<PAGE>
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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Quarterly Report under Section 13 or 15 (d)
of the Securities and Exchange Act of 1934
For Quarter Ended September 30, 1996
Commission File Number: 0-28442
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Heartland Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
Illinois 37-1356594
- ------------------------ ---------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
318 South Park Avenue, Herrin, Illinois 62948-3604
- --------------------------------------- ------------
(Address of principal executive officer) (Zip Code)
Issuer's telephone number, including area code: (618) 942-7373
--------------
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days:
Yes X No
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As of November 8, 1996, there were 876,875 shares of the
registrant's Common Stock, par value $0.01 per share, issued and
outstanding.
Transitional small business disclosure format (check one):
Yes No X
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents
Interest-bearing $ 1,880 $ 3,562
Noninterest-bearing 1,728 1,682
Investment securities available-for-sale at
estimated market value 2,090 102
Investment securities held to maturity 9,777 9,120
Mortgage-backed and related securities available
for sale at estimated market value 2,897 7,335
Mortgage-backed and related securities held to
maturity 6,828 3,128
Loans receivable, net 39,244 35,060
Investment required by law 490 342
Property, equipment, and property held
for investment, net 457 572
Accrued interest receivable 356 233
Prepaid expenses and other assets 66 18
Prepaid income taxes 112 127
Other assets - 28
Deferred tax asset 53 -
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TOTAL ASSETS $ 65,978 $ 61,309
- ------------ ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Deposits $ 52,683 $ 55,632
Accrued interest on deposits 49 66
Advances from borrowers for taxes and insurance 257 380
SAIF assessment 351 -
Other liabilities 71 49
Deferred tax liability - 432
-------- --------
Total Liabilities $ 53,411 $ 56,559
----------------- ======== ========
Commitments and Contingencies
- -----------------------------
Stockholders' Equity
- --------------------
Preferred stock, 1,000,000 shares authorized,
- 0 - issued $ - $ -
Common stock, $.01 par value per share:
4,000,000 shares authorized; 876,875 and
- 0 - shares issued and outstanding at
September 30, 1996 and December 31, 1995 9 -
Additional paid-in capital 8,144 -
Unearned ESOP shares (666) -
Retained earnings - substantially restricted 5,111 4,733
Unrealized gain (loss) on securities
available for sale, net of tax (31) 17
-------- --------
Total Stockholders' Equity $ 12,567 $ 4,750
-------------------------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,978 $ 61,309
- ------------------------------------------ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1996 1995 1996 1995
------- ------- ------ --------
<S> <C> <C> <C> <C>
Interest Income
- ---------------
Interest on first mortgage loans $ 713 $ 641 $2,094 $1,767
Interest on other loans 30 28 92 58
Interest on investments, securities,
and deposits with banks 223 181 661 632
Interest on mortgage backed securities 155 169 432 517
------ ------ ------ ------
Total Interest Income $1,121 $1,019 $3,279 $2,974
--------------------
Interest Expense
- ----------------
Interest on deposits 669 679 2,061 1,932
------ ------ ------ ------
Net Interest Income $ 452 $ 340 $1,218 $1,042
- -------------------
Provision for Loan Losses - - - -
- ------------------------- ------ ------ ------ ------
Net Interest Income After Provision
- -----------------------------------
for Loan Losses $ 452 $ 340 $1,218 $1,042
--------------- ------ ------ ------ ------
Non-Interest Income
- -------------------
Initial service charges and other
loan fees $ 19 $ 18 $ 57 $ 54
Gain on sale of investments - 1 13 1
Gain on sale of other real estate 2 - 2 -
Other 38 40 112 114
------ ------ ------ ------
Total Non-Interest Income $ 59 $ 59 $ 184 $ 169
------------------------- ------ ------ ------ ------
Non-Interest Expense
- --------------------
Compensation to directors, officers, and
employees $ 174 $ 117 $ 403 $ 358
Pension expense and other employee
benefits 49 13 94 41
Office properties and equipment expense
including depreciation 30 26 82 75
Advertising 11 6 29 28
Federal insurance premiums 33 29 96 93
Stationery, postage, and office supplies 16 17 43 45
Checking account expense 39 35 113 109
Service bureau expense 17 14 53 47
SAIF special assessment 351 - 351 -
Other 64 33 149 113
Loss on sale of other real estate - 9 - 9
Loss on sale of investments - - 3 -
Loss on sale of property held for
investment - - 6 -
------ ------ ------ ------
Total Non-Interest Expense $ 784 $ 299 $1,422 $ 918
-------------------------- ------ ------ ------ ------
Income Before Income Taxes $ (273) $ 100 $ (20) $ 293
- --------------------------
Income Tax Expense (Benefit) (568) 33 (479) 89
