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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission file number: 0-28442
HEARTLAND BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1356594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
318 South Park Avenue
Herrin, Illinois 62948-3604
(Address of principal executive offices) (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 Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
As of May 13, 1999, the registrant had outstanding 876,875 shares of
Common Stock, $.01 par value.
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TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Statements Of Financial Condition 3
Consolidated Statements Of Income 4
Consolidated Statements Of Stockholders' Equity 5
Consolidated Statements Of Cash Flows 6
Item 2. Management's Discussion and Analysis of Financial Condition and Plan of
Operations 11
Cautionary Statement Regarding Forward-Looking Statement 11
General 11
Financial Condition 12
Results of Operations 13
Liquidity and Capital Resources 14
Year 2000 Compliance Matters 15
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Securityholders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
EXHIBIT INDEX 19
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HEARTLAND BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents
Interest-bearing $ 8,784 $10,220
Noninterest-bearing 1,421 1,982
Certificates of deposit 1,579 1,379
Investment securities available-for-sale at
estimated market value 1,139 1,145
Investment securities held-to-maturity 8,779 5,287
Mortgage-backed and related securities available-for-
sale at estimated market value 367 661
Mortgage-backed and related securities held-to-maturity 4,707 4,251
Loans receivable, net 34,797 36,382
Investments required by law 539 539
Property, equipment and property held for investment, net 472 486
Accrued interest receivable 335 229
Prepaid expenses and other assets 65 60
Prepaid income taxes 206 173
Foreclosed real estate 246 293
Deferred tax asset 256 238
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TOTAL ASSETS $63,692 $63,325
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
Deposits $51,777 $51,417
Accrued interest on deposits 41 49
Advances from borrowers for taxes and insurance 279 205
Other liabilities 311 359
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Total Liabilities 52,408 52,030
======= =======
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value per share:
1,000,000 shares authorized, none issued - -
Common stock, $.01 par value per share:
4,000,000 shares authorized; 876,875 shares issued; 832,833
outstanding at March 31, 1999 and December 31, 1998 9 9
Additional paid-in capital 8,263 8,255
Unearned employee stock ownership plan (ESOP) shares (412) (429)
Management recognition plan (MRP) shares (420) (435)
Treasury stock (44,042 shares at cost) (684) (684)
Retained earnings - substantially restricted 4,520 4,566
Accumulated other comprehensive income 8 13
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Total Stockholders' Equity 11,285 11,295
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,692 $63,325
======= =======
See accompanying notes to consolidated financial statements.
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HEARTLAND BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Interest Income
Interest on first mortgage loans $ 680 $ 850
Interest on other loans 66 52
Interest on investments, securities, and deposits with banks 231 147
Interest on mortgage-backed securities 59 109
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Total Interest Income 1,036 1,158
Interest Expense
Interest on deposits 598 642
Interest on other borrowed funds - 3
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Total Interest Expense 598 645
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Net Interest Income 438 513
Provision for Loan Losses - 81
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Net Interest Income After Provision for Loan Losses 438 432
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Non-Interest Income
Initial service charges and other loan fees 14 12
Gain on sale of other real estate 7 8
Other 34 27
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Total Non-Interest Income 55 47
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Non-Interest Expense
Compensation to directors, officers and employees 171 201
Pension expense and other employee benefits 35 39
Office, properties and equipment expense, including depreciation 34 34
Advertising 3 9
Federal insurance premiums 12 12
Stationery, postage and office supplies 14 14
Checking account expense - 19
Service bureau expense 43 43
Legal and professional services 210 46
Other 66 59
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Total Non-Interest Expense 588 476
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Income Before Income Taxes (95) 3
Income Tax Expense (Benefit) (49) (4)
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Net Income (Loss) $ (46) $ 7
====== ======
Earnings (Loss) Per Common Share - Basic
Net income (loss) $ (.06) $ .01
====== ======
Earnings (Loss) Per Common Share - Assuming Dilution
Net income (loss) $ (.06) $ .01
====== ======
See accompanying notes to consolidated financial statements.
