<PAGE>
<PAGE>
FORM 10-QSB/A
Amendment No. 1 to 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, 1998
Commission File Number: 0-28442
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Heartland Bancshares, Inc.
-------------------------------------------------------
(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
As of November 14, 1998, there were 832,833 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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<PAGE>
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(IN THOUSANDS)
-------------
<TABLE>
<CAPTION>
September 30,
1998 December 31,
------------ 1997
(Unaudited) ------------
ASSETS ------------
<S> ------ <C> <C>
Cash and cash equivalents
Interest-bearing $ 8,029 $ 3,319
Noninterest-bearing 1,626 1,651
Certificates of deposit 1,263 95
Investment securities available-for-sale at
estimated market value 1,152 1,714
Investment securities held-to-maturity 4,486 5,627
Mortgage-backed and related securities
available-for-sale at estimated market value 809 1,249
Mortgage-backed and related securities held-to-
maturity 4,701 5,737
Loans receivable, net 38,830 46,307
Investments required by law 585 577
Property, equipment, and property held
for investment, net 462 461
Accrued interest receivable 278 292
Prepaid expenses and other assets 168 32
Foreclosed real estate 321 239
Deferred tax asset 256 161
-------- --------
TOTAL ASSETS $ 62,966 $ 67,461
- ------------ ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
- -----------
Deposits $ 51,156 $ 54,022
Accrued interest on deposits 47 63
Advances from borrowers for taxes and insurance 149 228
Other liabilities 336 127
Accrued income taxes - 126
Short-term borrowings - 750
-------- --------
Total Liabilities $ 51,688 $ 55,316
----------------- -------- --------
Commitments and Contingencies
- -----------------------------
Stockholders' Equity
- --------------------
Preferred stock, $.01 par value per share:
1,000,000 shares authorized, - 0 - issued $ - $ -
Common stock, $.01 par value per share:
4,000,000 shares authorized; 876,875
shares issued; 832,833 and 876,875
outstanding at September 30, 1998 and
December 31, 1997, respectively 9 9
Additional paid-in capital 8,253 8,212
Unearned employee stock ownership plan
(ESOP) shares (445) (519)
Management recognition plan shares (450) (496)
Treasury stock (44,042 shares at cost) (684) -
Retained earnings - substantially restricted 4,577 4,938
Accumulated other comprehensive income:
Unrealized gains (losses) on securities 18 1
-------- --------
Total Stockholders' Equity $ 11,278 $ 12,145
-------------------------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,966 $ 67,461
- ------------------------------------------ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1<PAGE>
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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,
1998 1997 1998 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Interest Income
- ---------------
Interest on first mortgage loans $ 766 $ 835 $ 2,423 $ 2,454
Interest on other loans 64 48 165 125
Interest on investments, securities, and
deposits with banks 194 152 512 510
Interest on mortgage backed securities 85 132 290 423
-------- -------- -------- --------
Total Interest Income $ 1,109 $ 1,167 $ 3,390 $ 3,512
---------------------
Interest Expense
- ----------------
Interest on deposits $ 644 $ 641 $ 1,925 $ 1,923
Interest on borrowings - 23 3 56
-------- -------- -------- --------
Total Interest Expense $ 644 $ 664 $ 1,928 $ 1,979
---------------------- -------- -------- -------- --------
Net Interest Income $ 465 $ 503 $ 1,462 $ 1,533
- -------------------
Provision for Loan Losses 9 60 106 70
- ------------------------- -------- -------- -------- --------
Net Interest Income After Provision
- -----------------------------------
for Loan Losses $ 456 $ 443 $ 1,356 $ 1,463
--------------- -------- -------- -------- --------
Non-Interest Income
- -------------------
Initial service charges and other loan fees $ 9 $ 13 $ 31 $ 38
Gain on sale of other real estate - - 8 12
Other 40 28 95 90
Gain on sale of investments 1 7 1 11
-------- -------- -------- --------
Total Non-Interest Income $ 50 $ 48 $ 135 $ 151
------------------------- -------- -------- -------- --------
Non-Interest Expense
- --------------------
Compensation to directors, officers, and
employees $ 185 $ 187 $ 580 $ 536
Pension expense and other employee benefits 44 36 123 130
Office properties and equipment expense
including depreciation 36 32 103 96
Advertising 4 11 20 35
Federal insurance premiums 13 13 37 30
Stationery, postage, and office supplies 15 13 47 53
Checking account expense (1) 37 20 108
Service bureau expense 38 25 117 67
Other 65 54 176 163
Legal and professional services 156 44 338 202
Adjustment for mortgage loan rebates 148 - 148 -
