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, 1999
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 22, 2000 of $7.125 per
share $8,254,028
Shares of common stock outstanding as of March 22, 2000: 1,265,000
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Shareholders of Heartland Bancshares, Inc.
for 1999, to the extent stated herein, are incorporated by reference from
Exhibit 13 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 24, 2000, to the extent stated
herein, are incorporated by reference from Exhibit 99.1 into Part III.
<PAGE>
FORM 10-KSB TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7. Financial Statements and Supplementary Data
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors Executive Officers Promoters and Control
Persons of Heartland
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners
and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
ITEM 1. DESCRIPTION OF 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, 1999, Heartland had approximately $110,139 of assets, loans of
$91,045, deposits of approximately $88,519 and shareholders' equity of
approximately $11,643. The Bank operates from offices located in Franklin and
Greenwood, Indiana and from its newest branch office location in Bargersville
Indiana opened in January 2000. As of December 31, 1999, The Bank had 43 full
time equivalent employees. The Bank utilizes a leased employee arrangement with
a third party company, where-by all employees are leased to the Bank from the
third party company. The arrangement allows for employees to participate in
group benefits of the third party company. The third party company also
administers the majority of human resource activities including payroll, payroll
taxes and policy administration. 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 the Bank consists primarily of attracting deposits from the
general public, originating commercial, residential real estate and consumer
loans and purchasing certain investment securities. The Bank in November 1999
opened a full-service brokerage department in order to sell mutual funds and
other non-deposit investment products and in January 2000 opened a certificate
of deposit brokerage program.
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.
<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. The Bank 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, 1999 and
1998, Heartland had $0 in federal funds borrowed.
The Bank also borrows funds from the Federal Home Loan Bank of Indianapolis
(FHLBI). The borrowings consist of three advances as follows at December 31,
1999:
Maturity Date and Interest Rate Balance
-------
February 28, 2000 5.95% $ 1,000
June 19, 2000 5.63% 4,000
July 7, 2000 Adjustable 6.03% 1,000
--------
Total $ 6,000
========
Each advance is payable at maturity date, generally with a prepayment penalty.
The advances are collateralized by a blanket pledge of mortgage loans and
eligible securities. Interest is payable monthly. There were no FHLBI advances
outstanding at December 31, 1998.
Additional information regarding Heartland and the Bank is included in
Heartland's Annual Report to Shareholders for 1999, which is filed as Exhibit
13.
<PAGE>
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 1998.
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, and a
branch in Bargersville, in southwestern Johnson 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.
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 that the Federal Reserve has determined to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Under the amendments to the BHCA made in 1999 by the
Gramm-Leach-Bliley Act, a bank holding company meeting certain financial and
other requirements may elect to be treated as a "financial holding company" and
engage in or own shares of companies that are engaged in, insurance
underwriting, securities underwriting, merchant banking, and other financial
services activities.
<PAGE>
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.
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
The Bank 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.
<PAGE>
Heartland is not required to comply with Federal Reserve capital requirements
applicable to bank holding companies because it has consolidated assets of less
than $150,000. However, Heartland has agreed with the Federal Reserve not to
incur debt at the holding company level outside the ordinary course of business
prior to October 3, 2002 without Federal Reserve approval.
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, 1999 and December 31, 1998.
As of December 31, 1999 and 1998, the Bank was categorized as "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.
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
1999
Total capital
(to risk weighted assets) $12,589 14.1% $7,118 8% $8,898 10%
Tier 1 capital
(to risk weighted assets) 11,474 12.9 3,559 4 5,339 6
Tier 1 capital
(to average assets) 11,474 10.5 4,358 4 5,448 5
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
In addition, a more 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,
1999 was 10.2% compared to 13.0% at December 31, 1998.
<PAGE>
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, 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;
(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; (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. Heartland 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.
<PAGE>
Selected Financial Data
The information presented below should be read in conjunction with the
consolidated financial statements, which are included under Item 8, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 6.
May 27, 1997
Year Ended Year Ended (inception)
December 31, December 31, through
Income Statement Data: 1999 1998 December 31, 1997
---- ---- -----------------
Total interest income $ 7,573 $ 3,140 $ 165
Total interest expense 3,612 1,307 12
Net interest income 3,961 1,833 153
Provision for loan losses 656 700 46
Noninterest income 202 56 -
Noninterest Expense 2,352 1,817 347
Provision for income taxes 182 - -
Net income/(loss) $ 973 $ (628) $ (240)
Net income/(loss) per share $ .77 $ (.50) $ (.19)
Average shares 1,265,000 1,265,000 1,265,000
At December 31, At December 31, At December 31,
1999 1998 1997
---- ---- ----
Balance Sheet Data:
Total Assets $ 110,139 $ 64,660 $ 14,519
Loans, Net of Allowance
for Loan Losses 89,680 48,700 3,912
Demand & Savings Deposits 38,135 17,738 1,591
Time Deposits 50,384 35,016 488
Stockholders' Equity 11,643 10,916 11,504
Book Value Per Share $ 9.20 $ 8.63 $ 9.09
Equity to Asset Ratio 10.57% 16.88% 79.23%
<PAGE>
AVERAGE BALANCES, INCOME, EXPENSES AND RATES. The following tables depict for
the years ended December 31, 1999 and 1998, and the period from May 27, 1997
(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>
May 27, 1997
Year Ended Year Ended (inception) through
December 31,1999 December 31, 1998 December 31, 1997
---------------- ----------------- -----------------
Average/ Yield/ Average/ Yield/ Average/ Yield/
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Federal funds sold $ 1,818 5.28% $ 2,581 3.83% $ 729 5.49%
Taxable securities 12,057 6.00 8,647 6.05 1,635 6.18
Non-taxable securities 605 3.64 152 3.71 -
Loans 72,340 9.31 25,047 10.03 230 10.43
------- ---- -------- ----- ------- -----
Total interest earning
assets $86,820 8.72 $ 36,427 8.62 $ 2,594 6.36
======= ==== ======== ===== ======= =====
Interest bearing liabilities
Interest-bearing demand,
Money Market and
Savings Deposits $21,285 3.96% $ 6,718 4.01% $ 20 3.77%
Time deposits 47,088 5.45 18,048 5.70 22 6.00
Short-term borrowings 1,151 4.26 150 5.82 128 8.29
Other borrowings 2,745 5.68 - -
------- ---- -------- ---- ------- -----
Total interest bearing
liabilities $72,269 5.00 $ 24,916 5.25 $ 170 7.47%
======= ==== ======== ==== ======= ====
</TABLE>
1999 1998 1997
---- ---- ----
Average yield on interest-earning assets 8.72% 8.62% 6.36%
Average rate paid on interest-bearing liabilities 5.00 5.25 7.47
Net interest spread 3.72 3.37 (1.11)
Net interest margin (net interest earnings divided
by average total interest-earning assets) 4.56 5.03 5.90
Return on average assets 1.09 (1.63) (7.56)
Return on average equity 8.54 (5.65) (8.29)
<PAGE>
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Heartland's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.
Year ended December 31,
-----------------------
1999 vs. 1998 1998 vs. 1997
------------- -------------
Increase (Decrease) Increase (Decrease)
due to due to
------ ------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income
attributable to:
Loans ............ $ 4,414 $(194) $ 4,220 $2,489 $ (1) $ 2,488
Securities ....... 231 (15) 216 431 (3) 428
Other interest-
earning assets(1) (34) 31 (3) 74 (15) 59
------- ----- ------- ------ ---- -------
Total interest-
earning assets 4,611 (178) 4,433 2,994 (19) 2,975
Interest expense
attributable to:
Money Market and
Savings Deposits 576 (3) 573 268 -- 268
Time deposits .... 1,584 (48) 1,536 1,027 1 1,028
Short-term borrowings 43 (3) 40 2 (4) (2)
Other borrowings . 156 -- 156 -- -- --
----- ---- ----- ------ ----- ------
Total interest-bearing
liabilities 2,359 (54) 2,305 1,297 (3) 1,294
------- ----- ------- ------ ---- -------
Increase (decrease) in
net interest income $ 2,252 $(124) $ 2,128 $1,697 $(16) $ 1,681
======= ===== ======= ====== ==== =======
(1) Includes federal funds sold and interest-bearing deposits in other
financial institutions.
