to the other in writing, except that notices of changes of address shall be effective only upon receipt. 8. Applicable Law. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the state of Iowa. 9. Severability. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement and all other provisions shall remain in full force and effect. 10. Withholding of Taxes. The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling. 11. Not an Employment Agreement. Nothing in this Agreement shall give the Employee any rights (or impose any obligations) to continued employment by the Company or any Affiliate or successor of the Company, nor shall it give the Company any rights (or impose any obligations) for the continued performance of duties by the Employee for the Company or any Affiliate or successor of the Company. 12. No Assignment. The Employee's rights to receive payments or benefits under this Agreement shall not be assignable or transferable whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 13. Successors. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (a) the person or entity acquiring the assets, or a substantial portion of the assets, shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement, or (b) the Company shall provide, through the establishment of a separate reserve, for the payment in full of all amounts which are or may reasonably be expected to become payable to the Employee under this Agreement. 14. Legal Fees. All reasonable legal fees and related expenses (including the costs of experts, evidence and counsel) paid or incurred by the Employee pursuant to any dispute or question of interpretation relating this Agreement shall be paid or reimbursed by the Company if the Employee is successful on the merits pursuant to a legal judgment, arbitration or settlement. 15. Term. This Agreement shall remain in effect through December 31, 2003. In the event of a Change of Control during the term of this Agreement, this Agreement shall remain in effect for the Covered Period. 16. Amendment. This Agreement may not be amended or modified except by written agreement signed by the Employee and the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first written. HEARTLAND FINANCIAL USA, INC. By: /s/ Mark C. Falb /s/ Employee -------------------- -------------------- Mark C. Falb (See Attachment to Director Exhibit 10.1) Chairman, Compensation Committee ATTACHMENT TO EXHIBIT 10.1 TIMES EMPLOYEE PAY ADDRESS - --------------------- ------- ----------------------- 1. Lynn B. Fuller four (4) 960 Prince Phillip Drive Dubuque, IA 52003-7886 2. John K. Schmidt three (3) 1075 Bonnie Court Dubuque, IA 52001-3191 3. Kenneth J. Erickson three (3) 11122 Hidden Springs Ct. Dubuque, IA 52003-9659 4. Edward H. Everts two (2) 1105 Richards Road Dubuque, IA 52003 EX-10 4 ex1020603q.txt EXHIBIT 10.2 - CHANGE OF CONTROL AGREEMENT Exhibit 10.2 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is made as of the 1st day of January, 2003, (the "Effective Date") by and between HEARTLAND FINANCIAL USA, INC., an Iowa corporation, (the "Company") and (See Attachment to Exhibit 10.2)(the "Employee"). RECITALS A. The Employee is currently serving as an employee of the Company or one of its Affiliates. B. The Company desires to continue to employ the Employee as an employee of the Company or one of its Affiliates and the Employer is willing to continue such employment. C. The Company recognizes that circumstances may arise in which a change of control of the Company through acquisition or otherwise may occur thereby causing uncertainty of employment without regard to the competence or past contributions of the Employee, which uncertainty may result in the loss of valuable services of the Employee, and the Company and the Employee wish to provide reasonable security to the Employee against changes in the employment relationship in the event of any such change of control. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: 1. Payment of Severance Amount. If the Employee's employment by the Company, or any Affiliate or successor of the Company, shall be subject to a Termination within the Covered Period, then the Company shall pay the Employee an amount equal to the applicable Severance Amount, payable within fifteen (15) days after the Employee's termination that is related to the Change of Control. 2. Definitions. As used throughout this Agreement, all of the terms defined in this paragraph 2 shall have the meanings given below. A. An "Affiliate" shall mean any entity which owns or controls, is owned by or is under common ownership or control with, the Company. B. "Base Annual Salary" shall mean the amount equal to the sum of (i) the greater of Employee's then-current annual salary or the Employee's annual salary as of the date one (1) day prior to the Change of Control; (ii) the average of the three (3) most recent bonuses paid to the Employee; and (iii) the average of the three (3) most recent contributions made by the Company on behalf of the Employee to the Company's tax-qualified retirement plans (which, as of the date hereof, includes the profit sharing plan, the money purchase pension plan and the 401(k) plan). C. A "Change of Control" shall mean: (i) the consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty-one percent (51%) or more of the combined voting power of the then outstanding Voting Securities of the Company; or (ii) the individuals who, as of the date hereof, are members of the Board of Directors of the Company (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (iii) approval by stockholders of the