Heartland Financial USA DEF 14A 2012
Documents found in this filing:
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.)
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Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to Section 240.14a-12
HEARTLAND FINANCIAL USA, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
x No fee required
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
o Fee paid previously with preliminary materials.
o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
April 4, 2012
Dear Fellow Stockholder:
You are cordially invited to attend the annual stockholders' meeting of Heartland Financial USA, Inc. to be held at the Grand River Center, 500 Bell Street, Dubuque, Iowa, on Wednesday, May 16, 2012, at 6:00 p.m.
At our annual meeting, we will discuss and vote on the matters described in the notice of annual meeting of stockholders and the proxy statement. Copies of the meeting notice and proxy statement are enclosed, together with a copy of our 2011 Annual Report to Stockholders.
We encourage you to attend our annual meeting in person and enjoy fellowship with other stockholders at the reception following our meeting. Whether or not you plan to attend, however, please complete, sign and date the enclosed proxy and return it in the accompanying postage-paid return envelope as promptly as possible. This will ensure that your shares are represented at the meeting.
I look forward with pleasure to seeing you and visiting with you at the meeting.
1398 Central Avenue · Dubuque, Iowa 52001 · (563) 589-2100
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 16, 2012
TO THE STOCKHOLDERS:
The annual meeting of stockholders of HEARTLAND FINANCIAL USA, INC. will be held at the Grand River Center, 500 Bell Street, Dubuque, Iowa, on Wednesday, May 16, 2012, at 6:00 p.m., for the purpose of considering and voting upon the following matters:
The Board of Directors is not aware of any other business to come before the meeting. Stockholders of record at the close of business on March 19, 2012, are the stockholders entitled to vote at the meeting and any adjournments or postponements of the meeting. Whether or not you plan to attend the meeting, please vote your shares promptly to ensure they are represented at the meeting. In the event there are an insufficient number of votes for a quorum or to approve or ratify any of the foregoing proposals at the time of the annual meeting, the meeting may be adjourned or postponed in order to permit further solicitation of proxies.
Important: The prompt return of proxies will save us the expense of further requests for proxies to ensure a quorum at the meeting. A self-addressed envelope is enclosed for your convenience. No postage is required if mailed within the United States.
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on May 16, 2012: The Proxy Statement and Annual Report to Stockholders are available at www.htlf.com.
This proxy statement is furnished in connection with the solicitation by the Board of Directors of Heartland Financial USA, Inc. of proxies to be voted at the annual meeting of stockholders to be held at the Grand River Center located at 500 Bell Street, Dubuque, Iowa, on Wednesday, May 16, 2012, at 6:00 p.m. local time, or at any adjournments or postponements of the meeting. We first mailed this proxy statement and proxy card on or about April 4, 2012.
Please read this proxy statement carefully. You should consider the information contained in this proxy statement when deciding how to vote your shares at the annual meeting. The following information regarding the meeting and the voting process is presented in a question and answer format.
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Why am I receiving this proxy statement and proxy card?
You are receiving a proxy statement and proxy card from us because on March 19, 2012, you owned shares of our common stock. This proxy statement describes the matters that will be presented for consideration by the stockholders at the annual meeting. It also gives you information concerning the matters to be voted upon to assist you in making an informed decision.
When you sign the enclosed proxy card, you appoint the proxy holder designated on the proxy card as your representative at the meeting. The proxy holder will vote your shares as you have instructed in the proxy card; this will ensure that your shares will be voted whether or not you attend the meeting. Even if you plan to attend the meeting, you should complete, sign and return your proxy card in advance of the meeting just in case your plans change.
If you have signed and returned the proxy card and an issue comes up for a vote at the meeting that is not identified on the form, the proxy holder will vote your shares, pursuant to your proxy, in accordance with his or her judgment.
What matters will be voted on at the meeting?
You are being asked to vote on the following matters proposed by our Board of Directors:
Our Board of Directors recommends that you vote FOR each of these proposals.
These matters are more fully described in this proxy statement. We are not aware of any other matters that will be voted on at the annual meeting. However, if any other business properly comes before the meeting, the persons named as proxies for stockholders will vote on these matters in a manner they consider appropriate.
How do I vote?
You may vote either by mail or in person at the meeting. To vote by mail, complete and sign the enclosed proxy card and mail it in the enclosed pre-addressed envelope. No postage is required if mailed in the United States. If you mark your proxy card to indicate how you want your shares voted, your shares will be voted as you instruct.
If you sign and return your proxy card but do not mark the form to provide voting instructions, the shares represented by your proxy card will be voted “for” all nominees named in this proxy statement; “for” the ratification of our independent registered public accounting firm; "for" the approval of Heartland executives' compensation as described in the Compensation Discussion and Analysis; "for" annual approval of the non-binding advisory proposal on compensation to our executive officers; “for” the adoption of the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan; and "for" the adoption of the Amended and Restated Heartland Financial USA, Inc. Stockholder Rights Agreement.
If you want to vote in person, please come to the meeting. Please note, however, that if your shares are held in the name of your broker (or in what is usually referred to as “street name”), you will need to arrange to obtain a separate proxy from your broker in order to vote in person at the meeting.
What does it mean if I receive more than one proxy card?
You will receive more than one proxy card if you have multiple holdings reflected in our stock transfer records and/or in accounts with brokers. Please sign and return ALL proxy cards to ensure that all your shares are voted.
If I hold shares in the name of a broker, who votes my shares?
If you received this proxy statement from your broker, your broker should have given you instructions for directing how your broker should vote your shares. It will then be your broker's responsibility to vote your shares for you in the manner you direct.
Under the rules of various national and regional securities exchanges, brokers may generally vote in their discretion on behalf of their customers on routine matters, such as the ratification of KPMG, LLP as our independent registered public accounting firm, but cannot vote on non-routine matters, such as the election of directors; any matter related to executive compensation, such as the non-binding vote on executive compensation and the frequency with which such non-binding vote will be brought to the stockholders; adoption of the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan; and adoption of the Amended and Restated Stockholder Rights Plan, unless they have received voting instructions from the person for whom they are holding shares. If your broker does not receive instructions from you on how to vote particular shares on matters on which your broker does not have discretionary authority to vote, your broker will return the proxy form to us indicating that he or she does not have the authority to vote on these matters. This is generally referred to as a “broker non-vote” and will affect the outcome of the voting as described below under “How many votes are needed for approval of each proposal?” Therefore, we encourage you to provide directions to your broker as to how you want your shares voted on all matters to be brought before the meeting. You should do this by carefully following the instructions your broker gives you concerning its procedures. This ensures that your shares will be voted at the meeting.
What if I change my mind after I return my proxy?
If you hold your shares in your own name, you may revoke your proxy and change your vote at any time before the polls close at the meeting. You may do this by:
If you hold your shares in the name of your broker and desire to revoke your proxy, you will need to contact your broker.
How many votes do we need to hold the annual meeting?
A majority of the shares that are outstanding and entitled to vote as of the record date must be present in person or by proxy at the meeting in order to hold the meeting and conduct business.
Shares are counted as present at the meeting if the stockholder either
On March 19, 2012, there were 16,501,560 shares of common stock issued and outstanding. Therefore, at least 8,250,781 shares need to be present at the annual meeting in order to hold the meeting and conduct business.
What happens if a nominee for director is unable to stand for election?
The Board may, by resolution, provide for a lesser number of directors or designate a substitute nominee. In the latter case, shares represented by proxies may be voted for a substitute nominee. You cannot vote for more than two nominees. The Board has no reason to believe any nominee will be unable to stand for election.
What options do I have in voting on each of the proposals?
You may vote “for” or “withhold authority to vote for” each nominee for director. You may vote to consider executive compensation every “1 Year,” every “2 Years,” every “3 Years,” or abstain from voting on this item. You may vote “for,” “against” or “abstain” on any other proposal that may properly be brought before the meeting.
How many votes may I cast?
Generally, you are entitled to cast one vote for each share of stock you owned on the record date.
How many votes are needed for each proposal?
The directors are elected by a plurality and the two individuals receiving the highest number of votes cast “for” their election will be elected as directors of Heartland. With respect to the Frequency of Say on Pay Proposal, the frequency selected by the stockholders will also be determined based on the plurality of votes cast. This means that the option of one year, two years or three years that receives the most votes cast by stockholders will be the frequency for the advisory vote on executive compensation that has been selected by stockholders.
The affirmative vote of a majority of the shares present in person or by proxy at the meeting and entitled to vote is required to approve the remaining items you are being asked to vote upon: 1) the ratification of the appointment of independent public accountants for the fiscal year ending December 31, 2012; 2) the approval, on a non-binding advisory basis, of compensation to our executive officers; 3) the adoption of the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan; and 4) the adoption of the Heartland Financial USA, Inc. Amended and Restated Stockholder Rights Agreement.
The vote on our executive compensation and the frequency of future executive compensation votes are advisory and will not be binding upon Heartland or the Board of Directors. However, the Compensation/Nominating Committee of the Board will consider the extent of approval in establishing our compensation plan for subsequent years.
Broker non-votes will not be counted as entitled to vote, but will count for purposes of determining whether or not a quorum is present on the matter. So long as a quorum is present, broker non-votes will have no effect on the outcome of the matters to be taken up at the meeting. Abstentions will have the same effect as negative votes.
Where do I find the voting results of the meeting?
We will announce preliminary voting results at the meeting. The voting results will also be disclosed in a Current Report on Form 8-K that we will file with the SEC by the close of business on the fourth business day after the meeting, which will be by May 22, 2012.
Who bears the cost of soliciting proxies?
We will bear the cost of soliciting proxies. In addition to solicitations by mail, officers, directors and employees of Heartland or its subsidiaries may solicit proxies in person or by telephone. These persons will not receive any special or additional compensation for soliciting proxies. We may reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to stockholders.
PROPOSAL 1 - ELECTION OF DIRECTORS
At the annual meeting to be held on May 16, 2012, you will be entitled to vote for two Class I directors for terms expiring in 2015. The Board of Directors is divided into three classes of directors having staggered terms of three years. Both of the nominees for election as Class I directors are incumbent directors. We have no knowledge that either of the nominees will refuse or be unable to serve, but if any of the nominees become unavailable for election, the holders of proxies reserve the right to substitute another person of their choice as a nominee when voting at the meeting.