<PAGE>
LOANS. Heartland's loans, before adjusting for the allowance for loan losses,
totaled $91,045 at December 31, 1999, $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,
1999,1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
Percent of Percent of Percent of
Amount Net Loans Amount Net Loans Amount Net Loans
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Commercial loans and leases $42,778 47.70% $26,475 54.37% $ 2,960 75.66%
Real estate construction 17,109 19.08 7,409 15.21 136 3.48
Residential mortgages
(1-4 family homes) 15,069 16.80 6,241 12.81 189 4.83
Consumer 16,089 17.94 9,317 19.13 673 17.20
------- ------ ------- ------ ------- ------
Gross loans 91,045 101.52 49,442 101.52 3,958 101.17
Allowance for loan losses (1,365) (1.52) (742) (1.52) (46) (1.17)
------- ------ ------- ------ ------- ------
Loans, net $89,680 100.00% $48,700 100.00% $ 3,912 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information at
December 31, 1999 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.
Remaining Maturities
One Year Over one to Over five
Amount or less five years years
------ ------- ---------- -----
TYPE OF LOAN
Commercial loans and leases $42,778 $12,121 $ 4,216 $26,441
Real estate construction 17,109 11,993 5,116 -
Residential mortgages
(1-4 family homes) 15,069 - 515 14,554
Consumer 16,089 4,482 8,644 2,963
------- ------- ------- -------
Total $91,045 $28,596 $18,491 $43,958
======= ======= ======= =======
Nonperforming loans include accruing loans that are contractually past due 90
days or more as to interest or principal payments. Nonperforming loans totaled
$137, $0 and $0 at December 31, 1999, 1998 and 1997. At December 31, 1999,
nonperforming loans included $100 in residential real estate loans and $37 in
consumer loans. Non-accrual 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. Non-accrual loans totaled $138, $0 and $0 at December
31, 1999, 1998 and 1997 and were comprised entirely of residential real estate
loans.
<PAGE>
ALLOWANCE FOR LOAN LOSSES. Heartland maintains an allowance for loan losses to
provide a valuation allowance for loans that might not be repaid. Senior
management, with oversight responsibility provided by the Board of Directors,
reviews on a monthly basis the allowance for loan losses as it relates to a
number of relevant factors, including, but not limited to, historical trends in
the level of nonperforming assets and classified loans, current charge-offs and
the amount of the allowance as a percent of the total loan portfolio. Due to a
limited amount of historic experience, Heartland's provisions since
incorporation have been influenced by national loan loss experience applied to
the portfolio outstanding. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments, and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. At December 31, 1999,
Heartland's allowance for loan losses totaled $1,365.
The following table provides an allocation of Heartland's allowance for possible
loan losses as of each of the following dates:
At December 31,
1999 1998 1997
---- ---- ----
Loan type
Commercial and leases $ 641 $ 397 $ 34
Real estate construction 257 111 2
Residential mortgages 226 94 2
Consumer 241 140 8
------- ------- -------
Total allowance for
loan losses $ 1,365 $ 742 $ 46
======= ======= =======
The provision for loan losses charged to earnings was $656, $700 and $46 for the
years ended December 31, 1999, 1998 and 1997. Net charge-offs were $33, $4 and
$0 during the years ended December 31, 1999, 1998 and 1997. All charge-offs were
consumer loans.
<PAGE>
SECURITIES. The following table sets forth the carrying value of Heartland's
investment portfolio as of December 31:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999
U.S. Government and its agencies $ 9,400 $ - $ (210) $ 9,190
Obligations of states and
political subdivisions 613 - (12) 601
Mortgage backed securities 2,705 1 (50) 2,656
Corporates 877 - (47) 830
FHLB stock 400 - - 400
-------- ------- -------- -------
$ 13,995 $ 1 $ (319) $13,677
======== ======= ======== =======
1998
U.S. Government and its agencies $ 9,577 $ 71 $ (16) $ 9,632
Obligations of states and
political subdivisions 614 1 (3) 612
Mortgage backed 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
======== ====== ======== =======
The following table sets forth the maturities of investment securities at
December 31, 1999 and the weighted-average yield (on a tax equivalent basis) on
such securities.
Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Due in one year or less $ 5,640 $ 5,488 5.80%
Due after one year through five years 5,013 4,897 6.00
Due after five years through ten years 237 236 6.90
Due after ten years - - -
Mortgage-backed securities 2,705 2,656 7.12
FHLB stock 400 400 8.00
-------- -------- ----
Total $ 13,995 $ 13,677 6.21%
======== ========= ====
1. Computation of yields is based on amortized cost.
<PAGE>
The following table sets forth the amounts of Heartland's interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1999, which
are scheduled to reprice or mature in each of the time periods shown. The amount
of assets and liabilities shown which reprice or mature in a given period were
determined in accordance with the contractual terms of the asset or liability.
This table does not necessarily indicate the impact of general interest rate
movements on Heartland's net interest income because the repricing of certain
categories of assets and liabilities is subject to the interest rate
environment, competition and other factors beyond Heartland's control. As a
result, certain assets and liabilities may in fact mature or reprice at
different times and in different volumes than indicated.
<TABLE>
<CAPTION>
Within 3 4 - 12 1 through 5
Months Months years Over 5 years Total
------ ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 75 $ 0 $ 0 $ 0 $ 75
Securities 4,387 1,101 4,897 3,292 13,677
Loans 36,057 6,530 30,573 17,885 91,045
-------- --------- --------- -------- ---------
Total interest-earning
assets 40,519 7,631 35,470 21,177 104,797
-------- --------- --------- -------- ---------
Interest-bearing
liabilities:
Interest bearing
demand and savings 29,428 0 0 0 29,428
deposits
Time deposits 16,905 13,869 19,610 0 50,384
Federal Funds Purchased 0 0 0 0 0
Short-term borrowings 3,519 0 0 0 3,519
Other borrowings 2,000 4,000 0 0 6,000
-------- --------- --------- --------- ---------
Total interest-bearing
liabilities 51,852 17,869 19,610 0 89,331
-------- --------- --------- -------- ---------
Interest-earning assets
less
Interest-bearing
liabilities $(11,333) $ (10,238) $ 15,860 $ 21,177 $ 15,466
======== ========= ========= ======== =========
Cumulative interest-rate
sensitivity gap $(11,333) $ (21,571) $ (5,711) $ 15,466
======== ========= ========= ========
Cumulative interest-rate
gap as a percentage of
total interest earning
assets (10.81)% (20.58)% (5.45)% 14.76%
====== ====== ===== =====
</TABLE>
<PAGE>
CERTIFICATES OF DEPOSIT. The following table presents the amount of Heartland's
jumbo certificates of deposit with principal balances greater than $100,000 by
the time remaining until maturity as of December 31, 1999:
At December 31,
Maturity 1999
----
Three months or less $ 10,984
Over 3 months to 6 months 2,406
Over 6 months to 12 months 3,795
Over 12 months 5,488
-- ----------
Total $ 22,673
==========
ITEM 2. DESCRIPTION OF PROPERTY
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 in 1997 prior to the opening of Heartland.
In 1998, the Bank entered into a lease agreement of a branch office in
Greenwood, Indiana. The lease 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.
The Bank has also entered into a lease of a parcel of land in Bargersville,
Indiana, commencing in January 2000. The Bank is constructing a branch facility
on the land in 2000 and will own the building. The land lease has a term of 5
years with options to renew.
Heartland and the Bank presently do not invest in real estate other than real
estate acquired for purposes of operations and mortgage interests in real estate
securing loans made by the Bank in the ordinary course of business. The Board of
Directors of the Bank from time to time specifies its policies as to the amounts
and types of mortgage loans that the Bank may originate or acquire, and these
policies may be changed without action by Heartland shareholders. Mortgage loans
are made for interest income purposes, not for capital gain.
ITEM 3. LEGAL PROCEEDINGS
Heartland and the Bank are not involved in any legal proceedings other than
routine litigation incidental to the business.
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, 1999.
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information required for this item is included in the section headed "COMMON
STOCK." in Exhibit 13 (The Registrant's Annual Report to Shareholders for the
year ended December 31, 1999), which section is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information required for this item is included in the section headed
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." in Exhibit 13 (The Registrant's Annual Report to Shareholders for
the year ended December 31, 1999,) which section is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS.
