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, 1998
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 of Incorporation (IRS Employer Id. No.)
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, 1999 of $9.25 per
share $11,701,250
Shares of common stock outstanding as of March 23, 1999: 1,265,000
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Shareholders of Heartland Bancshares, Inc.
for 1998, to the extent stated herein, are incorporated by reference from
Exhibit 13.1 into Parts I and II.
2. Portions of the Proxy Statement of Heartland Bancshares, Inc. for the Annual
Meeting of its Shareholders to be held April 19, 1999, to the extent stated
herein, are incorporated by reference from Exhibit 13.2 into Part III.
<PAGE>
FORM 10-KSB TABLE OF CONTENTS
PART I Page
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Period
May 27, 1997 (inception) through December 31, 1997 13
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
Item 10. Directors and Executive Officers of Heartland 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management 21
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
Signatures 23
Note: Dollar amounts are in thousands except per share data.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Heartland Bancshares, Inc. (Heartland) is a one-bank holding company
incorporated May 27, 1997. Heartland raised approximately $11,731 in equity
capital through the sale of 1,265,000 shares of Heartland's common stock at $10
per share, net of underwriting discounts and offering costs. Proceeds were used
to capitalize Heartland Community Bank (the Bank), Heartland's primary asset, a
wholly-owned banking subsidiary, an Indiana-chartered commercial bank. The Bank
received regulatory approval to open in the fall of 1997 and commenced banking
operation December 17, 1997.
At December 31, 1998, Heartland had approximately $64,660 of assets, loans of
$48,700, deposits of approximately $52,754 and stockholders' equity of
approximately $10,916. Heartland'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, 1998, The Bank had 28 full
time equivalent employees. Heartland has no full time employees. Heartland is
subject to regulation by the Federal Reserve Board.
The Bank's deposits are insured to the maximum extent permitted by law by the
Federal Deposit Insurance Corporation (FDIC). The Bank 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 originates adjustable rate first
mortgage loans, second mortgage loans and home equity lines of credit secured by
single-family homes. Heartland offers 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,
data processing expenses and other overhead expenses incurred in operation.
Note: Dollar amounts are in thousands except per share data. 4
<PAGE>
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
were also used as a source of funding for 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.
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 often 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,
1998, Heartland had $0 in federal funds borrowed compared to $800 at December
31, 1997.
As of December 31, 1998, the Bank was awaiting approval for membership to the
Federal Home Loan Bank of Indianapolis (FHLBI), which was received prior to the
date of this report. Membership in the FHLBI will provide an additional source
of borrowing with limits based on availability of specific collateral such as
certain mortgages and investment securities.
Additional information regarding Heartland and the Bank is included in
Heartland's Annual Report to Shareholders for 1998, selected portions of which
are filed as Exhibit
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 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
Heartland and the Bank 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.
Note: Dollar amounts are in thousands except per share data. 5
<PAGE>
REGULATION AND SUPERVISION OF HEARTLAND
Heartland 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"). Heartland
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.
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 Heartland of banks and savings associations are also subject to
regulation. Any acquisition by Heartland 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 THE BANK
The Bank 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 the Bank if the respective agency finds that the activities of
the Bank represent an unsafe and unsound banking practice or violation of law.
The deposits of the Bank 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, the Bank may branch anywhere in the state.
Note: Dollar amounts are in thousands except per share data. 6
<PAGE>
Heartland is a legal entity separate and distinct from the Bank. There are
various legal limitations on the extent to which the Bank can supply funds to
Heartland. The principal source of Heartland's funds consists of dividends from
the Bank. State and federal laws restrict the amount of dividends which may be
paid by banks. In addition, the Bank is subject to certain restrictions imposed
by the Federal Reserve on extensions of credit to Heartland 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 the Bank.
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. Heartland is not required to comply with Federal
Reserve capital requirements because it has consolidated assets of less than
$150,000.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes the Bank meets all applicable capital
adequacy requirements as of December 31, 1998 and December 31, 1997.
Note: Dollar amounts are in thousands except per share data. 7
<PAGE>
As of December 31, 1998 and 1997, the Bank was categorized well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital
(to risk weighted assets)$ 8,606 17.0% $4,056 8% $5,070 10%
Tier 1 capital
(to risk weighted assets) 7,971 15.7 2,028 4 3,042 6
Tier 1 capital
(to average assets) 7,971 14.5 2,196 4 2,745 5
1997
Total capital
(to risk weighted assets)$ 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>
FORWARD-LOOKING STATEMENTS
This Form 10-KSB and future filings made by Heartland with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by Heartland and the Bank, and oral statements made by executive
officers of Heartland and the Bank, may include forward-looking statements
relating to such matters as (a) assumptions concerning future economic and
business conditions and their effect on the economy in general and on the
markets in which the Bank do business, (b) expectations regarding revenues,
expenses, and earnings for Heartland and the Bank, (c) the impact of future or
pending acquisitions, (d) deposit and loan volume, and (e) new products or
services. Such forward-looking statements are based on assumptions rather than
historical or current facts and, therefore, are inherently uncertain and subject
to risk.
To comply with the terms of a "safe harbor" provided by the Private Securities
Litigation Reform Act of 1995 that protects the making of such forward-looking
statements from liability under certain circumstances, Heartland notes that a
variety of factors could cause the actual results or experience to differ
materially from the anticipated results or other expectations described or
implied by such forward-looking statements. These risks and uncertainties that
may affect the operations, performance, development and results of Heartland's
business include, but are not limited to, the following: (a) the risk of adverse
changes in business and economic conditions generally and in the specific
markets in which the Bank operate which might adversely affect credit quality
and deposit and loan activity; (b) the risk of rapid increases or decreases in
interest rates, which could adversely affect Heartland's net interest margin if
changes in its cost of funds do not correspond to the changes in income yields;
Note: Dollar amounts are in thousands except per share data. 8
<PAGE>
(c) possible changes in the legislative and regulatory environment that might
negatively impact Heartland and the Bank through increased operating expenses or
restrictions on authorized activities; (d) the possibility of increased
competition from other financial and non-financial institutions; (e) the risk
that borrowers may misrepresent information to management of the Bank, leading
to loan losses, which is an inherent risk of the activity of lending money; and
(f) the risk that banks that Heartland may acquire in the future may be subject
to undisclosed asset quality problems, contingent liabilities or other
unanticipated problems; and (g) other risks detailed from time to time in
Heartland's filings with the Securities and Exchange Commission. The Corporation
and the Bank do not undertake any obligation to update or revise any
forward-looking statements subsequent to the date on which they are made.
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 Heartland'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 leased a temporary branch office in Greenwood, Indiana from January to
May, at which time the permanent leased facility was occupied. 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 an option to renew.
ITEM 3. LEGAL PROCEEDINGS
Heartland and the Bank were not involved in any legal proceedings at December
31, 1998 or 1997.
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, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Heartland 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, 1999.
Note: Dollar amounts are in thousands except per share data. 9
<PAGE>
The Common Stock has been quoted on the NASD Over-the-Counter Bulletin Board
since October 3, 1997. The following table sets forth the reported high and low
bid prices of the Common Stock for the quarter indicated as reported on the NASD
Over-the-Counter Bulletin Board.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fourth Quarter 1997 $12.87 $ 8.75
First Quarter 1998 11.50 8.50
Second Quarter 1998 11.87 10.00
Third Quarter 1998 11.00 7.50
Fourth Quarter 1998 $ 9.00 $ 7.00
</TABLE>
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.
Heartland has not paid dividends since its inception. Funding for possible
future dividends by Heartland would primarily come from dividends paid by the
Bank. 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 Heartland 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 Heartland.
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.
<TABLE>
<CAPTION>
Year Ended May 27, 1997(inception)
Income Statement Data: December 31,1998 through December 31, 1997
------------------- -------------------------
<S> <C> <C>
Total interest income $ 3,140 $ 165
Total interest expense 1,307 12
Net interest income 1,833 153
Provision for loan loss 700 46
Noninterest income 56 -
Noninterest Expense 1,817 347
Provision for income taxes - -
Net loss $ (628) $ (240)
Net loss per share $ (.50) $ (.19)
Average shares 1,265,000 1,265,000
</TABLE>
Note: Dollar amounts are in thousands except per share data. 10
<PAGE>
<TABLE>
<CAPTION>
At December 31, At December 31,
1998 1997
---- ----
<S> <C> <C>
Balance Sheet Data:
Total Assets $ 64,660 $ 14,519
Loans, Net of Allowance
for Loan Loss 48,700 3,912
Demand & Savings Deposits 17,738 1,591
Time Deposits 35,016 488
Stockholders' Equity 10,916 11,504
Book Value Per Share $ 8.63 $ 9.09
Equity to Asset Ratio 16.88% 79.23%
</TABLE>
AVERAGE BALANCES, INCOME, EXPENSES AND RATES. The following tables depict for
the year ended December 31, 1998 and the period from inception through December
31, 1997, certain information related to Heartland's average balance sheets 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.
<TABLE>
<CAPTION>
Year Ended May 27, 1997(inception)
December 31,1998 through December 31, 1997
Average/ Yield/ Average/ Yield/
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Interest earning assets
Federal funds sold $ 2,581 3.83% $ 729 5.49%
Taxable securities 8,647 6.05 1,635 6.18
Non-taxable securities 152 3.71 -
Loans 25,047 10.03 230 10.43
-------- ------
Total interest earning assets $ 36,427 8.62 $2,594 6.36
======== ======
Interest bearing liabilities
Interest-bearing demand,
Money Market and Savings
Deposits 6,718 4.01% 20 3.77%
Time deposits 18,048 5.70 22 6.00
Short-term borrowings 150 5.82 128 8.29
-------- ------
Total interest bearing
liabilities $ 24,916 5.25 $ 170 7.47
======== ======
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average yield on interest-earning assets 8.62% 6.36%
Average rate paid on interest-bearing liabilities 5.25 7.47
Net interest spread 3.37 (1.11)
Net interest margin (net interest earnings divided
by total interest-earning assets) 5.03 5.90
Return on average assets (1.34) (7.56)
Return on average equity (3.24) (8.29)
</TABLE>
Note: Dollar amounts are in thousands except per share data. 11
<PAGE>
LOANS. Heartland's loans, before adjusting for the allowance for loan losses,
totaled $49,442 at December 31, 1998 and $3,958 at December 31, 1997.