------ ------ ------ ------
Net Income (Loss) $ 295 $ 67 $ 459 $ 204
- ---------------- ====== ====== ====== ======
Earnings per Share $ .36 $ N/A $ .36 $ N/A
- ------------------ ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
2<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(IN THOUSANDS)
-------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Additional Unearned on Securities
Common Paid-in ESOP Retained Available
Stock Capital Shares Earnings for Sale Total
------ ---------- -------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - $ - $ - $4,733 $ 17 $ 4,750
- ---------------------------
Net income - - - 459 - 459
Sale of common stock 9 8,139 - - - 8,148
Cash dividends paid - - - (81) - (81)
Issuance of shares to ESOP - - (702) - - (702)
Amortization of ESOP expense - 5 36 - - 41
Change in net unrealized gain (loss)
on securities available for sale - - - - (48) (48)
----- ------- ----- ------ ---- -------
Balance at September 30, 1996 $ 9 $ 8,144 $(666) $5,111 $(31) $12,567
- ---------------------------- ===== ======= ===== ====== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC. AND SUBSIDIARY
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
------- -------
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net income $ 459 $ 204
-------- --------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation $ 37 $ 35
Discount accretion/premium amortization-
securities (net) 7 (1)
Amortization of deferred loan origination fees (36) (36)
Amortization of ESOP expense 41 -
Provision for loan losses - -
(Gain) loss on sale of investments (10) (1)
(Gain) loss on sale of property held
for investment 6 -
(Gain) loss on sale of other real estate (2) 9
(Increase) decrease in accrued interest receivable (123) 8
(Increase) decrease in prepaid expenses (48) (35)
(Increase) decrease in prepaid income taxes 14 (3)
Increase (decrease) in deferred income taxes (454) 20
(Increase) decrease in other assets 28 -
Increase (decrease) in accrued interest payable (18) 5
Increase (decrease) in other liabilities 375 (8)
-------- -------
Total Adjustments $ (183) $ (7)
----------------- -------- -------
Net Cash Provided by Operating Activities $ 276 $ 197
----------------------------------------- -------- -------
Cash Flows From Investing Activities
- ------------------------------------
Proceeds from maturities of investment securities
and mortgage backed securities $ 4,035 $ 3,420
Principal payments on mortgage backed securities 1,036 671
Net (increase) decrease in loans receivable (4,209) (6,464)
Purchases of property and equipment (39) (152)
Purchase of investment securities - held-to-maturity (4,685) (150)
Purchase of mortgage backed securities - held-
to-maturity (4,150) (750)
Purchase of investment securities - available-
for-sale (1,985) -
Purchase of mortgage backed securities -
available-for-sale (248) -
Proceeds from sale of investment securities -
held to maturity - 50
Proceeds from sale of mortgage-backed securities -
available-for-sale 4,015 -
Purchase of Federal Home Loan Bank stock (24) (5)
Proceeds from the sale of property held for investment 112 -
Proceeds from sale of other real estate 63 4
Purchase of Federal Reserve Bank stock (124) -
-------- -------
Net Cash Provided (Used) by Investing Activities $ (6,203) $(3,376)
------------------------------------------------ -------- -------
Cash Flows From Financing Activities
- ------------------------------------
Net increase (decrease) in deposits $ (2,950) $ 634
Net increase (decrease) in mortgage escrow funds (124) (121)
Sale of stock 7,446 -
Dividends on common stock (81) -
-------- -------
Net Cash Provided (Used) by Financing Activities $ 4,291 $ 513
------------------------------------------------ -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents $ (1,636) $(2,666)
- ---------------------------------------------------- -------- -------
Cash and Cash Equivalents at Beginning of Period 5,244 6,238
-------- -------
Cash and Cash Equivalents at End of Period $ 3,608 $ 3,572
- ------------------------------------------ ======== =======
Supplemental Disclosures
- ------------------------
Cash Paid During the Period for:
Interest $ 2,079 $ 1,926
Income taxes paid (refunded) $ (29) $ 73
Loans Transferred to Foreclosed Real Estate
During Period $ 61 $ 29
Schedule of Noncash Investing Activities:
- ----------------------------------------
FHLB Stock Dividend $ - $ 5
</TABLE>
See accompanying notes to consolidated financial statements. 4<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
SEPTEMBER 30, 1996 AND 1995
---------------------------
1. Stock Conversion
----------------
On June 28, 1996, First Federal Savings and Loan Association of
Herrin (the "Association") completed its conversion from a
federal mutual savings and loan association to a federal stock
savings and loan association, and then from a stock association
to a national bank known as Heartland National Bank (the "Bank"),
while simultaneously being acquired by Heartland Bancshares, Inc.