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HEARTLAND BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Accumulated
Additional Unearned Other
Common Paid-In ESOP MRP Treasury Retained Comprehensive
Stock Capital Shares Shares Stock Earnings Income Total
----- ------- ------ ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 9 $8,255 $(429) $(435) $(684) $4,566 $13 $11,295
- ----------------------------
Comprehensive income (loss):
Net income (loss) - - - - - (46) - (46)
Other comprehensive income,
net of tax:
Unrealized gains (losses) on
securities:
Gain arising during year
(net of tax of $(3)) - - - - - - (5) (5)
Reclassification adjustment - - - - - - - -
--- ------ ----- ----- ----- ------ --- -------
Total comprehensive income (loss) - - - - - (46) (5) (51)
Amortization of MRP expense - - - 15 - - - 15
Cash dividends paid - - - - - - - -
Amortization of ESOP expense - 8 17 - - - - 25
--- ------ ----- ----- ----- ------ --- -------
Balance at March 31, 1999 $ 9 $8,263 $(412) $(420) $(684) $4,520 $ 8 $11,284
- ------------------------- === ====== ===== ===== ===== ====== === =======
See accompanying notes to consolidated financial statements.
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HEARTLAND BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Cash Flows From Operating Activities:
- ------------------------------------
Net income $ (46) $ 7
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Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation 14 14
Discount accretion/premium amortization-securities (net) 10 (1)
Amortization of deferred loan origination fees (8) (8)
Amortization of ESOP expense 25 40
Amortization of MRP expense 15 15
Provision for loan losses - 81
(Gain) loss on sale of other real estate (7) (8)
(Increase) decrease in accrued interest receivable (106) (19)
(Increase) decrease in prepaid expenses/other assets (5) (15)
(Increase) decrease in deferred income taxes (15) (19)
Increase (decrease) in accrued interest payable (8) (12)
Increase (decrease) in other liabilities (48) 13
Increase (decrease) in accrued income taxes (34) (109)
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Total adjustments (167) (28)
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Net cash used in operating activities (213) (21)
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Cash Flows From Investing Activities:
- ------------------------------------
Net (increase) decrease in certificates of deposit (200) -
Proceeds from maturities of investment securities
and mortgage-backed securities held-to-maturity 2,750 250
Proceeds from maturities of investment securities
and mortgage-backed securities available-for-sale - 200
Principal payments on mortgage-backed securities 814 439
Net (increase) decrease in loans receivable 1,593 1,726
Purchases of property and equipment - (16)
Purchase of investment securities held-to-maturity (6,241) -
Purchase of mortgage-backed securities held-to-maturity (988) -
Proceeds from sale of other real estate 54 90
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Net cash provided by (used in) investing activities (2,218) 2,689
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Cash Flows From Financing Activities:
- ------------------------------------
Net increase (decrease) in deposits 360 (1,178)
Net increase (decrease) in mortgage escrow funds 74 109
Dividends on common stock - (83)
Payments on Federal Home Loan Bank advances - (750)
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Net cash provided by (used in) financing activities 434 (1,902)
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Net increase in cash and cash equivalents (1,997) 766
Cash and cash equivalents at beginning of period 12,202 4,970
------- -------
Cash and cash equivalents at end of period $10,205 $ 5,736
======= =======
Supplemental disclosures
Cash paid during the period for:
Interest $ 606 $ 657
Income taxes - 124
Loans transferred to foreclosed real estate
during period - 118
Proceeds from sales of foreclosed real estate
financed through loans - 19
See accompanying notes to consolidated financial statements.
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HEARTLAND BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999 AND 1998
1. BUSINESS
--------
On June 28, 1996, First Federal Savings and Loan Association of
Herrin (the "Association") completed its conversion (the
"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"). Simultaneously, the Bank was acquired by
Heartland Bancshares, Inc. (the "Company"), 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 (the "Common Stock"), 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 (the "ESOP") totaled
approximately $7.4 million.
The Company (through the Bank) provides a full range of financial
services to individual and corporate customers from two office
locations in Herrin and Carterville, Illinois. The Company is
subject to competition from other financial institutions in the
area, is subject to the regulations of certain federal agencies
and undergoes periodic examinations by those regulatory
authorities.
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.
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 ended March 31, 1999 and
1998 have been recorded. Operating results for the three months
ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
Certain reclassifications have been made for the three months
ended March 31, 1998 to conform with the financial statement
presentation for the three months ended March 31, 1999. The
reclassifications had no effect on previously reported net income
or retained earnings.