The following table sets forth information concerning the composition of
Heartland's loan portfolio in dollar amounts and percentages as of December 31,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
TYPE OF LOAN
Commercial loans and leases $26,475 54.36% $ 2,960 75.66%
Real estate construction 7,409 15.21 136 3.48
Residential mortgages
(1-4 family homes) 6,241 12.81 189 4.83
Consumer 9,317 19.12 673 17.20
------- -------- ------- --------
Gross loans 49,442 101.50 3,958 101.17
Allowance for loan losses (742) (1.50) (46) (1.17)
------- -------- ------- --------
Loans, net $48,700 100.00% $ 3,912 100.00%
======= ======== ======= ========
</TABLE>
The following table sets forth certain information at December 31, 1998
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>
<CAPTION>
Remaining Maturities
One Year Over one to Over five
Amount or less five years years
------ ------- ---------- -----
<S> <C> <C> <C> <C>
TYPE OF LOAN
Commercial $26,475 $ 7,360 $ 4,988 $ 14,127
Real estate construction 7,409 4,650 2,759 -
Residential mortgages
(1-4 family homes) 6,241 136 114 5,991
Consumer 9,317 2,916 4,562 1,839
------- ------- ------- -------
Total $49,442 $15,062 $12,423 $21,957
======= ======= ======= =======
</TABLE>
Note: Dollar amounts are in thousands except per share data. 12
<PAGE>
INVESTMENT SECURITIES. The following table sets forth the carrying value of
Heartland's investment portfolio as of December 31:
Securities Available-for-Sale
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1998
U.S. Government and its agencies $ 9,577 $ 71 $ (16) $ 9,632
Obligations of states and
political subdivisions 614 1 (3) 612
Mortgage back securities 213 - - 213
-------- ------- -------- -------
$ 10,404 $ 72 $ (19) $10,457
======== ======= ======== =======
1997
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>
The following table sets forth the maturities of investment securities at
December 31, 1998 and the weighted-average yield (on a tax equivalent basis) on
such securities.
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
Cost Value Yield
---- ----- -----
<S> <C> <C> <C>
Due in one year or less $ 1,000 $ 1,008 5.69%
Due after one year through five years 7,139 7,198 5.85
Due after five years through ten years 2,052 2,038 5.60
Due after ten years - - -
Mortgage-backed securities 213 213 6.29
-------- --------- ------
Total $ 10,404 $ 10,457 5.79%
======== ========= ======
</TABLE>
1. Computation of yields is performed using amortized cost.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND FOR THE PERIOD MAY 27, 1997 (INCEPTION) THROUGH
DECEMBER 31, 1997.
GENERAL
Heartland Bancshares, Inc. ("Heartland") is a one-bank holding company
incorporated May 27, 1997. Heartland's primary asset is its wholly owned banking
subsidiary, Heartland Community Bank ("the Bank"), an Indiana-chartered
commercial bank. The Bank received regulatory approval to open in the fall of
1997 and commenced banking operation December 17, 1997. Heartland'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.
Note: Dollar amounts are in thousands except per share data. 13
<PAGE>
Due to the short period of actual operations preceding December 31, 1997, it is
difficult to make meaningful comparisons between the amounts outstanding at
December 31, 1998 and those at the previous period end.
At December 31, 1998, Heartland had approximately $64,660 in total assets, an
increase of $50,141 from December 31, 1997 total of $14,519. Those assets were
primarily loans of $48,700 and investment securities of $10,457 at December 31,
1998 compared to December 31, 1997 totals of $3,958 and $8,012 respectively.
Total deposits at December 31, 1998 were approximately $52,754 compared to
$2,079 at December 31, 1997. Total shareholders' equity was approximately
$10,916 and $11,504 at December 31, 1998 and December 31, 1997. The decrease in
equity was due to the net loss for the year ended December 31, 1998.
The Bank's deposits are insured to the maximum extent permitted by law by the
Federal Deposit Insurance Corporation (FDIC). The Bank is subject to
comprehensive regulation, examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC.
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.
YEAR 2000
The Federal Financial Institutions Examination Council (FFIEC) has issued
several statements regarding preparing for the Year 2000 date change and related
issues. Those statements have identified specific actions and plans to be
adopted by financial institutions, in an effort for them to avoid being
materially adversely affected by Year 2000 failure of data processing systems.
As of December 31, 1998, Heartland has implemented the procedures and plans set
out by FFIEC. Heartland has completed the evaluation and testing of computer and
software systems in cooperation with its primary independent data processing
service provider and estimates that the amount of costs that will be incurred to
prepare for the date change will not be significant. Heartland has also
implemented evaluation and testing strategies for all areas of Heartland and has
begun efforts to communicate with customers and vendors regarding Heartland's
efforts toward Year 2000 compliance.
Although Heartland has no reason to expect that its data processing and other
costs and expenses will be significant or that its financial condition and
results of operations will be adversely affected by Year 2000 problems, this is
a forward-looking statement, and actual expenses may vary materially from
current expectations due to the possibility, among other risks, that Heartland's
data processing service provider will be unable to perform in accordance with
the Year 2000 plan and the possibility that Heartland's customers may not be
Year 2000 compliant.
Note: Dollar amounts are in thousands except per share data. 14
<PAGE>
RESULTS OF OPERATIONS
Heartland's operating results during the period from inception on May 27, 1997
through December 31, 1997 were limited to various expenses related to the
development stage and 14 calendar days of banking operations at the close of the
period and are therefore not comparable to the operating results for the year
ended December 31, 1998. Changes in income and expenses between the two periods
relate primarily to this difference unless otherwise stated in the following
discussion. Heartland incurred net losses of $628 for the year ended December
31, 1998 or $(.50) per share and $240 or $(.19) per share for the period from
inception, through December 31, 1997.
Heartland's net losses for its second and third quarters in 1998 declined from
the net loss for the preceding quarter, and Heartland posted its first
profitable quarter since inception in the fourth quarter of 1998. See Table 1 to
this Item 7 Discussion for unaudited interim financial data for 1998.
Comprehensive income consists of net income and other comprehensive income such
as unrealized gains and losses on securities available for sale which are also
recognized as separate components of equity. Comprehensive loss was $588 for the
year ended December 31, 1998 and $227 for the period from inception through
December 31, 1997.
Interest income of $3,140 was earned during the year ended December 31, 1998
compared to $165 for the period from inception through December 31, 1997 and was
primarily generated from investment securities and loans. Interest expense of
$1,307 was incurred during the year ended December 31, 1998 and $12 during the
period from inception through December 31, 1997. Interest expense is primarily
related to deposits during 1998. For 1997, interest expense was primarily for
related party notes payable used to fund start-up costs and a note payable
obtained during the organization period to purchase the main office facility.
All such notes payable were repaid in 1997.
The net interest income for the year ended December 31, 1998 was $1,833 compared
to $153 for the period from inception through December 31, 1997.
The provision for loan losses was $700 for the year ended December 31, 1998 and
$46 for the period from inception through December 31, 1997. Total charge-offs
were $4 during the year ended December 31, 1998 and $0 during the period from
inception through December 31, 1997. There were no recoveries of loans during
the periods.
Non-interest income was $56 for the year ended December 31, 1998 and $0 for the
period from inception through December 31, 1997 and consisted of miscellaneous
fees, service charges and other income.
Salaries and benefits expense for the year ended December 31, 1998 was $1,016
compared to $195 for the period from inception through December 31, 1997.
Salaries and benefits were paid to employees during the development stage for
services performed.
Note: Dollar amounts are in thousands except per share data. 15
<PAGE>
Occupancy and equipment expenses of $167 and $28 were incurred during the year
ended December 31, 1998 and the period from inception through December 31, 1997.
During 1998 those expenses consisted primarily of the lease payments for the
branch facility, depreciation and utilities expenses. During the period from
inception through December 31, 1997, occupancy and equipment expenses were
primarily depreciation and utilities expenses. The permanent branch facility was
occupied in the second quarter of 1998 and therefore a full 12 months of lease
expense was not incurred in the year ended December 31, 1998.
Data processing expenses were $183 for the year ended December 31, 1998 and were
$31 for the period from inception through December 31, 1997.
Printing and Supplies expenses for the year ended December 31, 1998 totaled $69,
while they were $31 for the period from inception through December 31, 1997.
Advertising expenses during the year ended December 31, 1998 were $79 and were
$17 during the period from inception through December 31, 1997.
Director fees were $28 for the year ended December 31, 1998. No director fees
were paid during the period from inception through December 31, 1997.
Credit reports and loan expenses were $45 for the year ended December 31, 1998
and were $2 for the period from inception through December 31, 1997
Professional fees of $54 and $7 were incurred for the year ended December 31,
1998 and the period from inception through December 31, 1997.
During the year ended December 31, 1998, Heartland adopted a new accounting
standard that requires that costs associated with the organization and start-up
of a business be expensed as incurred. Consequently, all previously unamortized
costs associated with the organization of Heartland were expensed during 1998 in
the amount of $75. The amortization expense incurred for organizational cost
under the previous accounting standard was $1 for the period from inception
through December 31, 1997.
The remaining expenses of $101 for the year ended December 31, 1998 and $35 for
the period from inception through December 31, 1997, relate to various other
items such as postage, insurance and training.
LENDING ACTIVITIES
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.
Note: Dollar amounts are in thousands except per share data. 16
<PAGE>
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.
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.
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, 1998, commercial
loans totaled $26,475 or 54.36% of Heartland's loan portfolio compared to $2,960
or 75.66% of Heartland's loan portfolio at December 31, 1997.
