SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 333-32245
HEARTLAND BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-2017085
(State or Other Jurisdiction (IRS Employer Id. No.)
of Incorporation or Organization)
420 North Morton Street
Franklin, Indiana 46131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 738-3915
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this FORM 10-KSB or any amendment to
this FORM 10-KSB. [X]
---
Aggregate market value of common stock held by non-affiliates computed by
reference to the sale price of such stock as of March 23, 1998 of $11.25 per
share $13,200,728
Shares of common stock outstanding as of March 23, 1998: 1,265,000
DOCUMENT INCORPORATED BY REFERENCE: None
<PAGE>
FORM 10-KSB TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Period
May 27, 1997 (since inception) to December 31, 1997 12
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Company 14
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 17
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
Signatures 20
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Heartland Bancshares, Inc. (the "Company") is a one-bank holding company
incorporated May 27, 1997. The Company raised approximately $11,731,000 in
equity capital through the sale of 1,265,000 shares of the Company's common
stock at $10 per share, net of underwriting discounts and offering costs.
Proceeds were used to capitalize Heartland Community Bank ("Heartland"), the
Company's primary asset, a wholly-owned banking subsidiary, an Indiana-chartered
commercial bank. Heartland received regulatory approval to open in the fall of
1997 and commenced banking operation December 17, 1997.
At December 31, 1997, the Company had approximately $14.5 million of assets,
deposits of approximately $2.1 million and stockholders' equity of approximately
$11.5 million. The Company's primary business consists of attracting deposits
from the general public and originating real estate, commercial and consumer
loans and purchasing investments through its offices located in Franklin and
Greenwood, Indiana. As of December 31, 1997, Heartland had 18 full time
equivalent employees. The Company has no full time employees. The Company is
subject to regulation by the Federal Reserve Board.
Heartland's deposits are insured to the maximum extent permitted by law by the
Federal Deposit Insurance Corporation (FDIC). Heartland is subject to
comprehensive regulation, examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC.
The business of Heartland consists primarily of attracting deposits from the
general public, originating commercial, residential real estate, and consumer
loans and purchasing certain investment securities. Consumer loans include,
among others, new and used automobile and other secured and unsecured personal
loans. Heartland offers small commercial loans to area businesses in addition to
new home construction loans and business lines of credit. Heartland also invests
in various US Treasury, federal agency, state, municipal and other investment
securities permitted by applicable laws and regulations. The principal sources
of funds for Heartland's lending activities include deposits received from the
general public, amortization and repayment of loans, and maturity of investment
securities.
Heartland's primary sources of income are interest on loans, and investment
Securities. Its principal expenses are interest paid on deposit accounts and
borrowings, salaries and employee benefits, premises and equipment expenses and
other overhead expenses incurred in operation.
AVERAGE BALANCES, INCOME, EXPENSES AND RATES. The following tables depict for
the period since inception ended December 31, 1997, certain information related
to the Company's average balance sheet and its average yields on assets and
average costs of liabilities. Such yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities.
Average balances have been derived from daily averages.
<PAGE>
<TABLE>
Average/ Yield/
Balance Rate
(Dollars in 000's)
<S> <C> <C>
Assets
Cash & due from banks $ 135
Federal funds sold 729 5.42%
Taxable securities 1,635 6.21
Loans 230 8.95
Other assets 445
------------
Total assets $ 3,174
============
Liabilities Non-Interest-bearing Demand deposits $ 12
Interest-bearing demand
And Savings deposits 20 3.77%
Time deposits 22 6.00
Short-term borrowings 128 8.29
Other liabilities 96
------------
Total liabilities 278
Stockholders' equity 2,896
Total liabilities and stockholders'
Equity $ 3,174
============
Average yield on interest-earning assets 6.23%
Average rate paid on interest-bearing liabilities 7.47
Net interest spread (1.24)
Net interest margin (net interest earnings divided
by total interest-earning assets) 5.74
Return on average assets (7.56)
Return on average equity (8.29)
</TABLE>
LENDING ACTIVITIES
Heartland's loans, before adjusting for the allowance for loan losses, totaled
$3,958,000 at December 31, 1997.
The following table sets forth information concerning the composition of
Heartland's loan portfolio in dollar amounts and percentages.
<TABLE>
Percent of
Amount Total
------ -----
TYPE OF LOAN (Dollars in 000's)
<S> <C> <C>
Commercial $ 3,096 79.14%
Residential mortgages (1-4 family homes) 189 4.83
Consumer 673 17.20
----------- ---------
Gross loans 3,958 101.17
Allowance for loan losses (46) (1.17)
----------- ----------
Loans, net $ 3,912 100.00%
=========== =========
</TABLE>
<PAGE>
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of loans maturing in Heartland's loan portfolio
based on the date that final payment is due. This schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Management expects prepayments will cause actual maturities to be shorter than
contractual maturities. Certain mortgage loans such as construction loans and
second mortgage loans are included in the commercial and installment loan totals
below.
<TABLE>
Remaining Maturities
One Year Over one to Over five
Amount or less five years years
------ ------- ---------- -----
TYPE OF LOAN (Dollars in 000's)
<S> <C> <C> <C> <C>
Commercial $ 3,096 $ 2,059 $ 113 $ 924
Residential mortgages
(1-4 family homes) 189 - - 189
Consumer 673 358 256 59
----------- ----------- ----------- ----------
Total $ 3,958 $ 2,417 $ 369 $ 1,172
=========== =========== =========== ==========
</TABLE>
ORIGINATION, PURCHASE AND SALE OF LOANS. Interest rates charged by Heartland on
its loans are affected primarily by loan demand and the supply of funds
available for lending. These factors are in turn affected by general economic
conditions and monetary policies of the federal government, including the
Federal Reserve Board, the general supply of money in the economy, legislative
tax policies and governmental budgetary matters.
Loan originations are derived from a number of sources, primarily from walk-in
customers. All property securing real estate loans made by Heartland is
appraised in accordance with applicable regulations of the FDIC and includes an
actual inspection of such property by designated fee appraisers.
Heartland has negotiated with a third party mortgage company an agreement
whereby Heartland would receive a fee for originating fixed rate 1-4 family
residential real estate mortgages. Underwriting and servicing would be the
responsibility of the third party mortgage company. Heartland may from time to
time originate a loan with the intention of participating a portion of the loan
to another commercial bank in the area.
Lending limits are reviewed and changed from time to time to reflect current
market conditions. Fire and casualty insurance is required on all mortgage loans
as well as abstracts of title or title insurance.