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3. PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying unaudited consolidated financial statements
include the accounts of the Company, the Bank and Herrin First
Service Corporation, a wholly owned subsidiary of the Bank. All
significant intercompany items have been eliminated.
4. EARNINGS PER SHARE
------------------
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," earnings per common share
are being computed and presented on both a basic and diluted
basis. Basic earnings per share are computed based on the
weighted average number of shares actually outstanding during the
period in question. In addition to using the weighted average
number of outstanding shares, diluted earnings per share
computations also consider the dilutive effect of stock options.
The number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price
of the Company's stock. In accordance with Statement of Position
93-6, "Employers' Accounting for Employee Stock Ownership Plans"
("SOP 93-6"), only ESOP shares that have been committed to be
released are considered outstanding shares. The number of shares
outstanding has also been reduced by shares repurchased by the
Company and held as treasury stock (see Note 11). The weighted
average numbers of shares used for basic earnings per share for
the three months ended March 31, 1999 and March 31, 1998 were
790,904 and 816,763, respectively. The weighted average numbers
of shares used for diluted earnings per share for the three months
ended March 31, 1999 and March 31, 1998 were 793,974 and 824,261,
respectively.
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 a tax qualified 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 ESOP. On June 28, 1996, the Company loaned the ESOP
$701,500 (the "Loan") to finance the ESOP'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 SOP 93-6. 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 and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as
a reduction of retained earnings; dividends on unallocated ESOP
shares are recorded as a reduction of debt. ESOP benefits expense
recorded during the three months ended March 31, 1999 and 1998 was
$25,444 and $37,587, respectively.
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7. DIRECTOR RETIREMENT PLAN
------------------------
In connection with the Conversion, the Board of Directors of the
Association (now the Bank) adopted a director retirement plan (the
"Director Retirement Plan") effective December 31, 1995 (the
"Effective Date") for its directors who are members of the Board
of Directors at some time on or after the Effective Date. Under
the Director Retirement 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 Effective
Date becomes 50% vested if the participant serves on the Board for
less than a year after 1995, 75% vested after the second year and
100% vested 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 Effective Date
are fully vested at all times.
As of March 31, 1999, a liability of $122,771 has been recognized
in the financial statements based on the vested value of the
interests in the Director Retirement Plan as of that date. The
amount of expense recognized in the financial statements for the
three months ended March 31, 1999 and 1998 was $2,063 and $9,513,
respectively.
8. MANAGEMENT RECOGNITION PLAN
---------------------------
On January 28, 1997, the stockholders of the Company approved a
management recognition plan ("MRP"). With funds contributed by
the Company, the MRP has purchased, in the aggregate, 35,075
shares of the Company's Common Stock (the maximum number of shares
allowed to be purchased). Such shares were purchased in the open
market. In June 1997, the MRP's administrative committee voted to
grant awards of Common Stock totaling 21,917 shares to certain
executive officers and directors of the Company and the Bank.
These awards were deemed to be effective as of the date of
stockholder approval of the MRP. Common Stock granted under the
MRP vests over a five-year period at twenty percent per year.
Under current accounting standards, when MRP awards are granted,
the Company recognizes compensation expense based on the fair
market value of the Common Stock on the date the awards are
granted with such amount being amortized over the expected vesting
period for the award. As of March 31, 1999, 35,075 shares had
been purchased on the open market by the MRP at a total cost of
approximately $552,000. This amount has been recorded in the
consolidated financial statements as an increase in a contra
equity account. This contra equity account will be amortized to
expense in the future over the period over which the MRP awards
become vested. The amount of expense recognized in the financial
statements for the three months ended March 31, 1999 and 1998 was
$15,342 for both periods.
9. STOCK OPTION AND INCENTIVE PLAN
-------------------------------
Also on January 28, 1997, the stockholders of the Company approved
a stock option and incentive plan (the "Option Plan"). The Option
Plan provides for the granting of stock options and stock
appreciation rights to certain employees and directors of the
Company and the Bank
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and has a term of ten years from the effective date of the Option
Plan after which no awards may be granted. The Company has
reserved 87,687 authorized, but unissued shares (or treasury
shares) of Common Stock for issuance upon the future exercise of
options or stock appreciation rights under the Option Plan. On
the effective date of the Option Plan, certain executive officers
and directors of the Company and the Bank received a grant of an
option under the Option Plan to purchase shares of Common Stock at
an exercise price per share equal to the fair market value on that
date. The Option Plan provides for one-fifth of the options
granted to be exercisable on each of the first five anniversaries
of the date the option was granted. The Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for the Option Plan.