Set forth below is information concerning the nominees for election and concerning the other directors whose terms of office will continue after the meeting, including the age, year first elected as a director and business experience during the previous five years.
The Board of Directors recommends that you vote your shares FOR each of the nominees.
CLASS I (Term Expires 2015)
Lynn B. Fuller; 62; Chairman, President and Chief Executive Officer, Heartland Financial USA, Inc., Dubuque, Iowa
Mr. Fuller received his undergraduate degree from the University of Dubuque and obtained his MBA from the University of Iowa. He began his banking career with Dubuque Bank and Trust Company in 1971, and worked as an officer at First National Bank of St. Paul from 1976 until returning to Dubuque Bank and Trust Company in 1978. Mr. Fuller has the deepest knowledge and understanding of Heartland and the most extensive experience in the banking business of any director, with hands-on operational experience and decades of experience in all aspects of commercial banking.
John W. Cox, Jr.; 64; Vice President of External Affairs and General Counsel for Jo-Carroll Energy, Inc., Elizabeth, Illinois
Mr. Cox is a former Member of the U.S. House of Representatives from the 16th District of the State of Illinois. During his term in the U. S. Congress, Mr. Cox served on the House Banking and Finance Committees. He brings to our Board significant knowledge of, and contacts with, community leaders in the markets we serve in Northern Illinois, Eastern Iowa and Southwestern Wisconsin, as well as working knowledge of the legal interpretations and consequences of banking decisions.
CLASS II (Term Expires 2013)
Mark C. Falb; 64; Chairman of the Board and Chief Executive Officer, Kendall/Hunt Publishing Company and Westmark Enterprises, Inc., Dubuque, Iowa
Mr. Falb has been Chairman of the Board and Chief Executive Officer of Kendall/Hunt Publishing Company, a publisher of textbooks for the Pre-K - 12th grade market and the higher education market, and Westmark Enterprises, Inc., a real estate development company, since 1993. Mr. Falb brings to our Board considerable experience in executive management of nationally based organizations and in finance and financial accounting. He has significant contacts and is considered a community leader in our primary market of Dubuque and the Tri-State area.
John K. Schmidt; 52; Executive Vice President, Chief Operating Officer and Chief Financial Officer, Heartland Financial USA, Inc., Dubuque, Iowa
Mr. Schmidt earned his undergraduate degree from the University of Northern Iowa and subsequently was employed by the Office of the Comptroller of the Currency and Peat Marwick Mitchell, currently known as KPMG LLP. He joined Dubuque Bank and Trust Company in 1994. A CPA (inactive), Mr. Schmidt brings to our Board extensive knowledge in bank operational management and accounting.
James R. Hill; 60; President, Hill Companies, LLC, Englewood, Colorado
Mr. Hill is and has been for the past thirteen years, President of Hill Companies, LLC, a real estate investment company located in Englewood, Colorado. Prior to forming Hill Companies, Mr. Hill was an executive officer with Trizec Corporation, Ltd., a leading Canadian real estate development company. Mr. Hill brings broad experience in real estate development and lending to our Board, particularly in the Colorado area, one of our newer geographic markets.
CLASS III (Term Expires 2014)
James F. Conlan; 48; Partner with Sidley Austin LLP, Chicago, Illinois
Mr. Conlan has been a partner with Sidley Austin LLP, one of the largest law firms in the world, since 1996. He has also been a member of the Executive Committee of Sidley Austin since 2005, Vice Chairman from 2000 to 2006, and Co-Chairman of the Firm-Wide Corporate Reorganization Practice since 2006. Mr. Conlan brings to our Board considerable expertise in complex financial structuring, particularly those associated with workout transactions, and the legal implications of such transactions.
Thomas L. Flynn; 56; Retired President and Chief Executive Officer of Flynn Ready-Mix Concrete Co.
Mr. Flynn was President and Chief Executive Officer of Flynn Ready-Mix Concrete Co. from 1999 until his retirement in 2012 when a majority of the company was sold. He was Chief Financial Officer of Flynn Ready-Mix from 1977 until 1999. He is a Past Chairman of the Board of Directors of the National Ready-Mix Concrete Association. Mr. Flynn is a former member of the Iowa Legislature having served for eight years as a State Senator. He also previously served for ten years as an adjunct faculty member in the Business Department of a local Liberal Arts College teaching courses in finance and business research methods. Mr. Flynn brings to our Board considerable small business expertise, business contacts in one of our principal markets and skill in governance.
All of our directors will hold office for the terms indicated, or until their respective successors are duly elected and qualified. There are no arrangements or understandings between Heartland and any other person pursuant to which any of our directors have been selected for their respective positions. With the exception of Mr. Conlan, who is the brother-in-law of Mr. Fuller, no member of the Board of Directors is related to any other member of the Board.
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
Our Board of Directors
There are currently seven members of the Board of Directors of Heartland. Although it is the responsibility of Heartland's officers to manage day-to-day operations, the Board oversees our business and monitors the performance of our management.
Independence. Our Board has determined that each of Messrs. Falb, Cox, Flynn and Hill (57% of our Board members) are “independent” directors as defined in the rules of the NASDAQ Stock Market and the rules and regulations of the SEC. Messrs. Fuller and Schmidt are not independent because they are executive officers of Heartland. Because Mr. Conlan is the brother-in-law to Mr. Fuller, our Board determined that Mr. Conlan is not independent, although it also determined that
Mr. Conlan discharges his duties in the manner of an independent director. In considering the independence of the directors, our Board reviewed questionnaires prepared by each director, reviewed its own records of transactions with directors and inquired of directors whether they or any member of their immediate families had engaged in any transaction with us, other than transactions made in the ordinary course of business.
Meetings. Our directors meet on at least a quarterly basis, or as needed at special meetings held from time to time. During 2011, the Board of Directors held four regular meetings and ten special meetings. All directors attended at least 75% of the total number of meetings of the Board of Directors and committees on which they served in 2011.
The independent directors are offered the opportunity at each meeting of the Board of Directors to meet without Messrs. Fuller, Schmidt and Conlan in attendance. During 2011, the independent directors met in such capacity three times. At the request of the independent directors, Mr. Conlan attended one meeting. Each of our Audit/Corporate Governance Committee and our Compensation/Nominating Committee consists solely of independent directors and these committees meet in conjunction with most regular Board meetings.
It is Heartland's policy that all directors be in attendance at annual meetings unless excused by the Chairman of the Board. In 2011, all seven of our directors attended the annual meeting in person.
Board Leadership. Under our bylaws, the Chairman of the Board presides at meetings of the Board at which he is in attendance. Mr. Fuller, our Chief Executive Officer, has been Chairman of our Board of Directors since 2000. Mr. Fuller, as the director with the most knowledge of banking operations and of Heartland's business, is the director most capable of leading discussions on important matters affecting Heartland, including formulation and implementation of corporate strategy. Further, our Board believes that Mr. Fuller's role as Chairman creates a firm link with management and a clear indication of management authority, and causes the Board to function more effectively and efficiently. Our Board believes that our performance during Mr. Fuller's tenure, including during this tumultuous economy, reflects the effectiveness of his leadership and his goal of advancing Heartland's interests over his personal gain.
Although Mr. Falb, the Chairman of both our Audit/Corporate Governance Committee and our Compensation/Nominating Committee, has not been formally designated as the “lead director,” he chairs and assists in setting the agenda for executive sessions of the Board, as well as regularly interacts with Messrs. Fuller and Schmidt to convey concerns of the directors and to assist with the full agenda for Board meetings.
Risk Management - Background. Heartland has historically delegated some portion of the risk management function for traditional bank products to its subsidiary banks, and the role of Heartland's management has traditionally been to oversee and audit this function and to manage risk on an enterprise-wide basis for assets and liabilities, such as securities, bank borrowings and interbank transactions. The economic environment of the past four years has led Heartland to take a more active role in the risk management of traditional loan and deposit products. In addition to a more formalized approach to risk management at Heartland, subsidiary bank, and branch levels, Heartland has developed a specialized program for working with and through the disposition of troubled loans, which, as many banking companies have experienced, have risen due to the economic dislocation of the past few years. The program encompasses specialized personnel at Heartland, as well as, at the subsidiary bank level, with the experience and authority to manage troubled loans and other assets.
Risk Management - The Board. The Heartland Board of Directors oversees planning and responding to risks arising from changing business conditions or the initiation of new activities or products. The Heartland Board of Directors also is responsible for overseeing compliance with laws and regulations, responding to recommendations from auditors and supervisory authorities, and overseeing management's conformance with internal policies and controls addressing the operations and risks of significant activities. The Board of Directors receives periodic reviews of Heartland's risk management programs and approves risk oversight and controls based upon reporting from management. The Audit/Corporate Governance Committee oversees risks associated with financial reporting, including internal control over financial reporting, and identifies and oversees compliance with changing law and regulation. The Compensation/Nominating Committee also identifies, reviews and oversees risk created by Heartland's executive benefit programs and employee compensation plans.
Risk Management - Senior Management. Senior Management of Heartland has direct oversight and involvement in risk management via reporting and regular cross-functional communications. This is primarily accomplished through senior management personnel who are assigned responsibility for monitoring and managing all types of risk within their functional areas of responsibility, aided by the input and support of other managers who have a stakeholder interest in the various risk areas. Typically, the senior manager will work with Heartland and subsidiary bank staff to develop, implement and monitor standardized policies, procedures, products, risk limits and tolerances. The Board believes that this structure enables Heartland to pro-actively manage material risks as close as reasonably possible to the level where functional decisions are made.
Committees of the Board
Audit/Corporate Governance Committee. Currently, the members of the Audit/Corporate Governance Committee are Messrs. Falb, Cox, Flynn and Hill, each of whom is an “independent” director under the listing standards of the NASDAQ Stock Market and the rules and regulations of the SEC. The Board of Directors has determined that each member of the Audit/Corporate Governance Committee qualifies as, and should be named as an “audit committee financial expert” as set forth in the rules and regulations of the SEC. The Board based this decision on the educational background and experience of Mr. Falb and Mr. Flynn in financial accounting, of Mr. Hill in business administration and of Mr. Cox in law, and the experience of each of these committee members as executive officers of other companies and other relevant experience using and analyzing financial statements.