Information required for this item is included in the section headed "FINANCIAL
STATEMENTS." in Exhibit 13 (The Registrant's Annual Report to Shareholders for
the year ended December 31, 1999,) which section is incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
HEARTLAND; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information relating to directors and executive officers of Heartland is
included in the section headed "Election of Directors" in Exhibit 99.1, the 2000
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, Consumer Lending
Age 50
K. Keith Fox2
Vice President, Commercial Lending
Age 40
R. Trent McWilliams3
Vice President, Business Development
Age 48
<PAGE>
Jeff Joyce4
Vice President and Chief Financial Officer
Age 29
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.
Section 16(a) Compliance:
Heartland has no class of equity securities registered with the Commission under
Section 12 of the Securities Exchange Act of 1934, as amended, and Section 16(a)
is therefore inapplicable to its securities.
ITEM 10. 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 Exhibit 99.1, the 2000 Proxy
Statement of Heartland, which sections are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is included under the captions "ELECTION OF
DIRECTORS" and "PRINCIPAL OWNERS OF COMMON SHARES" in Exhibit 99.1, The 2000
Proxy Statement of Heartland, which section is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is included under the caption "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" in Exhibit 99.1, The 2000 Proxy
Statement of Heartland, which section is incorporated herein by reference.
<PAGE>
ITEM 13. EXHIBITS 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, as amended, which is incorporated by
reference to Exhibit 10.1 in the Regestrant's Quarterly Report
on the Form 10-QSB for quarter ended June 30, 1999
10.2 1997 Stock Option Plan for Nonemployee Directors, as amended, which is
incorporated by reference to Exhibit 10.1 in the Regestrant's Quarterly
Report on the Form 10-QSB for quarter ended June 30, 1999
10.3 Lease (Greenwood, Indiana property), which is incorporated by reference to
Exhibit 10.5 in the Form SB-2
13 The Registrant's Annual Report to Shareholders for the year ended
December 31, 1999 21 Subsidiaries of the Registrant and names under which
the Registrant is doing business 27 Financial Data Schedule (EDGAR filing
only)
99.1 The Registrant's 2000 Proxy Statement 99.2 Form of Proxy for 2000 Annual
Meeting
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December 31,
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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 29th day of March, 2000.
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 29, 2000
- - -----------------------------
Steven L. Bechman, Director
(Chief Executive Officer)
/s/ Gordon Dunn March 29, 2000
- - -----------------------------
Gordon Dunn, Chairman
/s/ Sharon Acton March 29, 2000
- - -----------------------------
Sharon Acton, Director
/s/ Jeffrey L. Goben March 29, 2000
- - -----------------------------
Jeffrey L. Goben, Director
/s/ J. Michael Jarvis March 29, 2000
- - -----------------------------
J. Michael Jarvis, Director
/s/ John Norton March 29, 2000
- - -----------------------------
John Norton, Director
/s/ Robert Richardson March 29, 2000
- - -----------------------------
Robert Richardson, Director
/s/ Patrick A. Sherman March 29, 2000
- - -----------------------------
Patrick A. Sherman, Director
/s/ James C. Stewart March 29, 2000
- - -----------------------------
James C. Stewart, Director
/s/ Jeffery D. Joyce March 29, 2000
- - -----------------------------
Jeffery D. Joyce, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 25, 2000
Dear Shareholders and Friends:
December 31, 1999 marked the completion of the second full year of operations
for Heartland Bancshares, Inc. and a year in which we continue to outpace our
original projections. We ended the year with assets of $110 million, an increase
of 70% from the previous year-end. More importantly, we recorded net income of
$973,000 or $.77 per share with an efficiency ratio of 56.5%.
While the growth has far exceeded our expectations, we have been able to control
the overhead, which is evidenced by an efficiency ratio equal to or better than
many seasoned banks. The earnings covered our original start-up losses and have
placed us in a positive retained earnings position.
The economy of Johnson County, which is the market we serve, continues to be
strong, recording a record number of building permits in 1999 and boasting an
unemployment percentage under 2%. The cities of Franklin and Greenwood, where we
have offices, were listed as the 5th and 7th fastest growing cities in the state
respectively according to the U.S. Census Bureau's population estimate for 1998.
According to FDIC June 30, 1999 statistics, Heartland Community Bank had climbed
to fourth place in terms of market share of deposits in Johnson County. We
consider this quite an accomplishment after 18 months of operation in a market
with 15 other banks.
While many banks in 1999 expended many resources on preparing for Y2K, we were
fortunate to have purchased Y2K ready hardware and software from the beginning.
Nevertheless, we were prepared, as were all financial institutions, to deal with
any unforeseen circumstances. Fortunately, there were no problems, and we
incurred very little expense through the preparation for and passing of the
event.
Our original plan has been to grow our two locations and establish a solid level
of profitability, then pursue other locations and services. In August of 1999,
we reached $100 million in assets and by November of 1999, we recouped all our
start-up losses, causing us to begin recording income tax expense.
In October 1999, we introduced Heartline 24, a 24-hour voice response system in
reaction to a customer survey taken earlier in the year. In November 1999, we
introduced Heartland Investment Services, a full-service brokerage department
staffed by two very experienced individuals from a competitive institution in
our market. In just two months of operations, they have generated more business
than projected and will continue to contribute to fee income.
On January 3, 2000, we opened a Certificate of Deposit Brokerage Program. We
were fortunate to attract two experienced individuals for this area who will
also contribute a positive amount to non-interest income. We have not changed
our service charge structure since we opened the bank. By controlling overhead
and providing services such as these, we will be able to maintain a reasonable
fee structure for our customers and generate an adequate profit for our
shareholders.
<PAGE>
Also in January 2000, we opened our third location in Bargersville about six
miles west of our Franklin office and seven miles south of our Greenwood office.
We opened in a temporary facility with the anticipation of the permanent
building being completed in June. The permanent facility will be owned by the
Bank while the land on which it is built will be leased. We feel there is good
opportunity for core deposit growth in this location, which is staffed with
experienced staff who came to us from a local competitor.
We continue to believe our success is due to our tremendous group of employees.
Our staff has grown to 48 at year-end. The customers have embraced the excellent
service and expertise our team of employees have brought to the table. Our
involvement in various community agencies and activities continue to set us
apart from the other banks in the market.
While our performance has been excellent, our disappointment, as well I am sure
is yours, is in the performance of the stock price. The last trade price at
December 31, 1999 was $8.00 as compared to $8.50 at December 31, 1998. The
current year-end price represents 86.9% of the $9.20 book value or 10.4 times
1999 earnings.
A comparison to Indiana's Listed Bank Group, which is comprised of 12 Indiana
based bank holding companies that are publicly traded and reported by David A.
Noyes & Co., shows they, on average, are priced at 207% of book value and 14
times earnings as of December 31, 1999. This same group of banks suffered a loss
in per share price of 16.2% for the year of 1999 as compared to 5.9% loss in per
share price for Heartland over the same period of time.
We feel that controlled growth and solid earnings will build shareholder value.
This is the plan we intend to follow into the future as we continue to provide
our community with banking the way they expect it.
As always, we thank our staff, shareholders, and customers for their support and
confidence in Heartland Bancshares, Inc.
Steve Bechman Jeffrey L. Goben
President Executive Vice President
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (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 limited length of actual operations since the bank's inception and
the rapid growth experienced during that period, it is difficult to make
meaningful comparisons between the amounts outstanding at December 31, 1999 and
those at the previous period end. Future growth rates may not be as rapid as
those realized during the start-up period due to the characteristics inherent in
the early growth of a new bank.
At December 31, 1999, Heartland had approximately $110,139 in total assets, an
increase of $45,479 or 70.3% from December 31, 1998 total of $64,660. Those
assets were primarily comprised of loans of $91,045 and investment securities of
$13,677 at December 31, 1999 compared to December 31, 1998 totals of $49,442 and
$10,457 respectively. Total deposits at December 31, 1999 were approximately
$88,519 compared to $52,754 at December 31, 1998. Total shareholders' equity was
approximately $11,643 and $10,916 at December 31, 1999 and December 31, 1998.
The increase in equity was due to the comprehensive income for the year ended
December 31, 1999.
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.
Note. Dollar amounts in thousands except per share data.