(the "Company"), an Illinois corporation, which was formed to act
as the holding company of the Bank. At the date of the
conversion, the Company completed the sale of 876,875 shares of
common stock, $.01 par value at $10.00 per share. Net proceeds
from the above transactions, after deducting offering expenses,
underwriting fees, and amounts retained to fund the Company's
employee stock ownership plan (ESOP) totaled approximately $7.4
million.
The Company is primarily engaged in the business of directing,
planning and coordinating the business activities of the Bank.
These activities primarily consist of accepting deposits from the
general public and investing these funds in loans in the Bank's
market area and in investment securities and mortgage-backed
securities. In the future, the holding company structure will
permit the Company to expand the financial services currently
offered through the Bank, although there are no definitive plans
or arrangements for such expansion at present.
2. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all information and footnotes necessary
for a complete presentation of financial position, results of
operations, changes in stockholders' equity, and cash flows in
conformity with generally accepted accounting principles.
However, all adjustments which, in the opinion of management, are
necessary for a fair presentation of the unaudited consolidated
financial statements for the three months and nine months ended
September 30, 1996 and 1995 have been recorded. Operating
results for the three months and nine months ended September 30,
1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
Prior to the acquisition of the Association on June 28, 1996, and
the Association's simultaneous conversion to the Bank, the
Company had not issued any stock, had no assets or liabilities,
and had not engaged in any business activities other than that of
an organizational nature. Accordingly, the unaudited
consolidated financial statements included herein reflect the
operations of the Association only for periods prior to June 28,
1996.
3. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements
include the accounts of Heartland Bancshares, Inc., Heartland
National Bank, and Herrin First Service Corporation, a wholly
owned subsidiary of Heartland National Bank. All significant
intercompany items have been eliminated.
5
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<PAGE>
4. Earnings per Share
------------------
Earnings per share are based upon the weighted average number of
common shares outstanding during the period. In accordance with
Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans" (SOP 93-6), only employee stock ownership
plan (ESOP) shares that have been committed to be released are
considered outstanding shares. The weighted average number of
shares used for the three months and nine months ended September
30, 1996 was 808,498. The Company completed its initial stock
offering on June 28, 1996. Earnings per share for the nine
months ended September 30, 1996 have been computed based upon net
income for the period from July 1, 1996 to September 30, 1996.
The effect on earnings per share for the period June 28, 1996 to
June 30, 1996 is not considered significant.
As no common stock was outstanding during the three and nine
months ended September 30, 1995, earnings per share information
for those periods is not applicable.
5. Dividends per Share
-------------------
In accordance with the provisions of SOP 93-6, dividends paid on
unallocated ESOP shares are not considered dividends for
financial reporting purposes.
6. Employee Stock Ownership Plan
-----------------------------
The Company has established the ESOP for employees of the Company
and its subsidiary. Employees who have attained age 21 and
completed one year of service are eligible to participate in the
plan. On June 28, 1996, the Company loaned the ESOP $701,500 to
finance the plan's initial purchase of 70,150 shares. The loan
is due and payable in ten (10) annual payments of principal and
interest, beginning December 31, 1996. The principal is to be
repaid in equal installments, with interest at a variable rate of
1% above prime. The Company intends to contribute sufficient
funds to the ESOP to enable it to repay the loan, plus such other
amounts as the Company's Board of Directors may determine in its
discretion. The Company accounts for its ESOP in accordance with
Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans." As shares are committed to be released
to participants, the Company reports employee benefits expense
based on the average market price of the shares during the
period. ESOP benefits expense recorded during the three months
ended September 30, 1996 was $46,744.
7. Director Retirement Plan
------------------------
In connection with the stock conversion of the Association to the
Bank, the Board of Directors of the Association (now the Bank)
has adopted a director retirement plan, effective December 31,
1995, for its directors who are members of the Board of Directors
at some time on or after the plan's effective date. Under the
plan, a bookkeeping account in each participant's name is
credited with "Performance Units" according to the following
formula: (i) 70 Performance Units for each full year of service
as a director prior to 1996, plus (ii) 100 Performance Units for
each full year of service as a director after 1995, with the
value of each Performance Unit equal to the average fair market
value of one share of the Company's common stock as of December
31st of each of the three years preceding the determination date
(or such shorter period as to which trading information is
available). Additional Performance Units are to be credited at
the end of each year after 1995, based upon the amount of
dividends paid on the Company's common stock. A participant's
vested interest in Performance Units credited on the plan's
effective date equals 50% if the participant serves on the Board
for less than a year after 1995, 75% after the second year, and
100% after the third year. In the event a participant's service
on the Board is terminated due to death or disability, the vested
percentage becomes 100% regardless of the number of Years of
service. Performance Units credited after the plan's effective
date are fully vested at all times.