The Audit/Corporate Governance Committee charter can be found under the investor relations section of our website, www.htlf.com. The primary duties and functions of the Audit/Corporate Governance Committee are to:
The Audit/Corporate Governance Committee's duties and functions are set forth in more detail in its charter.
Mr. Falb has served as Chairman of the Audit/Corporate Governance Committee since 2001. During 2011, the Audit/Corporate Governance Committee met four times. To promote independence of the audit function, the Audit/Corporate Governance Committee consults both separately and jointly with our independent registered public accounting firm, internal auditors and management.
The report of the Audit/Corporate Governance Committee is contained later in this proxy statement and the processes used by the Audit/Corporate Governance Committee to approve audit and non-audit services are described later in this proxy statement under the caption “Relationship With Independent Registered Public Accounting Firm-Audit/Corporate Governance Committee Pre-Approval Policy.”
Compensation/Nominating Committee. The Compensation/Nominating Committee currently consists of Messrs. Falb, Cox, Flynn and Hill, each of whom is an “independent” director as defined by listing requirements of the NASDAQ Stock Market, an “outside” director pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, and a “non employee” director under Section 16 of the Securities Exchange Act of 1934. Mr. Falb has served as Chairman of the Compensation/Nominating Committee since 2001.
The charter of the Compensation/Nominating Committee can be found under the investor relations section of our website, www.htlf.com. The primary duties and functions of the Compensation/Nominating Committee are to:
The Compensation/Nominating Committee meets as often as necessary to evaluate the performance of the named executive officers, to determine salaries and bonuses for the coming year and to consider and approve any grants under incentive compensation programs. In formulating and approving the compensation plans for executive officers, the
Compensation/Nominating Committee also meets with the risk management personnel of Heartland to consider whether the executive compensation programs are appropriately balanced, do not create inappropriate risk-taking incentives and do not impair the safety and soundness of Heartland and its subsidiary banks. The Compensation/Nominating Committee held eight meetings in 2011.
The Compensation/Nominating Committee's duties and functions are set forth in more detail in its charter. The process used by the committee to evaluate and determine executive compensation is described in this proxy statement under the caption “Executive Officers and Directors Compensation - Compensation Discussion and Analysis - Administration of our Compensation Program." The report of the Compensation/Nominating Committee is also contained later in this proxy statement.
Compensation Committee Interlocks and Insider Participation
During 2011, the Compensation/Nominating Committee, which sets the salaries and compensation for our executive officers, was comprised solely of independent directors Messrs. Falb, Cox, Flynn and Hill. None of these individuals was an officer or employee of Heartland in 2011, and none of these individuals is a former officer or employee of Heartland. In addition, during 2011, no executive officer of Heartland served on the board of directors or compensation committee of any other corporation with respect to which any member of the Compensation/Nominating Committee was engaged as an executive officer.
Director Nominations and Qualifications
In carrying out its nominating function, the Compensation/Nominating Committee evaluates all potential nominees for election, including incumbent directors, Board nominees and stockholder nominees, in the same manner. We are not currently seeking new candidates to serve on the Board and we did not receive any stockholder nominations for the 2012 annual meeting. The Compensation/Nominating Committee believes that, at a minimum, potential directors should have the highest personal and professional ethics, integrity and values, a sufficient educational and professional background that enables them to understand our business, exemplary management and communications skills, demonstrated leadership skills, sound judgment in his or her professional and personal life, a strong sense of service to the communities which we serve and an ability to meet the standards and duties set forth in our code of conduct. Additionally, no nominee can be eligible for election or re-election as a director if, at the time of such election, such person is 70 or more years of age. Each nominee must also be willing to devote sufficient time to carrying out his or her Board duties and responsibilities effectively. Although our Compensation/Nominating Committee considers diversity, including diversity of experience, gender and ethnicity in nominations, it does not have a formal diversity policy.
The Compensation/Nominating Committee also evaluates potential nominees to determine if they have any conflicts of interest that may interfere with their ability to serve as effective Board members and whether they are “independent” in accordance with NASDAQ Stock Market requirements (to ensure that at least a majority of the directors will, at all times, be independent). In the past, the Compensation/Nominating Committee has not retained any third party to assist it in identifying candidates, but it has the authority to retain a third-party firm or professional for the purpose of identifying candidates.
Stockholder Communications with the Board, Nomination and Proposal Procedures
General Communications with the Board. As set forth on our website, www.htlf.com, our Board of Directors can be contacted through Heartland's corporate headquarters at 1398 Central Avenue, P.O. Box 778, Dubuque, Iowa 52004-0778, Attn: Lois K. Pearce, or by telephone at Heartland's administrative offices at (563) 589-2100, or toll free at (888) 739-2100. Each communication will be forwarded to the Board or the specific directors identified in the communication as soon as reasonably possible.
Nominations of Directors. In order for a stockholder nominee to be considered by the Compensation/Nominating Committee as a nominee and included in our proxy statement, the nominating stockholder must file a written notice of the proposed director nomination with our corporate secretary, at the above address, at least 120 days prior to the anniversary of the date the previous year's proxy statement was mailed to stockholders. Nominations must include the full name and address of the proposed nominee and a brief description of the proposed nominee's business experience for at least the previous five years. All submissions must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected. The Compensation/Nominating Committee may request additional information in order to make a determination as to whether to nominate the person for director.
In accordance with our bylaws, a stockholder may otherwise nominate a director for election at an annual meeting of stockholders by delivering written notice of the nomination to our corporate secretary, at the above address, not less than 30 days nor more than 75 days prior to the date of the annual meeting. The stockholder's notice of intention to nominate a director must include (i) the name and address of record of the stockholder who intends to make the nomination; (ii) a representation that the stockholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence address, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (v) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, as then in effect; and (vi) the consent of each nominee to serve as a director of the corporation if so elected. We may request additional information after receiving the notification for the purpose of determining the proposed nominee's eligibility to serve as a director. Persons nominated for election to the Board pursuant to this paragraph will not be included in our proxy statement.
Other Stockholder Proposals. To be considered for inclusion in our proxy statement and form of proxy for our 2013 annual meeting of stockholders, stockholder proposals must be received by our corporate secretary, at the above address, no later than December 5, 2012, and must otherwise comply with the notice and other provisions of our bylaws, as well as SEC rules and regulations.
For proposals to be otherwise brought by a stockholder and voted upon at an annual meeting, the stockholder must file written notice of the proposal with our corporate secretary not less than 30 nor more than 75 days prior to the scheduled date of the annual meeting.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that applies to all of our directors and employees. The code sets forth the standard of ethics that we expect all of our directors and employees to follow, including our Chief Executive Officer and Chief Financial Officer. The code is posted on our website, www.htlf.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendment to or waiver of the code with respect to our Chief Executive Officer and Chief Financial Officer, and persons performing similar functions, by posting such information on our website.
Our Board of Directors believes that any compensation received by a non-employee director should be tied directly to the success of Heartland and, by extension, the success of all Heartland stockholders. Beginning in 2008, non-employee directors have been compensated for service on the Heartland Board of Directors solely by issuance of shares of restricted stock granted under the 2005 Long-Term Incentive Plan in an amount determined by the committee at its annual meeting. Such shares are awarded as of the date of the annual meeting and vest on the earlier of the one year anniversary of grant or the date of the next annual meeting. In the event a director leaves the Board for any reason prior to any vesting date (other than due to death or disability), the committee retains sole discretion to determine the disposition of the unvested shares. In the event of the death or disability of the director, the shares vest.
Each of Messrs. Conlan, Cox, and Hill were granted 1,000 shares of our common stock on May 18, 2011, as their sole compensation for the period from the May 18, 2011 Annual Meeting to the May 16, 2012 Annual Meeting. Mr. Falb and Mr. Flynn who chair and co-chair, respectively, both Audit/Corporate Governance and Compensation/Nominating committees were granted 1,100 shares. Mr. Fuller and Mr. Schmidt, who are officers, do not receive any compensation for serving on the Board of Heartland or any of its subsidiary banks. Messrs. Conlan, Cox, Falb and Flynn also serve on the Board of one of our subsidiary banks and receive cash compensation for such service.
The following table shows the compensation earned during 2011 by each of our independent directors for service on the Heartland Board of Directors and the Boards of our subsidiary banks:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership of our common stock at January 31, 2012, by each person we know to beneficially own more than 5% of our outstanding common stock, by each director or nominee, by each executive officer named in the summary compensation table and by all directors and executive officers of Heartland as a group.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that our directors, executive officers and 10% stockholders file reports of ownership and changes in ownership with the SEC. Such persons are also required to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of such forms, we believe that all Section 16(a) filing requirements applicable to our directors, executive officers or 10% stockholders were satisfied during 2011.
EXECUTIVE OFFICERS AND DIRECTORS COMPENSATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis addresses our compensation philosophy and objectives with respect to our named executive officers, compensation factors, elements of compensation and the basis for compensation decisions for 2011. Our named executive officers are Lynn B. Fuller, John K. Schmidt, Kenneth J. Erickson, Douglas J. Horstmann and Melvin E. Miller.
Historically, we have designed our executive compensation program to be both competitive in the marketplace and to align the interests of our executive officers with the long-term interests of our stockholders. Overall, our goal has been to pay total cash compensation (base salary plus incentive compensation) near the median of our peer group for comparable positions and performance. We have attempted to maintain base salary at slightly less than the median but incentive compensation above the median because we believe this is a reasonable way in which to encourage performance. We have also strived to pay a larger portion of the total compensation to executive officers in performance-based pay that is tied to the achievement of our 1-Year and 5-Year Plans of business operations because we believe this appropriately focuses our executive officers on consistent, sustained performance.
As discussed below, during the past five years, the economic and changing regulatory environments have caused us to adjust our compensation program for both economic realities and changing regulation. During 2007 and 2008, when we, along with many other bank holding companies, found our income to be less than historical earnings and short of projected earnings, we froze the salaries of our Chief Executive Officer and Chief Financial Officer. In 2009, our Compensation/Nominating Committee also froze the salaries of all officers who had earned $60,000 or more in 2008. Further, because we participated in the Capital Purchase Program of the United States Department of the Treasury's Troubled Asset Relief Program (“TARP”) from December19, 2008, until September 15, 2011, we were prohibited in 2009 through the first nine months of 2011 from paying cash incentive compensation to our five most highly compensated officers, including our Chief Executive Officer, Chief Financial Officer and several other named executive officers. Therefore, our five most highly compensated officers did not receive cash bonuses or other incentive compensation in 2009 or 2010.