Recognition of compensation expense for stock options is not
required when options are granted at an exercise price equal to or
exceeding the fair market value of the Company's Common Stock on
the date the option is granted. Therefore, no expense related to
the Option Plan is reflected on the accompanying financial
statements.
10. REGULATORY CAPITAL
------------------
The Bank is required to maintain certain levels of regulatory
capital. At March 31, 1999, 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 liquidation account.
11. STOCK REPURCHASE PLAN AND TREASURY STOCK
----------------------------------------
During 1998, the Board of Directors of the Company adopted a Stock
Repurchase Plan (the "Stock Repurchase Plan") to repurchase 43,843
shares, or 5%, of the Company's outstanding Common Stock. It is
management's intention that all repurchased shares be held as
treasury stock and be used for general corporate purposes,
including the exercise of stock options. As of March 31, 1999,
the Stock Repurchase Plan had been completed, with 43,843 shares
being repurchased. During the third quarter of 1998, the Company
acquired another 199 shares of treasury stock in a transaction
unrelated to the Stock Repurchase Plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and business
of the Company and its subsidiaries. These forward looking statements
involve certain risks and uncertainties. For example, by accepting
deposits at fixed rates, at different times and for different terms and
lending funds at fixed rates for fixed periods, a bank accepts the risk
that the cost of funds may rise and the use of the funds may be at a
fixed rate. Similarly, the cost of funds may fall, but a bank may have
committed by virtue of the term of a deposit to pay what becomes an
above-market rate. Investments may decline in value in a rising
interest rate environment. Loans, and the reserve for loan losses, have
the risk that the borrower will not repay all funds in a timely manner
as well as the risk of total loss. Collateral may or may not have the
value attributed to it. The loan loss reserve, while believed adequate,
may prove inadequate if one or more large borrowers, or numerous mid-
range borrowers, or a combination of both, experience financial
difficulty for individual, national or international reasons. Because
the business of banking is highly regulated, decisions of governmental
authorities, such as the rate of deposit insurance, can have a major
effect on operating results. Unanticipated events associated with Year
2000 compliance relating to work on developments or modifications to
computer systems and to software, including work performed by suppliers
or vendors, could affect the Company's future financial condition and
operating results. All of these uncertainties, as well as others, are
present in a banking operation and shareholders are cautioned that
management's view of the future on which it prices its products,
evaluates collateral, sets loan reserves and estimates costs of
operation and regulation may prove to be other than as anticipated.
GENERAL
The following discussion reviews the consolidated financial
condition of the Company, the Bank and Herrin First Service Corporation,
a wholly owned subsidiary of the Bank, as of March 31, 1999 and December
31, 1998, and the results of operations for the three months ended March
31, 1999 and 1998.
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 also are 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.
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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.
FINANCIAL CONDITION
Total assets increased by $367,000, or 58 basis points, from $63.3
million at December 31, 1998 to $63.7 million at March 31, 1999. The
increase was due primarily to an increase of $3.6 million in investment
and mortgage-backed securities. This increase was partially offset by
decreases of $1.6 million in loans receivable and $1.8 million in cash
and cash equivalents and certificates of deposit from December 31, 1998
to March 31, 1999.
The Bank's loan portfolio decreased by $1.6 million, or 4.36%,
from $36.4 million at December 31, 1998 to $34.8 million at March 31,
1999. The decrease in loan activity during the period was attributable
to the level of repayments on existing loans exceeding new loan demand
for the three months ended March 31, 1999. The decrease reflected
decreasing loan originations, especially in the one- to four-family
residential area.
The Bank's allowance for loan losses totaled $382,000 and $372,000
at March 31, 1999 and December 31, 1998, respectively. During the three
months ended March 31, 1999, net loan recoveries totaled $10,000. No
additional provision was made during the period.