6<PAGE>
<PAGE>
As Company stock was outstanding during the third quarter of
1996, a liability of $34,500 (and related expense) has been
recognized in the financial statements as of September 30, 1996
based on the vested value of the interests in the director
retirement plan as of that date.
8. Deferred Income Tax Adjustment
------------------------------
Prior to the Association's decision to convert to a stock
institution and national bank, the Association computed its
income taxes allowing for the effect of the special bad debt
deduction available to a savings and loan association under the
Internal Revenue Code if certain conditions are met. In general,
this special tax bad debt deduction represents the greater of
amounts deducted based upon historical loss experience or 8% of
taxable income. Based upon the Association's decision to convert
to bank status, the law in effect at that time required that the
entire amount of excess bad debt deductions referred to above
would be restored to income, and taxes thereon would become due.
As a result, income taxes totaling $450,000 were accrued in the
Association's 1995 financial statements as a component of income
tax expense. This accrual recognized a deferred liability for
the tax effect of bad debt reserves not previously recorded
(those arising before 1988).
During the third quarter of 1996, the Small Business Job
Protection Act of 1996 (Small Business Act) was enacted into law.
Under this law, for years beginning after 1995, thrift
institutions (such as the Association) are required to recapture
"excess bad debt reserves" over a six-year period. However, pre-
1988 reserves are not included in these excess bad debt reserves.
As the conversion of the Association to the Bank had not taken
place as of December 31, 1995 (the effective date of the new
law), the Bank was still a thrift institution as of that date.
Therefore, it is the current judgment of management that, due to
the change enacted by the Small Business Act, the pre-1988
reserves will not be required to be recaptured into taxable
income. As a result, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", the $450,000 increase in income taxes made
during 1995 is being reversed during the current period as a
change to income from continuing operations, leading to a
$450,000 decrease in income tax expense and deferred income taxes
as of September 30, 1996.
9. SAIF Special Assessment
-----------------------
On September 30, 1996, a bill was signed into law which requires
financial institutions which are members of the Savings
Association Insurance Fund (SAIF) to pay a special one-time
assessment on insured deposits. Subsequent to that date, the
Bank was informed that the amount of the special assessment to be
paid by the Bank was approximately $351,000. This amount has
been recorded on the financial statements as of and for the three
months ended September 30, 1996 as a charge to expense and an
increase in a corresponding liability.
10. Regulatory Capital
------------------
The Bank is required to maintain certain levels of regulatory
capital. At September 30, 1996, the Bank was in compliance with
all regulatory capital requirements. In addition to these
requirements, the Bank must maintain sufficient capital for the
"liquidation account" for the benefit of eligible account
holders. In the event of a complete liquidation of the Bank,
eligible depositors would have an interest in the account.
7<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of
Operations
-----------------------------------------------
General
- -------
The following discussion reviews the consolidated financial
condition of Heartland Bancshares, Inc. (the "Company"),
Heartland National Bank (the "Bank"), and Herrin First Service
Corporation, a wholly owned subsidiary of Heartland National
Bank, as of September 30, 1996 and December 31, 1995, and the
results of operations for the three months and nine months ended
September 30, 1996 and 1995.
As the completion of the conversion of First Federal Savings and
Loan Association of Herrin (the "Association") to the Bank, and
the simultaneous acquisition of the institution and issuance of
stock by the Company took place on June 28, 1996, this discussion
of financial condition and results of operations will relate to
the Association (now the Bank) as pertains to operations before
that date.
The business of the Bank has historically been to function as a
financial intermediary, accepting deposits from the general
public and investing these funds primarily in loans for one- to
four-family residences located in the Bank's market area. To a
lesser extent, the Bank engages in various forms of consumer and
home equity lending and invests in mortgage-backed securities,
U.S. Government and federal agency securities, municipal
securities and interest-bearing deposits.
The Company is currently primarily investing the funds received
from its issuance of common stock in mortgage-backed securities,
U.S. Government and federal agency securities, municipal
securities and interest-bearing deposits.
The Bank's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on
loans and investments, and the interest paid on interest-bearing
liabilities, primarily deposits. Net interest income is
determined by (i) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing
liabilities. The Bank's interest rate spread is affected by
regulatory, economic and competitive factors that influence
interest rates, loan demand and deposit flows. The Bank's net
earnings are also affected by the level of non-interest income,
which primarily consists of fees and service charges, and by the
level of its operating expenses and provisions for loan losses.