<PAGE>
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, 1999, 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 the amount of costs that were incurred to prepare for the
date change was not significant. Heartland has also implemented evaluation and
testing strategies for all areas of the company and has made efforts to
communicate with customers and vendors regarding Heartland's efforts toward Year
2000 compliance.
Although Heartland has no reason to expect that the impact to 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 has experienced rapid growth in loans and deposits during the period
of time since inception. Changes in interest income and interest expense between
the two periods relate primarily to this difference unless otherwise stated in
the following discussion. Heartland recorded net income of $973 for the year
ended December 31, 1999 or $.77 per share and net loss of $(628) or $(.50) per
share for the year ended December 31, 1998. The improvement in net income is
attributable to the growth of net interest income outpacing the growth of
non-interest expenses.
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 income was $727 for
the year ended December 31, 1999 compared to a loss of $(588) for the year ended
December 31, 1998.
Interest income of $7,573 was earned during the year ended December 31, 1999
compared to $3,140 for the year ended December 31, 1998 and was primarily
generated from securities and loans. The increase is primarily due to the
increase in average loans and securities outstanding during the year. Interest
expense of $3,612 was incurred during the year ended December 31, 1999 and
$1,307 during the year ended December 31, 1998. Interest expense is primarily
related to deposits during 1999 and 1998. The increase is primarily due to the
increase in average deposits and other borrowings outstanding during the year.
Net interest income for the year ended December 31, 1999 was $3,961compared to
$1,833 for the year ended December 31, 1998.
Note. Dollar amounts in thousands except per share data.
<PAGE>
The following tables depict for the years ended December 31, 1999 and 1998,
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.
Year Ended Year Ended
December 31,1999 December 31, 1998
---------------- -----------------
Average/ Yield/ Average/ Yield/
Balance Rate Balance Rate
------- ---- ------- ----
Interest earning assets
Federal funds sold $ 1,818 5.28% $ 2,581 3.83%
Taxable securities 12,057 6.00 8,647 6.05
Non-taxable securities 605 3.64 152 3.71
Loans 72,340 9.31 25,047 10.03
------ --------
Total interest earning assets $86,820 8.72 $ 36,427 8.62
======= ========
Interest bearing liabilities
Interest-bearing demand,
Money Market and Savings
Deposits $ 21,285 3.96% $ 6,718 4.01%
Time deposits 47,088 5.45 18,048 5.70
Short-term borrowings 1,151 4.26 150 5.82
Other borrowings 2,745 5.68 - -
------ ---------
Total interest bearing
liabilities $ 72,269 5.00 $ 24,916 5.25
======== =========
1999 1998
---- ----
Average yield on interest-earning assets 8.72% 8.62%
Average rate paid on interest-bearing liabilities 5.00 5.25
Net interest spread 3.72 3.37
Net interest margin (net interest earnings divided
by average total interest-earning assets) 4.56 5.03
Return on average assets 1.09 (1.63)
Return on average equity 8.54 (5.65)
The average yield on interest-earning assets increased to 8.72% in 1999 from
8.62% in 1998 primarily because the percentage of loans to total earning assets
increased during 1999 and loans are currently the highest yielding interest
earning assets owned by Heartland. The average rate paid on interest bearing
liabilities declined to 5.00% in 1999 from 5.25% in 1998 primarily because the
average rate paid on deposits decreased during 1999. The net interest spread is
calculated by subtracting the average rate paid on interest bearing liabilities
from the average yield on interest earning assets.
The net interest margin decreased to 4.56% in 1999 from 5.03% in 1998. The net
interest margin is calculated by dividing net interest income by average total
interest earning assets. The decrease is primarily due to the increase in total
average interest bearing liabilities as a percentage of total interest earning
assets. During 1999 a lower percentage of interest earning assets were funded by
owner's equity as compared to 1998.
Note. Dollar amounts in thousands except per share data.
<PAGE>
The provision for loan losses was $656 for the year ended December 31, 1999 and
$700 for the year ended December 31, 1998. Total charge-offs were $34 during the
year ended December 31, 1999 and $4 during the year ended December 31, 1998.
Non-interest income was $202 for the year ended December 31, 1999 and $56 for
the year ended December 31, 1998 and consisted of miscellaneous fees, service
charges and other income. In November 1999, the Bank established Heartland
Investment Services, a full-service brokerage department. Income from the
department will consist primarily of commissions from the sale of non-deposit
investment products such as stocks and mutual funds. Commission income during
the year ended December 31, 1999 was not significant. No commission income was
recorded in the year ended December 31, 1998.
During the year ended December 31, 1999, Heartland sold one security and
recorded a loss of $2. No securities were sold during 1998, therefore no gain or
loss on sale was recorded.
Salaries and benefits expense for the year ended December 31, 1999 was $1,373
compared to $1,016 for the year ended December 31, 1998. The number of full time
equivalent employees was increased to maintain customer service through the
rapid growth of loans and deposits.
Occupancy and equipment expenses of $205 and $167 were incurred during the year
ended December 31, 1999 and the year ended December 31, 1998. Those expenses
consist primarily of lease payments for the branch facility, depreciation and
utilities expenses. The permanent Greenwood branch facility was occupied in the
second quarter of 1998; therefore a full 12 months of lease expense was not
incurred in the year ended December 31, 1998. Occupancy and equipment expenses
are expected to increase during 2000 due to the opening of the Bargersville
branch.
Data processing expenses were $304 for the year ended December 31, 1999 and were
$183 for the year ended December 31, 1998. The increase in data processing
expenses is correlated with the increase in loans and deposits. Many of the
expenses are volume based charges.
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. No amortization of organization cost was recorded in 1999.
The remaining expenses of $470 for the year ended December 31, 1999 and $376 for
the year ended December 31, 1998, relate to various other items such as
printing, supplies, advertising, loan expenses, professional fees, postage,
insurance and training. The increase is primarily due to the increase in volume
of loans and deposits.
Note. Dollar amounts in thousands except per share data.
<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.
For the three months ended
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
1999
Total interest income $ 2,304 $ 2,076 $ 1,741 $ 1,452
Total interest expense 1,128 997 816 671
--------- --------- ---------- ---------
Net interest income 1,176 1,079 925 781
Provision for loan loss 143 115 222 176
Noninterest income 64 60 51 27
Noninterest expense 631 669 547 505
Provision for income taxes 182 - - -
--------- --------- ---------- ---------
Net income $ 284 $ 355 $ 207 $ 127
========= ========= ========== =========
Net income per share $ .23 $ .28 $ .16 $ .10
Average shares 1,265,000 1,265,000 1,265,000 1,265,000
For the three months ended
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
1998
Total interest income $ 1,208 $ 908 $ 672 $ 352
Total interest expense 557 400 267 83
--------- --------- ---------- ---------
Net interest income 651 508 405 269
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 income/(loss) $ 8 $ (155) $ (197) $ (284)
========= ========= ========== =========
Net income/(loss) per share $ .01 $ (.12) $ (.16) $ (.23)
Average shares 1,265,000 1,265,000 1,265,000 1,265,000
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.
Note. Dollar amounts in thousands except per share data.
<PAGE>
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 at December 31.
1999 1998
Percent of Percent of
Amount Net loans Amount Net loans
------ --------- ------ ---------
TYPE OF LOAN
Commercial loans and leases $59,887 66.78% $33,884 69.58%
Residential mortgages
(1-4 family homes) 15,069 16.80 6,241 12.81
Consumer 16,089 17.94 9,317 19.13
------- -------- ------- --------
Gross loans 91,045 101.52 49,442 101.52
Allowance for loan losses (1,365) (1.52) (742) (1.52)
------- -------- ------- --------
Loans, net $89,680 100.00% $48,700 100.00%
======= ======== ======= ========
COMMERCIAL LENDING. Commercial loans include loans secured by commercial real
estate; construction loans; and loans for business purchases, operations,
inventory and lines of credit. At December 31, 1999, commercial loans totaled
$59,887 or 66.8% of the Bank's total loan portfolio. Commercial loans totaled
$33,884, or 69.6% of the Bank's loan portfolio at December 31, 1998.
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, 1999, the Bank's residential mortgage loans totaled approximately
$15,069 or 16.8% of the Bank's total loan portfolio compared to $6,241 or 12.8%
of the Bank's total loans at December 31, 1998.