The Company's consolidated investment securities portfolio totaled
$9.9 million at March 31, 1999, an increase of $3.5 million from $6.4
million at December 31, 1998. This increase was due to purchases of
investment securities totaling $6.2 million exceeding sales and
maturities of such securities totaling $2.7 million for the three months
ended March 31, 1999. The Company's mortgage-backed and related
securities portfolio totaled $5.1 million as of March 31, 1999, an
increase of $162,000 from $4.9 million at December 31, 1998. This
increase was due to new purchases of mortgage-backed and related
securities of $988,000 for the three months ended March 31, 1999,
partially offset by $814,000 of principal payments received on such
securities during the same period. During the three months ended March
31, 1999, the Bank's portfolio of investment securities and mortgage-
backed and related securities classified as available for sale decreased
capital by $5,000 (net of taxes) as a result of a decrease in the market
value of such securities classified as available for sale pursuant to
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities."
Total liabilities increased by $378,000, or 73 basis points, from
$52.0 million at December 31, 1998 to $52.4 million at March 31, 1999.
Total deposits increased by $360,000, or 70 basis points, from $51.4
million at December 31, 1998 to $51.8 million at March 31, 1999. The
increase in total liabilities was primarily attributable to an increase
in deposits. The increase in deposits was primarily a result of
increases in short-term deposits such as NOW accounts and passbook
savings accounts.
Stockholders' equity decreased by $11,000 during the three months
ended March 31, 1999. This decrease was due to a net loss of $46,000
from operations and $5,000 of unrealized holding losses on securities
(net of tax). These decreases were offset by amortization of ESOP and
MRP expense of $40,000.
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RESULTS OF OPERATIONS
Net Income. The Company incurred a net loss of $46,000 for the
----------
three months ended March 31, 1999, as compared to net income of $7,000
for the three months ended March 31, 1998. The decrease of $53,000, or
757.14%, reflects a decrease of $75,000, or 14.62%, in net interest
income. Also contributing to the decrease in net income was an increase
of $112,000, or 23.53%, in non-interest expense for the three months
ended March 31, 1999, as compared with the same period in 1998. These
changes were partially offset by an increase of $8,000, or 17.02%, in
non-interest income, a decrease of $81,000 in the provision for loan
losses and a decrease of $45,000 in income tax expense.
Net Interest Income. Net interest income decreased $75,000, or
-------------------
14.62%, to $438,000 for the three months ended March 31, 1999, as
compared to $513,000 for the three months ended March 31, 1998. This
decrease was primarily due to a decrease in the ratio of average
interest-earning assets to average interest-bearing liabilities from
119.83% for the three months ended March 31, 1998 to 118.18% for the
three months ended March 31, 1999, while the net interest margin
decreased from 2.45% for the three months ended March 31, 1998 to 2.20%
for the three months ended March 31, 1999. The decrease in the net
interest margin was coupled with the fact that average interest-earning
assets decreased more than average interest-bearing liabilities for the
periods in question.
Interest Income. Total interest income decreased by $122,000, or
---------------
10.54%, to $1.0 million for the three months ended March 31, 1999 as
compared to $1.2 million for the three months ended March 31, 1998. The
decrease in interest income reflects a decrease of $2.8 million, or
4.43%, in average interest-earning assets from $62.7 million for the
three months ended March 31, 1998 to $60.0 million for the three months
ended March 31, 1999. This decrease was due to a decrease of $9.8
million in the average balance of loans receivable during the three
months ended March 31, 1999 as compared to the three months ended March
31, 1998. The decrease in loans reflects a decline in the new loans
being originated by the Bank compared with the level of repayments on
existing loans. The decrease in the average balance of loans receivable
was partially offset by an increase of $7.1 million in the average
balance of the securities and short-term investment portfolios during
the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998, resulting from new investments exceeding
maturities and repayments on such assets in this area. The decrease in
average interest-earning assets was accompanied by a decrease of 47
basis points in the average yield on interest-earning assets for the
three months ended March 31, 1999 as compared to the three months ended
March 31, 1998.
Interest Expense. Interest expense decreased by $47,000, or
----------------
7.29%, to $598,000 for the three months ended March 31, 1999 as compared
to $645,000 for the three months ended March 31, 1998. This decrease
was primarily due to a decrease of $1.6 million in the average balance
of deposit liabilities from $52.4 million for the three months ended
March 31, 1998 to $50.7 million for the three months ended March 31,
1999. The decrease in interest expense also reflected a 22 basis point
decrease in the average cost of interest-bearing liabilities, from 4.93%
for the three months ended March 31, 1998 to 4.71% for the three months
ended March 31, 1999.