The operations of the Bank are significantly affected by
prevailing economic conditions, competition and the monetary,
fiscal and regulatory policies of governmental agencies. Lending
activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates
and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily
on competing investments, account maturities and the levels of
personal income and savings in the Bank's market area.
Liquidity and Capital Resources
- -------------------------------
As a holding company, the Company conducts its business through
its subsidiary, the Bank (previously the Association). The
Bank's primary sources of funds are deposits and proceeds from
maturing investment securities, maturing mortgage-backed and
related securities and principal and interest payments on loans,
investment securities and mortgage-backed and related securities.
While maturities and scheduled amortization of investment
securities, mortgage-backed and related securities and loans are
a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors. The Bank
uses its liquidity resources principally to fund the origination
of loans, to purchase investment securities and mortgage-backed
and related securities, to fund deposit withdrawals, to maintain
liquidity, and to meet operating expenses. Management believes
that its sources of funds will be adequate to meet the Bank's
liquidity needs for the immediate future.
8<PAGE>
<PAGE>
A portion of the Bank's liquidity consists of cash and cash
equivalents, which include investments in highly liquid, short-
term deposits. The levels of these assets are dependent on the
Bank's operating, financing, and investing activities during any
given period. At September 30, 1996 and December 31, 1995, the
consolidated amounts of cash and cash equivalents totaled $3.6
million and $5.2 million, respectively.
Liquidity management is both a daily and long-term function of
business management. The Company has other sources of liquidity
if there is a need for funds. The Company has a portfolio of
investment securities and mortgage-backed and related securities
with a consolidated aggregate market value of $5.0 million at
September 30, 1996 classified as available for sale. Another
source of liquidity is the Bank's ability to obtain advances from
the Federal Home Loan Bank of Chicago ("FHLB"). At September 30,
1996, the Bank had no outstanding advances from the FHLB.
At September 30, 1996, the Bank had $621,000 in outstanding
commitments to extend credit. The Bank anticipates that it will
have sufficient funds available to meet its current loan
origination commitments.
The Bank is required to maintain certain levels of regulatory
capital. At September 30, 1996, the Bank was in compliance with
all regulatory capital requirements.
Financial Condition
- -------------------
Total assets increased by $4.7 million, or 7.62%, from $61.3
million at December 31, 1995 to $66.0 million at September 30,
1996. The increase was due primarily to an infusion of capital
of $8.1 million ($7.4 million net of ESOP funding) from the
conversion of the Association to stock ownership and concurrent
issue and sale of the Company's common stock. This was partially
offset by a decrease in depositors' funds of $3.0 million from
December 31, 1995 to September 30, 1996. This decrease is
attributed to depositors' use of funds to purchase stock in the
stock conversion.
The Bank's loan portfolio increased by $4.2 million, or 11.9%,
from $35.1 million at December 31, 1995 to $39.2 million at
September 30, 1996. The increase in loan activity during the
period is attributed to increased loan marketing activities in
the Bank's service area. The Bank's allowance for loan losses
totaled $300,000 at September 30, 1996 and December 31, 1995.
Cash and cash equivalents totaled $3.6 million at September 30,
1996, compared to a total of $5.2 million at December 31, 1995.
The $1.6 million decrease is primarily due to the investment of
the Company and the Bank of a portion of the liquid assets in
investment and mortgage-backed securities.
The Company's consolidated investment securities portfolio
totaled $11.9 million at September 30, 1996, an increase of $2.6
million from $9.2 million at December 31, 1995. This increase
was due to new purchases of investment securities in excess of
maturities of such securities for the nine months ended September
30, 1996. The Company's mortgage-backed and related securities
portfolio totaled $9.7 million as of September 30, 1996, a
decrease of $738,000 from $10.5 million at December 31, 1995.
This decrease was due to the sale of the institution's remaining
collateralized mortgage obligations ("CMO's") during the first
quarter of 1996, partially offset by the purchase of new
mortgage-backed securities. During the nine months ended
September 30, 1996, the institution's portfolio of investment
securities and mortgage-backed and related securities classified
as available for sale decreased capital by $48,000 (net of taxes)
as a result of a decrease in the market value of such securities
classified as available for sale pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115.
Total liabilities decreased by $3.1 million, or 5.6%, from $56.6
million at December 31, 1995 to $53.4 million at September 30,
1996. Total deposits decreased by $2.9 million, or 5.3%, from
$55.6 million at December 31, 1995 to $52.7 million at September
30, 1996. This decrease is primarily attributable to depositors'
use of funds to purchase stock in the stock conversion.