In 2010, our operations recovered to nearly pre-recession levels. In recognition of our named executive officers' important role in this recovery and the fact that their salaries and equity compensation were frozen during the previous several years, the Compensation/Nominating Committee reexamined and increased the salaries of our executive officers in 2010. Although the increased salaries brought their compensation closer to that of our peers, our executive officers continued to receive less overall compensation than officers at comparable peers.
In 2011, our earnings and operations continued to rebound, and our named executive officers received base salary increases to bring their base salaries nearly equal to the median at comparable peers. Because we remained a TARP participant until September 15, 2011, we were unable to provide bonuses and equity compensation to four of our five named executive officers. On September 15, 2011, our application to be a participant in the United States Treasury's Small Business Lending Fund (“SBLF”) was approved, and we simultaneously repaid our obligations under TARP. The Compensation/ Nominating Committee reevaluated compensation for our executive officers after repayment, and as a result:
In summary, although the base salary levels of our named executive officers during 2011 were close to those of our peers, total compensation, including the pro-rata bonus and non-performance-based equity awards for these officers, still remained slightly below peer median for 2010, which was consistent with the Compensation/Nominating Committee's intent.
Although the Compensation/Nominating Committee believes that any incentive compensation system that we implement will need to comply with the regulatory framework described below and be carefully structured to take into account any risk of adverse impact, the Committee continues to believe that tying compensation to financial and operational performance is important. Because our 2006 Long-Term Incentive Plan is expiring and the restrictions on incentive pay under TARP no longer apply to us, we are preparing to implement a new 2012 Long-Term Incentive Plan. We believe this new incentive plan is necessary to reward not only our named executive officers, but other qualifying officers in a manner that aligns the interests of our officers with the long-term interests of our stockholders.
Regulatory Impact on Compensation
As a publicly-traded financial institution, Heartland must contend with several overlapping layers of regulation when considering and implementing compensation-related decisions. Except for the TARP regulations described below, these regulations do not set specific parameters within which compensation decisions must be made, but do require Heartland and the Compensation/Nominating Committee to be mindful of the risks that often go hand-in-hand with compensation programs designed to incentivize the achievement of better than average performance. Although the regulatory focus on risk assessment has increased over the last several years, the incorporation of general concepts of risk assessment into compensation decisions is not a recent development.
As indicated above, we became subject to substantial restrictions on the form of compensation we were able to provide to our executive officers when we became a participant in TARP in late 2008. These restrictions included a prohibition on certain types of incentive compensation to our five most highly paid employees. With respect to periods following the repayment of our TARP obligations on September 15, 2011, we are no longer subject to these restrictions.
Under its long-standing Interagency Guidelines Establishing Standards for Safety and Soundness, the FDIC prohibits excessive compensation as an unsafe and unsound practice. In describing a framework within which to make a determination as to whether compensation is to be considered excessive, the FDIC has indicated that financial institutions should consider whether aggregate cash amounts paid, or noncash benefits provided, to employees are unreasonable or disproportionate to the services performed by an employee. The FDIC encourages financial institutions to review an employee's compensation history and to consider internal pay equity, and, as appropriate, to consider benchmarking compensation to peer groups. Finally, the FDIC provides that such an assessment must be made in light of the institution's overall financial condition.
In the summer of 2010, the financial institution regulatory agencies issued additional joint guidance, Guidance on Sound Incentive Compensation Policies, which was in many respects intended to serve as a compliment to the Safety and Soundness standards. The joint agency guidance establishes a framework for assessing the soundness of incentive compensation plans, programs and arrangements maintained by financial institutions. The joint agency guidance is narrower in scope than the Safety and Soundness standards because it applies only to senior executive officers and those other individuals who, either alone or as a group, could pose a material risk to the institution. The joint agency guidance is intended to focus the institution's attention on balanced risk-taking incentives, on compatibility with effective controls and risk management, and on general principles of strong corporate governance.
The Dodd-Frank Act also requires the federal financial institution regulatory agencies to jointly adopt regulations or guidelines that govern incentive-based compensation practices at institutions with more than $1 billion in assets. Proposed regulations implementing the Dodd-Frank requirement were issued in March 2011. Although these new regulations are not effective, with respect to financial institutions with less than $50 billion in assets, the regulations largely restate the framework set forth in the Safety and Soundness standards and joint agency guidance described above.
In addition to the guidelines and regulations imposed upon us by financial institution regulatory agencies, as a publicly-traded corporation, Heartland is also subject to the SEC's rules regarding risk assessment. Those rules require a publicly-traded company to determine whether any of its existing incentive compensation plans, programs or arrangements create risks that are reasonably likely to have a material adverse effect on the company.
The Compensation/Nominating Committee believes that a sensible approach to balancing risk-taking and rewarding reasonable, but not necessarily easily attainable, goals has always been a component of its overall assessment of the compensation plans, programs and arrangements it has established for Heartland's named executive officers. In this regard, the Committee has regularly revisited the components of the frameworks set forth in the Safety and Soundness standards and the joint guidance as an effective tool for conducting its own assessment of the balance between risk and reward built into Heartland's compensation programs for named executive officers, and will monitor adoption of the final regulations under the Dodd-Frank Act to incorporate into its risk assessment procedures the new regulations and procedures as adopted.
Administration of Our Compensation Program
Role of the Compensation/Nominating Committee. The Compensation/Nominating Committee, which consists solely of independent directors, is primarily responsible for setting executive compensation for Heartland. Although many decisions for our compensation program in the following year are made in the last quarter of the current fiscal year, the Compensation/Nominating Committee continues to meet and, as appropriate, evaluate and adjust the compensation program throughout the year. During 2011, the Compensation/Nominating Committee met eight times to establish the compensation program for 2011, to consider and respond to regulatory developments, to monitor the program's effect on risk and to establish a preliminary plan for 2012 compensation, including the development of the 2012 Long-Term Incentive Plan, which is presented for approval by stockholders at our annual stockholders' meeting on May 16, 2012.
The Compensation/Nominating Committee reviews and evaluates a broad range of material requested and received from management, the Committee's independent compensation consultant and legal counsel in establishing compensation programs, including, but not limited to, the following:
The Compensation/Nominating Committee makes all decisions regarding the compensation of our executive officers. Although the Compensation/Nominating Committee reports its decisions to our Board of Directors, and the Board normally ratifies the decisions, there is no requirement for Board approval.
Consideration of Advisory Vote. Although we have not yet been subject to the "say on pay" advisory vote on executive compensation under the Dodd-Frank Act until this year, as a participant in TARP, we have submitted our executive compensation to a non-binding stockholder vote since 2009. We believe it is important for our stockholders to vote on these matters and our Compensation/Nominating Committee considers the advisory vote on executive compensation when establishing and revising our compensation plans.
At our annual meetings in each of 2009, 2010 and 2011, over 90% of the shares cast on the advisory vote on executive compensation were cast in favor of our executive compensation. After reviewing these results, our Compensation/Nomintating Commmittee determined that, given the significant level of positive support, no changes in compensation policies or decision were necessary.
Role of Management. Our management performs employee performance evaluations, establishes business performance targets and objectives and recommends salaries, bonuses and equity awards. Our Chief Executive Officer and Chief Financial Officer assist the Chairman of the Compensation/Nominating Committee with setting the agenda for the Committee's meetings and coordinating the preparation of materials for all such meetings. At the request of the Compensation/Nominating Committee, our Chief Executive Officer and Chief Financial Officer also provide information regarding our strategic objectives, evaluations of executive officers' performance and compensation recommendations for executive officers
other than themselves. Our Chief Executive Officer and Chief Financial Officer, however, do not approve the compensation arrangements of any executive officers or participate in the formulation of their own compensation.
Role of Advisors - Peer Comparison. Frederic W. Cook & Co., Inc. (“FWCC”) was retained by the Compensation/Nominating Committee to provide compensation consulting services in 2011. FWCC does not provide any services to Heartland except for its services to the Compensation/Nominating Committee in advising on executive compensation. The Committee has, therefore, determined that FWCC is independent. FWCC's role includes providing market information on compensation levels and practices, assisting in the design of compensation programs, providing input on related technical and regulatory matters and working with other advisors in developing current peer comparison groups.
The Compensation/Nominating Committee annually reviews peer group comparisons generated by FWCC as a benchmark in establishing our compensation program, and establishes appropriate and competitive ranges of short- and long-term compensation based upon the median of the peer group. Various components of executive compensation (e.g., base salaries, bonuses, equity compensation, retirement plan contributions and other benefits) are compared to the peer group for similar positions. In addition, information on the usage of shares and related dilution levels for equity incentive plans is also prepared for and reviewed by the Compensation/Nominating Committee.
Consistent with our past practices, our current peer group consists of similar-sized, strong-performing, publicly-traded bank holding companies in the United States Midwest and Mountain regions. This year, in consultation with FWCC and with assistance from RBC Capital Markets, over half of the benchmark peer group was replaced due to merger/acquisition activity, severe financial problems and change in size. The companies included in the 2011 analysis were:
Elements of Compensation
Historically, our executive officers' compensation has been comprised of four components: base salary, cash bonus, equity compensation and additional benefits. While we were a TARP participant we were unable to pay an annual cash bonus to our five most highly compensated employees. On September 15, 2011, we exited TARP, thus substantially removing the TARP-related compensation restrictions and limitations on the affected employees. In setting 2011 compensation for our named executive officers, the Compensation/Nominating Committee determined each of the components for the named executive officers based in part on the Committee's subjective judgment, taking into account qualitative and quantitative factors as set forth in the discussion below.
Base Salary. The Compensation/Nominating Committee regards base salary as an important component of executive compensation because it provides executives with a regular income. Base salaries are intended to assist us in attracting executives and recognizing different levels of responsibility and contribution among executives. The determination of base salary is based upon the executive's qualifications and experience, scope of responsibility and potential to achieve the goals and objectives established for the executive. Additionally, past performance, internal pay equity and comparison to competitive salary practices in the peer group are also considered.