Loss on sale of investments - - 1 -
Loss on sale of other real estate - 1 - 1
-------- -------- -------- --------
Total Non-Interest Expense $ 703 $ 453 $ 1,710 $ 1,421
-------------------------- -------- -------- -------- --------
Income Before Income Taxes $ (197) $ 38 $ (219) $ 193
- --------------------------
Income Tax Expense (Benefit) (76) 8 (97) 50
-------- -------- -------- --------
Net Income (Loss) $ (121) $ 30 $ (122) $ 143
- ----------------- ======== ======== ======== ========
<PAGE>
Earnings (Loss) Per Common Share - Basic
- ----------------------------------------
Net income $ (.15) $ .04 $ (.15) $ .18
======== ======== ======== ========
Earnings (Loss) Per Common Share - Assuming
- -------------------------------------------
Dilution
--------
Net income $ (.15) $ .04 $ (.15) $ .17
======== ======== ======== ========
</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>
Management Accumulated
Additional Unearned Recognition Other
Common Paid-in ESOP Plan Treasury Retained Comprehensive
Stock Capital Shares Shares Stock Earnings Income Total
------ ---------- -------- -------- --------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 9 $ 8,212 $ (519) $(496) $ - $4,938 $ 1 $12,145
- ---------------------------
Comprehensive income:
Net income (loss) $ - $ - $ - $ - - (122) $ - $ (122)
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising during
the period (net of
tax of $10) - - - - - - 17 17
----- ------- ----- ----- ------ ------ ----- -------
Total comprehensive income
(loss) $ - $ - $ - $ - $ - $ (122) $ 17 $ (105)
Cash dividends paid - - - - - (239) - (239)
Purchase of treasury stock
(44,042 shares at cost) - - - - (684) - - (684)
Amortization of management
recognition plan expense - - - 46 - - - 46
Amortization of ESOP expense - 41 74 - - - - 115
----- ------- ----- ----- ------ ------ ----- -------
Balance at September 30, 1998 $ 9 $ 8,253 $(445) $(450) $ (684) $4,577 $ 18 $11,278
- ----------------------------- ===== ======= ===== ===== ====== ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC.
-------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)
--------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Nine Months Ended
---------------------
September 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net income (loss) $ (122) $ 143
-------- --------
Adjustments to reconcile net income
to net cash provided (used) by operating
activities
Depreciation $ 44 $ 40
Discount accretion/premium amortization-securities (net) (1) (2)
Amortization of deferred loan origination fees (16) (17)
Amortization of ESOP expense 115 80
Amortization of MRP expense 46 41
Provision for loan losses 106 70
(Gain) loss on sale of investments - (11)
(Gain) loss on sale of other real estate (8) (10)
(Increase) decrease in accrued interest receivable 14 (27)
(Increase) decrease in prepaid expenses/other assets (136) 12
(Increase) decrease in prepaid income taxes - 73
(Increase) decrease in deferred income taxes (105) (47)
Increase (decrease) in accrued interest payable (16) 16
Increase (decrease) in accrued income taxes (126) 51
Increase (decrease) in other liabilities 209 17
-------- --------
Total Adjustments $ 126 $ 286
----------------- -------- --------
Net Cash Provided by Operating Activities $ 4 $ 429
----------------------------------------- -------- --------
Cash Flows From Investing Activities
- ------------------------------------
Net (increase) decrease in certificates of deposit $ (1,168) $ 99
Proceeds from maturities of investment securities
and mortgage-backed securities 2,370 3,135
Principal payments on mortgage-backed securities 1,715 1,105
Net (increase) decrease in loans receivable 7,223 (4,787)
Purchases of property and equipment (45) (37)
Purchase of investment securities held-to-maturity (1,149) (251)
Purchase of investment securities available-for-sale - (200)
Purchase of mortgage-backed securities held to maturity (228) -
Proceeds from sale of mortgage-backed securities
available-for-sale - 1,085
Proceeds from sale of investment securities
available-for-sale 374 252
Proceeds from sale of investment securities held-to-
maturity 125 -
Purchase of Federal Home Loan Bank stock (8) (88)
Proceeds from sale of other real estate 90 105
-------- --------
Net Cash Provided by Investing Activities $ 9,299 $ 418
----------------------------------------- -------- --------
Cash Flows From Financing Activities
- ------------------------------------
Net increase (decrease) in deposits $ (2,866) $ (785)
Net increase (decrease) in mortgage escrow funds (79) (90)
Proceeds from Federal Home Loan Bank advances - 4,250
Payments on Federal Home Loan Bank advances (750) (2,500)
Shares acquired by management recognition plan - (552)
Dividends on common stock (239) (244)
Purchase of treasury stock (684) -