COMMERCIAL LENDING. Commercial loans include loans secured by commercial real
estate or deposits, construction loans and loans for business purchases,
operations, inventory and lines of credit. At December 31, 1997, commercial
loans totaled $3,096,000, or 79.14% of Heartland's loan portfolio. The primary
reason for the high percentage of the portfolio is the short amount of time in
operation for Heartland.
RESIDENTIAL MORTGAGE LOANS. Residential mortgage loans are predominantly secured
by single-family homes. To reduce its exposure to changes in interest rates,
Heartland currently originates adjustable rate first mortgage loans ("ARMs") and
second mortgage loans also with adjustable rates. At December 31, 1997,
Heartland's residential mortgage loans totaled approximately $189,000 or 4.83%
of Heartland's total loans.
<PAGE>
Heartland offers residential construction mortgage loans with maturities of
twelve months or less at interest rates which vary with current market rates.
The application process includes the same items which are required for other
residential mortgage loans and include a submission of accurate plans,
specifications and costs of the property to be constructed. These items are used
as a basis to determine the appraised value of the subject property. Appraisal
reports are completed by designated fee appraisers, and loans are based on the
current appraised value. Loans of up to 80% of such amount may be offered for a
maximum period of twelve months for the construction of the properties securing
the loans. Extensions are permitted, when circumstances warrant, if construction
has continued satisfactorily and the loan is current.
CONSUMER LENDING. Heartland makes various types of consumer loans including
loans to depositors secured by pledges of their deposit accounts, new and used
automobile loans, and secured and unsecured personal loans.
A loan officer's approval is required for loans up to certain amounts, and
either the officer loan committee or the Board loan committee (including at
least two outside directors) must approve all other loans. The officer loan
committee is comprised of at least three loan officers and the Board loan
committee consists of at least two loan officers and at least two outside
directors. Heartland has established policies regarding financial statement
requirements, credit verifications procedures and other matters intended to
minimize underwriting risk. The most recent loan approval limits were adopted by
the Board of Directors in the fall of 1997.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of nonaccrual loans, restructured loans, past-due
loans, real estate owned (acquired in foreclosure), and other repossessed
assets. Nonaccrual loans are loans on which interest recognition has been
suspended because they are 90 days past due as to interest or principal or
because there is a question about Heartland's ability to collect all principal
and interest. Restructured loans are loans where the terms have been modified to
provide a reduction or deferral of interest or principal because of
deterioration in the borrower's financial position. Past-due loans are accruing
loans that are contractually past due 90 days or more as to interest or
principal payments, and the amount of the loan is no greater than 80% of the
fair market value of the collateral securing the loan or Heartland has a
reasonable expectation of collecting all past-due interest and principal. There
were no nonperforming assets at December 31, 1997 or during the period since
inception ended December 31, 1997.
Due to risks inherent in lending, management estimates that a certain amount of
loan balances outstanding at December 31, 1997 may not be fully collected.
Although Heartland's management emphasizes the early detection and charge-off of
loan losses, it is inevitable that at any time certain losses exist in the
portfolio which have not been specifically identified. Accordingly, the
provision for loan losses is charged to earnings on an anticipatory basis, and
recognized loan losses are deducted from the allowance so established. Over
time, all net loan losses must be charged to earnings. The determination of the
adequacy of the allowance for loan loss is based on management's continuing
review and evaluation of the loan portfolio, and its judgment as to the impact
of current economic conditions on the portfolio. The evaluation by management
includes consideration of past loan loss experience, changes in the composition
of the loan portfolio, the current condition and amount of loans outstanding and
the surrounding economic conditions.
<PAGE>
At December 31, 1997, the balance of the loan loss reserve was $46,000.
Provision charged to earnings in the period from May 27, 1997 (date of
inception) to December 31, 1997 was $46,000. The entire balance of the reserve
is available to all loans.
INVESTMENT ACTIVITIES
The following table sets forth the carrying value of the Company's investment
portfolio as of December 31, 1997:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ------- ------ -----
(Dollars in 000's)
<S> <C> <C> <C> <C>
U.S. Government and its agencies $ 7,949 $ 18 $ (5) $ 7,962
Obligations of states and political
subdivisions 50 - - 50
----------- ----------- ----------- -----------
Total $ 7,999 $ 18 $ (5) $ 8,012
========== ========== ========= ==========
</TABLE>
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted-average yield (on a tax equivalent basis) on
such securities.
<TABLE>
Estimated Weighted
Amortized Market Average
Cost Value Yield
---- ----- -----
(Dollars in 000's)
<S> <C> <C> <C>
Due in one year or less $ - $ - -%
Due after one year through five years 7,999 8,012 6.15
Due after five years through ten years - - -
Due after ten years - - -
------------ ------------- ---------
Total $ 7,999 $ 8,012 6.15%
============ ============= =========
</TABLE>
1. Computation of yields is performed using amortized cost.
SOURCES OF FUNDS
Deposits are the primary source of Heartland's funds for use in lending and for
other general business purposes. Proceeds from issuance of common stock in 1997
have also been used as a source of funding for current loan growth. However,
additional issuance of common stock is not in the short-term plans for
Heartland.
DEPOSIT ACTIVITIES. Heartland offers several types of deposit programs designed
to attract both short-term and long-term savings by providing a wide assortment
of accounts and rates. Heartland also obtains deposits on a bid basis from
customers or potential customers wishing to deposit amounts of at least
$100,000.
All certificates of deposit outstanding at December 31, 1997 are due in 1998.
Heartland had three certificates of deposit with balances of $100,000 or more
totaling $300,000 at December 31, 1997.
<PAGE>
Interest earned on statement savings accounts is paid from the date of deposit
to the date of withdrawal, compounded and credited quarterly. Interest earned on
money market demand deposit accounts is compounded and credited monthly. The
interest rates on these accounts are reviewed by management of Heartland daily
and adjusted as frequently as deemed necessary based on market conditions and
other factors.
Borrowings. Heartland borrows federal funds from other commercial banks from
time to time to provide for cash flow requirements. These borrowings mature
daily and are secured by certain investment securities in Heartland's portfolio.
The interest rates on such borrowings may be changed daily. At December 31,
1997, Heartland had $800,000 in federal funds borrowed.
SERVICE AREA
Heartland's primary service area is Johnson County, Indiana. Johnson County was
the second fastest growing county from 1990 through 1996 based on estimates of
the Indiana Business Research Center. Johnson County was recently ranked the
third fastest growing County in Indiana by the United States Census Bureau for
1997. Census data may be obtained from the Census Bureau Internet site
WWW.Census.gov. The majority of Heartland's customers reside in Johnson County,
particularly in the northern two-thirds of the county, which accounts for over
88% of the county's population, according to the 1990 U.S. Census. Heartland has
branches in Franklin and Greenwood, which are the two largest cities in the
county.