REAL ESTATE CONSTRUCTION LOANS. 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. At December 31, 1998, residential construction mortgage loans
totaled $7,409 or 15.21% of Heartland's loan portfolio compared to $136, or
3.48% of Heartland's loan portfolio at December 31, 1997.
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"),
second mortgage loans and home equity lines of credit also with adjustable
rates. At December 31, 1998, Heartland's residential mortgage loans totaled
approximately $6,241 or 12.8% of Heartland's total loans compared to $189 or
4.83% of Heartland's total loans at December 31, 1997.
Fire and casualty insurance is required on all mortgage loans as well as
abstracts of title or title insurance.
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. At December 31,
1998, Heartland's Consumer loans totaled approximately $9,317 or 19.12% of
Heartland's total loans compared to $673 or 17.20% of Heartland's total loans at
December 31, 1997.
Note: Dollar amounts are in thousands except per share data. 17
<PAGE>
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of impaired and nonperforming loans, real estate
owned (acquired in foreclosure), and other repossessed assets. Impaired loans
include loans on which interest recognition has been suspended because they are
90 days past due as to interest or principal and loans where there is a question
about the Bank's ability to collect all principal and interest. Nonperforming
loans include accruing loans that are contractually past due 90 days or more as
to interest or principal payments. Nonperforming assets totaled $3 and $0 at
December 31, 1998 and 1997.
Due to risks inherent in lending, management estimates that a certain amount of
loan balances outstanding at December 31, 1998 and 1997 may not be fully
collected. Although the Bank'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. To reflect
the expense for such losses, a provision for loan losses is charged to earnings.
Actual losses, when identified, 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. Management estimates the
allowance balance required based on known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations may be made for specific
loans, but the entire allowance is available for any loan that, in management's
judgement, should be charged-off.
At December 31, 1998, the balance of the allowance for loan losses was $742 or
1.5% of gross loans outstanding, compared to $46 or 1.2% of gross loans
outstanding at December 31, 1997. Provision charged to earnings in the year
ended December 31, 1998 was $700 compared to $46 for the period from May 27,
1997 (inception) through December 31, 1997. Charge-offs were $4 in the year
ended December 31, 1998 and $0 in the period from May 27, 1997 (inception)
through December 31, 1997. There were no recoveries during either period.
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, RATE SENSITIVITY AND CAPITAL RESOURCES
Liquidity is a measure of Heartland's ability to meet its customers' present and
future deposit withdrawals and/or increased loan demand without unduly
penalizing earnings. Interest rate sensitivity involves the relationship between
rate sensitive assets and liabilities and is an indication of the probable
effects of interest rate movements on Heartland's net interest income. Heartland
manages both its liquidity and interest sensitivity through a coordinated
asset/liability management program directed by the Asset Liability Committee.
Note: Dollar amounts are in thousands except per share data. 18
<PAGE>
Liquidity is provided by projecting loan demand and other financial needs and
then maintaining sufficient funding sources and assets readily convertible into
cash to meet these requirements. Heartland has provided for its liquidity needs
by maintaining adequate balances in money market assets, through growth in core
deposits, maturing loans and investments in its securities portfolio and by
maintaining various short-term borrowing sources. At December 31, 1998,
Heartland had $10,457 or 16.2% of total assets in investment securities
available for sale. Heartland also had $1,200 of federal funds sold and an
additional $2,000 available from unused federal funds purchased agreements.
Heartland also utilizes securities repurchase agreements with individual
customers as a source of funding. At December 31, 1998, repurchase agreements
totaled $740. There were no repurchase agreements outstanding at December 31,
1997.
As of December 31, 1998, the Bank was awaiting approval for membership to the
Federal Home Loan Bank of Indianapolis (FHLBI), which was received in March,
1999. Membership in the FHLBI will provide an additional source of borrowing
with limits based on availability of specific collateral such as certain
mortgages and investment securities.
Concern has been raised regarding the ability of financial institutions to
provide funding for possible large cash requirements by consumers related to the
Year 2000 date change. Heartland has plans and procedures in place to estimate
the amount of cash needed for such requirements by its customers and to acquire
that cash in advance. Plans include lines of credit and vault services
contracted with the Federal Reserve Bank of Chicago, FHLBI and a large regional
correspondent bank.
Management believes that expected deposit growth, maturing investment securities
and unused borrowing sources will be adequate to meet the liquidity needs for
the foreseeable future.
Heartland manages its rate sensitivity position through the use of variable-rate
loans and by matching funds acquired, having a specific maturity, with loans,
securities or money market investments with similar maturities. Heartland
employs a variety of measurement techniques to identify and manage its exposure
to changing interest rates. A simulation model is used to measure Heartland's
net interest income volatility to changes in the level of interest rates,
interest rate spreads, the shape of the yield curve and changing product growth
patterns and investment strategies. Additionally, a rate sensitivity position is
computed for various repricing intervals by calculating rate sensitivity gaps.
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 most restrictive capital adequacy requirement currently in place is from the
agreement with the Federal Deposit Insurance Corporation in conjunction with the
approval for deposit insurance, which requires that a minimum total capital to
total assets ratio of 8% be maintained for the first three years of operation.
The Bank's corresponding capital ratio at December 31, 1998 was 13.0% compared
to 74.3% at December 31, 1997.
Note: Dollar amounts are in thousands except per share data. 19
<PAGE>
INTERIM FINANCIAL DATA. The following table sets forth certain unaudited
operating results for each period indicated and is presented to assist the
reader in understanding the recent trends experienced by Heartland. Information
from the year ended December 31, 1997 has not been presented due to the short
period of operation and lack of comparability.
<TABLE>
<CAPTION>
Table 1, Unaudited
For the three months ended
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
1998
Total interest income $ 1,207 $ 908 $ 672 $ 352
Total interest expense 557 400 267 83
--------- --------- ---------- ---------
Net interest income 650 508 405 269
Provision for loan loss 170 207 180 143
Noninterest income 25 18 9 4
Noninterest expense 498 474 431 414
--------- --------- ---------- ---------
Provision for income taxes - - - -
--------- --------- ---------- ---------
Net loss 8 (155) (197) (284)
========= ========= ========== =========
Net income/(loss) per share $ .01 (.12) (.16) (.22)
Average shares 1,265,000 1,265,000 1,265,000 1,265,000
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Heartland'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
Note: Dollar amounts are in thousands except per share data. 20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HEARTLAND
Information relating to directors and executive officers of Heartland is
included under the caption "Election of Directors" in the 1999 Proxy Statement
of Heartland, which section is incorporated herein by reference. Addition
information relating to non-director executive officers is listed below.
Executive Officers:
John M. Morin1
Vice President
Age 49
K. Keith Fox2
Vice President
Age 39
R. Trent McWilliams3
Vice President
Age 47
Jeff Joyce4
Vice President and Chief Financial Officer
Age 28
1 Mr. Morin served in various positions at Citizens Bank of Central Indiana from
1985 until his resignation in 1997, most recently as Vice President in charge
of retail lending.
2 Mr. Fox served in various positions at Citizens Bank of Central Indiana from
1985 until his resignation in 1997, most recently as Commercial Loan Officer.
3 Mr. McWilliams served in various positions at Union Federal Savings Bank until
his resignation in 1997, most recently as Vice President in charge of
Marketing.
4 Mr. Joyce is a Certified Public Accountant who served in various positions,
including Staff Accountant and Senior Accountant in the Financial Institutions
Group at Crowe, Chizek and Company LLP from 1992 until his resignation in
1997.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to compensation of Heartland's Executive officers and
Directors is included under the captions "Executive Compensation" and "Election
of Directors - Compensation of Directors" in the 1999 Proxy Statement of
Heartland, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management of Heartland is included under the caption "Election of Directors" of
the 1999 Proxy Statement of Heartland, which section is incorporated herein by
reference.
21
<PAGE>
ITEM 13. CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS
During 1998 and 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 Heartland 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.
13.1 The Registrant's Annual Report to Shareholders for the year
ended December 31, 1998
13.2 The Registrant's 1999 Proxy Statement
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 financial statements. F-1
Consolidated Balance Sheets at December 31, 1998 and 1997 F-2
Consolidated Statements of Income for the year ended
December 31, 1998 and the period from May 27, 1997 (inception)
through December 31, 1997 F-3
Consolidated Statements of Changes In Shareholders' Equity
for the year ended December 31, 1998 and the period from
May 27, 1997 (inception) through December 31, 1997 F-4
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and the period from May 27, 1997 (inception)
through December 31, 1997 F-5
Notes to consolidated financial statements. F-6
(b) 1. No reports on Form 8-K were filed during the three months ended December
31, 1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Heartland has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26th day of March, 1999.
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/ Steven L. Bechman March 26, 1999
- - -----------------------------
Steven L. Bechman, Director
(Chief Executive Officer)
/s/ Gordon Dunn March 26, 1999
- - -----------------------------
Gordon Dunn, Chairman
/s/ Sharon Acton March 26, 1999
- - -----------------------------
Sharon Acton, Director
/s/ Jeffrey L. Goben March 26, 1999
- - -----------------------------
Jeffrey L. Goben, Director
/s/ J. Michael Jarvis March 26, 1999
- - -----------------------------
J. Michael Jarvis, Director
/s/ John Norton March 26, 1999
- - -----------------------------
John Norton, Director
/s/ Robert Richardson March 26, 1999
- - -----------------------------
Robert Richardson, Director
/s/ Patrick A. Sherman March 26, 1999
- - -----------------------------
Patrick A. Sherman, Director
/s/ James C. Stewart March 26, 1999
- - -----------------------------
James C. Stewart, Director
/s/ Jeffery D. Joyce March 26, 1999
- - -----------------------------
Jeffery D. Joyce, Chief Financial Officer
(Principal Financial and Accounting Officer)
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Heartland Bancshares, Inc.