-------- --------
Net Cash Provided by (Used in) Financing Activities $ (4,618) $ 79
--------------------------------------------------- -------- --------
<PAGE>
Net Increase in Cash and Cash Equivalents $ 4,685 $ 926
- -----------------------------------------
Cash and Cash Equivalents at Beginning of Period 4,970 1,872
-------- --------
Cash and Cash Equivalents at End of Period $ 9,655 $ 2,798
- ------------------------------------------ ======== ========
Supplemental Disclosures
- ------------------------
Cash Paid (Received) During the Period for:
Interest $ 1,944 $ 1,963
Income taxes $ 244 $ (27)
Loans Transferred to Foreclosed Real Estate During Period $ 230 $ 106
Proceeds from Sales of Foreclosed Real Estate Financed
Through Loans $ 19 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
4<PAGE>
<PAGE>
HEARTLAND BANCSHARES, INC.
--------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
SEPTEMBER 30, 1998 AND 1997
---------------------------
1. Business
--------
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"). Simultaneously, Heartland National 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 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 (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. 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, 1998 and 1997 have been recorded. Operating
results for the three months and nine months ended September
30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
Certain reclassifications have been made for the three months
and nine months ended September 30, 1997 to conform with the
financial statement presentation for the three months and
nine months ended September 30, 1998. The reclassifications
had no effect on previously reported net income or retained
earnings.
<PAGE>
3. Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements
include the accounts of Heartland Bancshares, Inc., Heartland
National Bank, and
5<PAGE>
<PAGE>
Herrin First Service Corporation, a wholly owned subsidiary of
Heartland National Bank. All significant intercompany items
have been eliminated.
4. Earnings per Share
------------------
In accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128),
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 employee stock ownership
plan (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 and nine months ended
September 30, 1998 were 786,802 and 803,768, respectively.
The weighted average numbers of shares used for basic
earnings per share for the three months and nine months ended
September 30, 1997 were 818,112 and 816,373, respectively.
The weighted average numbers of shares used for diluted
earnings per share for the three months and nine months ended
September 30, 1998 were 786,802 and 808,557, respectively.
The weighted average numbers of shares used for diluted
earnings per share for the three months and nine months ended
September 30, 1997 were 825,954 and 823,900, respectively.
Earnings per share amounts for the three months and nine
months ended September 30, 1997 have been restated to give
effect to the application of SFAS No. 128, which was adopted
by the Company at the end of 1997. This restatement caused
an increase of $0.01 in basic earnings per share for the nine
months ended September 30, 1997, as compared to the primary
earnings per share of $0.17 which were originally reported
for that period in 1997. This restatement did not affect the
other earnings per share amounts previously presented for the
three months and nine months ended September 30, 1997.
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 employee stock
ownership plan (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 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 and nine months ended September 30, 1998 was
$33,693 and $108,576, respectively. ESOP benefits expense
recorded during the three months and nine months ended
6<PAGE>
<PAGE>
September 30, 1997 was $33,278 and $99,580, respectively.
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.
As of September 30, 1998, a liability of $111,182 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 and nine months ended
September 30, 1998 was $9,500 and $28,526, respectively. The
amount of expense recognized in the financial statements for
the three months and nine months ended September 30, 1997 was
$8,307 and $24,921, 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 are 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
September 30, 1998, 35,075 shares had been purchased on the
open market by the MRP to fund the plan 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 and nine months
ended September 30, 1998 was $15,342 and $46,026,
respectively. The amount of expense recognized in the
financial statements for the three months and nine months
ended September 30, 1997 was $15,342 and $40,912,
respectively.