COMPETITION
The Company and Heartland face strong competition for deposits, loans and other
financial services from numerous Indiana and out-of-state banks, thrifts, credit
unions and other financial institutions as well as other entities which provide
financial services, including consumer finance companies, securities brokerage
firms, mortgage brokers, equipment leasing companies, insurance companies,
mutual funds and other lending sources and investment alternatives. Some of the
financial institutions and financial services organizations with which Heartland
competes are not subject to the same degree of regulation as Heartland. Many of
the financial institutions aggressively compete for business in Heartland's
market areas. Many of these competitors have been in business for many years,
have established customer bases, have substantially higher lending limits than
Heartland, are larger and will be able to offer certain services that Heartland
does not currently offer, including home electronic banking services, and
international banking services. In addition, most of these entities have greater
capital resources than Heartland, which, among other things, may allow them to
price their services at levels more favorable to the customer and to provide
larger credit facilities than could Heartland.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended ("BHCA"), and is registered as such with the
Board of Governors of the Federal Reserve System ("Federal Reserve"). The
Company is examined, regulated and supervised by the Federal Reserve and is
required to file annual reports and other information regarding its business and
operations and the business and operations of its subsidiaries with the Federal
Reserve. The Federal Reserve has the authority to issue cease and desist orders
against a bank holding company if it determines that activities represent an
unsafe and unsound practice or a violation of law.
<PAGE>
Under the BHCA, a bank holding company is, with limited exceptions, prohibited
from acquiring direct or indirect ownership or control of voting stock of any
company which is not a bank and from engaging in any activity other than
managing or controlling banks. A bank holding company may, however, own shares
of a company engaged in activities which the Federal Reserve has determined to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Acquisitions by the Company of banks and savings associations are also subject
to regulation. Any acquisition by the Company of more than five percent of the
voting stock of any bank requires prior approval of the Federal Reserve. A bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with the extension of credit or the provision
of any property or service. With certain exceptions, a bank holding company, a
bank, and a subsidiary or affiliate thereof, may not extend credit, lease or
sell property or furnish any services or fix or vary the consideration for the
foregoing on the condition that (I) the customer must obtain or provide some
additional credit, property or services from, or to, any of them, or (ii) the
customer may not obtain some other credit, property or service from a
competitor, except to the extent reasonable conditions are imposed to assure the
soundness of credit extended.
REGULATION AND SUPERVISION OF HEARTLAND
Heartland is supervised, regulated and examined by the DFI and, as a state
nonmember bank, by the FDIC. A cease or desist order may be issued by the DFI
and FDIC against Heartland if the respective agency finds that the activities of
Heartland represent an unsafe and unsound banking practice or violation of law.
The deposits of Heartland are insured by the FDIC.
Branching by banks in Indiana is subject to the jurisdiction, and requires the
prior approval of, the Bank's primary federal regulatory authority and the DFI.
Under Indiana law, Heartland may branch anywhere in the state.
The Company is a legal entity separate and distinct from Heartland. There are
various legal limitations on the extent to which Heartland can supply funds to
the Company. The principal source of the Company's funds consists of dividends
from Heartland. State and federal laws restrict the amount of dividends which
may be paid by banks. In addition, Heartland is subject to certain restrictions
imposed by the Federal Reserve on extensions of credit to the Company or any of
its subsidiaries, or investments in the stock or other securities as collateral
for loans.
The commercial banking business is affected not only by general economic
conditions but also by the monetary policies of the Federal Reserve. The
instruments of monetary policy employed by the Federal Reserve include the
discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. Federal Reserve monetary policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. In view of changing conditions
in the national economy and in the money markets, as well as the effect of
actions by monetary fiscal authorities, including the Federal Reserve, no
prediction can be made as to possible future changes in interest rates, deposit
levels, loan demand or the business and earnings of the Registrant and
Heartland.
<PAGE>
CAPITAL REQUIREMENTS
Heartland must meet certain minimum capital requirements mandated by the FDIC
and the DFI. These regulatory agencies require financial institutions to
maintain certain minimum ratios of primary capital to total assets and total
capital to total assets. The Company is not required to comply with Federal
Reserve capital requirements because it has consolidated assets of less than
$150,000,000.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes the Bank meets all applicable capital
adequacy requirements as of December 31, 1997.
As of December 31, 1997, the Bank was categorized well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below.
<TABLE>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in 000's)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 8,733 157% $ 444 8% $ 555 10%
Tier 1 capital
(to risk weighted assets) 8,661 156 222 4 333 6
Tier 1 capital
(to average assets) 8,661 352 99 4 123 5
</TABLE>
ITEM 2. PROPERTIES
Heartland owns its home office at 420 North Morton Street, Franklin, Indiana.
The facility is used as the main banking office and the Company's headquarters.
The 5,700 square foot building was constructed over 25 years ago and underwent
an extensive renovation prior to the opening of Heartland.
Heartland opened a temporary branch office in Greenwood, Indiana in January,
1998 which it leases. The lease of the temporary facility expires May, 1998 and
may be extended on a month to month basis if necessary. A permanent branch
office in Greenwood, Indiana is under construction and is expected to be
occupied in the spring of 1998. That facility will be leased and the temporary
facility will cease to be used. The lease for the permanent facility is for
3,800 square feet of space in a strip center with approximately three to four
other tenants. The term of the lease is ten years with option to renew.
ITEM 3. LEGAL PROCEEDINGS
The Company and Heartland were not involved in any legal proceedings at December
31, 1997.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company had 1,265,000 shares of Common Stock issued and outstanding to
approximately 1,800 shareholders (including those shares held in street name) on
March 23, 1998.
The Common Stock has been quoted on the NASDAQ Over-The-Counter Bulletin Board
since October 3, 1997. During the period from October 3, 1997 to December 31,
1997, the average number of shares traded per day was 45,507. The following
table sets forth the reported high and low ask and bid prices of the Common
Stock for the quarter indicated as reported on the Nasdaq Over-The-Counter
Bulletin Board.
High Low
Ask Bid
Fourth Quarter 1997 $12.875 $8.75
The prices quoted above represent prices between dealers and do not include
adjustments for mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions. Prior to October 3, 1997, there was no
established trading market for the Common Stock.