Franklin, Indiana
We have audited the accompanying consolidated balance sheets of Heartland
Bancshares, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year ended December 31, 1998 and the period from May 27, 1997 (date of
inception) through 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 audits.
We conducted our audits 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 audits provide 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, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998 and the
period from May 27, 1997 (date of inception) through December 31, 1997 in
conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 24, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(Amounts in thousands, except share data)
- ------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,963 $ 1,140
Federal funds sold 1,200 -
-------- --------
Total cash and cash equivalents 3,163 1,140
Securities available-for-sale, at market 10,457 8,012
Loans 49,442 3,958
Allowance for loan losses (742) (46)
-------- --------
Loans, net 48,700 3,912
Premises, furniture and equipment, net 1,707 1,207
Accrued interest receivable and other assets 633 248
-------- --------
$ 64,660 $ 14,519
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 4,341 $ 988
Interest-bearing demand and savings deposits 13,397 603
Interest-bearing time deposits 35,016 488
-------- --------
Total deposits 52,754 2,079
Short-term borrowings 740 800
Accrued interest payable and other liabilities 250 136
-------- --------
53,744 3,015
Shareholders' equity
Common stock, no par value: 10,000,000 shares
authorized; 1,265,000 shares issued and outstanding 1,265 1,265
Additional paid-in capital 10,466 10,466
Accumulated deficit (868) (240)
Accumulated other comprehensive income 53 13
-------- --------
10,916 11,504
------ ------
$ 64,660 $ 14,519
======== ========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 1998 and the period from
May 27, 1997 (date of inception) through December 31, 1997 (Dollar
amounts in thousands, except per share data)
- ------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans, including fees $ 2,512 $ 24
Securities:
Taxable 523 101
Non-taxable 6 -
Federal funds sold 99 40
-------- -------
3,140 165
Interest expense
Deposits 1,298 1
Short-term borrowings 9 11
-------- -------
1,307 12
Net interest income 1,833 153
Provision for loan losses 700 46
-------- -------
Net interest income after provision for loan losses 1,133 107
Noninterest income
Service charges and fees 56 -
Noninterest expense
Salaries and employee benefits 1,016 195
Occupancy and equipment expenses, net 167 28
Data processing expense 183 31
Printing and Supplies 69 31
Advertising 79 17
Director fees 28 -
Credit reports and other loan expenses 45 2
Professional fees 54 7
Amortization of organization cost 75 1
Other operating expenses 101 35
-------- -------
1,817 347
Loss before income taxes (628) (240)
Income taxes - -
-------- -------
Net loss $ (628) $ (240)
======== =======
Basic and diluted earnings per share $ (.50) $ (.19)
======== =======
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Year ended
December 31, 1998 and the period from
May 27, 1997 (date of inception) through December 31, 1997 (Dollar
amounts in thousands, except share through data)
- ------------------------------------------------------------------------------
Accumulated
Other Total
Additional Accum- Compre- Share-
Common Paid-in ulated hensive holders'
Stock Capital Deficit Income 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)
Comprehensive income (loss)
Net loss for 1997 (240) (240)
Change in unrealized
gain on securities
available-for-sale 13 13
---------
Total comprehensive loss (227)
-------- -------- -------- -------- --------
Balance December 31, 1997 1,265 10,466 (240) 13 11,504
Comprehensive income (loss)
Net loss for 1998 (628) (628)
Change in unrealized
gain on securities
available-for-sale 40 40
---------
Total comprehensive income (588)
-------- -------- -------- -------- --------
Balance December 31, 1998 $ 1,265 $10,466 $ (868) $ 53 $ 10,916
======= ======= ======= ========= =========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended
December 31, 1998 and the period from
May 27, 1997 (date of inception) through December 31, 1997
(Dollar amounts in thousands)
- ------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (628) $ (240)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 190 5
Provision for loan losses 700 46
Change in assets and liabilities:
Accrued interest receivable and other assets (460) (248)
Accrued interest payable and other liabilities 114 136
Net cash from operating activities (84) (301)
Cash flows from investing activities
Purchase of securities available-for-sale (8,033) (7,999)
Proceeds from calls and maturities of securities
available-for-sale 5,624 -
Loans made to customers, net of payments collected (45,488) (3,958)
Net purchases of property and equipment (611) (1,212)
-------- --------
Net cash from investing activities (48,508) (13,169)
Cash flows from financing activities
Net change in deposit accounts 50,675 2,079
Proceeds from short-term borrowings - 800
Net repayment of short-term borrowings (60)
Proceeds from issuance of common stock, net of
issuance costs - 11,731
-------- --------
Net cash from financing activities 50,615 14,610
-------- --------
Net change in cash and cash equivalents 2,023 1,140
Cash and cash equivalents at beginning of period 1,140 -
-------- --------
Cash and cash equivalents at end of period $ 3,163 $ 1,140
======== ========
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 1,079 $ 11
Income taxes - -
</TABLE>
F-5
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 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. (Heartland) and its wholly-owned
subsidiary, Heartland Community Bank (Bank), after elimination of significant
intercompany transactions and accounts. The Bank commenced operation December
17, 1997.
Heartland 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 is 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 instruments, 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 1997 or 1998.
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 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. Impairment 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: A new accounting standard effective on January 1, 1999, requires
all previously capitalized organizational costs to be written off as of that
date. Early adoption was allowed, so Heartland completely amortized
organizational costs during 1998. The incremental amount written-off in 1998 by
early adoption of this accounting standard was not significant to the results of
operations.
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.
F-7
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay.
Statement of Cash Flows: Cash and cash equivalents are defined to include cash
on hand, amounts due from banks, and federal funds sold. Heartland reports net
cash flows for customer loan transactions, deposit transactions, and short-term
borrowings.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable. There are no reclassification adjustments to other comprehensive
income in 1998 or 1997.
Dividend Restriction: Banking regulations require maintaining certain
capital levels and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.
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 onand 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.
F-8
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Industry Segment: Internal financial information is primarily reported and
aggregated in one line of business, i.e. banking.
Financial Statement Presentation: Certain items in the prior financial
statements have been reclassified to correspond with the current presentation.
NOTE 2 - SECURITIES
Year-end securities are as follows:
<TABLE>
<CAPTION>
Securities Available-for-Sale
Gross Gross Estimated
Amortized UnrealizedUnrealized Market
Cost Gains Losses Value
---- ----- ------ -----
1998
<S> <C> <C> <C> <C>
U.S. Government and its agencies $ 9,577 $ 71 $ (16) $ 9,632
Obligations of states and
political subdivisions 614 1 (3) 612
Mortgage back securities 213 - - 213
-------- ------- -------- -------
$ 10,404 $ 72 $ (19) $10,457
======== ======= ======== =======
1997
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 1998 and the period from May 27, 1997
(date of inception) through December 31, 1997.
The amortized cost and estimated market value of securities at December 31,
1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 1,000 $ 1,008
Due after one year through five years 7,139 7,198
Due after five years through ten years 2,052 2,038
Due after ten years - -
Mortgage back securities 213 213
-------- -------
$ 10,404 $10,457
======== =======
</TABLE>
Securities with a carrying value of $2,250 and $1,250 at December 31, 1998 and
1997, were pledged to secure repurchase agreements and federal funds purchased.
F-9
<PAGE>
NOTE 3 - LOANS
Loans are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and leases $ 26,475 $ 2,960
Real estate construction 7,409 136
Residential real estate mortgages 6,241 189
Installment loans to individuals 9,317 673
-------- --------
$ 49,442 $ 3,958
======== ========
</TABLE>
There were no impaired or non-performing loans outstanding at December 31, 1998
or 1997.
Certain of Heartland's officers and directors were loan customers of Heartland.
The balance of loans outstanding to these individuals was not significant at
December 31, 1998 or 1997.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 46 $ -
Provision charged to operations 700 46
Loans charged-off (4) -
Recoveries on loans previously charged-off - -
-------- --------
Ending balance $ 742 $ 46
======== ========
</TABLE>
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
A summary of premises, furniture and equipment by major category follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 205 $ 205
Buildings and improvements 931 711
Leasehold improvements 201 2
Furniture and equipment 485 294
-------- --------
Total 1,822 1,212
Accumulated depreciation 115 5
-------- --------
Premises, furniture and equipment, net $ 1,707 $ 1,207
======== ========
</TABLE>
F-10
<PAGE>
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Interest-bearing time deposits issued in denominations of one hundred thousand
dollars or greater totaled $19,374 and $300 at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Scheduled maturities of time deposits for the next five years are as follows:
<S> <C>
1999 $ 20,921
2000 10,882
2001 2,912
2002 180
2003 and thereafter 121
--------
$ 35,016
</TABLE>
Time deposits from governmental and other public entities such as school
corporations and hospitals in the Bank's market area totaled $13,900 at December
31, 1998 and $0 at December 31, 1997.
NOTE 7 - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Short-term borrowings are comprised of the following at December 31:
1998 1997
---- ----
<S> <C> <C>
Balance of repurchase agreements outstanding $ 740 $ -
Balance of Federal funds purchased - 800
-------- --------
Total short-term borrowings $ 740 $ 800
======== ========
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Bank created a 401(k) 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. The
401(k) contribution charged to expense for 1998 was $22.
F-11
<PAGE>
NOTE 9 - STOCK OPTION PLAN
On July 25, 1997, Heartland'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 Heartland's common stock may be granted to
key management employees and directors of Heartland 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.