9<PAGE>
<PAGE>
Stockholders' equity increased by $7.8 million during the nine
months ended September 30, 1996. This increase is primarily due
to the issuance and sale of common stock with net proceeds of
$7.4 million, as well as net income of $459,000 for the period.
Results of Operations
- ---------------------
Net Income. Net income was $295,000 for the three months ended
September 30, 1996, as compared to $67,000 for the three months
ended September 30, 1995. The increase of $228,000, or 340.3%,
reflects an increase of $112,000, or 32.9%, in net interest
income, and a $601,000 decrease in the provision for income
taxes, particularly offset by an increase of $485,000 or 162.2%,
in non-interest expense. The increase in net income was
primarily due to increased investment income from securities
purchased with proceeds from the stock issuance, increased
expense due to a special $351,000 assessment from the SAIF, and
decreased income tax expense due to the reversal of a 1995 tax
accrual for the tax effect of a probable recapture of excess bad
debt deductions.
Net income was $459,000 for the nine months ended September 30,
1996, as compared to $204,000 for the nine months ended September
30, 1995. The increase of $255,000, or 125.0%, reflects an
increase of $176,000, or 16.9%, in net interest income, an
increase of $15,000, or 8.9%, in non-interest income, an increase
of $504,000, or 54.9%, in non-interest expense, and a $568,000
decrease in the provision for income taxes.
Net Interest Income. Net interest income increased $112,000, or
32.9%, to $452,000 for the three months ended September 30, 1996,
as compared to $340,000 for the three months ended September 30,
1995. This increase was primarily due to an increase in the
ratio of average interest-earning assets to average interest-
bearing liabilities from 106.04% for the three months ended
September 30, 1995 to 120.13% for the three months ended
September 30, 1996, partially offset by a decrease in the net
interest margin from 2.09% for the three months ended September
30, 1995 to 1.99% for the three months ended September 30, 1996.
The increase in interest-earning assets is primarily due to the
investment of the net proceeds from the stock conversion and
stock offering.
Net interest income increased $176,000, or 16.9%, to $1.2 million
for the nine months ended September 30, 1996, as compared to $1.0
million for the nine months ended September 30, 1995. This
increase was primarily due to an increase in the ratio of average
interest-earning assets to average interest-bearing liabilities
from 106.49% for the nine months ended September 30, 1995 to
111.12% for the nine months ended September 30, 1996, partially
offset by a decrease in the net interest margin from 2.16% for
the nine months ended September 30, 1995 to 2.11% for the nine
months ended September 30, 1996. Again, the increase is
primarily due to the investment of the net proceeds from the
stock conversion and stock offering during the second quarter of
1996.
Interest Income. Total interest income increased by $102,000, or
10.0%, to $1.1 million for the three months ended September 30,
1996 as compared to $1.0 million for the three months ended
September 30, 1995. The increase in interest income is primarily
the result of an increase of $6.8 million, or 11.8%, in average
interest-earning assets from $57.1 million for the three months
ended September 30, 1995 to $63.8 million for the three months
ended September 30, 1996. This increase was primarily due to an
increase of $5.9 million in the average balance of the loan
portfolio during the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995 resulting
from ongoing loan origination efforts, and the increase in
interest-earning assets arising from proceeds from the stock
conversion. The increase in interest income also reflects a
decrease of 11 basis points in the average yield on interest-
earning assets for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995.
10<PAGE>
<PAGE>
Total interest income increased by $305,000, or 10.3%, to $3.3
million for the nine months ended September 30, 1996 as compared
to $3.0 million for the nine months ended September 30, 1995.
The increase in interest income is primarily the result of an
increase of $5.6 million, or 9.9%, in average interest-earning
assets from $56.8 million for the nine months ended September 30,
1995 to $62.4 million for the nine months ended September 30,
1996. This increase was primarily due to an increase of $6.3
million in the average balance of the loan portfolio during the
nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995 resulting from increased loan
origination efforts. The increase in interest income also
reflects a 2 basis point increase in the average yield on
interest-earning assets for the nine months ended September 30,
1996 compared to the nine months ended September 30, 1995.
Interest Expense. Interest expense decreased by $10,000, or
1.5%, to $669,000 for the three months ended September 30, 1996
as compared to $679,000 for the three months ended September 30,
1995. This decrease was primarily due to a decrease of $692,000
in the average balance of deposits from $53.8 million for the
three months ended September 30, 1995 to $53.1 million for the
three months ended September 30, 1996. This decrease was largely
attributed to decreases in deposit accounts caused by customers
using those deposit accounts to purchase the stock of the Company
in the conversion. The decrease in the average balance of
deposits was partially offset by a 1 basis point decrease in the
average cost of deposits, from 5.05% for the three months ended
September 30, 1995 to 5.04% for the three months ended September
30, 1996.