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. No
provision for loan losses was made during the three months ended March
31, 1999, while a provision of $81,000 was made during the three months
ended March 31, 1998. The prior year increase in the provision was
deemed necessary due to charge-offs of $81,000 during the first quarter
of 1998. Although the Company believes that the present level of the
allowance for loan
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<PAGE>
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 increased $8,000, or
-------------------
17.02%, from $47,000 for the three months ended March 31, 1998 to
$55,000 for the three months ended March 31, 1999. The largest
components of non-interest income for the three month periods ended
March 31, 1999 and 1998 included $14,000 and $12,000, respectively, in
loan and other service fees and $34,000 and $27,000, respectively, in
other service charges and other miscellaneous operating income. In
addition, the Company recognized $7,000 of realized gains on the sale of
real estate owned during the three months ended March 31, 1999, as
compared to $8,000 of corresponding gains during the three months ended
March 31, 1998.
Non-Interest Expense. Non-interest expense increased $112,000, or
--------------------
23.53%, from $476,000 for the three months ended March 31, 1998 to
$588,000 for the three months ended March 31, 1999. The main component
of this increase included an increase of $164,000 in legal and
professional services. This increase was partially offset by decreases
of $34,000 in compensation and employee benefits expense, and net
decreases of $18,000 in various other expense items. The increase in
legal and professional services was attributed to fees connected with
ongoing litigation, as well as payments for consulting and other
professional services for advice rendered in connection with the
proposed Merger.
In addition, the Company is a defendant in lawsuits filed by three
former employees. Such litigation is ongoing and, as such, the Company
anticipates that it will continue to incur legal expenses related to
such litigation in future periods.
Income Tax Expense. Income tax expense was $(49,000) for the
------------------
three months ended March 31, 1999 as compared with $(4,000) for the
three months ended March 31, 1998. The $45,000 decrease was primarily
due to the decrease in income before income taxes from $3,000 for the
three months ended March 31, 1998 to $(95,000) for the three months
ended March 31, 1999. The negative tax expense (or tax benefit) of
$49,000 for the three months ended March 31, 1999 also reflects the
effect of items such as tax-exempt interest income upon the Company's
income tax computation.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company conducts its business through
the Bank. 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, purchase investment securities and
mortgage-backed and related securities, fund deposit withdrawals,
maintain liquidity and meet operating expenses. Management believes
that its sources of funds will be adequate to meet the Bank's liquidity
needs for the immediate future.
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 March 31, 1999 and December
-14-
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<PAGE>
31, 1998, the consolidated amounts of cash and cash equivalents totaled
$10.2 million and $12.2 million, respectively.
Liquidity management is both a daily and long-term function of
business management. In the event that there is a need for funds, the
Company has several sources of liquidity. The Company has a portfolio
of investment securities and mortgage-backed and related securities with
a consolidated aggregate market value of $1.5 million at March 31, 1999
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 (the "FHLB"). At March 31, 1999, the Bank had no outstanding
advances from the FHLB.
At March 31, 1999, the Bank had $341,000 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 March 31, 1999, the Bank was in compliance with all
regulatory capital requirements.
YEAR 2000 COMPLIANCE MATTERS
As with all providers of financial services, the Bank's operations
are heavily dependent on information technology systems. The Bank is
addressing the potential problems associated with the possibility that
the computers that control or operate the Bank's information technology
systems and infrastructure may not be programmed to read four-digit date
codes and, upon arrival of the year 2000, may recognize the two-digit
code "00" as the year 1900, causing systems to fail to function or to
generate erroneous data.
As part of the awareness, inventory and assessment phases of its
action plan related to the Year 2000 problem, the Bank has identified
the operating systems which are considered critical to the ongoing
operations of the Bank and the Company. The Bank determined that it
does not have any internal mission critical systems. The mission
critical systems of the Bank are provided by third party servers,
including the following: NCR-Data Processing System (core processing);
Bank of Herrin (item processing); M&I ("on us" check clearings)/NCR
Interface; Federal Reserve/IBB/Bank of Herrin Interfaces (ACH); and
Federal Reserve/M&I/NCR Interfaces (ACH). All mission critical
servicers have completed their testing and have supplied the Bank with
written test results and test scripts. These test results and test
scripts have been reviewed by an independent auditor for each of the
servicers, the Bank and an independent auditor for the Bank. From a
review of the test results and test scripts, the Bank believes that the
services provided to the Bank by the servicers are Year 2000 compliant.