<PAGE>
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
provides for the granting of stock options and stock
appreciation rights to certain employees and directors of the
Company and the Bank and has a term of ten years from the
effective date of the plan after which no awards may be
granted. The plan intends to reserve 87,687 authorized, but
unissued shares (or treasury
7<PAGE>
<PAGE>
shares) of common stock for issuance upon the future exercise
of options or stock appreciation rights. At the effective date
of the plan, certain executive officers and directors of the
Company and the Bank will receive a grant of an option under
the plan to purchase up to 87,683 shares of common stock at an
exercise price per share equal to its fair market value on that
date. The 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 APB
Opinion 25 in accounting for its stock 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 stock option plan is reflected on the
accompanying financial statements.
10. Regulatory Capital
------------------
The Bank is required to maintain certain levels of regulatory
capital. At September 30, 1998, 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.
11. Stock Repurchase Plan and Treasury Stock
----------------------------------------
The Board of Directors of the Company has adopted a program
to repurchase 43,843 shares, or 5% of the Company's
outstanding common stock. It is management's current
intention that all repurchased shares will be held as
treasury stock and will be used for general corporate
purposes, including the exercise of stock options. As of
September 30, 1998, the repurchase program has been
completed, with 43,843 shares being repurchased under the
plan. During the third quarter of 1998, the Company acquired
another 199 shares of treasury stock in a transaction
unrelated to the stock repurchase plan.
12. Securities Transaction
----------------------
During the second quarter of 1998, the holding company
(Heartland Bancshares, Inc.) sold a municipal security which
had been classified as held-to-maturity for total proceeds of
$124,909, resulting in a net loss of $91. As a result of
this transaction, the other securities of that issue held by
the holding company (which comprise all of the held-to-
maturity securities held by the holding company) were
transferred to the available-for-sale category. These
securities are currently shown at estimated market value as
required by SFAS No. 115. These securities had an amortized
cost of approximately $250,000, with an unrealized gain of
approximately $2,199 at transfer.
13. Subsequent Events
-----------------
Subsequent to the end of the third quarter of 1998, the Bank
conducted a review of interest rate adjustments made in the
past relating to adjustable rate mortgages. Based upon this
review, the Bank has determined that it is probable that
rebates of excess interest income should be made to a portion
of the Bank's adjustable rate loan customers. The Bank
currently estimates the amount of these potential rebates at
$148,300. This amount has been recorded as a liability on the
September 30, 1998 consolidated statement of financial
condition, and has been recorded as a charge to current
period operations on the consolidated statements of income.
The after-tax effect of this charge is approximately $87,000.
<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, 1998 and December 31,
1997, and the results of operations for the three months and
nine months ended September 30, 1998 and 1997.
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
8<PAGE>
<PAGE>
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. 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.
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, 1998
and December 31, 1997, the consolidated amounts of cash and
cash equivalents totaled $9.7 million and $5.0 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 $2.0 million at September 30, 1998 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, 1998, the Bank had no outstanding
advances from the FHLB.
At September 30, 1998, the Bank had $331,000 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, 1998, the Bank was in compliance
with all regulatory capital requirements.
Financial Condition
- -------------------
Total assets decreased by $4.5 million, or 6.66%, from $67.5
million at December 31, 1997 to $63.0 million at September
30, 1998. The decrease
9<PAGE>
<PAGE>
was due primarily to decreases of $7.5 million in loans
receivable and $3.2 million in investment and mortgage-backed
securities. These decreases were partially offset by an
increase of $5.9 million in cash and cash equivalents and
certificates of deposit from December 31, 1997 to September 30,
1998.
The Bank's loan portfolio decreased by $7.5 million, or
16.15%, from $46.3 million at December 31, 1997 to $38.8
million at September 30, 1998. The decrease in loan activity
during the period is attributed to the level of repayments on
existing loans exceeding new loan demand for the nine months
ended September 30, 1998.
The Bank's allowance for loan losses totaled $386,000 and
$400,000 at September 30, 1998 and December 31, 1997,
respectively. During the nine months ended September 30,
1998, net loan charge-offs amounted to $120,000. An
additional provision of $106,000 was made during the period.