Interest expense increased by $129,000, or 6.7%, from $1.9
million for the nine months ended September 30, 1995 to $2.1
million for the nine months ended September 30, 1996. This
increase was primarily due to an increase of $2.8 million in the
average balance of deposits from $53.3 million for the nine
months ended September 30, 1995 to $56.1 million for the nine
months ended September 30, 1996. This increase was predominantly
due to increases in deposit accounts by customers depositing
funds in those accounts to purchase Company stock during the
second quarter of 1996. The increase in interest expense also
reflected a 7 basis point increase in the average cost of
deposits, from 4.83% for the nine months ended September 30, 1995
to 4.90% for the nine months ended September 30, 1996.
Provision for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on
management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation is based on
an analysis of various factors, including the market value of the
underlying collateral, growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to
outstanding loans, historical loss experience, delinquency trends
and prevailing and projected economic conditions. There was no
additional provision for loan losses made during the three months
ended September 30, 1996 and 1995, or for the nine months ended
September 30, 1996 and 1995. Although the Company believes that
the present level of the allowance for loan losses is adequate to
reflect the risks inherent in its loan portfolio, there can be no
assurance that the Company will not experience increases in its
nonperforming assets, that it will not increase the level of the
allowance for loan losses in the future or that significant
provisions for losses will not be required based on factors such
as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults.
Non-Interest Income. Non-interest income remained essentially
level at $59,000 for the three months ended September 30, 1995
and the three months ended September 30, 1996.
Non-interest income increased $15,000, or 8.9%, from $169,000 for
the nine months ended September 30, 1995 to $184,000 for the nine
months ended September 30, 1996. This increase was primarily due
to realized gains on the sale of investments during the first
quarter of 1996.
11<PAGE>
<PAGE>
Non-Interest Expense. Non-interest expense increased $485,000,
or 162.2%, from $299,000 for the three months ended September 30,
1995 to $784,000 for the three months ended September 30, 1996.
The increase was primarily due to the special SAIF assessment of
$351,000. The FDIC operates two deposit insurance funds: the
Bank Insurance Fund ("BIF") which generally insures the deposits
of commercial banks and the SAIF which generally insures the
deposits of savings associations. Since the Bank was originally
chartered as a savings association, its deposits are insured by
the SAIF rather than the BIF. Because the reserves of the SAIF
have been below statutorily required minimums, institutions with
SAIF-assessable deposits, like the Bank, have been required to
pay substantially higher deposit insurance premiums than
institutions with deposits insured by the BIF for the past
several semi-annual periods. In order to recapitalize the SAIF
and address the premium disparity, the recently-enacted Deposit
Insurance Funds Act of 1996 authorized the FDIC to impose a one-
time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be
necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based
on the amount of their SAIF-assessable deposits as of March 31,
1995.
The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-
capitalized institutions with the highest supervisory ratings
would be reduced to zero and institutions in the lowest risk
assessment classification will be assessed at the rate of 0.27%
of insured deposits. Until December 31, 1999, however, SAIF-
insured institutions will be required to pay assessments to the
FDIC at the rate of 6.5 basis points to help fund interest
payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to
finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for FICO obligations at the rate of 1.3
basis points. After December 31, 1999, both BIF and SAIF members
will be assessed at the same rate for FICO payments.
The Deposit Insurance Funds Act of 1996 provides that the BIF and
the SAIF will be merged into a single Deposit Insurance Fund
effective December 31, 1999 but only if there are no insured
savings associations on that date. The legislation directs the
Department of Treasury to make recommendations to Congress by
March 31, 1997 for the establishment of a single charter for
banks and thrifts. The Company cannot predict what the effect of
this legislation will be on the Bank.
The Bank also experienced a $93,000 increase in compensation and
employee benefits expense primarily as a result of recognition of
expense related to the ESOP and director retirement plans, and
net increases of $41,000 in various other expense items.
Non-interest expense increased $504,000, or 54.9%, from $918,000
for the nine months ended September 30, 1995 to $1.4 million for
the nine months ended September 30, 1996. The increase was
primarily due to the special SAIF assessment of $351,000, a
$98,000 increase in compensation and employee benefits expense
primarily due to the recognition of expense related to the ESOP
and director retirement plans, and net increases of $55,000 in
various other expense items.