The Bank is subject to restrictions on the payment of dividends under Indiana
law and Indiana Department of Financial Institutions regulations. See
"Supervision and Regulation -- Dividends" above. No assurance can be given that
any dividends will be declared by the Company in the future, or if declared,
what the amount of the dividends would be or whether such dividends, once
declared, would continue. Future dividend policy will depend on the Bank's
earnings, capital requirements, financial condition, and other factors
considered relevant by the Board of Directors of the Company.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The information presented below should be read in conjunction with the
consolidated financial statements, which are included herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Amounts shown below are in thousands except for earnings per share
information and shares outstanding.
May 27, 1997(since inception)
Income Statement Data: to December 31,1997
(Dollars in 000's)
Total Interest Income $ 162
Total Interest Expense 12
Net Interest Income 150
Provision for Loan Loss 46
Non Interest Income 3
Non Interest Expense 347
Provision for Income Taxes -
Net loss $ (240)
Net loss Per Share $ (.19)
Average Shares 1,265,000
At December 31,
1997
Balance Sheet Data: (Dollars in 000's)
Total Assets $ 14,519
Loans, Net of Allowance
for Loan Loss 3,912
Demand & Savings 1,591
Time Deposits 488
Stockholders' Equity 11,504
Book Value Per Share $ 9.09
Equity to Asset Ratio 79.23%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD MAY 27, 1997 (SINCE INCEPTION)
ENDED DECEMBER 31, 1997.
GENERAL
Heartland is the only subsidiary of the Company and operates as an Indiana
commercial bank. As a bank holding company, the Company depends upon the
operations of its subsidiary for all revenue and reports its results of
operations on a consolidated basis with its subsidiary.
Heartland's profitability depends primarily upon the difference between income
on its loans and investments and the cost of its deposits and borrowings. This
difference is referred to as the spread or net interest margin. The difference
between the amount of interest earned on loans and investments and the interest
incurred on deposits and borrowings is referred to as net interest income.
Interest income from loans and investments is a function of the amount of loans
and investments outstanding during the period and the interest rates earned.
Interest expense related to deposits and borrowings is a function of the amount
of deposits and borrowings outstanding during the period and the interest rates
paid.
<PAGE>
RESULTS OF OPERATIONS
The Company's operating results during the period since inception May 27, 1997
through December 31, 1997 are limited to various expenses related to the
development stage and 14 calendar days of banking operations at the close of the
period. The Company incurred a net loss of $240,000 for the period since
inception, ended December 31, 1997.
Interest income of $162,000 was earned during the period from inception through
December 31, 1997 and was primarily generated from taxable investment securities
and loans. Interest expense of $12,000 was incurred during the period from
inception through December 31, 1997. Interest expense is primarily related to
the related party notes payable and a note payable obtained during the
organization period to purchase the main office facility and for other cash
requirements. All such notes payable were repaid in 1997.
The provision for loan losses was $46,000 for the period since inception ended
December 31, 1997. There were no charge-offs and no recoveries of loans during
the same period.
Noninterest income was $3,000 and consisted of miscellaneous loan fees and
service charges for the period since inception ended December 31, 1997.
Salaries and benefits expense was $195,000 for the period since inception
through December 31, 1997. Salaries and benefits were paid to employees during
the development stage for services performed.
Occupancy and equipment expenses of $27,000 were incurred during the period
since inception ended December 31, 1997 and consisted primarily of depreciation
and utilities expenses.
The remaining expenses of $125,000 during the period since inception ended
December 31, 1997, relate to various other items such as postage, advertising,
and supplies.
ASSET/LIABILITY MANAGEMENT
One of the actions undertaken by Heartland's management has been to adopt
asset/liability management policies in an attempt to reduce the susceptibility
of Heartland's net interest spread to the adverse impact of volatile interest by
attempting to match maturities (or time-to-repricing) of assets with maturities
or repricing of liabilities and then actively managing any mismatch.
Accomplishing this objective requires attention to both the asset and liability
sides of the balance sheet. The balance between maturity of assets and maturity
of liabilities is measured by the interest-rate gap.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The primary sources of liquidity are cash,
interest-bearing deposits in other financial institutions, marketable
securities, loan repayments, increased deposits and total institutional
borrowing capacity.
<PAGE>
Cash and interest-bearing deposits, when combined with investments, have
decreased as a percentage of total assets primarily due to a shift to higher
yielding loans to improve margins. Management's goal is to maintain cash,
interest-bearing deposits and investments at a level sufficient to satisfy needs
for liquidity and other short-term obligations.
Management believes it has adequate liquidity for long-term needs. Short-term
liquidity needs resulting from normal deposit/withdrawal functions are provided
by retaining a portion of cash generated from operations in a FHLB daily
investment account. This account acts as the short-term liquidity source while
providing interest income.
At December 31, 1997, commitments to fund loan originations were approximately
$2,351,000. In the opinion of management, Heartland has sufficient cash flow and
borrowing capacity to meet funding commitments and to maintain proper liquidity
levels based upon the ability to borrow Federal Funds from other commercial
banks and Heartland's favorable liquidity ratio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Financial Statements are included in a separate section of this
Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors: Executive Officers:
Gordon R. Dunn, Steve Bechman,
Chairman of the Board President, Chief Executive Officer and
Director
Patrick A. Sherman, Jeffrey L. Goben,
Vice Chairman Senior Vice President, Chief Operating
Officer and Director
Sharon Acton, John M. Morin,
Director Vice President
J. Michael Jarvis, K. Keith Fox,
Director Vice President
John Norton, R. Trent McWilliams,
Director Vice President
Robert Richardson, Jeff Joyce,
Director Vice President and Chief Financial
Officer
James C. Stewart,
Director
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid to the
Company's Chief Executive Officer for 1997.
<TABLE>
Long Term
Compensation
Annual Compensation Awards
------------------- -------
Securities Underlying
Name and Options /
Principal Position Year Salary(1) Bonus SAR
------------------ ---- --------- ----- ----
<S> <C> <C> <C> <C>
Steve Bechman, Chief 1997 $15,480.78 $0 20,000
Executive Officer
</TABLE>
(1) Mr. Bechman's compensation was for the period commencing on
November 1, 1997.
The following table presents information on the stock option grants that were
made to the Company's President and Chief Executive Officer during 1997 pursuant
the Heartland Bancshares, Inc. 1997 Stock Option Plan.
<TABLE>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Option Term (1)
Individual Grants ------------------
-----------------
% of Total
Options/SARs
Number of Granted to Exercise or
Securities Employees in Base Price
Underlying Fiscal Year ($/Sh) Expiration
Options/SARs Date 5% 10%
Name Granted
------ ------------ ----------- ---------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Steve Bechman 20,000 24.1% $10.00 9/24/2007 $125,800 $318,800
</TABLE>
*The Company does not grant Stock Appreciation Rights ("SARs").