As mentioned above, the historical goal of the Compensation/Nominating Committee has been to establish base salaries for executives at a level at or below peer median, with a significant portion of the executives' additional compensation to come in the form of incentive compensation. During the turbulent economic years from 2007 through 2009, however, our executive officers' salaries were either frozen or subject to minimal increases and from December 2008 through September 2011, TARP restrictions prohibited the payment of incentive compensation to the top five most highly compensated employees of Heartland, which affected four of our five named executive officers. In setting 2010 compensation, the Compensation/Nominating Committee concluded that the salary freezes and the TARP-related restrictions were causing Heartland's executive compensation to become increasingly uncompetitive. Accordingly, the Compensation/Nominating Committee approved significant increases in the salaries of Mr. Fuller and Mr. Schmidt for 2010 that caused those salaries to approach the median of their peer groups for 2009, and more moderate increases in the base salaries for the other named executive officers
For 2011, the Compensation/Nominating Committee reviewed peer group information from FWCC that indicated that the combination of base salaries and equity awards for our named executive officers for 2010 was almost exactly at the median of our peer group. This same data indicated that base salaries were slightly below median, that the value of long-term equity incentives represented by restricted stock units ("RSUs") that vest after TARP repayment was above peer group median and that overall aggregate compensation was approximately at median for each named executive officer. Accordingly, the Compensation/Nominating Committee approved an average increase in the base salaries of the named executive officers of approximately 2% for 2011, including an increase of 2.17% for Mr. Fuller to $470,000, of 2.15% for Mr. Schmidt to $332,000, of 1.15% for Mr. Erickson to $263,000, of 2.04% for Mr. Horstmann to $250,000 and of 2.67% for Mr. Miller to $154,000.
For 2012, and given repayment of TARP, the Compensation/Nominating Committee determined to return to its historical practice of fixing base salaries at slightly below the median of peers, and paying more of the aggregate compensation in incentive pay. Accordingly, the Committee established 2012 base salaries for four of the named executive officers at the same level as 2011. Mr. Fuller's base salary was set at $470,000 for 2012, Mr. Schmidt's at $332,000, Mr. Erickson's at $263,000, and Mr. Horstmann's at $250,000. Mr. Miller's base salary was increased for 2012 from $154,000 to $163,000.
Performance-Based Plan - Executive Bonuses. Although we have traditionally established an executive incentive plan that pays cash incentives based upon our 1-Year and 5-Year Plans of business operations, the executive compensation restrictions contained in the TARP rules prohibited Heartland from paying or accruing cash incentives on behalf of the top five most highly paid employees (as determined on an annual basis) during the TARP period that ended on September 15, 2011. Each of the named executive officers, other than Mr. Miller, was subject to this cash incentive prohibition during all of 2010 and a portion of 2011 until September 15. Further, although earnings had greatly improved, because Heartland was not expected to reach the stretch budget, and at the suggestion of Mr. Fuller, no incentive pay was granted to the three most highly paid executive officers for the period from September 15, 2011, to December 31, 2011. Messrs. Fuller, Schmidt and Erickson did not receive any cash incentive compensation for 2010 and 2011.
Each of our subsidiary banks establishes an incentive plan for its executive management, but the plan for Mr. Horstmann, as President of Dubuque Bank and Trust Company, was suspended during the period that we were subject to restrictions under TARP: from 2009 through September 15, 2011. The plan provided that, absent TARP restrictions, Mr. Horstmann would have been entitled to a targeted bonus of $112,500 in 2011 equal to 45% of his salary based upon the following criteria:
Based on these criteria and the performance of Heartland and Dubuque Bank and Trust Company for 2011, Mr. Horstmann would have been entitled to a bonus of $80,210 for the entire year. Because the TARP restrictions lapsed in September, our Compensation/Nominating Committee granted Mr. Horstmann a bonus of one quarter of this amount or $20,052.
Mr. Miller, the Chief Investment Officer of Heartland, was not one of the five most highly compensated employees subject to TARP restrictions and did participate in the cash incentive plan for the entire fiscal year under which he was entitled to a targeted bonus of up to $53,900 based upon achievement of three corporate goals and several personal goals. The corporate goals for Mr. Miller were as follows:
Based on these criteria and the performance of Heartland for 2011, along with the achievement of all his personal goals for 2011, Mr. Miller was granted a bonus of $45,918.
For 2012, and given the elimination of the TARP prohibitions, the Compensation/Nominating Committee has reformulated its performance-based plan and frozen base salaries of the named executive officers at 2011 levels, except for Mr. Miller. Under the 2012 performance-based plan, the named executive officers of Heartland will be entitled to incentive compensation ranging as a percentage of their salaries, at the maximum, from roughly 59% for Mr. Erickson to roughly 81% for Mr. Fuller, based upon achievement of up to six separate performance standards. The performance standards for Mr. Fuller and Mr. Schmidt include specific criteria relative to return on equity (40% weighting), loan growth (20% weighting), deposit growth (20% weighting), non-performing assets (6% weighting), net charge-offs (6% weighting) and 5-year plan achievement by subsidiary banks (8% weighting).
Equity Compensation. The Compensation/Nominating Committee believes that equity compensation is an effective way of creating a long-term link between the compensation provided to officers and other key management personnel with gains to be realized by stockholders. Our equity compensation program is also intended to support pay-for-performance, foster employee stock ownership, and focus the management team on increasing value for the stockholders. In addition, the Compensation/Nominating Committee believes that equity compensation provides balance to the overall compensation program, with the bonus program focusing on the achievement of year-to-year goals, and the equity compensation program creating incentives for increases in stockholder value over a longer term.
Traditionally, we have granted nonqualified stock options and performance-based restricted stock to our officers under our 2005 Long-Term Incentive Plan. TARP compensation limitations, however, effectively prohibited the granting of equity awards to our five most highly compensated employees, other than restricted stock or RSUs that vested over a period of not less than two years, and could not be settled until after repayment of TARP obligations. Accordingly, in both 2010 and 2011, the Compensation/Nominating Committee granted time-based RSUs to the named executive officers, with the following characteristics:
Because we exited TARP in 2011, and our 2005 performance-based restricted stock program expired in 2009, the Compensation/Nominating Committee created a new performance-based equity grant program under which awards will be earned based on achievement of Heartland's 5-Year Plan of business operations. The purpose of this program is to drive the achievement of the 5-Year Plan and other long-term business goals, enhance the ability to retain and attract senior leadership talent, provide compensation opportunities tied to long-term service and stockholder value, and reinforce our pay-for-performance and stockholder-alignment philosophy. The program is intended to complement other compensation elements such as salary, annual cash bonus, annual stock awards, perquisites and benefits, and will be used for a select group of executive management at both the holding company and subsidiary levels who are in a position to directly impact the ability to achieve our 5-Year Plan.
Unlike our prior 5-Year performance-based restricted stock program, under which awards were made in a single grant at the beginning of a 5-year performance period, this new program will involve a series of annual grants that have performance measures aligned with each year of our 5-Year Plan. Although the intent of this new program will be to track as closely as possible to the 5-Year Plan performance goals, the Compensation/Nominating Committee will have discretion and complete flexibility to modify the program as Heartland's business or industry changes.
Awards under the new program will be made in the form of RSUs, reflecting the right to receive an unrestricted, freely transferable share of Heartland common stock in the future, provided that certain criteria are met. First, the RSUs must be “earned” by achieving the goals and benchmarks established in the 5-Year Plan; and second, the earned RSUs must become vested, which generally will require a two-year service period. RSUs may be earned under the program based on the achievement of two key performance measures: (1) 70% based on earnings, and (2) 30% based on assets.
The first grants of performance-based RSUs were made to our senior management in October 2011. However, Mr. Fuller recommended that the five most highly compensated executive officers waive participation in this new performance-based RSU program until 2012 when Heartland will have a full calendar year without TARP restrictions. The Compensation/Nominating Committee concurred and in October 2011 granted RSUs to key Heartland and subsidiary executives, excluding Messrs. Fuller, Schmidt, Erickson, Horstmann and Miller.
In January 2012, Messrs. Fuller, Schmidt, Erickson, Horstmann and Miller were granted performance-based RSUs, with goals and benchmarks established in accordance with 2012 performance under Heartland's 5-Year Plan of business operations. In granting performance-based RSUs to the named executive officers, the Compensation/Nominating Committee considered the overall allocation of shares between the time-based restricted stock awards and the new performance-based RSU program. The Compensation/Nominating Committee intends that approximately 50% of equity awards granted to the named executive officers be performance-based awards, and 50% be time-based awards.
Stock Ownership and Retention Guidelines. To reinforce our philosophy of equity ownership for executives and to further align the interest of our executives with our stockholders, we have share retention and ownership guidelines for our executives, including the presidents of our bank subsidiaries. The stock ownership guidelines vary based upon position, and for our named executive officers, range from 30,000 to 100,000 shares. Executives subject to our ownership policy are required to retain a portion of shares received from equity awards until the guideline level is attained. Currently, all named executive officers exceed these ownership guidelines, except for Mr. Miller.
Other Compensation and Benefits. We have historically provided perquisites and other types of non-cash benefits on a limited basis in an effort to avoid an entitlement mentality, reinforce a pay-for-performance orientation and minimize expenses. Such non-cash benefits, when provided, can include the use of a company-owned vehicle and payment of 50% of country club or social club dues. Mr. Fuller, as our President and Chief Executive Officer; Mr. Schmidt, as our Executive Vice President, Chief Operating Officer and Chief Financial Officer; and Mr. Horstmann, as the president of Dubuque Bank and Trust Company, are each provided the use of a company-owned vehicle. Consistent with our philosophy, the annual value of the above non-cash benefits is, in the aggregate, less than $10,000 for each executive.
Heartland is a majority owner of a Cessna business jet. The aircraft is used to transport personnel to meetings at various Heartland locations, particularly in the West, Southwest and Minnesota, and to provide transportation for Heartland executives to business meetings. The aircraft is also used to transport Heartland executives, directors, major stockholders and customers for business development purposes. It is our policy that the aircraft is not to be utilized for personal benefit. On occasion, and subject to applicable regulation, an executive officer or director's family member may board a flight if an empty seat is available on a regularly-scheduled business flight. We believe such usage does not create any incremental cost to Heartland.