The Company's consolidated investment securities portfolio
totaled $5.6 million at September 30, 1998, a decrease of
$1.7 million from $7.3 million at December 31, 1997. This
decrease was due to maturities and sales of investment
securities totaling $2.9 million exceeding purchases of such
securities totaling $1.2 million for the nine months ended
September 30, 1998. The Company's mortgage-backed and
related securities portfolio totaled $5.5 million as of
September 30, 1998, a decrease of $1.5 million from $7.0
million at December 31, 1997. This decrease was due to
principal payments received on mortgage-backed and related
securities of $1.7 million for the nine months ended
September 30, 1998, partially offset by $228,000 of new
purchases of such securities during the same period. During
the nine months ended September 30, 1998, the institution's
portfolio of investment securities and mortgage-backed and
related securities classified as available for sale increased
capital by $17,000 (net of taxes) as a result of an increase
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 $3.6 million, or 6.56%, from
$55.3 million at December 31, 1997 to $51.7 million at
September 30, 1998. Total deposits decreased by $2.9
million, or 5.31%, from $54.0 million at December 31, 1997 to
$51.2 million at September 30, 1998. The decrease in total
liabilities is primarily attributable to that decrease in
deposits, and to the $750,000 decrease in borrowings from the
Federal Home Loan Bank during the nine months ended September
30, 1998. Management attributes the decrease in deposits to
competition from other local banks to attract deposit
business. The decrease has to date primarily affected the
Bank's levels of one-year maturity certificates of deposit.
Stockholders' equity decreased by $867,000 during the nine
months ended September 30, 1998. This decrease is primarily
due to the $684,000 repurchase of Company stock performed by
the Company during the nine months ended September 30, 1998,
along with dividends of $239,000 paid on Company stock and a
net loss of $122,000 from operations. These decreases were
offset by amortization of ESOP and MRP expense of $161,000 and
$17,000 in unrealized holding gains on securities (net of tax).
Results of Operations
- ---------------------
Net Income. The Company incurred a net loss of $121,000 for
the three months ended September 30, 1998, as compared to net
income of $30,000 for the three months ended September 30,
1997. The decrease of $151,000, or 503.33%, reflects a
decrease of $38,000, or 7.55%, in net interest income. Also
contributing to the decrease in net income were an increase
of $250,000, or 55.19%, in non-interest expense for the three
months ended September 30, 1998, as compared with the same
period in 1997. These changes were partially offset by an
increase of $2,000, or 4.17%, in non-interest income, a
decrease of $51,000 in the provision for loan losses, and by
a decrease of $84,000 in income tax expense.
The Company incurred a net loss of $122,000 for the nine
months ended September 30, 1998, as compared to net income of
$143,000 for the nine months ended September 30, 1997. The
decrease of $265,000, or 185.31%, reflects a decrease of
$71,000, or 4.63%, in net interest income, a
10<PAGE>
<PAGE>
$36,000 increase in the provision for loan losses, a decrease
of $16,000, or 10.60%, in non-interest income, an increase of
$289,000, or 20.34%, in non-interest expense, and a $147,000
decrease in the provision for income taxes.
Net Interest Income. Net interest income decreased $38,000,
or 7.55%, to $465,000 for the three months ended September
30, 1998, as compared to $503,000 for the three months ended
September 30, 1997. This decrease was primarily due to a
decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities from 119.62% for the
three months ended September 30, 1997 to 117.96% for the
three months ended September 30, 1997, while the net interest
margin decreased from 2.35% for the three months ended
September 30, 1997 to 2.32% for the three months ended
September 30, 1998. 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.
Net interest income decreased $71,000, or 4.63%, totaling
$1.5 million both for the nine months ended September 30,
1998 and the nine months ended September 30, 1997. This
decrease was primarily due to the decrease in the ratio of
average interest-earning assets to average interest-bearing
liabilities from 119.91% for the nine months ended September
30, 1997 to 118.89% for the nine months ended September 30,
1998. This decrease was partially offset by an increase in
the net interest margin from 2.38% for the nine months ended
September 30, 1997 to 2.39% for the nine months ended
September 30, 1998. The small increase in the net interest
margin was more than offset by the fact that average
interest-earning assets again decreased more than average
interest-bearing liabilities for the periods in question.
Interest Income. Total interest income decreased by $58,000,
or 4.97%, to $1.1 million for the three months ended
September 30, 1998 as compared to $1.2 million for the three
months ended September 30, 1997. The decrease in interest
income is primarily the result of a decrease of $3.5 million,
or 5.52%, in average interest-earning assets from $63.7
million for the three months ended September 30, 1997 to
$60.2 million for the three months ended September 30, 1998.