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 Heartland, 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 Heartland's stock option activity, and related information for the
periods ended December 31, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1998 1997
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
<S> <C> <C> <C> <C>
Outstanding - beginning
of period 83,000 $ 10.00 - $ -
Granted - - 83,000 10.00
Exercised - - - -
Forfeited - - - -
--------- --------- --------- -------
Outstanding-end of period 83,000 $ 10.00 83,000 $ 10.00
========= ========= ========= =======
Exercisable at end of
period 36,000 $ 10.00 18,000 $ 10.00
========= ========= ========= =======
Weighted-average fair value
per option granted during
the period $ - $ 2.70
</TABLE>
F-12
<PAGE>
NOTE 9 - STOCK OPTION PLAN (Continued)
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 1998 and 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
Heartland's common stock of .001, and a weighted average expected life of the
options of 9.75 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
Heartland's pro forma information follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pro forma net income $ (677) $ (289)
Pro forma basic and diluted earnings per share $ (.54) $ (.23)
</TABLE>
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
NOTE 10 - INCOME TAXES
Heartland had a net deferred tax asset of $275 at December 31, 1998. This asset
is primarily due to a net operating loss carryforward and accumulated
differences in the allowance for loan losses, offset by timing differences
related to leases and the computation of taxable income on the cash basis. A
valuation allowance has been recorded to reduce the net deferred tax asset to
zero, as Heartland has not yet paid any income taxes which would be refundable
if these timing differences reversed.
Heartland had an operating loss carryforward at December 31, 1998 in the
approximate amount of $495 which can be utilized to offset future taxable income
over a 15 year period.
F-13
<PAGE>
NOTE 11 - PER SHARE DATA
The following illustrates the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share
Net loss $ (628) $ (240)
========== =========
Weighted average shares outstanding 1,265,000 1,265,000
========== =========
Basic earnings per share $ (.50) $ (.19)
========= =========
1998 1997
---- ----
Dilutive earnings per share
Net loss $ (628) $ (240)
========== =========
Weighted average shares outstanding 1,265,000 1,265,000
Dilutive effect of assumed exercise of
stock options - 86
---------- ---------
Diluted average shares outstanding 1,265,000 1,265,086
========== =========
Diluted earnings per share $ (.50) $ (.19)
========= =========
</TABLE>
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.
F-14
<PAGE>
NOTE 12 - CAPITAL REQUIREMENTS (Continued)
<TABLE>
<CAPTION>
At year end, the Bank was well-capitalized. Actual capital levels and minimum
required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
Actual For Capital Prompt Corrective
Regulations Adequacy Purposes Action
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital
(to risk weighted assets) $8,606 17.0% $ 4,056 8% $5,070 10%
Tier 1 capital
(to risk weighted assets) 7,971 15.7 2,028 4 3,042 6
Tier 1 capital
(to average assets) 7,971 14.5 2,196 4 2,745 5
1997
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 its branch facility under an operating lease expiring in 2007.
Expense for the leased facility was $43 and $12 for 1998 and 1997.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 60
2000 60
2001 62
2002 64
2003 66
Thereafter 283
--------
Total minimum lease payments $ 595
</TABLE>
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.
F-15
<PAGE>
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
<TABLE>
<CAPTION>
At December 31,1998 off-balance sheet financial instruments whose contract
amount represents credit risk are summarized as follows:
<S> <C>
Unused lines of credit $ 10,098
Commitments to make loans 7,774
Letters of credit 298
</TABLE>
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 $531 at December 31, 1998. These reserves do not earn
interest.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of Heartland's financial
instruments were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 3,163 $ 3,163 $ 1,140 $ 1,140
Securities
available-for-sale 10,457 10,457 8,012 8,012
Loans, net 48,700 48,706 3,912 3,912
Accrued interest receivable 564 564 129 129
Financial liabilities:
Deposits $ 52,754 $53,012 $ 2,079 $ 2,079
Short-term borrowings 740 740 800 800
Accrued interest payable 228 228 1 1
</TABLE>
F-16
<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 sheets and statements of income and cash
flows for the parent company:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash $ 22 $ 5
Securities available-for-sale, at market 2,851 2,704
Investment in bank 7,993 8,733
Other assets 50 62
-------- --------
$ 10,916 $ 11,504
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ - $ -
Shareholders' equity 10,916 11,504
-------- --------
$ 10,916 $ 11,504
======== ========
</TABLE>
F-17
<PAGE>
NOTE 15 - PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
1998 1997
---- ----
<S> <C> <C>
Operating income
Dividends received from subsidiary bank $ - $ -
Interest income 161 38
-------- --------
Operating expenses
Professional fees 16 -
Amortization of deferred costs 12 1
Other 9 -
-------- --------
Income before income taxes and equity in
undistributed earnings of subsidiary 124 37
Income tax expense - -
-------- --------
Income before equity in undistributed earnings of bank 124 37
Equity in undistributed earnings of bank (752) (277)
-------- --------
Net loss (628) (240)
======== ========
</TABLE>
F-18
<PAGE>
NOTE 15 - PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (628) $ (240)
Adjustments to reconcile net loss to net cash
from operating activities
Amortization of deferred costs 12 1
Equity in undistributed earnings of bank 752 277
Other assets and other liabilities - (64)
-------- --------
Net cash from operating activities 136 (26)
Cash flows from investing activities
Purchase of securities available-for-sale (119) (2,700)
Purchase of stock in bank - (9,000)
-------- --------
Net cash from investing activities (119) (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 17 5
Beginning cash and cash equivalents 5 -
-------- --------
Cash and cash equivalents at end of period $ 22 $ 5
======== ========
</TABLE>
F-19
March 25, 1999
Dear Shareholders and Friends:
I am sure you have all heard the saying "Time flies when you're having fun."
Well, these past twelve months have certainly flown by. The growth and progress
towards profitability during the first full twelve months of operations have far
exceeded our expectations. If you have followed our quarterly updates, you are
aware that we ended the year December 31, 1998 with total assets of $64.7
million. Even though we experienced rapid asset growth, our capital position
remains strong. The Bank's total capital to total assets ratio at year-end was
12.95%, which is well above the 8% minimum level established by our regulators.
Even more gratifying than the growth was the fact that the fourth quarter ending
December 31, 1998 produced net income of $8,000. Net loss for the year ended
December 31, 1998 was $628,000, which included a provision for loan losses of
$700,000. Our current balance in the allowance for loans losses is 1.5% of gross
loans, while delinquent loans are still virtually nonexistent. Loans 30 days or
more past due at year-end totaled $35,000 or .07% of total loans outstanding.
The economy in Johnson County, which is the market we serve, remains strong. The
unemployment rate was below 2% and new housing permits were at record levels in
1998. The County continues to be the second fastest growing county in the state.
During our first year, Heartland Community Bank originated over 143 first
residential mortgage loans totaling over $14,000,000. The majority of those were
fixed rate mortgages that were sold into the secondary market, eliminating the
interest rate risk for the Bank.
As we look to the future, we intend to maintain a strong capital position and a
high quality loan portfolio representing prudent investments in our community we
serve. Heartland Community Bank strives to be a creative but disciplined
risk-taker which sustains attractive loan growth while maintaining excellent
credit quality.
Other than our rapid growth, we have stayed significantly on schedule with our
original business plan, which included the opening of our second location in
Greenwood. We opened in a temporary location in January and moved into our
permanent location, which is being leased, on May 18, 1998. This location has
proven to be very successful as core deposits have already surpassed those of
the Franklin office and new accounts continue to be opened at a rapid pace. One
thing that continues to spur this growth is the merger activity of the larger
banks and the name changes.
The one absolutely certain thing about the future is that it will involve more
change. However, at Heartland Community Bank our employees and their commitment
will remain the same. We must also have the ability to continually learn in
order to evolve and adapt to our ever-changing environment.
<PAGE>
Satisfying our customers continues to be our top priority. Our marketing dollars
are not spent on flashy promotions or gimmicks. Instead, we invest those funds
in community projects, sponsorships of many youth activities, as well as senior
service organizations. Also this past year, we developed a quarterly newsletter
to better communicate with our customers, which includes asking for feedback
regarding new and potential products and services.
We believe that the number one thing that has led to our success during this
first year is our team of employees. To us this is not just a job, but a family.
We have all embraced and practice the philosophy of "Community Banking" by
becoming involved in local organizations such as Chamber of Commerce, United
Way, Rotary, Sertoma, Health Foundation, Meals on Wheels, and the Big Brothers
program, just to name a few. During the holiday season, we also adopted a needy
family of five providing them food, clothing, and toys. It is this unselfish
commitment to the community that sets us apart from the competition.
Rapid growth creates challenges to look ahead and anticipate needs. There is
great optimism and excitement about the future for Heartland Bancshares, along
with recognition that appropriate diligence and caution will always be required
as we explore new opportunities and challenges. Our plan for the future is an
emphasis on soundness, profitability, and growth in that order of priority.
We also know that the future success of Heartland Bancshares is dependent on the
continued support of its shareholders. With this in mind, the directors and
employees extend a special invitation to each of you to visit our Franklin or
Greenwood location and take advantage of the many services offered by "your"
bank.
Thank you for your continued confidence and support.
Steve Bechman Jeffrey L. Goben
President Executive Vice President
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM MAY 27,
1997 (INCEPTION) THROUGH DECEMBER 31, 1997. (Dollar amounts are in thousands
except per share data.)
SUMMARY
Heartland Bancshares, Inc. ("Heartland") is a one-bank holding company
incorporated May 27, 1997. Heartland's primary asset is its wholly owned banking
subsidiary, Heartland Community Bank ("the Bank"), an Indiana-chartered
commercial bank. The Bank received regulatory approval to open in the fall of
1997 and commenced banking operation December 17, 1997. Heartland'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.
Due to the short period of actual operations preceding December 31, 1997, it is
difficult to make meaningful comparisons between the amounts outstanding at
December 31, 1998 and those at the previous period end.
At December 31, 1998, Heartland had approximately $64.7 million in total assets,
an increase of $50.2 million from December 31, 1997 total of $14.5 million.
Those assets were primarily loans of $49.4 million and investment securities of
$10.5 million at December 31, 1998 compared to December 31, 1997 totals of $4.0
million and $8.0 million respectively. Total deposits at December 31, 1998 were
approximately $52.8 million compared to $2.1 million at December 31, 1997. Total
shareholders' equity was approximately $10.9 million and $11.5 million at
December 31, 1998 and December 31, 1997. The decrease in equity was due to the
net loss for the year ended December 31, 1998.