Heartland does provide additional life insurance benefits to certain officers of Heartland under a number of different executive life insurance programs. The dollar value of these benefits for 2011 was $1,403 for Mr. Fuller; $7,529 for Mr. Schmidt; $17,201 for Mr. Horstmann; $689 for Mr. Erickson; and $579 for Mr. Miller.
Executive officers also participate in our other broad-based employee benefit programs on the same terms as similarly situated employees, including the 2006 Employee Stock Purchase Plan, health insurance plans and a defined contribution retirement savings plan. Because of the uncertainty regarding eligibility of our named executive officers to participate in the Employee Stock Purchase Plan under TARP regulations, the named executive officers did not participate in such plan in 2009, 2010 and 2011. Named executive officers are eligible to participate in the Employee Stock Purchase Plan for 2012.
Summary Compensation Table
The following table sets forth information concerning the compensation paid or granted to our Chief Executive Officer, our Chief Financial Officer and to each of the other three most highly compensated executive officers of Heartland or our subsidiaries for the fiscal years ended December 31, 2011, 2010 and 2009:
Grants of Plan-Based Awards
The following table sets forth certain information concerning grants of plan-based awards made during 2011 to the named executive officers:
Outstanding Equity Awards
The following table sets forth information concerning non-exercised stock options and non-vested RSUs and restricted stock awards held at December 31, 2011, by the named executive officers:
Option Exercises and Stock Vested
The following table sets forth certain information concerning stock option awards exercised and restricted stock awards vested during 2011 for the named executive officers:
Potential Payments upon Termination or Change in Control
As described below, we maintain several employee benefit plans that provide for payments upon death or termination, and have adopted severance agreements with our executive officers that provide payments upon termination after a change in control. We believe these plans help ensure the continuity of our management and staff, and allow them to function more objectively, and in a manner that is in the best interests of stockholders, in the face of corporate changes.
Payments Made Upon Death. Heartland has a Split-Dollar Life Insurance Plan and Executive Supplemental Life Insurance Plan that provides a death benefit to the designated beneficiaries of the officers who have been enrolled in the plans. Until 2009, only those officers who were in a position of Vice President or higher and had provided at least three years of service to Heartland were eligible to participate in this plan, and beginning in 2009, participation was further limited to persons in the position of Senior Vice President or higher with at least three years of service. The combined death benefit under the plan is two times current compensation at the time of termination (salary plus bonus or commission), not to exceed $1 million. For those participants that entered the plans prior to 2008, this benefit continues for the officer when employment has terminated as a result of disability, retirement or a change in control. For those participants that entered the plans in 2008 or later, this benefit continues for the officer when employment has terminated as a result of disability or a change in control.
On December 31, 2007, Heartland terminated participation in these life insurance plans for officers not then qualifying for early retirement. Included in this terminated group were Messrs. Schmidt and Horstmann. An Executive Life Insurance Bonus Plan was adopted by Heartland for all the officers whose participation in the split-dollar life insurance plans had been terminated. The bonus plan provides for a bonus amount equal to the annual premium on a life insurance policy purchased for the officer, paid directly to the insurance company, that is designed to provide a death benefit equal to two times salary at December 31, 2007, with annual increases of 5% per year until retirement at age 65. Additionally, the policies were designed for premium payments until age 65 that would be adequate to fund continued coverage through age 80 with no premium payments after age 65. The plan also provides for a payment of 40% of the premium (in January of each year) directly to the employee. In 2010 and 2011, Messrs. Schmidt and Horstmann waived their right to the 40% of annual premium amount. Under this new plan, there will be no continuation of premium payments by Heartland after the employee has left employment with Heartland for any reason other than disability or change in control. The employee is the owner of the policy and may continue premium payments or cash out the policy upon leaving the employment of Heartland.
If employment of any of our officers who have received equity awards is terminated due to death, the terms of our standard stock option agreement provide that the options become fully exercisable and expire if not exercised within 12 months of the date of death. The terms of our standard restricted stock agreement provide that, upon termination due to death, all earned shares become fully vested and any unearned shares are forfeited. Additionally, the terms of our standard RSU agreement provide that, upon termination due to death, all unvested RSUs immediately vest.
Payments Made Upon Disability. All full-time employees of Heartland who have been employed at least six months are eligible for a long-term disability benefit. The benefit for full-time employees, which begins after 90 days of total disability, is a monthly payment equal to 60 percent of regular monthly earnings, with a maximum monthly benefit of $5,000. All full-time officers of Heartland are eligible for a long-term disability benefit equal to 66 2/3 percent of regular monthly earnings, with a maximum monthly benefit of $7,000. Eligibility for officers is the same as that for full-time employees. The monthly payments continue until the participant dies, ceases to have a disability or reaches age 65. The benefit includes an annual increase and a survivor benefit of one lump sum payment equal to three times the employee's last full monthly benefit.
If employment of any of our officers who have received equity awards is terminated due to disability, the terms of our standard stock option agreement provide that the options become fully exercisable and expire if not exercised within 12 months of the date of disability. The terms of our standard restricted stock agreement provide that, upon termination due to disability, all earned shares become fully vested and any unearned shares are forfeited. Additionally, the terms of our standard RSU agreement provide that, upon termination due to disability, all unvested RSUs immediately vest.
The Executive Life Insurance Bonus Plan, under which Messrs. Schmidt and Horstmann are participants, requires a lump sum premium payment at the date of termination due to disability sufficient to provide the scheduled death benefit until age 80. Additionally, the participant is to be paid an amount equal to 40% of such lump sum payment. The lump sum payment may not, however, exceed an amount that would cause the life insurance to cease to be a “life insurance” contract under Section 7702(a) of the Internal Revenue Code.
Payments Made Upon Retirement. If employment of any of our officers who have received equity awards is terminated due to retirement, the terms of our standard stock option agreement provide that the options become fully exercisable and expire if not exercised within 6 months of the date of retirement. Additionally, the terms of our standard restricted stock agreement provide that, upon termination due to retirement, all earned shares become fully vested and any unearned shares continue to be subject to the earning provisions as if the officer had continued employment with Heartland. An officer's retirement for stock options granted prior to 2008 and all restricted stock awards is defined as any termination of employment on or after the date (i) the officer reaches the age of 55 and has provided 10 years of service to Heartland or (ii) the officer retires pursuant to the provisions of Heartland's defined contribution retirement plan, which currently provides that retirement occurs at age 65. For stock options granted in 2008 and thereafter, retirement is defined as any termination of employment on or after the date the officer reaches the age of 65 and has provided 10 years of service to Heartland. As of December 31, 2011, Messrs. Fuller, Erickson, Horstmann and Miller qualified for retirement under the stock options granted prior to 2008 and under all the restricted stock awards. RSU awards will terminate upon the termination of employment, but will continue to vest after retirement under the original vesting schedule, except for those RSUs granted in 2010 and 2011, for which vesting will continue only if retirement occurs on or after the second anniversary of the award date. For RSUs granted in 2010 and 2011, retirement is defined as reaching the age of 62 and having provided at least 10 years of service to Heartland, and for RSUs granted in 2012, reaching age 62 and having provided at least 5 years of service.
Payments Made Upon Change In Control. In July 2007, we entered into Change in Control Agreements with certain of our officers, including each of the named executive officers. These agreements replaced prior agreements which expired on December 31, 2004. The agreements provide that, if the officer's employment is terminated by Heartland other than for “cause,” or is terminated by the officer for "good reason," within 6 months prior to, or 24 months after, a change in control, then the officer is entitled to a special severance payment. The severance payment ranges from 1 to 2 times the sum of (1) the officer's salary, plus (2) the average of the three most recent bonuses paid to the officer, plus (3) the average of the three most recent contributions made on behalf of the officer to Heartland's retirement plan. The agreements also provide for continuation of insurance benefits after termination for 12 to 24 months, and for out-placement services or training in an amount not to exceed one-fourth of base compensation. The agreements do not provide for the payment of “gross-ups” to cover any applicable federal or state taxes but instead provide that applicable taxes, if owed, will be paid by the officers covered under the agreements. The agreements define "cause" as (1) the continued willful failure, after 20 days notice, to perform employment obligations, (2) conviction of a felony or crime of embezzlement or fraud, (3) breach of fiduciary responsibility, or (4) an act of dishonesty that materially injures Heartland. "Good reason" for a voluntary termination under the agreements is defined to include (1) an adverse change in the nature, scope or status of the officer's position, including a failure to continue in the position as an executive officer of a public company, (2) a reduction in compensation or benefits, (3) a relocation of work by more than 50 miles or increase in travel obligations, or (4) a failure by the acquiring entity to assume the agreement or to comply with the agreement. A "change in control" is defined in the agreements to include: (i) the acquisition by a person of 51% or more of Heartland's voting securities; (ii) the election of persons who constitute a majority of the Board who were not nominated by our Board or one of its committees; (iii) the consummation of a merger where the prior stockholders do not hold at least 51% of the resulting entity; or (iv) the liquidation or dissolution of Heartland.
Our standard stock option, restricted stock, and RSU agreements contain terms that provide for the acceleration of the vesting of any non-vested stock options, shares of restricted stock or RSUs upon a change in control. For such purposes, a change in control is defined by reference to Section 1.409A(i)(5) issued under the Internal Revenue Code. Under the standard stock option agreement, the options become fully exercisable and expire if not exercised within 6 months of the date of a change in control. Under the standard restricted stock agreement, all earned restricted stock vests immediately upon a change in control. Unearned restricted stock also vests immediately if the restricted stock agreement is not fully assumed in the change in control. To the extent the restricted stock agreements are assumed, any unearned shares will vest immediately upon the officer's termination of employment (i) by the successor entity for any reason other than cause at any time following the change in control or (ii) by the officer for good reason within 24 months of the change in control. Under the standard RSU agreement, all RSUs awarded vest immediately. For purposes of these agreements, “change in control” and “good reason” are defined in the same manner as in the Change in Control Agreements.