This decrease was primarily due to a decrease of $5.7 million
in the average balance of loans receivable during the three
months ended September 30, 1998 as compared to the three
months ended September 30, 1997. 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 $2.2 million in the
average balance of the securities and short-term investment
portfolios during the three months ended September 30, 1998
as compared to the three months ended September 30, 1997,
resulting from new investments exceeding maturities and
repayments on such assets in this area. The decrease in
average interest-earning assets was partially offset by an
increase of 3 basis points in the average yield on interest-
earning assets for the three months ended September 30, 1998
as compared to the three months ended September 30, 1997.
Total interest income decreased by $122,000, or 3.47%,
totaling $3.4 million for the nine months ended September 30,
1998 as compared to $3.5 million for the nine months ended
September 30, 1997. Average interest-earning assets
decreased by $2.5 million, or 3.89%, from $63.9 million for
the nine months ended September 30, 1997 to $61.4 million for
the nine months ended September 30, 1998. The decrease in
average interest-earning assets was primarily caused by
decreases of $1.6 million in the average balance of loans
receivable and $916,000 in the average balance of the
securities and short-term investment portfolios during the
nine months ended September 30, 1998 as compared to the nine
months ended September 30, 1997. The decrease in average
interest-earning assets was partially offset by an increase
of 3 basis points in the average yield on interest-earning
assets for the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997.
<PAGE>
Interest Expense. Interest expense decreased by $20,000, or
3.01%, to $644,000 for the three months ended September 30,
1998 as compared to $664,000 for the three months ended
September 30, 1997. This decrease was primarily due to a
decrease of $2.2 million in the average balance of
11<PAGE>
<PAGE>
interest-bearing liabilities from $53.2 million for the three
months ended September 30, 1997 to $51.0 million for the three
months ended September 30, 1998. This decrease is primarily
attributed to a $1.8 million decrease in the average balance
of borrowings from the Federal Home Loan Bank, with no such
borrowings outstanding as of September 30, 1998. The average
balance of deposit liabilities also decreased by $481,000
during the same periods. The decrease in interest expense
also reflected a 6 basis point increase in the average cost
of interest-bearing liabilities, from 4.99% for the three
months ended September 30, 1997 to 5.05% for the three months
ended September 30, 1998.
Interest expense decreased by $51,000, or 2.58%, to $1.9
million for the nine months ended September 30, 1998 as
compared to $2.0 million for the nine months ended September
30, 1997. Average interest-bearing liabilities decreased by
$1.6 million, or 3.06%, from $53.3 million for the nine
months ended September 30, 1997 to $51.7 million for the nine
months ended September 30, 1998. This decrease in the level
of average interest-bearing liabilities was again primarily
attributed to the decrease in the average balance of
borrowings from the Federal Home Loan Bank, such decrease
totaling $1.4 million. The decrease in average interest-
bearing liabilities was slightly offset by a 2 basis point
increase in the average cost of interest-bearing liabilities,
from 4.95% for the nine months ended September 30, 1997 to
4.97% for the nine months ended September 30, 1998.
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. A $9,000 provision for loan losses was made
during the three months ended September 30, 1998, while a
provision of $60,000 was made during the three months ended
September 30, 1997. A $106,000 provision for loan losses was
made for the nine months ended September 30, 1998, as
compared with a provision of $70,000 for the nine months
ended September 30, 1997. The increase in the provision was
deemed necessary due to charge-offs of $23,000 during the
third quarter of 1998, and $120,000 during the first nine
months of 1998. 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 increased $2,000,
or 4.17%, from $48,000 for the three months ended September
30, 1997 to $50,000 for the three months ended September 30,
1998. The largest components of non-interest income for the
three month periods ended September 30, 1998 and 1997
included $9,000 and $13,000, respectively, in loan and other
service fees and $40,000 and $28,000, respectively, in other
service charges and other miscellaneous operating income. In
addition, the Company recognized $1,000 of realized gains on
the sale of investment securities and real estate owned
during the three months ended September 30, 1998, as compared
to $7,000 of corresponding gains during the three months
ended September 30, 1997.