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. At December 31,
1999, the Bank's consumer loans totaled approximately $16,089 or 17.9% of the
Bank's total loan portfolio compared to $9,317 or 19.1% of the Bank's total
loans at December 31, 1998.
Note. Dollar amounts in thousands except per share data.
<PAGE>
NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Nonperforming assets consist of non-accrual and nonperforming loans, real estate
owned (acquired in foreclosure), and other repossessed assets. Non-accrual 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 $137 and $3 at
December 31, 1999 and 1998 and are comprised of nonperforming loans and other
repossessed assets.
Due to risks inherent in lending, management estimates that a certain amount of
loan balances outstanding at December 31, 1999 and 1998 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
judgment, should be charged-off.
To help identify and minimize potential future loan losses, on an on-going
basis, management evaluates the credit quality of individual loans and borrowers
and assigns a risk grade based on the various factors included in the
evaluation. Loans receiving substandard risk grades are monitored regularly for
repayment performance and changes in the borrowers' ability to repay the loans.
These loans do not necessarily meet the definition of non-accrual or
nonperforming loans and a substandard grade does not indicate that management
expects a future loan loss. The outstanding balance of loans with an assigned
risk grade of substandard was $1,174 and $580 at December 31, 1999 and 1998.
At December 31, 1999, the balance of the allowance for loan losses was $1,365 or
1.5% of gross loans outstanding, compared to $742 or 1.5% of gross loans
outstanding at December 31, 1998. The provision charged to earnings in the year
ended December 31, 1999 was $656 compared to $700 for the year ended December
31, 1998. Charge-offs were $34 in the year ended December 31, 1999 and $4 in the
year ended December 31, 1998.
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 time deposits on a bid basis from customers or
potential customers wishing to deposit amounts of at least $100. Time deposits
from public entities such as state and local government entities, schools and
hospitals totaled $9,168 or 10.4% of total deposits at December 31, 1999 and
$13,900 or 26.3% at December 31, 1998.
Note. Dollar amounts in thousands except per share data.
<PAGE>
Interest earned on statement savings accounts is paid from the date of deposit
to the date of withdrawal, compounded and credited quarterly. Interest earned on
money market demand deposit accounts is compounded and credited monthly. The
interest rates on these accounts are reviewed by management of 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, 1999,
Heartland had $13,677 or 12.4% of total assets in investment securities
available-for-sale. Heartland also had $75 of federal funds sold and an
additional $5,000 available from unused federal funds purchased agreement with a
large commercial bank and a guaranteed line of credit from the Federal Home Loan
Bank of Indianapolis.
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 attempts to manage 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, 1999 was 10.2% compared
to 13.0% at December 31, 1998.
Note. Dollar amounts in thousands except per share data.
<PAGE>
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 Bank has branches in Franklin and Greenwood, which are the two
largest cities in the county. In January 2000, the Bank opened a third branch in
Bargersville, Indiana. Bargersville, also in Johnson County, is approximately
six miles west of Franklin and seven miles south of Greenwood.
COMMON STOCK
Heartland had 1,265,000 shares of Common Stock issued and outstanding to
approximately 1,800 shareholders (including beneficial owners who held their
shares in street name) on March 10, 2000. The number of shareholders of record
was 153 on March 10, 2000.
The Common Stock has been quoted on the NASD Over-the-Counter Bulletin Board
under the symbol HRTB 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.
High Low
---- ---
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
First Quarter 1999 11.50 7.25
Second Quarter 1999 10.00 7.75
Third Quarter 1999 9.25 7.62
Fourth Quarter 1999 9.75 7.00
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.
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 ("DFI")
regulations, and generally cannot pay dividends if to do so would result in its
capital being deemed inadequate by the DFI or FDIC as a matter of supervisory
policy. See Item I, "Capital Requirements". 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.
Note. Dollar amounts in thousands except per share data.
<PAGE>
FINANCIAL STATEMENTS
The items listed below are presented on the following pages for your review in
conjunction with the foregoing discussion:
o Report of Independent Auditors on consolidated financial statements.
o Consolidated Balance Sheets at December 31, 1999 and 1998.
o Consolidated Statements of Income for the years ended December 31, 1999
and 1998.
o Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999 and 1998.
o Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998.
o Notes to consolidated financial statements.
<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, 1999 and 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years then ended. 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, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
February 24, 2000
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
1999 1998
---- ----
ASSETS
Cash and due from banks $ 3,598 $ 1,963
Federal funds sold 75 1,200
-------- --------
Total cash and cash equivalents 3,673 3,163
Securities available-for-sale 13,677 10,457
Loans 91,045 49,442
Allowance for loan losses (1,365) (742)
-------- --------
Loans, net 89,680 48,700
Premises and equipment, net 1,659 1,707
Accrued interest receivable and other assets 1,450 633
-------- --------
$110,139 $ 64,660
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 8,707 $ 4,341
Interest-bearing demand and savings deposits 29,428 13,397
Interest-bearing time deposits 50,384 35,016
-------- --------
Total deposits 88,519 52,754
Short-term borrowings 3,519 740
Other borrowings 6,000 -
Accrued interest payable and other liabilities 458 250
-------- --------
98,496 53,744
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
Retained earnings/(deficit) 105 (868)
Accumulated other comprehensive income/(loss) (193) 53
-------- --------
11,643 10,916
$110,139 $ 64,660
======== ========
See accompanying notes.
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
1999 1998
---- ----
Interest income
Loans, including related fees $ 6,732 $ 2,512
Securities:
Taxable 723 523
Non-taxable 22 6
Federal funds sold 96 99
-------- -------
7,573 3,140
Interest expense
Deposits 3,407 1,298
Short-term borrowings 49 9
Other borrowings 156 -
-------- -------
3,612 1,307
Net interest income 3,961 1,833
Provision for loan losses 656 700
-------- -------
Net interest income after provision for loan losses 3,305 1,133
Noninterest income
Service charges and fees on deposit accounts 152 44
Loss on sale of security (2) -
Other 52 12
-------- -------
202 56
Noninterest expense
Salaries and employee benefits 1,373 1,016
Occupancy and equipment, net 205 167
Data processing 304 183
Printing and supplies 77 69
Advertising 84 79
Loan expenses 48 45
Professional fees 73 54
Amortization of organization cost - 75
Other 188 129
-------- -------
2,352 1,817
Income/(loss) before income taxes 1,155 (628)
Income taxes 182 -
-------- -------
Net income/(loss) $ 973 $ (628)
======== =======
Basic and diluted earnings per share $ .77 $ (.50)
======== =======
See accompanying notes.
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Common Paid-in Earnings/ Comprehensive Shareholders'
Stock Capital (Deficit) Income/(loss) Equity
----- ------- --------- ------------ ------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 $1,265 $10,466 $ (240) $ 13 $11,504
Comprehensive income
Net loss for 1998 (628) (628)
Change in unrealized
gain/(loss) 40 40
-------
Total comprehensive income (588)
------ ------- -------- -------- -------
Balance December 31, 1999 1,265 10,466 (868) 53 10,916
Comprehensive income
Net income for 1999 973 973
Change in unrealized
gain/(loss) (246) (246)
-------
Total comprehensive income 727
------ ------- -------- -------- -------
Balance December 31, 1999 $1,265 $10,466 $ 105 $ (193) $11,643
====== ======= ======== ======== =======
</TABLE>
See accompanying notes.
<PAGE>
HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
1999 1998
---- ----
Cash flows from operating activities
Net income/(loss) $ 973 $ (628)
Adjustments to reconcile net income/(loss) to net
cash from operating activities
Depreciation and amortization 135 190
Provision for loan losses 656 700
Loss on sale of security 2 -
Change in assets and liabilities:
Accrued interest receivable and other assets (693) (460)
Accrued interest payable and other liabilities 208 114
Net cash from operating activities 1,281 (84)
Cash flows from investing activities
Purchase of securities available-for-sale (5,892) (8,033)
Proceeds from sales, calls and maturities of securities
available-for-sale 2,296 5,624
Loans made to customers, net of payments collected (41,636) (45,488)
Net purchases of property and equipment (83) (611)
-------- --------
Net cash from investing activities (45,311) (48,508)
Cash flows from financing activities
Net change in deposit accounts 35,765 50,675
Net change in short-term borrowings 2,779 (60)
Draws on FHLB advances 6,000 -
-------- --------
Net cash from financing activities 44,544 50,615
-------- --------
Net change in cash and cash equivalents 510 2,023
Cash and cash equivalents at beginning of period 3,163 1,140
-------- --------
Cash and cash equivalents at end of period $ 3,673 $ 3,163
======== ========
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest $ 3,510 $ 1,079
Income taxes 484 -
See accompanying notes.