The Bank's deposits are insured to the maximum extent permitted by law by the
Federal Deposit Insurance Corporation (FDIC). The Bank is subject to
comprehensive regulation, examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC.
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.
YEAR 2000
The Federal Financial Institutions Examination Council (FFIEC) has issued
several statements regarding preparing for the Year 2000 date change and related
issues. Those statements have identified specific actions and plans to be
adopted by financial institutions, in an effort for them to avoid being
materially adversely affected by Year 2000 failure of data processing systems.
As of December 31, 1998, Heartland has implemented the procedures and plans set
out by FFIEC. Heartland has completed the evaluation and testing of computer and
software systems in cooperation with its primary independent data processing
service provider and estimates that the amount of costs that will be incurred to
prepare for the date change will not be significant. Heartland has also
implemented evaluation and testing strategies for all areas of the company and
has begun efforts to communicate with customers and vendors regarding
Heartland's efforts toward Year 2000 compliance.
Although Heartland has no reason to expect that its data processing and other
costs and expenses will be significant or that its financial condition and
results of operations will be adversely affected by Year 2000 problems, this is
a forward-looking statement, and actual expenses may vary materially from
current expectations due to the possibility, among other risks, that the
Company's data processing service provider will be unable to perform in
accordance with the Year 2000 plan and the possibility that the Company's
customers may not be Year 2000 compliant.
RESULTS OF OPERATIONS
Heartland's operating results during the period from inception on May 27, 1997
through December 31, 1997 were limited to various expenses related to the
development stage and 14 calendar days of banking operations at the close of the
period and are therefore not comparable to the operating results for the year
ended December 31, 1998. Changes in income and expenses between the two periods
relate primarily to this difference unless otherwise stated in the following
discussion. Heartland incurred net losses of $628 for the year ended December
31, 1998 or $(.50) per share and $240 or $(.19) per share for the period from
inception, through December 31, 1997.
Comprehensive income consists of net income and other comprehensive income such
as unrealized gains and losses on securities available for sale which are also
recognized as separate components of equity. Comprehensive loss was $588 for the
year ended December 31, 1998 and $227 for the period from inception through
December 31, 1997.
Interest income of $3.1 million was earned during the year ended December 31,
1998 compared to $165 for the period from inception through December 31, 1997
and was primarily generated from investment securities and loans. Interest
expense of $1.3 million was incurred during the year ended December 31, 1998 and
$12 during the period from inception through December 31, 1997. Interest expense
is primarily related to deposits during 1998. For 1997, interest expense was
primarily for related party notes payable used to fund start-up costs and a note
payable obtained during the organization period to purchase the main office
facility. All such notes payable were repaid in 1997.
The net interest income for the year ended December 31, 1998 was $1.8 million
compared to $153 for the period from inception through December 31, 1997.
The provision for loan losses was $700 for the year ended December 31, 1998 and
$46 for the period from inception through December 31, 1997. Total charge-offs
were $4 during the year ended December 31, 1998 and $0 during the period from
inception through December 31, 1997.
There were no recoveries of loans during the periods.
Non-interest income was $56 for the year ended December 31, 1998 and $0 for the
period from inception through December 31, 1997 and consisted of miscellaneous
fees, service charges and other income.
Salaries and benefits expense for the year ended December 31, 1998 was $1.0
million compared to $195 for the period from inception through December 31,
1997. Salaries and benefits were paid to employees during the development stage
for services performed.
Occupancy and equipment expenses of $167 and $28 were incurred during the year
ended December 31, 1998 and the period from inception through December 31, 1997.
During 1998 those expenses consisted primarily of the lease payments for the
branch facility, depreciation and utilities expenses. During the period from
inception through December 31, 1997, occupancy and equipment expenses were
primarily depreciation and utilities expenses. The permanent branch facility was
occupied in the second quarter of 1998 and therefore a full 12 months of lease
expense was not incurred in the year ended December 31, 1998.
Data processing expenses were $183 for the year ended December 31, 1998 and were
$31 for the period from inception through December 31, 1997.
Printing and Supplies expenses for the year ended December 31, 1998 totaled $69,
while they were $31 for the period from inception through December 31, 1997.
Advertising expenses during the year ended December 31, 1998 were $79 and were
$17 during the period from inception through December 31, 1997.
Director fees were $28 for the year ended December 31, 1998. No director fees
were paid during the period from inception through December 31, 1997.
Credit reports and loan expenses were $45 for the year ended December 31, 1998
and were $2 for the period from inception through December 31, 1997
Professional fees of $54 and $7 were incurred for the year ended December 31,
1998 and the period from inception through December 31, 1997.
During the year ended December 31, 1998, Heartland adopted a new accounting
standard that requires that costs associated with the organization and start-up
of a business be expensed as incurred. Consequently, all previously unamortized
costs associated with the organization of Heartland were expensed during 1998 in
the amount of $75. The amortization expense incurred for organizational cost
under the previous accounting standard was $1 for the period from inception
through December 31, 1997.
The remaining expenses of $101 for the year ended December 31, 1998 and $35 for
the period from inception through December 31, 1997, relate to various other
items such as postage, insurance and training.
<PAGE>
LENDING ACTIVITIES
A loan officer's approval is required for loans up to specified amounts, and
either the officer loan committee or the Board loan committee 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. The Bank has established policies regarding
financial statement requirements, credit verification procedures and other
matters intended to minimize underwriting risk. Fire and casualty insurance is
required on all mortgage loans as well as abstracts of title or title insurance.
The following table sets forth information concerning the composition of the
Bank's loan portfolio in dollar amounts stated in thousands and percentages of
net loans.
<TABLE>
<CAPTION>
1998 1997
---- ----
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
TYPE OF LOAN
Commercial loans and leases $33,884 69.58% $ 3,096 79.14%
Residential mortgages
(1-4 family homes) 6,241 12.81 189 4.83
Consumer 9,317 19.13 673 17.20
------- -------- ------- --------
Gross loans 49,442 101.52 3,958 101.17
Allowance for loan losses (742) (1.50) (46) (1.17)
------- -------- ------- --------
Loans, net $48,700 100.00% $ 3,912 100.00%
======= ======== ======= ========
</TABLE>
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, 1998, commercial
loans totaled $33.9 million or 69.6% of the Bank's total loan portfolio.
Commercial loans totaled $3.1 million, or 79.14% of the Bank's loan portfolio at
December 31, 1997.
RESIDENTIAL MORTGAGE LOANS. Residential mortgage loans are predominantly secured
by single-family homes. To reduce its exposure to changes in interest rates, the
Bank currently originates adjustable rate first mortgage loans ("ARMs"), second
mortgage loans and home equity lines of credit, also with adjustable rates. At
December 31, 1998, the Bank's residential mortgage loans totaled approximately
$6.2 million or 12.8% of the Bank's total loan portfolio compared to $189 or
4.83% of the Bank's total loans at December 31, 1997.
The Bank has negotiated with third party mortgage companies an agreement whereby
the Bank 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.
The Bank offers residential construction mortgage loans with maturities of
twelve months or less at interest rates that vary with current market rates. The
application process includes the same items that are required for other
residential mortgage loans and include a submission of accurate plans,
specifications and costs of the home 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. The Bank 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.
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of impaired and nonperforming loans, real estate
owned (acquired in foreclosure), and other repossessed assets. Impaired loans
include loans on which interest recognition has been suspended because they are
90 days past due as to interest or principal and loans where there is a question
about the Bank's ability to collect all principal and interest. Nonperforming
loans include accruing loans that are contractually past due 90 days or more as
to interest or principal payments. Nonperforming assets totaled $3 and $0 at
December 31, 1998 and 1997.
Due to risks inherent in lending, management estimates that a certain amount of
loan balances outstanding at December 31, 1998 and 1997 may not be fully
collected. Although the Bank'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. To reflect
the expense for such losses, a provision for loan losses is charged to earnings.
Actual losses, when identified, 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. Management estimates the
allowance balance required based on known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations may be made for specific
loans, but the entire allowance is available for any loan that, in management's
judgement, should be charged-off.
At December 31, 1998, the balance of the allowance for loan losses was $742 or
1.5% of gross loans outstanding, compared to $46 or 1.2% of gross loans
outstanding at December 31, 1997. Provision charged to earnings in the year
ended December 31, 1998 was $700 compared to $46 for the period from May 27,
1997 (inception) to December 31, 1997. Charge-offs were $4 in the year ended
December 31, 1998 and $0 in the period from May 27, 1997 (inception) to December
31, 1997. There were no recoveries during either period.
DEPOSIT ACTIVITIES
The Bank 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. The Bank also obtains deposits on a bid basis from customers or potential
customers wishing to deposit amounts of at least $100. Deposits from public
entities such as state and local government entities, schools and hospitals
totaled $14.9 million or 28.3% of total deposits at December 31, 1998 and $0 at
December 31, 1997.
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 the Bank daily
and adjusted as often as deemed necessary.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is a measure of Heartland's ability to meet its customers' present and
future deposit withdrawals and/or increased loan demand without unduly
penalizing earnings. Interest rate sensitivity involves the relationship between
rate sensitive assets and liabilities and is an indication of the probable
effects of interest rate movements on Heartland's net interest income. Heartland
manages both its liquidity and interest sensitivity through a coordinated
asset/liability management program directed by the Asset Liability Committee.
Liquidity is provided by projecting loan demand and other financial needs and
then maintaining sufficient funding sources and assets readily convertible into
cash to meet these requirements. Heartland has provided for its liquidity needs
by maintaining adequate balances in money market assets, through growth in core
deposits, maturing loans and investments in its securities portfolio and by
maintaining various short-term borrowing sources. At December 31, 1998,
Heartland had $10.5 million or 16.2% of total assets in investment securities
available for sale. Heartland also had $1.2 million of federal funds sold and an
additional $2 million available from unused federal funds purchased agreements.