1 The amounts in the table are not intended to forecast possible future
appreciation, if any, of the Company's Common Shares. Actual gains, if
any, are dependent upon the future market price of the Company's Common
Shares and there can be no assurance that the amounts reflected in this
table will be achieved.
<PAGE>
2 The options were granted pursuant to the Heartland Bancshares, Inc. 1997
Stock Option Plan (the "Employee Option Plan"). The Employee Option Plan
provides for the grant of options intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, and of non-qualified options. The options granted
to Mr. Bechman are intended to qualify as incentive stock options and
have an exercise price of $10.00 per share, which was determined to be
the fair market value of one Common Share on the date of grant. The
options become exercisable in twenty percent increments, with twenty
percent of the shares covered by an option becoming exercisable on the
date of grant and an additional twenty percent becoming exercisable on
each of the first four anniversaries of the grant date; provided,
however, that the options become immediately exercisable upon the
occurrence of a change in control of the Company. If an optionee tenders
already owned shares in payment (in whole or in part) of the exercise
price of an option (the "Exercised Option"), the Employee Option Plan
requires the Company to use its best efforts to issue a replacement
option for a number of shares equal to the number of shares tendered and
with the same expiration date as the Exercised Option. The exercise
price for each share covered by the replacement option is equal to the
fair market value of one Common Share on the date of exercise of the
Exercised Option.
The following table sets forth information with respect to the value of options
that were granted to Mr. Bechman pursuant to the Heartland Bancshares, Inc. 1997
Stock Option Plan during 1997. No option exercises occurred during 1997.
<TABLE>
Number of Unexercised Options/SARs at Value of Unexercised
Fiscal In-the-Money Options/SARs at Fiscal
Year-End (#) Year-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
------ ------------------------- -------------------------
<S> <C> <C>
Steve Bechman 4,000/16,000 0 / 0 (1)
</TABLE>
1 The options were not "in the money" since the last per share
trade price of the Company's Common Shares as reported on OTC
on December 29, 1997 ($9.00) did not exceed the exercise
prices of the options.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The following table presents certain information as of March 1, 1998, regarding
the current Directors and executive officers of the Company, including the three
nominees proposed by the Board of Directors for election at this year's Annual
Meeting. All of the current Directors began serving on the Board of Directors of
the Company during 1997. Unless otherwise indicated in a footnote, the principal
occupation of each Director has been the same for the last five years and such
Director possesses sole voting and investment powers with respect to the shares
indicated as beneficially owned by such Director. Unless specified otherwise, a
Director is deemed to share voting and investment powers over shares indicated
as held by a spouse, children or other family members residing with the
Director. None of the persons named below beneficially owns one percent or more
of the outstanding Company Common Shares, except for Messrs. Bechman, Dunn and
Goben, who beneficially own 2.3%, 1.1% and 1.8% respectively.
Name,
Present principal occupation Shares
And age beneficially owned
------- ------------------
Sharon Acton 2,501(1)
Manager, Franklin/Greenwood District of
Cinergy/PSI (energy services company)
50
Steve Bechman(2) 29,201(3)
President and Chief Executive Officer of
the Company and Bank
46
Gordon R. Dunn(4) 14,501(5)
Retired
76
Jeffrey L. Goben(6) 23,315(7)
Executive Vice President and Chief
Operating Officer
45
J. Michael Jarvis(5) 6,001(8)
President and Part Owner, Power Investments,
Inc. Division of Delco Remy International,
Inc. (engine remanufacturer)
54
John Norton 6,401(9)
President and Owner, Norton Farms, Inc.
49
Robert Richardson 4,001(10)
President and Majority Owner, MegaSys, Inc.
(logistics company)
36
<PAGE>
Patrick A. Sherman 6,401(11)
President and Part Owner, Sherman &
Armbruster P.C. (a public accounting firm)
49
James C. Stewart12 9,501(13)
Consultant, Bauer Built Corp.
46
All Directors and Executive Officers
as a group (13 persons) 116,602(14)
*Nominee
1. Includes 500 shares that Ms. Acton holds jointly with her spouse and 2,000
shares that she has the right to acquire upon the exercise of stock
options.
2. Mr. Bechman served as Regional President of Citizens Bank of Central
Indiana from 1993 until his resignation in 1997. Mr. Bechman was with
Citizens Bank of Central Indiana beginning in 1975 and served in various
other positions prior to 1993.
3. Includes 10,278 shares that Mr. Bechman holds jointly with his spouse and
daughter and 4,000 shares that he has the right to acquire upon the
exercise of stock options.
4. Mr. Dunn is a retired purchasing agent for L. S. Ayres department stores,
where he was employed for 43 years. Mr. Dunn serves as Chairman of the
Company's Board of Directors and he previously served as Chairman of the
Board of Citizens Bank of Central Indiana.
5. Includes 6,500 shares that Mr. Dunn holds jointly with his spouse and
others and 2,000 shares that he has the right to acquire upon the exercise
of stock options.
6. Mr. Goben held the position of Senior Vice President in charge of marketing
and community development, in addition to various other management
positions, with Citizens Bank of Central Indiana from 1984 to his
resignation in 1997.
7. Includes 9,275 shares that Mr. Goben holds jointly with his spouse and sons
and 3,000 shares that he has the right to acquire upon the exercise of
stock options.
8. Includes 4,000 shares that Mr. Jarvis holds jointly with his spouse and
2,000 shares he has the right to acquire upon the exercise of stock
options.
9. Includes 300 shares that Mr. Norton holds jointly with his spouse and
children and 2,000 shares that he has the right to acquire upon the
exercise of stock options.
10. Includes 2,000 shares that Mr. Richardson holds jointly with his spouse and
2,000 shares that he has the right to acquire upon the exercise of stock
options.
11. Includes 2,000 shares that Mr. Sherman has the right to acquire upon the
exercise of stock options.
12. In his position as consultant, Mr. Stewart manages Jim Stewart Truck Tire
Company, a firm he owned for 24 years prior to its sale in October 1996 to
Bauer Built Corp.
13. Includes 1,220 shares that Mr. Stewart holds jointly with his spouse and
2,000 shares that he has the right to acquire upon the exercise of stock
options.
14. Includes 25,000 shares that Directors and executive officers have the right
to acquire upon the exercise of stock options and 34,773 shares held
jointly with spouses and others.