Of the systems that the Bank has identified as mission critical,
the most significant is the on-line account processing system that is
performed by a third party service provider, NCR. As of December 31,
1998, NCR has substantially completed its testing of internal systems,
and has completed its proxy testing by user participants and its on-line
testing. The Bank's review of this proxy test indicates that the
transactions performed, the hardware specifications and other factors
used in the proxy test closely match the Bank's own operational
environment and available hardware. The Bank intends to continue its
own program of appropriate testing of this and other mission critical
systems.
The Bank is in the process of evaluating its non-technological
systems to determine whether such systems have embedded technology that
could be affected by the Year 2000 problem. As of the date hereof, the
Bank does not anticipate that any disruption relating to such systems
will have a material adverse effect on the Bank's operations.
-15-
<PAGE>
<PAGE>
On June 3, 1998, the Bank entered into a formal agreement with the
OCC which requires that the Bank adopt a formal strategic plan to ensure
that its information systems are Year 2000 compliant. In November 1998
and March 1999, the OCC completed examinations of the Bank's Year 2000
compliance. As a result of its examinations, the OCC concluded that the
management of the Bank was adequately preparing the Bank for the Year
2000.
During 1998, the Bank developed a contingency plan in the event
the mission-critical systems are not successfully renovated in a timely
manner or such systems were to actually fail at Year 2000 critical
dates. Among other issues, that plan addresses the possibility that
NCR, the current data service provider, could fail to operate on
January 1, 2000. A business resumption plan was formed to deal with
this possibility. With respect to a short-term remedy for business
disruptions potentially caused by the Year 2000 problem, the Bank's
Board and management have determined that a manual system is the most
reasonable approach to allow the Bank to continue to effectively serve
its customer base. The business resumption plan addresses preparation,
logistics, departmental requirements and guidelines for the potential
handling of specific types of banking transactions on such a manual
basis.
Management has indicated that, as of December 31, 1998,
approximately $43,000 of expenditures have been incurred resulting from
the Bank's efforts to make its systems Year 2000 compliant. Management
is currently estimating that approximately $8,000 of additional
expenditures will be incurred during 1999 in connection with this issue.
No assurance can be given, however, that significant expense will not be
incurred in future periods. In the event that the Bank is ultimately
required to purchase additional replacement computer systems, programs
and equipment, or if the Bank is required to incur substantial
additional expense to make the Bank's current systems, programs and
equipment Year 2000 compliant, the Bank's net earnings and financial
condition could be adversely affected.
In addition to possible expense related to its own systems, the
Bank could incur losses if loan payments are delayed due to Year 2000
problems affecting any major borrowers in the Bank's primary market
area. In anticipation of such problems, the Bank has all material loan
customers sign a Year 2000 disclosure and acknowledgement. Because the
Bank's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses, and the Bank's primary market area is
not significantly dependent upon one employer or industry, the Bank does
not expect any significant or prolonged difficulties that will affect
net earnings or cash flow.
-16-
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various claims and lawsuits, incidental to its ordinary course of
business, are pending against the Company. In the opinion of
management, after consultation with legal counsel, resolution of these
matters is not expected to have a material adverse effect on the
Company's consolidated financial condition or results of operations. A
description of each legal proceeding has been previously reported in
filings by the Company. Such information is hereby incorporated by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
A Special Meeting of Shareholders of the Company is scheduled to
be held on May 27, 1999 to consider and vote upon a proposal to approve
an Agreement and Plan of Merger, dated as of December 23, 1998, pursuant
to which the Company will be acquired by Banterra Corp. by means of a
merger of Banterra Acquisitionco., Inc., a wholly owned subsidiary of
Banterra Corp., with and into the Company, with the Company as the
surviving corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index on page 19 hereof.
--------
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by
-------------------
the Company during the quarter ended March 31, 1999.
-17-
<PAGE>
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HEARTLAND BANCSHARES, INC.
(Registrant)
Dated: May 14, 1999 By:
------------------------------
Roger O. Hileman
Chairman, President and Chief
Executive Officer
-18-
<PAGE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule (March 31, 1999).
-19-
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<PERIOD-START> JAN-01-1999
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