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The consolidated financial statements include the
accounts of Heartland Bancshares, Inc. (Corporation) and its wholly-owned
subsidiary, Heartland Community Bank (Bank), after elimination of significant
intercompany transactions and accounts.
The Corporation operates primarily in the banking industry, which accounts for
more than 90% of its revenues, operating income and assets. The Bank is engaged
in the business of commercial and retail banking, with operations conducted
through its main office located in Franklin, Indiana and an additional branch
location in Greenwood, Indiana. 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 and the fair values of
financial instruments are particularly subject to change.
Securities: 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.
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 significantly past due. Payments received on such loans are
reported as principal reductions.
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.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 significantly delayed, 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.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Stock Compensation: Expense for employee compensation under stock option plans
is recorded 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 were used for stock based compensation.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
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. The Corporation reports
net cash flows for customer loan and deposit transactions, and short-term
borrowings.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of shares outstanding during the period. Diluted
earnings per share includes the dilutive effect of additional potential 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.
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 on- and off-balance sheet
financial instruments does not include the value of anticipated future business
or the values of assets and liabilities not considered financial instruments.
Industry Segment: Internal financial information is primarily reported and
aggregated in one line of business, i.e., banking.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Year-end securities are as follows:
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999
U.S. Government and its agencies $ 9,400 $ - $ (210) $ 9,190
Obligations of states and
political subdivisions 613 - (12) 601
Mortgage backed securities 2,705 1 (50) 2,656
Corporates 877 - (47) 830
FHLB stock 400 - - 400
-------- ------- -------- -------
$ 13,995 $ 1 $ (319) $13,677
======== ======= ======== =======
1998
U.S. Government and its agencies $ 9,577 $ 71 $ (16) $ 9,632
Obligations of states and
political subdivisions 614 1 (3) 612
Mortgage backed securities 213 - - 213
-------- ------- -------- -------
$ 10,404 $ 72 $ (19) $10,457
======== ======= ======== =======
During 1999, one security classified as available-for-sale was sold. Gross
proceeds were $499 and the recognized loss on the sale was $2. There were no
sales of securities during 1998.
The amortized cost and fair value of securities at December 31, 1999, by
contractual maturity, are shown below.
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 5,640 $ 5,488
Due after one year through five years 5,013 4,897
Due after five years through ten years 237 236
Due after ten years - -
Mortgage backed securities 2,705 2,656
FHLB stock 400 400
-------- -------
$ 13,995 $13,677
======== =======
Securities with a carrying value of $3,168 and $2,250 at December 31, 1999 and
1998, were pledged to secure repurchase agreements.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans at year end are comprised of the following:
1999 1998
---- ----
Commercial loans and leases $ 42,778 $ 26,475
Real estate construction and land development 17,109 7,409
Residential real estate 15,069 6,241
Consumer 16,089 9,317
-------- --------
$ 91,045 $ 49,442
======== ========
There were no impaired loans outstanding at December 31, 1999 or 1998, nor were
any loans so identified during either year. Non-accrual loans totaled $138 and
$0 at December 31, 1999 and 1998.
Certain of the Company's officers and directors were loan customers of
Heartland. The balance of loans outstanding to these individuals was $229 at
December 31, 1999.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
1999 1998
---- ----
Beginning balance $ 742 $ 46
Provision charged to operations 656 700
Loans charged-off (34) (4)
Recoveries on loans previously charged-off 1 -
-------- --------
Ending balance $ 1,365 $ 742
======== ========
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
1999 1998
---- ----
Land $ 205 $ 205
Buildings and improvements 931 931
Leasehold improvements 207 201
Furniture and equipment 562 485
-------- --------
Total 1,905 1,822
Accumulated depreciation 246 115
-------- --------
Premises, furniture and equipment, net $ 1,659 $ 1,707
======== ========
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 6 - INTEREST-BEARING TIME DEPOSITS
Interest-bearing time deposits issued in denominations of $100 or greater
totaled $22,673 and $19,374 at December 31, 1999 and 1998.
Scheduled maturities of time deposits for the next five years are as follows:
2000 $ 30,774
2001 17,405
2002 1,996
2003 134
2004 75
--------
$ 50,384
Time deposits from governmental and other public entities such as school
corporations and hospitals in the Bank's market area totaled $9,168 at December
31, 1999 and $13,900 at December 31, 1998.
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings consist solely of repurchase agreements.
NOTE 8 - OTHER BORROWINGS
Other borrowings consist solely of advances from the Federal Home Loan Bank and
were as follows at December 31, 1999:
Maturity Interest
Date Rate Balance
---- ---- -------
February 28, 2000 5.95% $ 1,000
June 19, 2000 5.63% 4,000
July 7, 2000 Adjustable 6.03% 1,000
Total $ 6,000
========
Each advance is payable at maturity date, generally with a prepayment penalty.
The advances are collateralized by a blanket pledge of mortgage loans and
eligible securities. Interest is payable monthly.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLANS
A 401(k) retirement savings plan is maintained for the benefit of eligible
employees. The Plan requires employees to be 21 years of age and perform one
year of service before entering the Plan. Employee contributions are limited to
a maximum of 15% of their salary. The Plan provides for a 50% matching of the
first 6% of employee salary contributions and allows for 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 was $23 and $22 for 1999 and 1998,
respectively.
NOTE 10 - STOCK OPTION PLAN
The Corporation maintains two stock option plans: an employee plan and a
non-employee director plan. Under the terms of the plans, options for up to
265,000 shares of the Corporation's common stock may be granted to key
management employees and directors of the Corporation and its subsidiaries. The
exercise price of options granted to employees will be determined at the time of
grant by an administrative committee 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.
Employee 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.
Nonemployee director options are immediately exercisable for 1,000 shares of
common stock per nonemployee director. On the date of each successive annual
meeting of the Corporation, options will become exercisable (assuming continued
service on the Board of Directors) for an additional 1,000 shares of common
stock per nonemployee director, until all options are exercisable in full.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 10 - STOCK OPTION PLAN (Continued)
A summary of the Corporation's stock option activity, and related information
for the periods ended December 31, 1999 and 1998 follows:
1999 1998
---- ----
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding - beginning
of period 83,000 $ 10.00 83,000 $ 10.00
Granted 51,000 10.00 - -
Exercised - - - -
Forfeited - - - -
--------- ---------
Outstanding-end of period 134,000 $ 10.00 83,000 $ 10.00
========= ========= ========= ==========
Exercisable at end of
period 67,000 $ 10.00 36,000 $ 10.00
========= ========= ========= ==========
Weighted-average fair
value per option granted
duringthe period $ 2.59 $ -
========= =========
Pro forma disclosures are required for companies that do not adopt the fair
value accounting method for stock-based employee compensation. The pro forma
information presents net income and earnings per share had the fair value method
been used to measure compensation cost for stock option plans. Compensation cost
actually recognized for stock options was $0 for 1999 and 1998. Fair value is
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1999: risk-free interest rate of
6%; dividend yield of 0%; volatility factor of .001, and a weighted average
expected life of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Corporation's pro
forma information follows:
1999 1998
---- ----
Pro forma net income/(loss) $ 891 $ (677)
Pro forma basic and diluted earnings per share $ .70 $ (.54)
In future years, the pro forma effect of not applying this standard may increase
if additional options are granted.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
At December 31, 1998, the Corporation had a net deferred tax asset of $275,
which was reduced to $0 by a valuation allowance. During 1999, the Corporation
generated sufficient profit to fully utilize all existing net operating loss
carryforwards and eliminate the need for a valuation allowance.