Non-interest income decreased $16,000, or 10.60%, from
$151,000 for the nine months ended September 30, 1997 to
$135,000 for the nine months ended September 30, 1998. The
largest components of non-interest income for the nine month
periods ended September 30, 1998 and 1997 included $31,000
and $38,000, respectively, in loan and other service fees and
$95,000 and $90,000, respectively, in other service charges
and other miscellaneous operating income. In addition, the
Company recognized $9,000 of realized gains on the sale of
real estate owned during the nine months ended September 30,
1998, as compared with $23,000 of realized gains on the sale
of investments and real estate owned during the nine months
ended
12<PAGE>
<PAGE>
September 30, 1997.
Non-Interest Expense. Non-interest expense increased
$250,000, or 55.19%, from $453,000 for the three months ended
September 30, 1997 to $703,000 for the three months ended
September 30, 1998. The components of this increase included
increases of $6,000 in compensation and employee benefits
expense, $112,000 in legal and professional services, the
$148,000 adjustment for mortgage loan rebates discussed in Note
13 to the financial statements, and net decreases of $16,000
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.
On May 7, 1998, Barrett Rochman, a stockholder of the
Company, filed suit against the Company and each of the
directors individually seeking an injunction requiring the
Company to install him and David Burns as directors of the
Company and prohibiting the Company from installing Directors
Hileman and Stevens as directors. This matter was settled in
November 1998, and Mr. Rochman and Mr. Burns, as well as James
Cripps were appointed to the Board of Directors, which was
increased in size from six to nine directors. The Company also
agreed to pay $60,000 in Mr. Rochman's expenses as part of the
settlement. Final judicial approval of the settlement is
pending. The Company and each director individually are also
party to litigation involving three former employees of the
Bank, one of whom alleges that she was terminated in
retaliation for her voting of shares in opposition to
management and certain other matters, while the other two
employees filed suit claiming that they were "constructively
discharged" and entitled to certain payments due under their
employment agreements. The Company and the Bank believe the
claims of these former employees are without merit. 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.
Non-interest expense increased $289,000, or 20.34%, from $1.4
million for the nine months ended September 30, 1997 to $1.7
million for the nine months ended September 30, 1998. This
increase included increases of $37,000 in compensation and
employee benefits expense, $136,000 in legal and professional
services, the $148,000 adjustment for mortgage loan rebates
mentioned above, and net decreases of $32,000 in various other
expense items. The increase in compensation and employee
benefits expense was attributed to increases in employee
wages, while the increase in legal and professional services
is attributable to the same factors described in the previous
paragraph relating to the operating results for the three
month periods ended September 30, 1998 and 1997, as well as
expenses incurred earlier in 1998 resulting from proxy
contests involving the Company.
Income Tax Expense. Income tax expense was $(76,000) for the
three months ended September 30, 1998 as compared with $8,000
for the three months ended September 30, 1997. The $84,000
decrease is primarily due to the decrease in income before
income taxes from $38,000 for the three months ended
September 30, 1997 to $(197,000) for the three months ended
September 30, 1998. The negative tax expense (or tax
benefit) of $76,000 for the three months ended September 30,
1998 also reflects the effect of items such as tax-exempt
interest income upon the Company's income tax computation.
Income tax expense was $(97,000) for the nine months ended
September 30, 1998 as compared with $50,000 for the nine
months ended September 30, 1997. The $147,000 decrease is
primarily due to the decrease in income before income taxes
from $193,000 for the nine months ended September 30, 1997 to
$(219,000) for the nine months ended September 30, 1998.
Again, the negative tax expense (or tax benefit) of $97,000
for the nine months ended September 30, 1998 also reflects
the effect of items such as tax-exempt interest income upon
the Company's income tax computation.
<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
13<PAGE>
<PAGE>
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 Transfers and Servicing of Financial Assets.
In June, 1996, the Financial Accounting Standards Board
("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. Subsequent to
the issuance of SFAS No. 125, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." This statement defers for one year the
effective date of SFAS No. 125 as applies to secured
borrowings and collateral and certain other transactions.
The Company adopted the relevant provisions of the statement
during 1997, and is now adopting the provisions of the
statement which become effective in 1998. The provisions of
the statement adopted in 1998 did not have a material effect
on the Company's financial position or operating results.
Comprehensive Income. In June, 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
This statement requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a
statement of financial position. This statement is effective
for fiscal years beginning after December 15, 1997. The
Company has adopted the provision of this statement in 1998,
and has presented comprehensive income information in the
consolidated statements of financial condition and statements
of stockholders' equity.