<PAGE>
ITEM 13. Certain Business Relationships And Transactions
During 1997, the Bank had, and expects to continue to have in the future,
banking transactions in the ordinary course of business with Directors, officers
and principal shareholders of the Company and their associates. These
transactions have been made on substantially the same terms, including interest
rates, collateral and repayment terms on extensions of credit, as those
prevailing at the same time for comparable transactions with others and did not
involve more than the normal risk of collectibility or present other unfavorable
features.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of Heartland
Bancshares, Inc., which are incorporated by reference to Exhibit
3.1 in the Registration Statement Form SB-2, filed July 28, 1997,
as amended, ("Form SB-2").
3.2 Amended and Restated Bylaws of Heartland Bancshares, Inc., which
are incorporated by reference to Exhibit 3.2 in the Form SB-2.
10.1 1997 Stock Option Plan, which is incorporated by reference to
Exhibit 10.1 in the Form SB-2.
10.2 1997 Stock Option Plan for Nonemployee Directors, which is
incorporated by reference to Exhibit 10.2 in the Form SB-2.
10.3 Form of Organization Agreement Under Which Debt Described in
Prospectus as "Borrowings" Was Incurred, which is incorporated by
reference to Exhibit 10.3 in the Form SB-2.
10.4 Purchase Agreement and Note (Franklin, Indiana property), which
are incorporated by reference to Exhibit 10.4 in the Form SB-2.
10.5 Lease (Greenwood, Indiana property), which is incorporated by
reference to Exhibit 10.5 in the Form SB-2.
21 List of Subsidiaries
27 Financial Data Schedule (EDGAR filing only)
(a) 1. FINANCIAL STATEMENTS. The following information appears elsewhere in
this Annual Report on FORM 10-KSB on the pages indicated
Page
Independent Auditor's Report on consolidated financial statements. F-1
Consolidated Balance Sheet at December 31, 1997 F-2
Consolidated Statement of Income for the period from May 27, 1997
(since inception) to December 31, 1997 F-3
Consolidated Statement of Changes In Stockholders' Equity for the period from
May 27, 1997 (since inception) to December 31, 1997 F-4
Consolidated Statement of Cash Flows for the period from May 27, 1997
(since inception) to December 31, 1997 F-5
Notes to consolidated financial statements. F-6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26th day of March, 1998.
HEARTLAND BANCSHARES, INC.
By:/s/ Steven L. Bechman
Steven L. Bechman,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signatures and Title(s) Date
/s/ Gordon Dunn March 26, 1998
Gordon Dunn, Chairman
/s/ Sharon Acton March 26, 1998
Sharon Acton, Director
/s/ Jeffrey L. Goben March 26, 1998
Jeffrey L. Goben, Director
/s/ J. Michael Jarvis March 26, 1998
J. Michael Jarvis, Director
/s/ John Norton March 26, 1998
John Norton, Director
/s/ Robert Richardson March 26, 1998
Robert Richardson, Director
/s/ Patrick A. Sherman March 26, 1998
Patrick A. Sherman, Director
/s/ James C. Stewart March 26, 1998
James C. Stewart, Director
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Heartland Bancshares, Inc.
Franklin, Indiana
We have audited the accompanying consolidated balance sheet of Heartland
Bancshares, Inc. as of December 31, 1997 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the period from
May 27, 1997 (date of inception) to December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartland
Bancshares, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the period from May 27, 1997 (date of inception) to December
31, 1997 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 27, 1998
F-1
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1997
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Cash and due from banks $ 1,140
Securities available-for-sale, at market 8,012
Loans 3,958
Allowance for loan losses (46)
-----------------
Loans, net 3,912
Premises, furniture and equipment, net 1,207
Accrued interest receivable and other assets 248
-----------------
$ 14,519
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 988
Interest-bearing demand and savings deposits 603
Interest-bearing time deposits 488
-----------------
Total deposits 2,079
Short-term borrowings 800
Accrued interest payable and other liabilities 136
-----------------
3,015
Shareholders' equity
Common stock, no par value: 10,000,000 shares
authorized; 1,265,000 shares issued and outstanding 1,265
Additional paid-in capital 10,466
Accumulated deficit (240)
Unrealized gain on securities available-for-sale 13
-----------------
11,504
$ 14,519
=================
</TABLE>
See accompanying notes.
F-2
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
For the period from May 27, 1997 (date of inception)
to December 31, 1997 (Dollar amounts in
thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income
Loans $ 21
Taxable securities 101
Other 40
----------------
162
Interest expense
Deposits 1
Short-term borrowings 11
----------------
12
================
Net interest income 150
Provision for loan losses 46
----------------
Net interest income after provision for loan losses 104
Noninterest income
Service charges and fees 3
Noninterest expense
Salaries and employee benefits 195
Occupancy and equipment expenses, net 27
Data processing expense 31
Supplies 19
Advertising 17
Other operating expenses 58
----------------
347
----------------
Income before income taxes (240)
Income taxes -
-----------------
Net loss $ (240)
=================
Basic and diluted earnings per share $ (.19)
=================
</TABLE>
See accompanying notes.
F-3
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the period from May 27, 1997 (date of inception) to December 31, 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
Unrealized
Gain Total
Additional on Securities Share-
Common Paid-in Retained Available- holders'
Stock Capital Earnings for-Sale Equity
----- ------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at inception,
(May 27, 1997) $ - $ - $ - $ - $ -
Issuance of common stock
1,265,000 shares 1,265 11,385 - - 12,650
Underwriter's discount
on issuance of common stock - (816) - - (816)
Costs associated with
issuance of common stock - (103) - - (103)
Net loss for 1997 (240) (240)
Change in unrealized gain on
securities available-for-sale - - - 13 13
----------- ---------- ---------- -------- ---------
Balance December 31, 1997 $ 1,265 $ 10,466 $ (240) $ 13 $ 11,504
=========== ========== ========== ======== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from May 27, 1997 (date of inception) to December 31, 1997
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities
Net loss $ (240)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation 5
Provision for loan losses 46
Change in assets and liabilities:
Accrued interest receivable and other assets (248)
Accrued interest payable and other liabilities 136
Net cash from operating activities (301)
Cash flows from investing activities
Purchase of securities available-for-sale (7,999)
Loans made to customers, net of payments collected (3,958)
Property and equipment expenditures (1,212)
-----------
Net cash from investing activities (13,169)
Cash flows from financing activities
Net change in deposit accounts 2,079
Net change in short-term borrowings 800
Proceeds from issuance of common stock, net of issuance costs 11,731
-----------
Net cash from financing activities 14,610
Net change in cash and cash equivalents 1,140
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 1,140
===========
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 11
Income taxes -
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The consolidated financial statements include the
accounts of Heartland Bancshares, Inc. (Corporation) and its wholly-owned
subsidiary, Heartland Community Bank (Bank), after elimination of significant
intercompany transactions and accounts. The Bank commenced operation December
17, 1997.