Company of: (1) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty-one percent (51%) of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because fifty-one percent (51%) or more of the combined voting power of the then outstanding securities of the Company are acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. D. "Covered Period" shall mean the period beginning six (6) months prior to a Change of Control and ending twelve (12) months after a Change of Control. E. "Termination" shall mean termination of the Employee's employment either: (i) by the Company or its successor, as the case may be, during the Covered Period, other than a Termination for Cause or any termination as a result of death, disability, or normal retirement pursuant to a retirement plan to which the Employee was subject prior to any Change of Control; or (iii) by the Employee, for any reason, during the period beginning ten (10) days prior to a Change of Control and ending ten (10) days after a Change of Control. F. "Severance Amount" shall mean the sum of all amounts earned or accrued through the Termination Date, including Base Annual Salary, deferred compensation plan accruals and vacation pay, plus (See Attachment to Exhibit 10.12) times the Employee's Base Annual Salary. G. "Termination for Cause" shall mean only a termination by the Company as a result of the Employee's fraud, misappropriation of or intentional material damage to the property or business of the Company (including its Affiliates), substantial and material failure by the Employee to fulfill the duties and responsibilities of his or her regular position and/or comply with the Company's or its Affiliates' policies, rules or regulations, or the Employee's conviction of a felony. H. "Termination Date" shall mean the date of employment termination indicated in the written notice provided by the Company or the Employee to the other. I. "Voting Securities" shall mean any securities which ordinarily possess the power to vote in the election of directors without the happening of any pre-condition or contingency. 3. Medical and Dental Benefits. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, then to the extent that the Employee or any of the Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any Affiliate) for active employees immediately prior to the termination, the Company will provide the Employee and those dependents with equivalent coverages for a period not to exceed twelve (12) months from the Termination Date. The coverages may be procured directly by the Company (or any Affiliate, if appropriate) apart from, and outside of the terms of the plans themselves; provided that the Employee and the Employee's dependents comply with all of the conditions of the medical or dental plans. In the event the Employee or any of the Employee's dependents become eligible for coverage under the terms of any other medical and/or dental plan of a subsequent employer which plan benefits are comparable to Company (or any Affiliate) plan benefits, coverage under Company (or any Affiliate) plans will cease for the eligible Employee and/or dependent. The Employee and Employee's dependents must notify the Company (or any Affiliate) of any subsequent employment and provide information regarding medical and/or dental coverage available. In the event the Company (or any Affiliate) discovers that the Employee and/or dependent has become employed and not provided the above notification, all payments and benefits under this Agreement will cease. 4. Out-Placement Counseling. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, the Company will provide out-placement counseling assistance in the form of reimbursement of the expenses incurred for such assistance within the twelve (12) month period following the Termination Date, such reimbursement amount not to exceed one-quarter (1/4) of the Employee's Base Annual Salary on the Termination Date. 5. Notices. Notices and all other communications under this Agreement shall be in writing and shall be deemed given when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company to: Heartland Financial USA, Inc. Attention: President 1398 Central Avenue Box 778 Dubuque, Iowa 52004-0778 If to the Employee to: (See Attachment to Exhibit 10.2) or to such other address as either party may furnish to the other in writing, except that notices of changes of address shall be effective only upon receipt. 6. Applicable Law. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the state of Iowa. 7. Severability. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement and all other provisions shall remain in full force and effect. 8. Withholding of Taxes. The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling. 9. Not an Employment Agreement. Nothing in this Agreement shall give the Employee any rights (or impose any obligations) to continued employment by the Company or any Affiliate or successor of the Company, nor shall it give the Company any rights (or impose any obligations) for the continued performance of duties by the Employee for the Company or any Affiliate or successor of the Company. 10. No Assignment. The Employee's rights to receive payments or benefits under this Agreement shall not be assignable or transferable whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 11. Successors. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (a) the person or entity acquiring the assets, or a substantial portion of the assets, shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement, or (b) the Company shall provide, through the establishment of a separate reserve, for the payment in full of all amounts which are or may reasonably be expected to become payable to the Employee under this Agreement. 