As of December 31, 1998, the Bank was awaiting approval for membership to the
Federal Home Loan Bank of Indianapolis (FHLBI), which was received prior to the
date of this report. Membership in the FHLBI will provide an additional source
of borrowing with limits based on availability of specific collateral such as
certain mortgages and investment securities.
Management believes that expected deposit growth, maturing investment securities
and unused borrowing sources will be adequate to meet the liquidity needs for
the foreseeable future.
Heartland manages its rate sensitivity position through the use of variable-rate
loans and by matching funds acquired, having a specific maturity, with loans,
securities or money market investments with similar maturities. Heartland
employs a variety of measurement techniques to identify and manage its exposure
to changing interest rates. A simulation model is used to measure Heartland's
net interest income volatility to changes in the level of interest rates,
interest rate spreads, the shape of the yield curve and changing product growth
patterns and investment strategies. Additionally, a rate sensitivity position is
computed for various repricing intervals by calculating rate sensitivity gaps.
CAPITAL ADEQUACY
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 most restrictive capital adequacy requirement currently in place is from the
agreement with the Federal Deposit Insurance Corporation in conjunction with the
approval for deposit insurance, which requires that a minimum total capital to
total assets ratio of 8% be maintained for the first three years of operation.
The Bank's corresponding capital ratio at December 31, 1998 was 13.0% compared
to 74.3% at December 31, 1997.
SERVICE AREA
The Bank's primary service area is Johnson County, Indiana. Johnson County has
been described as one of the fastest growing Indiana counties by population in
recent years. The majority of the Bank'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. The Bank has
branches in Franklin and Greenwood, which are the two largest cities in the
county.
COMMON STOCK
Heartland had 1,265,000 shares of Common Stock issued and outstanding which are
currently held by approximately 1,800 shareholders (including those shares held
in street name) on March 1, 1999. The daily trading per share price and volume
of shares traded may be found on the NASD Over-the-Counter Bulletin Board
listing under the ticker symbol HRTB.
FINANCIAL STATEMENTS
The items listed below are presented on the following pages for your review in
conjunction with the foregoing discussion:
Independent Auditor's Report on consolidated financial statements.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Income for the year ended December 31, 1998 and
the period from May 27, 1997 (inception) through December 31, 1997.
Consolidated Statements of Changes In Stockholders' Equity for the year
ended December 31, 1998 and the period from May 27, 1997 (inception)
through December 31, 1997.
Consolidated Statements of Cash Flows for the year ended December 31, 1998
the period from May 27, 1997 (inception) through December 31, 1997.
Notes to consolidated financial statements.
<PAGE>
DIRECTORS AND OFFICERS
Heartland Community Bank is a full service commercial bank with a wide array of
easy to understand checking, savings, certificate and IRA deposit accounts,
along with commercial, residential, consumer and home equity loan products. The
following is a list of directors and officers of the Bank:
Directors: Officers:
Gordon R. Dunn, Steve Bechman,
Chairman of the Board President and Chief Executive Officer
Patrick A. Sherman, Jeffrey L. Goben,
Vice Chairman Executive Vice President and
Chief Operating Officer
Sharon Acton, John M. Morin,
Director Vice President Consumer loans
J. Michael Jarvis, K. Keith Fox,
Director Vice President Commercial Loans
John Norton, R. Trent McWilliams,
Director Vice President Business Development
Robert Richardson, Jeff Joyce,
Director Vice President and Controller
James C. Stewart, Pam Fender,
Director Assistant Vice President, Deposit Operations
Steve Bechman, Alexa McKnight,
Director Assistant Vice President, Teller Operations
Jeffrey L. Goben, Terri Webb,
Director Assistant Vice President, Loan Operations
<PAGE>
Banking Facilities
Franklin: Greenwood:
420 North Morton Street (U.S. 31) 489 South State Road 135
Franklin, Indiana 46131 Greenwood, Indiana 46142
Phone (317) 738-3915 Phone (317) 881-3915
FAX (317) 736-5022 FAX (317) 859-3849
Investor Relations/Analyst Contact
Jeff D. Joyce, Chief Financial Officer
(317) 738-2854
(317) 736-5022 facsimile
[email protected]
ANNUAL REPORT ON FORM 10-KSB
UPON WRITTEN REQUEST HEARTLAND WILL PROVIDE TO EACH SHAREHOLDER, WITHOUT CHARGE,
A COPY OF HEARTLAND'S ANNUAL REPORT ON FORM 10-KSB FOR 1998, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. REQUESTS SHOULD BE DIRECTED TO JEFF JOYCE,
CFO, HEARTLAND BANCSHARES, INC. PO BOX 469 FRANKLIN, INDIANA 46131.
HEARTLAND BANCSHARES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 19, 1999
The Annual Meeting of Shareholders of Heartland Bancshares, Inc. will be
held at the Hillview Country Club, 1800 E. King Street, Franklin, Indiana 46131,
on Monday, April 19, 1999, at 6:30 p.m., local time, for the following purposes:
1. To elect three Directors to hold office until the Annual Meeting of
Shareholders in the year 2002 and until their successors are elected
and have qualified.
2. To consider and vote upon the proposal to amend the Heartland
Bancshares, Inc. 1997 Stock Option Plan to increase the number of
shares available for grant from 75,000 to 137,000 shares.
3. To transact such other business as may properly come before the
meeting.
Holders of record of Common Shares of Heartland Bancshares, Inc. at the
close of business on March 5, 1999, are entitled to notice of and to vote at
the Annual Meeting.
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ALL
SHAREHOLDERS, EVEN IF THEY PLAN TO ATTEND THE MEETING, ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
By Order of the Board
of Directors
STEVE BECHMAN
President and Chief Executive
Officer
March 25, 1999
Franklin, Indiana
(ANNUAL REPORT ENCLOSED)
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS OF
HEARTLAND BANCSHARES, INC.
April 19, 1999
This Proxy Statement is being furnished to shareholders on or about March
25, 1999, in connection with the solicitation by the Board of Directors of
Heartland Bancshares, Inc. (the "Company"), 420 N. Morton Street, Franklin,
Indiana 46131, of proxies to be voted at the Annual Meeting of Shareholders to
be held at 6:30 p.m., local time, on Monday, April 19, 1999, at Hillview Country
Club, 1800 E. King Street, Franklin, Indiana 46131. The Company is the parent
holding company for Heartland Community Bank, which has its main office in
Franklin, Indiana, and a branch office in Greenwood, Indiana.
At the close of business on March 5, 1999, the record date for the Annual
Meeting, there were 1,265,000 Common Shares outstanding and entitled to vote at
the Annual Meeting. On all matters, including the election of Directors, each
shareholder will have one vote for each share held.
If the enclosed form of proxy is executed and returned, it may
nevertheless be revoked at any time insofar as it has not been exercised. The
proxy may be revoked by either (a) filing with the Secretary (or other officer
or agent of the Company authorized to tabulate votes) (i) a written instrument
revoking the proxy or (ii) a subsequently dated proxy, or (b) attending the
Annual Meeting and voting in person. Unless revoked, the proxy will be voted at
the Annual Meeting in accordance with the instructions of the shareholder as
indicated on the proxy. If no instructions are given, the shares will be voted
as recommended by the Directors.
PROPOSAL 1
ELECTION OF DIRECTORS
Nominees
Three Directors are to be elected at the Annual Meeting. The Board of
Directors, which currently consists of nine members, is divided into three
classes of equal size with the term of one class expiring each year. Generally,
each Director serves until the annual meeting of the shareholders held in the
year that is three years after such Director's election and thereafter until
such Director's successor is elected and has qualified or until the earlier of
the Director's resignation, disqualification, removal or death. The terms of the
current Directors expire as follows: 1999 -- Steve Bechman, Gordon R. Dunn and
James C. Stewart; 2000 -- Sharon Acton, Jeffrey L. Goben and John Norton; and
2001 -- J. Michael Jarvis, Robert Richardson and Patrick A. Sherman.
<PAGE>
Each Director will be elected by a plurality of the votes cast in the
election. Shares present but not voted for any nominee do not affect the
determination of whether a nominee has received a plurality of the votes cast.
It is the intention of the persons named in the accompanying form of proxy
to vote such proxy for the election to the Board of Directors of Steve Bechman,
Gordon R. Dunn and James C. Stewart, each of whom is now a Director whose
present term expires this year. Each such person has indicated that he will
accept nomination and election as a Director. If, however, any such person is
unable or unwilling to accept nomination or election, it is the intention of the
Board of Directors to nominate such other person as Director as it may in its
discretion determine, in which event the shares subject to the proxy will be
voted for that person.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE THREE NOMINEES
IDENTIFIED ABOVE (ITEM 1 ON THE PROXY).
<PAGE>
The following table presents certain information as of March 1, 1999,
regarding the current Directors 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 3.0%, 1.5% and 2.2%, respectively.
<TABLE>
<CAPTION>
Name, Shares
Present Principal Beneficially
Occupation and Age Owned
------------------ -----
<S> <C>
Sharon Acton(1),(15) 4,671
Manager, Franklin/Greenwood District of
Cinergy/PSI (energy services company)
Age 51
Steve Bechman*(2),(3),(16) 37,851
President and Chief Executive Officer of
the Company and Bank
Age 47
Gordon R. Dunn*(4),(5),(15) 18,491
Retired
Age 77
Jeffrey L. Goben(6),(7),(16) 27,991
Executive Vice President and Chief
Operating Officer
Age 46
J. Michael Jarvis(8),(15) 8,001
President and Part Owner, Power Investments,
Inc. Division of Delco Remy International,
Inc. (engine remanufacturer)
Age 55
John Norton(9),(15) 9,401
President and Owner, Norton Farms, Inc.
Age 50
Robert Richardson(10),(15) 6,001
President and Majority Owner, MegaSys, Inc.