The Executive Life Insurance Bonus Plan, under which Messrs. Schmidt and Horstmann are participants, requires a lump sum premium payment sufficient to provide the scheduled death benefit at the date of the change in control until age 80. Additionally, the participant is to be paid an amount equal to 40% of such lump sum payment. Notwithstanding the foregoing, the lump sum payment will not exceed an amount that would cause the life insurance to cease to be a “life insurance” contract under Section 7702(a) of the Internal Revenue Code.
Payments Made Upon Termination. In the case of an involuntary termination of employment for other than cause of any named executive officer, any earned non-vested shares of restricted stock will be immediately vested. Except for the benefits upon termination on death, disability, retirement or a change in control discussed above, and except for acceleration of such vesting of restricted stock for involuntary termination without cause, no additional payments or benefits will accrue or be paid upon termination of a named executive officer.
The following table shows potential payments to the named executive officers upon disability, death, retirement or termination upon a change in control of Heartland. The amounts shown assume that termination was effective as of December 30, 2011, the last business day of the year, and are estimates of the amounts that would be paid to the executives upon termination in addition to the base salary and bonus earned by the executives during 2011. The actual amounts to be paid can only be determined at the actual time of an executive's termination.
Compensation/Nominating Committee Report on Executive Compensation
We have reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based upon our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for the year ended December 31, 2011.
As a participant in TARP through September 15, 2011, Section 111(b)(2)(A) of the Emergency Economic Stabilization Act requires the Compensation/Nominating Committee to conduct, in conjunction with senior risk officers of Heartland, a review of the compensation arrangements in place between Heartland and its employees (the “TARP Risk Assessment”).
As required by TARP rules, we met on June 27, 2011, and March 6, 2012, with participation of our senior risk officer, and considered the overall business and risk environment confronting Heartland as well as the impact of the compensation plans for our named executive officers and other employee compensation plans on the risk environment and on motivating employee behavior within that environment. We refer to the named executive officers listed in the Summary Compensation Table as “SEOs” in this section. At the June 27, 2011, meeting, the senior risk officer explained that there were no changes to the SEO incentive plans, and confirmed that all plans were in compliance with applicable regulations. At the March 6, 2012, meeting, the senior risk officer reviewed the text of the Committee's report on executive compensation as contained in the proxy statement for the 2011 annual meeting, as well as this report to be included in the proxy statement for the 2012 annual meeting, confirming that the SEO compensation plans, as well as, all other compensation plans, do not encourage unnecessary and excessive risks that could threaten the value of Heartland.
As part of its review, the Compensation/Nominating Committee considered the following components of SEO compensation and applied the analysis indicated:
We also reviewed with the senior risk officers employee compensation plans for 2011 that applied to Heartland managers and other Heartland employees. The majority of the plans relate to sales positions including mortgage loan originators and processors, investment services personnel, personal bankers and wealth management advisors. The plans were included in the scope of the review if the plan applied to more than one person as required for TARP compliance. Many of the plans do not appear to have plan risks, and those that do have plan risks, appear to have adequate risk mitigation through independent review of a sampling of loans, external provider calculations and support, and management review.
Accordingly, we certify that, during the TARP period:
TRANSACTIONS WITH MANAGEMENT
Directors and officers of Heartland and our subsidiaries, and their associates, were customers of and had banking transactions with one or more of Heartland's subsidiaries during 2011. Additional transactions may be expected to take place in the future. All outstanding loans, commitments to loan, transactions in repurchase agreements and certificates of deposit and depository relationships, in the opinion of management, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectability or present other unfavorable features. All such loans are approved by the subsidiary bank's Board of Directors in accordance with the bank regulatory requirements. Additionally, the Audit/Corporate Governance Committee charter provides that the committee will consider and approve other material non-lending transactions between a director and Heartland, including its subsidiaries, to ensure that such transactions are done at arm's length and do not affect a director's independence.
As part of a private placement to several unaffiliated purchasers, Kendall Hunt Publishing Company, a company for which Mark C. Falb, a director of Heartland, is Chairman and a principal stockholder, purchased $3 million of Heartland's Senior Notes in March 2011 and an additional $5 million of Heartland's Senior Notes in January 2012. The Senior Notes sold to Kendall Hunt were on the same terms as Senior Notes sold to unaffiliated purchasers in the same placement and we believe that such terms, including interest rates, are the same as those prevailing at the time for comparable transactions. The sale of the Senior Notes to Kendall Hunt was specially approved by Heartland's Board of Directors, without Mr. Falb's participation.
Stockholder Return Performance Presentation
The following table and graph show a five-year comparison of cumulative total returns for Heartland Financial USA, Inc., the NASDAQ Composite Index and the NASDAQ Bank Stock Index. Figures for our common stock represent inter-dealer quotations, without retail markups, markdowns or commissions and do not necessarily represent actual transactions. Heartland became listed on NASDAQ in May 2004. The table and graph were prepared at our request by SNL Financial LC.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON DECEMBER 31, 2006
*Total return assumes reinvestment of dividends
AUDIT/CORPORATE GOVERNANCE COMMITTEE REPORT
The Audit/Corporate Governance Committee assists the Board in carrying out its oversight responsibilities for our financial reporting process, audit process and internal controls. The Audit/Corporate Governance Committee also reviews the audited financial statements and recommends to the Board that they be included in our annual report on Form 10-K.
The Audit/Corporate Governance Committee has:
Based on the review and discussions with management and KPMG LLP, the Audit/Corporate Governance Committee has recommended to the Board that the audited financial statements be included in our annual report on Form 10-K for the fiscal year ended December 31, 2011, for filing with the SEC.
RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Fees. The aggregate amounts of fees billed by KPMG LLP during fiscal years 2011 and 2010 for its audit of our annual financial statements and for its required reviews of our unaudited interim financial statements included in our quarterly reports filed were $520,000 and $525,000, respectively
Audit Related Fees. The aggregate amounts of audit related fees billed by KPMG LLP during fiscal years 2011 and 2010 were $47,500 and $5,000, respectively. The majority of these services were related to filings with the Securities and Exchange Commission and services related to the audit of our Employee Stock Purchase Plan.
Tax Fees. The aggregate amounts of tax fees billed by KPMG LLP during the fiscal years 2011 and 2010 were $127,325 for 2011 and $ 167,782 for 2010.
All Other Fees. We did not incur any other fees from KPMG LLP for fiscal years 2011 and 2010.
The Audit/Corporate Governance Committee, after consideration of these matters, does not believe that the rendering of these services by KPMG LLP is incompatible with maintaining their independence as our independent registered public accounting firm.
Audit/Corporate Governance Committee Pre-Approval Policy
Among other things, the Audit/Corporate Governance Committee is responsible for appointing, setting compensation for and overseeing the work of the independent registered public accounting firm. The Audit/Corporate Governance Committee has adopted a policy requiring pre-approval of any audit and permissible non-audit services to be provided by our independent registered public accounting firm if the fees for those services are anticipated to exceed $25,000. These services include audit and audit-related services, tax services and other services. In the case of fees for audit, audit-related, tax and other permissible
services that are not expected to exceed $25,000, the fees are subject to ratification by the Audit/Corporate Governance Committee. All of the fees earned by KPMG LLP described above were attributable to services pre-approved by the Audit/Corporate Governance Committee, with the exception of the fees related to SEC filings associated with our participation in the TARP Capital Purchase Program, which were subsequently ratified by the Audit/Corporate Governance Committee.
PROPOSAL 2 - RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP has served as our independent registered public accounting firm since June 1994 and our Audit/Corporate Governance Committee has selected KPMG LLP to be our independent registered public accounting firm for the fiscal year ending December 31, 2012.
Although we are not required to do so, our Board of Directors recommends that the stockholders ratify the appointment. A representative of KPMG LLP is expected to attend the meeting and will be available to respond to appropriate questions and to make a statement if he or she so desires. If the appointment of our independent registered public accounting firm is not ratified, the Audit/Corporate Governance Committee of the Board of Directors will consider the matter of the appointment.
The Board of Directors recommends that you vote your shares FOR ratification of the selection of KPMG LLP as our independent registered public accounting firm.
PROPOSAL 3 - ADVISORY APPROVAL OF EXECUTIVE COMPENSATION
As described in more detail in the “Compensation Discussion and Analysis” section of this proxy statement, Heartland's compensation program during the past three years has been reflective of its results of operations. The objective of our Board has been to provide salary levels to our executives that adequately compensate them relative to their peers and longer-term incentives that both align executive officer compensation with the success of meeting long-term strategic operating and financial goals, and minimize any risks to Heartland. The Board believes our compensation policies and procedures achieve these objectives. As required by the Dodd-Frank Act and Section 14A of the Exchange Act, we are submitting to stockholders for their approval, on an advisory basis, the compensation of our named executive officers. This proposal (commonly known as a "say on pay" proposal) is set forth in the following resolution:
RESOLVED, that the stockholders approve the compensation of Heartland's executives as described in the Compensation Discussion and Analysis, the Summary Compensation Table and the other executive compensation tables and related discussion contained in the Heartland proxy statement dated April 4, 2012.
Your vote is advisory and will not be binding upon the Compensation/Nominating Committee. The Compensation/Nominating Committee will take into account the outcome of the vote when considering future compensation arrangements.
The Board of Directors recommends that you vote your shares FOR the approval of Heartland's executive compensation.
PROPOSAL 4 - NONBINDING VOTE ON THE FREQUENCY OF EXECUTIVE COMPENSATION VOTES
The Dodd-Frank Act and Section 14A of the Exchange Act also require that, at least once every six years, stockholders be afforded the opportunity to recommend to the Board of Directors whether future advisory votes on executive compensation should occur every one, two or three years. This proposal offers stockholders the opportunity to cast a non-binding advisory vote on how often Heartland should include a “say on pay” proposal in its proxy materials for future annual stockholder meetings (or special stockholder meetings for which Heartland must include executive compensation information in the proxy statement for that meeting).
Our Board of Directors believes that setting appropriate compensation, directly or through its committees, for executive officers and the Board itself is one of its most important functions and that stockholders should have direct input regarding such compensation. Accordingly, our Board has determined that an annual advisory vote on executive compensation is appropriate for Heartland at the present time. Annual advisory votes will allow our stockholders to advise us whether they agree with our compensation philosophy, policies and practices as disclosed in our proxy statement each year. This is consistent with our efforts to seek input from our stockholders, and will make the results of the vote more relevant and meaningful to the Board of Directors. We understand that our stockholders may have different views as to the best approach for Heartland, and we look forward to hearing from our stockholders on this proposal.