Disclosures about Segments of an Enterprise and Related
Information. In June, 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for the way
that public business enterprises report information about
operating segments in annual financial statements and
requires that those enterprises report selected information
about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas,
and major customers. This statement is effective for
financial statements for periods beginning after December 15,
1997. The statement provides that its provisions need not be
applied to interim financial statements in the initial year
of its application. Therefore, the Company plans to adopt
the appropriate provisions of the statement for its financial
statements for the year ended December 31, 1998, and does not
believe that the adoption of this statement will have a
material effect on the Company's financial position or
operating results.
14<PAGE>
<PAGE>
Employers' Disclosure about Pensions and Other Postretirement
Benefits. In February, 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement
benefits. This statement is effective for financial
statements for periods beginning after December 15, 1997.
The Company is adopting the appropriate provisions of this
statement during 1998, and does not believe that the adoption
of this statement will have a material effect on the
Company's financial position or operating results.
Accounting for Derivative Instruments and Hedging Activities.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of
existing standards. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application
is permitted as of the beginning of any fiscal quarters
subsequent to June 15, 1998. Upon the statement's initial
application, all derivatives are required to be recognized in
the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133.
Adoption of SFAS No. 133 is not expected to have a material
effect on the Company's financial position or operating
results.
Regulatory Developments
-----------------------
On June 3, 1998, the Bank entered into a formal agreement
with the Office of the Comptroller of the Currency ("OCC").
The agreement requires that the Bank adopt a formal strategic
plan, a written plan with timetables to ensure that all of
its information systems are Year 2000 compliant and to take
certain other actions with respect to the internal audit and
compliance functions and its policies and procedures. The
Bank does not expect that such written agreement will have a
material adverse effect on its operations.
Year 2000
---------
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 system
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 of the
date hereof, the Board of Directors of the Bank has adopted a
formal policy with respect to this Year 2000 problem and has
tested its primary mission critical systems. The Bank is
working with the companies that supply or service its
information technology systems to identify and remedy any
year 2000 related problems.
As of the date of this Form 10-QSB, the Bank does not
anticipate that any expenses that are reasonably likely to be
incurred by the Bank in connection with this issue will be
material. 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
replacement computer systems, programs and equipment, or
incur substantial 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. 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.
15<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 7, 1998, Barrett Rochman, a stockholder of the
Company, filed suit in the Circuit Court of the First Judicial
Circuit, Williamson County, Illinois, (Rochman v. Heartland
Bancshares, Inc., Roger O. Hileman, Charles Stevens, James C.
Walker, Randall A. Youngblood, Paul R. Calcaterra and B. D.
Cross) against Heartland Bancshares, Inc. and each of the
individual directors of the Company seeking a preliminary and
permanent injunction and damages. Mr. Rochman alleges certain
wrongdoings in connection with the exclusion of votes at the
Annual Meeting of Stockholders. Mr. Rochman is seeking an
injunction prohibiting the Company from installing Messrs.
Hileman and Stevens as directors and requiring that Mr. Rochman
and Mr. Burns be installed as directors of the Company. Mr.
Rochman is also seeking damages although no specific amount is
specified in the complaint.
On June 16, 1998, Vicki Gower, a former employee of the
Bank, filed suit in the Circuit Court of the First Judicial
Circuit, Williamson County, Illinois (Vicki Gower v. Heartland
Bancshares, Inc., Roger O. Hileman, Charles Stevens, James C.
Walker, Randall A. Youngblood, Paul R. Calcaterra and B.D.
Cross) against the Company and each director individually
seeking money damages of an unspecified amount. Ms. Gower
alleges that she was wrongfully terminated in retaliation for
voting shares of stock owned by her and in the Bank's employee
stock ownership plan against management. She also claims that
such discharge constituted intentional infliction of emotional
distress and is seeking monetary damages of an unspecified
amount.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
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 (EDGAR Only)
16<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: January 6, 1999 By: /s/ Roger O. Hileman
------------------------
Roger O. Hileman
(Principal Executive,
Accounting and Financial
Officer)
17
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<PERIOD-END> SEP-30-1998
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<INVESTMENTS-HELD-FOR-SALE> 1,961
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<YIELD-ACTUAL> 3.17
<LOANS-NON> 515
<LOANS-PAST> 24
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 400
<CHARGE-OFFS> 125
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 386
<ALLOWANCE-DOMESTIC> 386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