The Corporation operates primarily in the banking industry, which accounts for
more than 90% of its revenues, operating income and assets. The Bank is engaged
in the business of commercial and retail banking, with operations conducted
through its main office located in Franklin, Indiana. The Bank opened an
additional branch location in Greenwood, Indiana in January 1998. The majority
of the Bank's income will be derived from commercial and retail business lending
activities and investments. The majority of the Bank's loans are secured by
specific items of collateral including business assets, real property and
consumer assets.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, the fair values of
financial statements, and status of contingencies are particularly subject to
change.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are written down to fair value when a decline in
fair value is not temporary. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. The Bank
had no held to maturity securities at year end.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days (180 days for residential mortgages).
Payments received on such loans are reported as principal reductions.
F-6
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Im-pairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises, Furniture and Equipment: Premises, furniture and equipment are stated
at cost less accumulated depreciation. Depreciation expense is recognized over
the estimated useful lives of the assets, principally on the straight-line
method. These assets are reviewed for impairment when events indicate the
carrying amount may not be recoverable. Maintenance and repairs are expensed and
major improvements are capitalized.
Intangibles: Organizational costs are amortized on the straight-line method over
5 years and are included in other assets. Intangibles are assessed for
impairment based on estimated undiscounted cash flows, and written down if
necessary.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board Opinion 25, with expense reported only
if options are granted below market price at grant date. Pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
Financial Accounting Standard No. 123 were used for stock-based compensation.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Statement of Cash Flows: Cash and cash equivalents are defined to include cash
on hand, amounts due from banks, and federal funds sold. The Corporation reports
net cash flows for customer loan transactions, deposit transactions, and
short-term borrowings.
F-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates. The fair value estimates of existing on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
NOTE 2 - SECURITIES
The amortized cost and estimated market values of securities are as follows at
December 31, 1997:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities Available-for-Sale
U.S. Government and its agencies $ 7,949 $ 18 $ (5) $ 7,962
Obligations of states and political
subdivisions 50 - - 50
----------- ----------- ----------- -----------
$ 7,999 $ 18 $ (5) $ 8,012
=========== ========== ========== ==========
</TABLE>
There were no sales of securities during the period from May 27, 1997 (date of
inception) to December 31, 1997.
The amortized cost and estimated market value of securities at December 31,
1997, by contractual maturity, are shown below.
<TABLE>
Estimated
Amortized Market
Cost Value
--------- ------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 7,999 8,012
Due after five years through ten years - -
Due after ten years - -
----------- -----------
$ 7,999 $ 8,012
=========== ===========
</TABLE>
A security with a carrying value of $1,250 at December 31, 1997, was pledged to
secure federal funds purchased.
F-8
<PAGE>
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
<TABLE>
<S> <C>
Commercial $ 2,960
Real estate construction 136
Residential real estate mortgages 189
Installment loans to individuals 673
-------------
$ 3,958
=============
</TABLE>
There were no impaired or non-performing loans outstanding at December 31, 1997
or during the period then ending.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<S> <C>
Balance, May 27, 1997 $ -
Provision charged to operations 46
Loans charged-off -
Recoveries on loans previously charged-off -
-------------
Balance, December 31, 1997 $ 46
=============
</TABLE>
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
<TABLE>
<S> <C>
Land $ 205
Buildings and improvements 711
Leasehold improvements 2
Furniture and equipment 294
-------------
Total 1,212
Accumulated depreciation 5
-------------
Premises, furniture and equipment, net $ 1,207
=============
</TABLE>
F-9
<PAGE>
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Interest-bearing time deposits issued in denominations of one hundred thousand
dollars or greater totaled $300 at December 31, 1997.
At December 31, 1997, all time deposits are scheduled to mature in 1998.
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings are comprised of federal funds purchased from Bank One,
Indiana, NA The Bank pledged one security as collateral for those borrowings
(see Note 2), which security is maintained in safekeeping under the Bank's
control. Federal funds purchased mature daily.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Bank created a retirement savings plan covering substantially all employees
which became effective January 1, 1998. The Plan requires employees to be 21
years of age before entering the Plan. Employee contributions are limited to a
maximum of 15% of their salary. The Plan allows for a 50% matching of the first
6% of employee salary contributions and an annual discretionary contribution.
Participants are fully vested in salary deferral contributions. Employer
matching contributions vest at a rate of 20% per year of employment and are
fully vested after the completion of 5 years of service with the Bank. There was
no 401(k) contribution charged to expense for 1997, since the plan became
effective on January 1, 1998.
NOTE 9 - STOCK OPTION PLAN
On July 25, 1997, the Corporation's Board of Directors adopted two stock option
plans: an employee plan and a non-employee director plan. Under the terms of the
plans, options for up to 115,000 shares of the Corporation's common stock may be
granted to key management employees and directors of the Corporation and its
subsidiaries. The exercise price of the options will be determined at the time
of grant by an administrative committee to be appointed by the Board of
Directors and in any event, will not be less than fair market value of the
shares of common stock at the time the option is granted.
Regarding the employee plan, options are immediately exercisable with respect to
20 percent of the shares covered by the option and will vest with respect to an
additional 20 percent of the shares on each of the following four anniversaries
of the date of grant, assuming continued employment of the optionee. The options
will expire after ten years.
F-10
<PAGE>
NOTE 9 - STOCK OPTION PLAN (Continued)
Regarding the nonemployee director plan, options granted are immediately
exercisable for 1,000 shares of common stock per nonemployee director. On the
date of each successive annual meeting of the Corporation, options will become
exercisable (assuming continued service on the Board of Directors) for an
additional 1,000 shares of common stock per nonemployee director, until all
options are exercisable in full.
A summary of the Corporation's stock option activity, and related information
for the period ended December 31, 1997 follows:
<TABLE>
Weighted-
Average
Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding May 27, 1997 - $ -
Granted 83,000 10.00
Exercised - -
Forfeited - -
------------- ----------
Outstanding-end of period 83,000 $ 10.00
============= ==========
Exercisable at end of period 18,000 $ 10.00
============= ==========
Weighted-average fair value per
option granted during the period $ 2.70
</TABLE>
Financial Accounting Standard No. 123 requires pro forma disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. The pro forma information presents net income and
earnings per share had the Standard's fair value method been used to measure
compensation cost for stock option plans. Compensation cost actually recognized
for stock options was $0 for 1997. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1997: risk-free interest rate of
6.3% dividend yields of 0%; volatility factors of the expected market price of
the Corporation's common stock of .001, and a weighted average expected life of
the options of 9.75 years.