The proxy card provides stockholders with the opportunity to choose among four options (holding the vote every one, two or three years, or abstain from voting). The option of one year, two years or three years that receives a majority of votes cast by stockholders will be the frequency for the advisory vote on executive compensation that has been selected by stockholders. However, in the event that no option receives a majority of the votes cast, we will consider the option that receives the most votes cast to be the option selected by stockholders.
As an advisory vote, this proposal is not binding upon Heartland. However, our Board of Directors and our Compensation/Nominating Committee, which administers Heartland's executive compensation program, value the opinions expressed by stockholders in their vote on this proposal and will consider the outcome of the vote when making a determination regarding the frequency of future say on pay advisory votes. Although the Board of Directors has provided its recommendation, stockholders will not be voting to approve or disapprove the recommendation of the Board of Directors.
The Board of Directors recommends that you vote your shares for an ANNUAL advisory “Say on Pay” vote.
PROPOSAL 5 - ADOPTION OF THE HEARTLAND FINANCIAL USA, INC. 2012 LONG-TERM INCENTIVE PLAN
On January 17, 2012, the Board approved the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan (the “2012 LTIP”) for Heartland and its subsidiaries, subject to stockholder approval. A summary of the material provisions of the 2012 LTIP is set forth below. A copy of the 2012 LTIP is set forth as Appendix A.
The 2012 LTIP was established by the Board to promote Heartland's long-term financial success, to attract, retain and reward persons who can and do contribute to Heartland's success, and to further align the participants' interests with those of Heartland's stockholders. The 2012 LTIP will be administered by a committee selected by the Board, currently the Compensation/Nominating Committee (the “Committee”), which will select award recipients from the eligible participants, determine the types of awards to be granted, the number of shares covered by the awards, and determine the applicable terms, conditions, performance criteria, restrictions and other provisions of such awards, including any vesting or accelerated vesting requirements or conditions applicable to an award or awards.
The 2012 LTIP incorporates a broad variety of equity-based and cash-based incentive compensation elements to provide the Committee with significant flexibility to address the requirements and limitations of applicable legal, regulatory and financial accounting standards in a manner mutually consistent with the purposes of the 2012 LTIP and stockholder interests.
The maximum number of shares of Heartland's common stock that may be delivered to participants, or their beneficiaries, under the 2012 LTIP is 500,000 shares, subject to permitted adjustments for certain corporate transactions and for forfeited shares. As of the date of stockholder approval of the 2012 LTIP, no additional awards will be granted under the Heartland Financial USA, Inc. 2005 Long-Term Incentive Plan or the Heartland Financial USA, Inc. 2003 Stock Option Plan. To the extent that any shares covered by an award under the 2012 LTIP, or one of the aforementioned prior equity incentive plans, are forfeited or are not delivered for any reason, including because the award is forfeited, cancelled or settled in cash, or shares are withheld to satisfy tax withholding requirements, the shares will not be deemed to have been delivered for purposes of determining the maximum number of shares available for delivery under the 2012 LTIP. For stock appreciation rights (“SARs”) that are settled in stock, only the actual shares delivered will be counted for purposes of these limitations. If any option granted under the 2012 LTIP is exercised by tendering shares, only the number of shares issued net of the shares tendered will be counted for purposes of these limitations.
The 2012 LTIP's effective date is January 1, 2012, subject to approval by Heartland's stockholders. If approved, the 2012 LTIP will continue in effect until terminated by the Board; provided, however, that no awards may be granted under the 2012 LTIP after the 10-year anniversary of its effective date. Any awards that are outstanding after the 10th anniversary of the effective date will remain subject to the terms of the 2012 LTIP.
The following additional limits apply to awards under the 2012 LTIP:
The Committee may use shares available under the 2012 LTIP as the form of payment for grants or rights earned or due under any compensation plans or arrangements of Heartland or a subsidiary, including the plans and arrangements of Heartland or a subsidiary assumed in business combinations.
In the event of a corporate transaction involving the stock of Heartland (such as a stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization or merger), the foregoing share limitations and all outstanding awards will automatically be adjusted proportionally and uniformly to reflect such event to the extent that the adjustment will not affect an award's status as “performance-based compensation” under Code Section 162(m). However, the Committee may adjust awards, or prevent the automatic adjustment of awards, to preserve the benefits or potential benefits of awards under the 2012 LTIP.
Awards granted under the 2012 LTIP generally will not be transferable except as designated by the participant by will or by the laws of descent and distribution or pursuant to a “qualified domestic relations order,” as defined in the Code and ERISA; provided, however, that the Committee has the discretion to permit the transfer of awards under the 2012 LTIP to immediate family members of participants, trusts and partnerships established for the primary benefit of such family members or to charitable organizations, provided that such transfers are made without consideration to the participant.
Selected employees and directors of, and service providers to, Heartland and its subsidiaries are eligible to become participants in the 2012 LTIP, except that non-employees may not be granted incentive stock options. The Committee will determine the specific individuals who will be granted awards under the 2012 LTIP and the type and amount of any such awards.
The Committee may grant incentive stock options and nonqualified stock options to purchase stock at a specified exercise price. Each award must be pursuant to an award agreement setting forth the terms of the individual award. Awards of options must expire no later than 10 years from the date of grant (and no later than five years for incentive stock options granted to a person that beneficially owns 10% or more of Heartland's common stock).
The exercise price for any option may not be less than the fair market value of Heartland's common stock on the date the option is granted. In addition, the exercise price of an incentive stock option granted to a person who beneficially owns 10% or more of Heartland's common stock at the time of grant may not be less than 110% of the fair market value of the stock on the date the option is granted. The exercise price of an option may, however, be higher or lower than the fair market value for an option granted in replacement of an existing award held by an employee or director of, or service provider to, a third party that is acquired by Heartland or one of its subsidiaries. The exercise price of an option may not be decreased after the date of grant nor may an option be surrendered to Heartland as consideration for the grant of a replacement option with a lower exercise price, except as approved by Heartland's stockholders, as adjusted for corporate transactions described above, or in the case of options granted in replacement of existing awards granted under a predecessor plan.
Options awarded under the 2012 LTIP will be exercisable in accordance with the terms established by the Committee. Any incentive stock option granted under the 2012 LTIP that fails to continue to qualify as an incentive stock option will be deemed to be a nonqualified stock option and the Committee may unilaterally modify any incentive stock option to disqualify it as an incentive stock option. The full purchase price of each share of stock purchased upon the exercise of any option must be paid at the time of exercise of an option. Except as otherwise determined by the Committee, the purchase price of an option
may be paid in cash, by personal, certified or cashiers' check, in shares of Heartland's common stock (valued at fair market value as of the day of exercise) either via attestation or actual delivery, by net exercise, by other property deemed acceptable by the Board or by irrevocably authorizing a third party to sell shares of Heartland's common stock and remit a sufficient portion of the proceeds to Heartland to satisfy the exercise price (sometimes referred to as a “cashless exercise”) or in any combination of the foregoing methods deemed acceptable by the Committee. In a net exercise, the person exercising the option does not pay any cash and the net number of shares received will be equal in value to the number of shares as to which the option is being exercised, multiplied by a fraction, the numerator of which is the fair market value less the exercise price, and the denominator of which is fair market value.
Stock Appreciation Rights
SARs entitle the participant to receive cash or stock equal in value to, or based on the value of, the amount by which the fair market value of a specified number of shares on the exercise date exceeds an exercise price established by the Committee. Except as described below, the exercise price for an SAR may not be less than the fair market value of the stock on the date the SAR is granted. However, the exercise price may be higher or lower than fair market value for an SAR granted in replacement of an existing award held by an employee, director or service provider of a third party that is acquired by Heartland or one of its subsidiaries, or for SARs granted under a predecessor plan. SARs will be exercisable in accordance with the terms established by the Committee.
A stock award is a grant of shares of Heartland's common stock or a right to receive shares of Heartland's common stock, an equivalent amount of cash or a combination thereof in the future. Awards may include, but are not be limited to, bonus shares, stock units, performance shares, performance units, restricted stock or restricted stock units or any other equity-based award as determined by the Committee. Any specific performance measures, performance objectives or period of service requirements are set by the Committee in its discretion.
Cash Incentive Awards
A cash incentive award is the grant of a right to receive a payment of cash, determined on an individual basis or as an allocation of an incentive pool (or Heartland's common stock having a value equivalent to the cash otherwise payable) that is contingent on the achievement of performance objectives established by the Committee. The Committee may grant cash incentive awards (including the right to receive payment of cash or Heartland's common stock having the value equivalent to the cash otherwise payable) that may be contingent on achievement of performance objectives over a specified period established by the Committee. The grant of cash incentive awards may also be subject to such other conditions, restrictions and contingencies, as determined by the Committee.
Unless specifically provided to the contrary in the applicable award agreement, if a participant's service is terminated for cause, any outstanding award held by the participant will be forfeited immediately and the participant will have no further rights under the award.
Further, except as otherwise provided by the Committee, if a participant breaches a non-competition, non-solicitation, non-disclosure or other restrictive covenant in any agreement between the participant and Heartland or a subsidiary, whether during or after the participant's termination of service, the participant will forfeit or pay the following to Heartland:
$1 Million Limit
Code Section 162(m). A U.S. income tax deduction for Heartland generally will be unavailable for annual compensation in excess of $1 million paid to a “covered employee” (our chief executive officer and three other most highly compensated executive officers other than the chief financial officer). However, amounts that constitute “performance-based compensation” under Code Section 162(m) are not counted toward the $1 million limit. It is expected that, generally, options and SARs granted under the 2012 LTIP will satisfy the requirements for “performance-based compensation.” The Committee may designate whether any stock awards or cash incentive awards granted to any participant are intended to be “performance-based compensation.” Any such awards designated as intended to be “performance-based compensation” will be conditioned on the achievement of one or more performance measures, to the extent required by Code Section 162(m).
Performance Measures. The performance measures that may be used for awards designated as intended to be “performance-based compensation” will be based on any one or more of the following performance measures as