(logistics company)
Age 37
Patrick A. Sherman(11),(15) 9,701
President and Part Owner, Sherman &
Armbruster P.C. (a public accounting firm)
Age 50
James C. Stewart*(12),(13),(15) 12,001
Consultant, Bauer Built Corp.
Age 47
All Directors and Executive Officers
as a group (14 persons)(14),(16) 155,471
<FN>
*Nominee
(1) Includes 500 shares that Ms. Acton holds jointly with her spouse and 4,000
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 12,578 shares that Mr. Bechman holds jointly with his spouse, 700
shares he holds for his daughter and 9,650 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 1,000 shares that Mr. Dunn holds jointly with his spouse, 5,000
shares held in a trust for which Mr. Dunn acts as trustee, 500 shares held
jointly by Mr. Dunn's spouse and her father and 4,000 shares that Mr. Dunn
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 8,961 shares that Mr. Goben holds jointly with his spouse and
sons and 7,650 shares that he has the right to acquire upon the exercise
of stock options.
(8) Includes 4,000 shares Mr. Jarvis has the right to acquire upon the
exercise of stock options.
(9) Includes 200 shares that Mr. Norton holds jointly with his children, 100
shares held by Mr. Norton's spouse and 4,000 shares that Mr. Norton has
the right to acquire upon the exercise of stock options.
(10) Includes 4,000 shares that Mr. Richardson has the right to acquire upon
the exercise of stock options.
(11) Includes 4,000 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 1,020 shares that Mr. Stewart holds jointly with his spouse, 700
shares owned by Mr. Stewart's spouse and 4,000 shares that Mr. Stewart has
the right to acquire upon the exercise of stock options.
(14) Includes 56,000 shares that Directors and executive officers have the
right to acquire upon the exercise of stock options and 33,150 shares held
jointly with or as custodian for family members.
(15) Does not include an additional 3,000 shares that each indicated Director
may acquire under stock options that are not yet exercisable but will
become exercisable upon continued service by such Director on the Board of
Directors.
(16) Does not include 18,600 shares Mr. Bechman may acquire, 15,600 shares Mr.
Goben may acquire or 22,800 shares other executive officers may acquire
under stock options that are not yet exercisable but will become
exercisable upon their continued employment with the Company.
</FN>
</TABLE>
Committees and Attendance
The Board of Directors of the Company held twelve meetings during 1998.
The Company's Board of Directors has a Stock Option Committee but does not have
standing audit, nominating or compensation committees. The members of the Stock
Option Committee are Directors Dunn and Sherman, both of whom are outside
Directors. The Stock Option Committee administers the Company's 1997 Stock
Option Plan, which provides for the grant of options to key employees of the
Company and Bank, and the Company's 1997 Stock Option Plan for Non-Employee
Directors. The Stock Option Committee did not meet during 1998, but, as
discussed below in connection with the proposal to amend the 1997 Stock Option
Plan, the Stock Option Committee did meet in January 1999 to consider options
grants based on service during 1998.
All of the members of the Company's Board of Directors also serve on the
Bank's Board of Directors. The Bank's Board of Directors has standing audit and
compensation committees. The members of the Audit Committee are Directors Acton,
Norton, Sherman and Stewart. The Audit Committee, which met three times during
1998, reviews with the Bank's independent auditors the scope of the audit to be
undertaken and the results of the audit and also reviews internal audits. The
members of the Compensation Committee are Directors Dunn and Sherman. The
Compensation Committee, which met once during 1998, sets salaries and bonuses
for the President and Chief Executive Officer. Except for Mr. Jarvis, each of
the Directors attended at least 75 percent of the aggregate number of meetings
of the Board of Directors of the Company and Bank and the committees on which he
or she served during 1998.
Compensation of Directors
Options
In 1997 members of the Company's Board of Directors who were not employees
of the Company or Bank were granted stock options for their service on the
Board. Each Director was granted an option to acquire 4,000 Common Shares at an
exercise price of $10.00 per share. The options were immediately exercisable for
1,000 Common Shares and become exercisable (assuming continued service on the
Board) for an additional 1,000 Common Shares at each successive Annual Meeting
of Shareholders, until exercisable in full. In January 1999, the Board of
Directors of the Company amended the 1997 Stock Option Plan for Non-Employee
Directors to award additional options to each non-employee Director equal to
3,000 shares at an exercise price of $10.00 per share. The options vested
immediately with respect to 1,000 shares and will become exercisable with
respect to an additional 1,000 shares at each Annual Meeting of Shareholders
beginning with the meeting in the year 2000 until exercisable in full.
<PAGE>
Cash Compensation
During 1998, non-employee Directors of the Bank received $300 per month
(the Chairman received $500 per month) regardless of attendance at Board
meetings. Directors do not receive any additional compensation for serving on
the Company's Board or on Board committees of the Company or Bank.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid to
the Company's Chief Executive Officer for 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Awards
Compensation
Securities
Name and Underlying
Principal Position Year Salary Bonus Options/SAR
------------------ ---- ------ ----- -----------
<S> <C> <C> <C> <C>
Steve Bechman, 1998 $ 115,000 $0 0
Chief Executive 1997 $ 15,481(1) $0 20,000
Officer
<FN>
(1) Mr. Bechman's compensation was for the period from November 1, 1997
through December 31, 1997.
</FN>
</TABLE>
Aggregated Option/SAR Exercises In
Last Fiscal Year and Fiscal Year-End
Option/SAR Values
No option grants or exercises occurred during 1998. The following table
sets forth information with respect to the value of options held by Mr. Bechman
as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised In-the-Money Options/SARs
Options/SARs at at Fiscal Year-End ($)
Fiscal
Year-End (#)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Steve Bechman 8,000/12,000(1) 0 / 0(2)
<PAGE>
<FN>
(1) The options were granted pursuant to the Heartland Bancshares, Inc. 1997
Stock Option Plan (the "Employee Option Plan"), which 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 not less than 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.
(2) 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 31, 1998 ($8.50)
did not exceed the exercise price of the options.
</FN>
</TABLE>
Certain Business Relationships And Transactions
During 1998, the Bank had, and the Bank 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.
PROPOSAL 2
APPROVAL OF THE AMENDMENT OF THE
HEARTLAND BANCSHARES, INC.
1997 STOCK OPTION PLAN
On January 18, 1999, the Company's Board of Directors amended, subject to
shareholder approval, the Heartland Bancshares, Inc. 1997 Stock Option Plan (the
"Option Plan") to increase the aggregate number of shares of the Company's
Common Stock that may be granted pursuant to the Option Plan from 75,000 to
137,000 shares. Shareholder approval of the amendment to the Option Plan is
being sought at the 1999 Annual Meeting of Shareholders.
The Option Plan provides for the grant of incentive stock options or
non-qualified stock options to key employees of the Company or the Bank. The
Board of Directors amended the Option Plan to enable the Committee that
administers the Option Plan to have sufficient authorized shares in the Option
Plan to make additional grants in January 1999 to the Company's executive
officers and to have 52,000 additional shares available for future grants to
employees under the Option Plan. The Company's executive officers were not
granted any increase in their base salaries for 1999, with one exception, and
the Board of Directors therefore believed that the January 1999 grants by the
Committee to the executives was in the Company's best interests in order to
reward the executives in noncash remuneration for their efforts in 1998 and to
keep their interests closely aligned to those of the Company's shareholders.
Subsequent to the adoption of the amendment to the Option Plan, the
Committee granted, subject to shareholder approval, options to the following
executive officers for the number of shares indicated: Steve Bechman: 8,250
shares; Jeffrey L. Goben: 8,250 shares; K. Keith Fox: 4,500 shares; John Morin:
4,500 shares; and Jeffery D. Joyce: 4,500 shares.
<PAGE>
The amendment to the Option Plan will be adopted if it is approved by a
majority of the votes cast at the Annual Meeting of Shareholders, provided that
a majority of outstanding Common Shares is present in person or by proxy and
entitled to vote at the Annual Meeting. Shares voted "for" the Option Plan and
shares represented by return proxies that do not contain instructions to vote
against the Option Plan or to abstain from voting will be counted as shares cast
for the approval of the Option Plan. Abstentions and broker non-votes will not
be treated as votes cast "for" or "against" the Option Plan but will be included
for purposes of determining whether a quorum is present.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
APPROVE THE AMENDMENT TO THE HEARTLAND BANCSHARES, INC. 1997 STOCK OPTION PLAN
(ITEM 2 ON THE PROXY).
APPOINTMENT OF AUDITORS
Crowe, Chizek and Company LLP ("Crowe Chizek") served as auditors for the
Company in 1998. Although it is anticipated that Crowe Chizek will be selected,
the Audit Committee has not yet considered the appointment of auditors for 1999.
Representatives of Crowe Chizek will be present at the Annual Meeting, will have
the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
PRINCIPAL OWNERS OF COMMON SHARES
To the knowledge of the Company's management, no person, or group, known
by management beneficially owns more than five percent of the Company's
outstanding Common Shares.
OTHER MATTERS
The Board of Directors knows of no matters, other than the matters
reported above, that are to be brought before the Annual Meeting. If other
matters properly come before the Annual Meeting, however, it is the intention of
the persons named in the enclosed form of proxy to vote such proxy in accordance
with their judgment on such matters.
EXPENSES
All expenses in connection with this solicitation of proxies will be borne
by the Company.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
A shareholder desiring to submit a proposal for inclusion in the Company's
proxy statement for the 2000 Annual Meeting of Shareholders must deliver the
proposal so that it is received by the Company no later than November 26, 1999.
Proposals should be mailed to Jeffrey L. Goben, 420 N. Morton Street, Franklin,
Indiana 46131, by certified mail, return-receipt requested.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the filer's Form 10-KSB for the Year
ended December 31, 1998, and is filed in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001042905
<NAME> Heartland Bancshares, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,963
<INT-BEARING-DEPOSITS> 0
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0
0
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<INCOME-PRETAX> (628)
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<EPS-PRIMARY> (.50)
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</TABLE>