Income tax expense for 1999 was as follows:
Current $ 393
Deferred 64
Change in valuation allowance (275)
---------
Total $ 182
=========
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
Federal statutory rate times
financial statement income $ 392
Change in valuation allowance (275)
Effect of:
Tax-exempt income (6)
State taxes, net of federal
benefit 66
Other, net 5
---------
Total $ 182
=========
Year-end deferred tax assets and liabilities were due to the following:
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $ 497 $ 275
Net operating loss carryforward - 157
Net unrealized losses on securities 125 -
Other 21 20
-------- --------
643 452
Deferred tax liabilities:
Depreciation (46) (24)
Accrual to cash (261) (153)
-------- --------
(307) (177)
Valuation allowance - (275)
-------- --------
Total $ 336 $ -
======== =========
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 12 - PER SHARE DATA
Basic and diluted earnings/(loss) per share in 1999 and 1998 were computed by
dividing net income/(loss) for the year by the weighted average number of shares
outstanding, 1,265,000 for both periods. The outstanding stock options were not
dilutive in either period, but could become dilutive in the future.
NOTE 13 - CAPITAL REQUIREMENTS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative and qualitative measures of assets, liabilities
and certain off-balance-sheet items calculated under regulatory accounting
practices.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year end 1999 and 1998, the Bank was well-capitalized. Actual capital levels
and minimum required levels were:
<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>
1999
Total capital (to risk weighted assets) $12,589 14.1% $7,118 8% $ 8,898 10%
Tier 1 capital (to risk weighted assets) 11,474 12.9 3,559 4 5,339 6
Tier 1 capital (to average assets) 11,474 10.5 4,358 4 5,448 5
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
</TABLE>
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases certain branch facilities and land under operating leases
expiring in 2007 and 2005. The related lease expense was $60 and $43 for 1999
and 1998. Future minimum lease payments are as follows:
2000 $ 71
2001 77
2002 79
2003 81
2004 83
Thereafter 219
--------
Total minimum lease payments $ 610
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.
Off-balance sheet financial instruments whose contract amount represents credit
risk are summarized as follows:
1999 1998
---- ----
Unused lines of credit $ 18,409 $ 10,098
Commitments to make loans 6,525 7,774
Letters of credit 422 298
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 $374 at December 31, 1999. These reserves do not earn
interest.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of the Corporation's financial
instruments were as follows at December 31:
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
Cash and cash equivalents $ 3,673 $ 3,673 $ 3,163 $ 3,163
Securities
available-for-sale 13,677 13,677 10,457 10,457
Loans, net 89,680 89,412 48,700 48,706
Accrued interest receivable 922 922 564 564
Financial liabilities:
Deposits $(88,519) $(88,434) $(52,754) $(53,012)
Short-term borrowings (3,519) (3,519) (740) (740)
Other borrowings (6,000) (6,000) - -
Accrued interest payable (330) (330) (228) (228)
Fair value approximates carrying amount for all items except those described
below. Fair value for securities is based on quoted market values for the
individual securities or for equivalent securities. 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. Fair value for IRAs,
time certificates of deposit, and FHLB advances are based on the rates paid at
year end for new deposits or borrowings, applied until maturity. Fair value for
other financial instruments and off-balance-sheet loan commitments are
considered nominal.
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY STATEMENTS
Presented below are condensed balance sheets and statements of income and cash
flows for the parent company.
CONDENSED BALANCE SHEETS
1999 1998
---- ----
ASSETS
Cash $ 351 $ 22
Securities available-for-sale, at market - 2,851
Investment in bank 11,281 7,993
Other assets 32 50
-------- --------
$ 11,664 $ 10,916
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 21 $ -
Shareholders' equity 11,643 10,916
-------- --------
$ 11,664 $ 10,916
======== ========
CONDENSED STATEMENTS OF INCOME
1999 1998
---- ----
Operating income
Dividends received from subsidiary bank $ - $ -
Interest income 94 161
-------- --------
Operating expenses
Professional fees 10 16
Amortization of deferred costs - 12
Other 15 9
-------- --------
Income before income taxes and equity in
undistributed earnings of subsidiary 69 124
Income tax expense 99 -
-------- --------
Income before equity in undistributed earnings of bank (30) 124
Equity in undistributed earnings of bank 1,003 (752)
Net income/(loss) $ 973 $ (628)
======== ========
(Continued)
<PAGE>
HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Dollar amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998
---- ----
Cash flows from operating activities
Net income/(loss) $ 973 $ (628)
Adjustments to reconcile net income/(loss) to net cash
from operating activities
Amortization of deferred costs - 12
Equity in undistributed earnings of bank (1,003) 752
Other assets and liabilities, net 39 -
-------- --------
Net cash from operating activities 9 136
Cash flows from investing activities
Purchase of securities available-for-sale - (119)
Maturities of securities available-for-sale 320 -
-------- --------
Net cash from investing activities 320 (119)
Net change in cash and cash equivalents 329 17
Beginning cash and cash equivalents 22 5
-------- --------
Cash and cash equivalents at end of period $ 351 $ 22
======== =========
Supplemental disclosures of cash flow information Non-cash transactions:
During the year ended December 31, 1999, securities with carrying value of
$2,500 were transferred to the Bank as additional investment.
<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, Benjamin Whehling
Director Vice President, Heartland Investment Services
Steve Bechman, Robert Maher
Director Vice President, CD Brokerage Program
Jeffrey L. Goben, Alexa McKnight,
Director Assistant Vice President, Teller Operations
Terri Webb,
Assistant Vice President, Loan Operations
Pam Fender,
Assistant Vice President, Deposit Operations
Mary Carter
Assistant Vice President, Branch Manager
Kathee Pruitt
Assistant Vice President, Branch Manager
<PAGE>
Banking Facilities
Franklin: Greenwood: Bargersville:
420 North Morton Street 489 South State Road 135 507 Three Notch Lane
(U.S. 31) Greenwood, IN 46142 Bargersville, IN 46106
Franklin, IN 46131 Phone (317) 881-3915 Phone (317) 422-1370
Phone (317) 738-3915 FAX (317) 859-3849 FAX (317) 422-1495
FAX (317) 736-5022
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 1999, 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.
The registrant has one subsidiary, Heartland Community Bank, which is 100% own
by the registrant. The registrant also operates a brokerage department under the
name Heartland Investment Services.
<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, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 3,598
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 75
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 13,995
<INVESTMENTS-MARKET> 13,677
<LOANS> 91,045
<ALLOWANCE> 1,365
<TOTAL-ASSETS> 110,139
<DEPOSITS> 88,519
<SHORT-TERM> 3,519
<LIABILITIES-OTHER> 6,458
<LONG-TERM> 0
0
0
<COMMON> 11,731
<OTHER-SE> (88)
<TOTAL-LIABILITIES-AND-EQUITY> 110,139
<INTEREST-LOAN> 6,732
<INTEREST-INVEST> 745
<INTEREST-OTHER> 96
<INTEREST-TOTAL> 7,573
<INTEREST-DEPOSIT> 3,407
<INTEREST-EXPENSE> 3,612
<INTEREST-INCOME-NET> 3,961
<LOAN-LOSSES> 656
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 2,352
<INCOME-PRETAX> 1,155
<INCOME-PRE-EXTRAORDINARY> 973
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 973
<EPS-BASIC> .77
<EPS-DILUTED> .77
<YIELD-ACTUAL> 4.56
<LOANS-NON> 138
<LOANS-PAST> 137
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,174
<ALLOWANCE-OPEN> 742
<CHARGE-OFFS> 34
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,365
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,365
</TABLE>
HEARTLAND BANCSHARES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 24, 2000
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 24, 2000, 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 2003 and until their successors are elected
and have qualified.
2. 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 10, 2000, are entitled to notice of and to vote at the Annual
Meeting. Desserts and beverages will be served.
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 27, 2000
Franklin, Indiana
(ANNUAL REPORT ENCLOSED)
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS OF
HEARTLAND BANCSHARES, INC.
April 24, 2000
This Proxy Statement is being furnished to shareholders on or about March
27, 2000, 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 24, 2000, at Hillview Country
Club, 1800 E. King Street, Franklin, Indiana 46131. The Company is the parent
holding company for Heartland Community Bank.
At the close of business on March 10, 2000, 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: 2000 -- Sharon Acton, Jeffrey L. Goben and
John Norton; 2001 -- J. Michael Jarvis, Robert Richardson and Patrick A.
Sherman; and 2003 - Steve Bechman, Gordon R. Dunn and James C. Stewart.