F-11
<PAGE>
NOTE 9 - STOCK OPTION PLAN (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Corporation's pro
forma information follows (in thousands except for earnings per share
information):
Pro forma net income $ (289)
Pro forma basic and diluted earnings per share $ (.23)
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
NOTE 10 - INCOME TAXES
The Corporation had an operating loss carryforward at December 31, 1997 which
can be utilized over a 15 year period. No deferred tax asset has been
recognized, as a valuation allowance reduces the gross deferred tax asset to
zero.
NOTE 11 - PER SHARE DATA
The following illustrates the computation of basic and diluted earnings per
share.
Basic earnings per share
Net loss $ (240)
Weighted average shares outstanding 1,265,000
---------------
Basic earnings per share $ (.19)
===============
Diluted earnings per share
Net loss $ (240)
Weighted average shares outstanding 1,265,000
Stock options 83,000
Assumed shares repurchased upon exercise (82,914)
---------------
Diluted average shares outstanding 1,265,086
Diluted earnings per share $ (.19)
===============
F-12
<PAGE>
NOTE 12 - CAPITAL REQUIREMENTS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative and qualitative measures of assets, liabilities
and certain off-balance-sheet items calculated under regulatory accounting
practices.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end, the capital requirements were met. Actual capital levels and
minimum required levels were:
<TABLE>
Minimum Required
To Be Well
Capitalized Under
Minimum Required Prompt Corrective
Actual For Capital Action
------ Adequacy Purposes Regulations
----------------- ------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 8,706 157% $ 444 8% $ 555 10%
Tier 1 capital
(to risk weighted assets) 8,660 156 222 4 333 6
Tier 1 capital
(to average assets) 8,660 352 99 4 123 5
</TABLE>
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases the branch facility under an operating lease expiring in 2007.
Future minimum lease payments are as follows:
1998 $ 60,420
1999 60,420
2000 60,420
2001 62,320
2002 64,220
Thereafter 349,600
------------
Total minimum lease payments $ 657,400
=============
F-13
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
In the ordinary course of business, the Bank has loans, commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the consolidated balance sheet. The Bank's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Bank uses the
same credit policy to make such commitments as it uses for on-balance sheet
items.
At December 31,1997 off-balance sheet financial instruments whose contract
amount represents credit risk are summarized as follows:
Unused lines of credit $ 369
Commitments to make loans 1,982
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower, and may include accounts receivable, inventory, property, land and
other items. These commitments are generally variable rate or carry a term of
one year or less.
The cash balance required to be maintained on hand or on deposit with the
Federal Reserve was $48 at December 31, 1997. These reserves do not earn
interest.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of the Corporation's financial
instruments as of December 31, 1997 are as follows:
<TABLE>
Carrying Fair
Value Value
------- ------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,140 $ 1,140
Securities available-for-sale 7,999 8,012
Loans, net 3,912 3,912
Accrued interest receivable 129 129
Financial liabilities:
Deposits $ 2,079 $ 2,079
Short-term borrowings 800 800
Accrued interest payable 1 1
</TABLE>
F-14
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for IRAs, time certificates of deposit, and
agreements to repurchase is based on the rates paid at year end for new deposits
or borrowings, applied until maturity. Estimated fair value for other financial
instruments and off-balance-sheet loan commitments are considered nominal.
NOTE 15 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheet, statements of income and cash flows
for the parent company:
CONDENSED BALANCE SHEET
December 31, 1997
(Dollar amounts in thousands)
<TABLE>
<S> <C>
ASSETS
Cash $ 5
Securities available-for-sale, at market 2,704
Investment in bank 8,733
Other assets 62
-------------
$ 11,504
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ -
Shareholders' equity 11,504
-------------
$ 11,504
=============
</TABLE>
F-15
<PAGE>
NOTE 15 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME
For the period from May 27, 1997 (date of inception) to December 31, 1997
(Dollar amounts in thousands)
<TABLE>
<S> <C>
Operating income
Dividends received from subsidiary bank $ -
Interest income 38
-----------
Operating expenses
Amortization of deferred costs 1
----------
Income before income taxes and equity in
undistributed earnings of subsidiary 37
Income tax expense -
----------
Income before equity in undistributed earnings of bank 37
Equity in undistributed earnings of bank (277)
-----------
Net loss $ (240)
===========
</TABLE>
F-16
<PAGE>
NOTE 15 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the period from May 27, 1997 (date of inception) to December 31, 1997
(Dollar amounts in thousands)
Cash flows from operating activities
Net loss $ (240)
Adjustments to reconcile net loss to net cash
from operating activities
Amortization of deferred costs (1)
Equity in undistributed earnings of bank 277
Other assets and other liabilities (62)
-----------
Net cash from operating activities (26)
Cash flows from investing activities
Purchase of securities available-for-sale (2,700)
Purchase of stock in bank (9,000)
-----------
Net cash from investing activities (11,700)
Cash flows from financing activities
Proceeds from issuance of common stock 11,731
----------
Net cash from financing activities 11,731
----------
Net change in cash and cash equivalents 5
Cash and cash equivalents at May 27, 1997 -
-----------
Cash and cash equivalents at end of period $ 5
===========
F-17
EXHIBIT 21
HEARTLAND BANCSHARES, INC. LIST OF SUBSIDIARIES
1. Heartland Community Bank, Franklin, Indiana, is a wholly owned subsidiary
of Heartland Bancshares, Inc., and is an Indiana chartered commercial bank.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD FROM MAY 27, 1997 (SINCE
INCEPTION) ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS
</LEGEND>
<CIK> 0001042905
<NAME> HEARTLAND BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 150
<INT-BEARING-DEPOSITS> 990
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 7,999
<INVESTMENTS-MARKET> 8,012
<LOANS> 3,958
<ALLOWANCE> 46
<TOTAL-ASSETS> 14,519
<DEPOSITS> 2,079
<SHORT-TERM> 800
<LIABILITIES-OTHER> 136
<LONG-TERM> 0
0
0
<COMMON> 1,265
<OTHER-SE> 10,466
<TOTAL-LIABILITIES-AND-EQUITY> 14,519
<INTEREST-LOAN> 21
<INTEREST-INVEST> 101
<INTEREST-OTHER> 40
<INTEREST-TOTAL> 162
<INTEREST-DEPOSIT> 1
<INTEREST-EXPENSE> 12
<INTEREST-INCOME-NET> 150
<LOAN-LOSSES> 46
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 347
<INCOME-PRETAX> (240)
<INCOME-PRE-EXTRAORDINARY> (240)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 46
<ALLOWANCE-DOMESTIC> 46
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