12. Legal Fees. All reasonable legal fees and related expenses (including the costs of experts, evidence and counsel) paid or incurred by the Employee pursuant to any dispute or question of interpretation relating this Agreement shall be paid or reimbursed by the Company if the Employee is successful on the merits pursuant to a legal judgment, arbitration or settlement. 13. Term. This Agreement shall remain in effect through December 31, 2003. In the event of a Change of Control during the term of this Agreement, this Agreement shall remain in effect for the Covered Period. 14. Amendment. This Agreement may not be amended or modified except by written agreement signed by the Employee and the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first written. HEARTLAND FINANCIAL USA, INC. By: /s/ Mark C. Falb /s/ Employee ---------------------- -------------------- Mark C. Falb (See Attachment to Director Exhibit 10.2) Chairman, Compensation Committee ATTACHMENT TO EXHIBIT 10.2 TIMES EMPLOYEE PAY ADDRESS - --------------------- ------- ----------------------- 1. Paul J. Peckosh one (1) 1090 Langworthy Street Dubuque, IA 52003-7316 2. Douglas J. Horstmann one (1) 2418 Beacon Hill Drive Dubuque, IA 52003 EX-10 5 ex1030603q.txt EXHIBIT 10.3 - 6TH AMD TO NORTHERN TRUST CR AGREEMENT Exhibit 10.3 SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") dated as of April 17, 2003, is by and between HEARTLAND FINANCIAL USA, INC., a corporation formed under the laws of the State of Delaware (the "Borrower"), and THE NORTHERN TRUST COMPANY, an Illinois banking corporation (the "Lender") with a banking office at 50 South LaSalle Street, Chicago, Illinois 60675. WHEREAS, the Borrower and the Lender have entered into a Second Amended and Restated Credit Agreement dated as of September 28, 2000, as amended by a First Amendment thereto dated as of September 27, 2001, a Second Amendment thereto dated as of October 31, 2001, a Third Amendment thereto dated as of December 31, 2001, a Fourth Amendment thereto dated as of June 29, 2002 and a Fifth Amendment and Waiver thereto dated as of October 30, 2002 (as so amended, the "Agreement"); and WHEREAS, the parties wish to amend the Agreement to, among other things, permit the incurrence of certain indebtedness by the Borrower, as provided herein; NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. Terms defined in the introductory paragraphs hereof shall have their respective defined meanings when used in this Amendment, and, except as otherwise expressly provided herein, terms defined in the Agreement shall have their respective defined meanings when used in this Amendment. 2. AMENDMENTS TO THE AGREEMENT. (a) Amendment to Schedule 5.5(a) to the Agreement. Schedule 5.5(a) to the Agreement is hereby amended and restated as of the date hereof into Schedule 5.5(a) attached hereto. (b) Amendment to Section 5.5(d) of the Agreement. Section 5.5(d) of the Agreement is hereby amended as of the date hereof by (i) deleting the word "and" appearing immediately before clause (iii) therein, (ii) deleting the period at the end of clause (iii) therein and (iii) adding a new clause (iv) to read as follows: "(iv) DBT may issue a letter of credit for the benefit of the City of Dubuque for the account of the Borrower in an aggregate amount to be drawn not exceeding $500,000, which letter of credit will secure the Borrower's obligations to the City of Dubuque under the CDBG Economic Development Loan Program (as described on Schedule 5.5(a))." (c) Amendment to Section 5.6 of the Agreement. Section 5.6 of the Agreement is hereby amended as of the date hereof by (i) deleting the word "and" appearing at the end of clause (c) therein, (ii) deleting the period at the end of clause (d) therein and substituting the phrase "; and" therefor and (iii) adding a new clause (e) to read as follows: "(e) with respect to DBT, issue a letter of credit for the benefit of the City of Dubuque for the purposes permitted in Section 5.5(d) hereof." 3. REPRESENTATIONS AND WARRANTIES. (a) No Breach. The execution and delivery of this Amendment, and the performance of this Amendment and the Agreement, as amended hereby, will not conflict with or result in a breach of, or cause the creation of a lien or require any consent under, the charter or by-laws of the Borrower, or any applicable law or regulation, or any order, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Borrower is a party or by which it or its property is bound. (b) Power and Action, Binding Effect. The Borrower has been duly formed and is validly existing in good standing under the laws of the State of Delaware and has all necessary power and authority to execute, deliver and perform its obligations under this Amendment and the Agreement, as amended hereby; the execution, delivery and performance by the Borrower of this Amendment and the Agreement, as amended hereby, have been duly authorized by all necessary action on its part; and this Amendment and the Agreement, as amended hereby, have been duly and validly executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms. (c) Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency or any other person are necessary for the execution and delivery by the Borrower of this Amendment, the performance by the Borrower of its obligations under this Amendment or the Agreement, as amended hereby, or for the validity or enforceability hereof or thereof. 