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 Sharon Acton,
Jeffrey L. Goben and John Norton, each of whom is now a Director whose present
term expires this year. Each such person has indicated that he or she 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, 2000,
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.
<TABLE>
<CAPTION>
Name, Percent of
Present Principal Shares Beneficially Common Shares
Occupation and Age Owned Outstanding
------------------ ----- -----------
<S> <C> <C>
Sharon Acton 1* 6,671(2,15) 0.5%
Manager, Franklin/Greenwood District of
Cinergy/PSI (energy services company)
Age 52
Steve Bechman 3 44,00(14,16) 3.5
President and Chief Executive Officer of
the Company and Bank
Age 48
Gordon R. Dunn 22,101(5,15) 1.8
Retired
Age 78
Jeffrey L. Goben 6* 32,642(7,16) 2.6
Executive Vice President and Chief Operating
Officer of the Company and Bank
Age 47
J. Michael Jarvis 10,001(8,15) 0.8
President and Part Owner, Power Investments,
Inc. Division of Delco Remy International,
Inc. (engine remanufacturer)
Age 56
John Norton 9* 11,401(10,15) 0.9
President and Owner, Norton Farms, Inc.
Age 51
<PAGE>
Robert Richardson 12,001(11,15) 0.9
President and Majority Owner, MegaSys, Inc.
(logistics company)
Age 38
Patrick A. Sherman 11,801(12,15) 0.9
President and Part Owner, Sherman &
Armbruster P.C. (a public accounting firm)
Age 51
James C. Stewart 14,001(13,15) 1.1
President, First Platinum Group, Inc.
(financial services company)
Age 48
All Directors and Executive Officers
as a group (13 persons) 194,443(14, 16) 13.3%
<FN>
*Nominee
1 Ms. Acton serves as manager of the Franklin/Greenwood district of
Cinergy/PSI, an electric utility.
2 Includes 500 shares that Ms. Acton holds jointly with her spouse and 6,000
shares that she has the right to acquire upon the exercise of stock
options.
3 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.
4 Includes 13,079 shares that Mr. Bechman holds jointly with his spouse, 700
shares held by his daughter and 15,300 shares that he has the right to
acquire upon the exercise of stock options.
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, 600 shares held by Mr. Dunn's
spouse and 6,000 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 wife, 341
shares that Mr. Goben holds for his sons and 12,300 shares that he has the
right to acquire upon the exercise of stock options.
8 Includes 4,000 shares Mr. Jarvis holds jointly with his spouse and 6,000
shares Mr. Jarvis has the right to acquire upon the exercise of stock
options.
9 Mr. Norton is owner and president of Norton Farms, Inc., a grain farming
operation located in Franklin, Indiana.
10 Includes 200 shares that Mr. Norton holds jointly with his children, 100
shares held by Mr. Norton's spouse and 6,000 shares that Mr. Norton has
the right to acquire upon the exercise of stock options.
11 Includes 2,000 shares held by a corporation of which Mr. Richardson is the
President and 6,000 shares that Mr. Richardson has the right to acquire
upon the exercise of stock options.
12 Includes 6,000 shares that Mr. Sherman has the right to acquire upon the
exercise of stock options.
13 Includes 1,020 shares that Mr. Stewart holds jointly with his spouse, 700
shares owned by Mr. Stewart's spouse and 6,000 shares that Mr. Stewart has
the right to acquire upon the exercise of stock options.
14 Includes 81,000 shares that Directors and executive officers have the
right to acquire upon the exercise of stock options and 38,200 shares held
jointly with or as custodian for family members.
15 Does not include an additional 1,000 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 12,950 shares Mr. Bechman may acquire, 10,950 shares Mr.
Goben may acquire or 15,200 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>
<PAGE>
Committees and Attendance
The Board of Directors of the Company held twelve meetings during 1999.
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. The Stock Option Committee met 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
1999, 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 three times during 1999, sets salaries and
bonuses for the President and Chief Executive Officer. 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 1999.
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 a 10-year 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 10-year options to each non-employee
Director to purchase 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.
Cash Compensation
During 1999, 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.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid to
the Company's Chief Executive Officer for 1999, who was the only executive
officer whose cash compensation for 1999 exceeded $100,000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Securities
Name and Underlying
Principal Position Year Salary Bonus Options/SAR
------------------ ---- ------ ----- -----------
Steve Bechman, Chief 1999 $ 119,767 $3,916 8,250
Executive Officer 1998 $ 115,000 $ 0 0
1997 $ 15,481(1) $ 0 20,000
1 Mr. Bechman's compensation was for the period from November 1, 1997
through December 31, 1997.
Option/SAR Grants In Last Fiscal Year
The following table presents information on the stock option grants that
were made during 1999 pursuant to the Company's 1997 Stock Option Plan to Mr.
Bechman:
Number of Securities
Underlying % of Total Exercise or
Options/SARs Granted to Employees Base Price
Name Granted In Fiscal Year ($/Sh) Expiration Date
- ---- ------- -------------- ------ ---------------
Steve Bechman 8,2501 27.5% $10.00 January 17, 2009
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 $10.00 per share, which was determined to be not less than the fair
market value of one Common Share on the date of grant. The options become
exercisable in twenty percent increments, with twenty percent of the shares
covered by an option becoming exercisable on the date of grant and an
additional twenty percent becoming exercisable on each of the first four
anniversaries of the grant date; provided, however, that the options become
immediately exercisable upon the occurrence of a change in control of the
Company. If an optionee tenders already owned shares in payment (in whole
or in part) of the exercise price of an option (the "Exercised Option"),
the Employee Option Plan requires the Company to use its best efforts to
issue a replacement option for a number of shares equal to the number of
shares tendered and with the same expiration date as the Exercised Option.
The exercise price for each share covered by the replacement option is
equal to the fair market value of one Common Share on the date of exercise
of the Exercised Option.
<PAGE>
Aggregated Option/SAR Exercises In
Last Fiscal Year and Fiscal Year-End
Option/SAR Values
No option exercises occurred during 1999. The following table sets forth
information with respect to the value of options held by Mr. Bechman as of
December 31, 1999.
Number of Value of Unexercised
Unexercised In-the-Money Options/SARs
Options/SARs at at Fiscal Year-End ($)
Fiscal Year-End (#)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Steve Bechman 13,650/14,600 0 / 0
Certain Relationships And Related Transactions
During 1998 and 1999, 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.
APPOINTMENT OF AUDITORS
Crowe, Chizek and Company LLP ("Crowe Chizek") served as auditors for the
Company in 1999. Although it is anticipated that Crowe Chizek will be selected,
the Audit Committee has not yet considered the appointment of auditors for 2000.
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 best of the knowledge of the Company's management, no person or
group 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.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
2000 ANNUAL MEETING OF SHAREHOLDERS OF HEARTLAND BANCSHARES, INC.
I hereby appoint Steve Bechman and Jeffrey L. Goben, and each of them, my
proxies, with power of substitution and revocation, to vote all Common Shares of
Heartland Bancshares, Inc. that I am entitled to vote at the Annual Meeting of
Shareholders to be held at Hillview Country Club, 1800 E. King Street, Franklin,
Indiana 46131, on Monday, April 24, 2000, at 6:30 p.m., local time, and any
adjournments thereof, as provided herein:
1. ELECTION OF DIRECTORS
|_| FOR all nominees listed below to serve until the Annual Meeting of
Shareholders in the year 2003 as set forth in the Proxy Statement dated
March 27, 2000 (except as marked to the contrary below-see "Instructions"):
Sharon Acton
Jeffrey L. Goben
John Norton
|_| WITHHOLD AUTHORITY to vote for all nominees listed above
(Instructions: To withhold authority to vote for any nominee, write that
nominee's name in the space provided.)___________________________
(To Be Completed on Reverse Side)
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED. IN THE ABSENCE OF SPECIFICATIONS, THIS
PROXY WILL BE VOTED FOR ITEM 1.
SHAREHOLDERS SHOULD MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POST-PAID ENVELOPE. THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS
EXERCISE.
DATED: ________________
Signature or Signatures
(Please sign exactly as your
name appears on this proxy. If
shares are issued in the name
of two or more persons, all
such persons should sign.
Trustees, executors and others
signing in a representative
capacity should indicate the
capacity in which they sign.)