Income Tax Expense. Income tax expense was $(568,000) for the
three months ended September 30, 1996 as compared with $33,000
for the three months ended September 30, 1995. For the nine
months ended September 30, 1996, income tax expense was
$(479,000), as compared to $89,000 for the nine months ended
September 30, 1995. The large decreases in income tax expense
are primarily the result of the $450,000 reversal in the current
quarter of a 1995 addition to deferred tax expense. This prior
year addition related to the expected recapture into taxable
income of excess bad debt deductions upon the completion of the
conversion from thrift institution to bank. With the enactment
of the new Small Business Job Protection Act of 1996, management
believes that the pre-1988 excess bad debt deductions which gave
rise to the original deferred tax addition will not be required
to be recaptured. Therefore, in accordance with SFAS No. 109,
"Accounting for Income Taxes", the effects of the change in the
tax law are being reflected in the financial statements in the
period of the law's enactment. The other major component of the
reduction in income tax expense for both the three month and nine
month periods ended September 30, 1996 is the reduction of
taxable income caused by the imposition of the special SAIF
assessment of $351,000.
12<PAGE>
<PAGE>
Impact of Inflation and Changing Prices
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's
operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or
to the same extent as the price of goods and services.
Impact of New Accounting Standards
Accounting for the Impairment of Long-Lived Assets. In March,
1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The
statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If, under the criteria of the statement, an
asset is impaired, an impairment loss is recognized. SFAS No.
121 is effective for fiscal years ending after December 15, 1995.
The Bank has adopted the provisions of the statement effective
for the year ending December 31, 1996. The adoption of SFAS No.
121 did not have a material effect on the Bank's financial
position or operating results.
Accounting for Mortgage Servicing Rights. In May, 1995, the FASB
issued SFAS No. 122, "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. A mortgage
banking enterprise that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and
sells or securitizes those loans with servicing rights retained
should allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans (without mortgage
servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not
practicable to estimate the fair values of the mortgage servicing
rights and the mortgage loans (without the servicing rights), the
entire cost of purchasing or originating the loans should be
allocated to the mortgage loans, and no cost should be allocated
to the mortgage servicing rights. SFAS No. 122 also requires
that a mortgage banking enterprise assess its capitalized
mortgage servicing rights for impairment based on the fair value
of those rights. SFAS No. 122 must be applied prospectively for
fiscal years beginning after December 15, 1995, with earlier
adoption encouraged, to transactions in which a mortgage banking
enterprise sells or securitizes mortgage loans with servicing
rights retained and to impairment evaluations of all amounts
capitalized as mortgage servicing rights, including those
purchased before the adoption of SFAS No. 122. Retroactive
capitalization of mortgage servicing rights retained in
transactions in which a mortgage banking enterprise originates
mortgage loans and sells or securitizes those loans before the
adoption of SFAS No. 122 is prohibited. The Bank has adopted the
provision of the statement for the year ending December 31, 1996.
The adoption of SFAS No. 122 did not have a material effect on
the Bank's financial position or operating results.
Accounting for Transfers and Servicing of Financial Assets. In
June, 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 establishes accounting and
reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on the consistent
application of the financial components approach. This approach
requires the recognition of financial assets and servicing assets
that are controlled by the reporting entity, the derecognition of
financial assets when control is surrendered, and the
derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control
has been surrendered in the transfer of financial assets. SFAS
No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after
December 31, 1996. The Company will adopt the provisions of the
statement at that time. The management of the Company does not
currently believe that the future adoption of this statement will
have a material effect on the Company's financial position or
operating results.
13<PAGE>
<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
From time to time, the Company and its subsidiaries may be a
party to various legal proceedings incident to its or their
business. At September 30, 1996, there were no legal proceedings
to which the Company or any subsidiary was a party, or to which
any of their property was subject, which were expected by
management to result in a material loss.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
None.
The following exhibits are filed as a part of this
report:
Exhibit 27 Financial Data Schedule
14<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEARTLAND BANCSHARES, INC.
Date: November 12, 1996 By: /s/ Roger O. Hileman
-------------------------------
Roger O. Hileman
(Principal Executive, Accounting
and Financial Officer)
15
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,728
<INT-BEARING-DEPOSITS> 1,880
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<INVESTMENTS-HELD-FOR-SALE> 4,987
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<INVESTMENTS-MARKET> 16,422
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<TOTAL-ASSETS> 65,978
<DEPOSITS> 52,683
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<OTHER-SE> 12,558
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<INTEREST-DEPOSIT> 2,061
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<INTEREST-INCOME-NET> 1,218
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<INCOME-PRETAX> (20)
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<EXTRAORDINARY> 0
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<NET-INCOME> 459
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<YIELD-ACTUAL> 2.60
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<LOANS-PAST> 0
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