4. CONDITIONS PRECEDENT TO AMENDMENT. The amendments contemplated by Section 2 hereof are subject to the satisfaction of each of the following conditions precedent: (a) The Borrower and the Lender shall have executed and delivered this Amendment. (b) The Borrower shall have delivered to the Lender a certificate of an authorized officer of the Borrower, certifying that attached thereto is a true and correct copy of an amendment, substantially similar to this Amendment and otherwise satisfactory to the Lender, to the Other Bank Agreement. (c) No Event of Default or Unmatured Event of Default shall have occurred and be continuing under the Agreement, as amended hereby, and the representations and warranties of the Borrower in Section 4 of the Agreement and in Section 3 hereof shall be true and correct on and as of the date hereof and the Borrower shall have provided to the Lender a certificate of a senior officer of the Borrower to that effect. (d) Each Guarantor shall acknowledge and consent to this Amendment for purposes of its Guaranty as evidenced by its signed acknowledgment of this Amendment on the signature page hereof. (e) The Borrower shall have delivered to the Lender such other documents as the Lender may reasonably request. 5. GENERAL. (a) Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower may not transfer or assign any of its rights or interest hereunder. (b) Governing Law. This Amendment shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Illinois. (c) Ratification. The parties agree that the Agreement has not lapsed or terminated, is in full force and effect, and from and after the date hereof shall remain binding in accordance with its terms, as amended hereby. (d) Certain Usages. From and after the date hereof, each reference to the Second Amended and Restated Credit Agreement in the Agreement, in the Note and in the other agreements, documents or instruments referred to or provided for in or delivered under the Agreement or the Note shall be deemed to refer to the Agreement, as amended hereby. (e) Counterparts. This Amendment may be executed in any number of counterparts and each party hereto may execute any one or more of such counterparts, each of which shall be deemed to be an original, all of which, taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of this Amendment by telecopy shall be as effective as delivery of a manually executed counterpart of this Amendment. (f) Expenses. The Borrower agrees to pay, or to reimburse on demand, all reasonable costs and expenses incurred by the Lender in connection with the negotiation, preparation, execution, delivery, modification, amendment or enforcement of this Amendment, the Agreement, as amended hereby, and any other agreements, documents and instruments referred to herein, including the reasonable fees and expenses of Gardner, Carton & Douglas, special counsel to the Lender, and any other counsel engaged by the Lender. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. HEARTLAND FINANCIAL USA, INC. By: /s/ John K. Schmidt ________________________ John K. Schmidt Title: Executive VP & Chief Financial Officer THE NORTHERN TRUST COMPANY By: /s/ Thomas E. Bernhardt _______________________ Name: Thomas E. Bernhardt Title: Vice President GUARANTOR ACKNOWLEDGMENT Each of the undersigned Guarantors hereby acknowledges and consents to the Borrower's execution of this Amendment. CITIZENS FINANCE CO. ULTEA, INC. By: /s/ John K. Schmidt By: /s/ John K. Schmidt ______________________ _____________________ John K. Schmidt John K. Schmidt Title: Treasurer Title: Treasurer EX-31 6 ex3110603q.txt EXHIBIT 31.1 - CERTIFICATION OF CEO Exhibit 31.1 I, Lynn B. Fuller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Financial USA, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: August 14, 2003 Chief Executive Officer /s/ Lynn B. Fuller ----------------------- By: Lynn B. Fuller President and Chief Executive Officer EX-31 7 ex3120603q.txt EXHIBIT 31.2 - CERTIFICATION OF CFO Exhibit 31.2 I, John K. Schmidt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Heartland Financial USA, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [intentionally omitted] c) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: August 14, 2003 Chief Financial Officer /s/ John K. Schmidt ----------- ------------------- By: John K. Schmidt Executive Vice President and Chief Financial Officer EX-32 8 ex3210603q.txt EXHIBIT 32.1 - CERTIFICATION OF CEO PURSUANT SEC 1350 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Heartland Financial USA, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Lynn B. Fuller, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Lynn B. Fuller ________________________ Lynn B. Fuller Chief Executive Officer August 14, 2003 A signed original of this written statement required by Section 906 has been provided to Heartland Financial USA, Inc. and will be retained by Heartland Financial USA, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 9 ex3220603q.txt EXHIBIT 32.2 - CERTIFICATION OF CFO PURSUANT SEC 1350 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Heartland Financial USA, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, John K. Schmidt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John K. Schmidt _______________________ John K. Schmidt Chief Financial Officer August 14, 2003 A signed original of this written statement required by Section 906 has been provided to Heartland Financial USA, Inc. and will be retained by Heartland Financial USA, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----