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Split-dollar Endorsement Agreement - HEARTLAND BANCSHARES INC /IN/ - 3-30-2004

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Split-dollar Endorsement Agreement - HEARTLAND BANCSHARES INC /IN/ - 3-30-2004 Powered By Docstoc
					EXHIBIT 10.8 Split-Dollar Endorsement Agreement THIS AGREEMENT, made and entered into this 1st day of January, 2001, by and between the Heartland Community Bank, (hereinafter referred to as the "Corporation"), a Corporation organized and existing under the laws of the State of Indiana, and Jeffery D. Joyce (hereinafter referred to as the "Employee"). WHEREAS, the Employee has performed his duties in an efficient and capable manner; and WHEREAS, the Corporation is desirous of retaining the services of the Employee; and WHEREAS, the Corporation is desirous of assisting the Employee in paying for life insurance on his own life; and WHEREAS, the Corporation has determined that this assistance can best be provided under a "split-dollar" arrangement; and WHEREAS, the Corporation and the Employee have applied for Insurance Policy No. 1Y200102 (the "Policy") issued by the New England Financial Life Insurance Company ("New England Financial") on the Employee's life; and WHEREAS, it is now understood and agreed that this split-dollar agreement is to be effective as of the date on which the Policy was issued by "New England Financial". NOW, THEREFORE, for value received and in consideration of the mutual covenants contained herein, the parties agree as follows: ARTICLE I "Definitions" For purposes of this Agreement, the following terms will have the meanings set forth below: 1. "Cash Surrender Value of the Policy" will mean the Cash Value of the Policy; plus any dividends and/or earnings added hereto; and less any Policy Loan Balance. 2. "Cash Value of the Policy" will mean the cash value as calculated according to the provisions of the Policy. 3. "Corporation's Interest in the Policy" will be defined in Articles IV and V. 4. "Current Loan Value of the Policy" will mean the Loan Value of the Policy reduced by any outstanding Policy Loan Balance. 5. "Loan Value of the Policy" will mean the amount which with loan interest and Monthly Deductions for the Cost of Insurance, plus any applicable Surrender Charge, will equal the Cash Value of the Policy on the next loan interest due date. 6. "Policy Loan Balance" at any time will mean policy loans outstanding plus interest accrued to date. ARTICLE II "Allocation of Gross Premium" The Corporation will pay all premiums on the Policy when due, according to the Schedule of Premiums in the Policy.

ARTICLE III "Payment of Premiums" Any premium or portion thereof which is payable by the Employee under any Article of the Agreement may at the election of the Employee be deducted from the cash compensation otherwise payable to him and the Corporation agrees to transmit that premium or portion, along with any premium or portion thereof payable by it, to the Insurance Company on or before the premium due date. ARTICLE IV "Rights in the Policy" The Employee will have the sole right to designate the beneficiary for a specified amount of the death proceeds of the Policy. The Corporation will have and may exercise, except as limited hereinafter, all ownership rights in the Policy. The Corporation will not without the written consent of the Employee assign its rights in the Policy, other than for the purpose of obtaining a loan against the Policy, to anyone other than the Employee. The Corporation will not take any action in dealing with the Insurance Company that would impair any right or interest of the Employee in the Policy. The Corporation will have the right to borrow from the Insurance Company, and to secure that loan by the Policy, an amount which together with the unpaid interest accrued thereon, will at no time exceed the lesser of (a) the Corporation's Interest in the Policy and (b) the Loan Value of the Policy. During the Employee's life time "The Corporation's Interest In The Policy" will mean, at any time at which the value of such interest is to be determined under this Agreement, the Cash Value of the Policy at such time, reduced by any then outstanding Policy Loan Balance with respect to any loans made or charged automatically against the Policy by the Corporation. ARTICLE V "Rights to the Proceeds at Death" Upon the death of the Employee while this Agreement is in force, the Employee's beneficiary as named in the policy will be entitled to receive from the Policy proceeds an amount equal to three (3) times the Employee's base salary as of the first day of January preceding the Employee's date of death. The remainder of the Policy Proceeds will be paid to the Corporation. Within 60 days after the death of the Employee, the Corporation will provide to "New England Financial" a written statement indicating the amount of the Policy proceeds the Employee's beneficiary is entitled to receive. ARTICLE VI "Termination of Agreement" This Agreement may be terminated at any time while the Employee is living by written notice thereof by either the Corporation or the Employee to the other; and, in any event, this Agreement will terminate upon termination of the Employee's employment. ARTICLE VII "Plan Management" For purposes of the Employee Retirement Income Security Act of 1974, the Corporation will be the "Named Fiduciary" and Plan Administrator of the split-dollar life insurance plan for which this Agreement is hereby designated the written plan instrument. The Corporation's board of directors may authorize a person or group of persons to fulfill the responsibilities of the Corporation as Plan Administrator. The Named Fiduciary or the Plan Administrator may employ others to render advice with regard to its responsibilities under this Plan. The Named Fiduciary may also allocate fiduciary responsibilities to others and may exercise any other powers necessary for the discharge of its duties to the extent not in conflict with the Employee Retirement Income Security Act of 1974. ARTICLE VIII "Claims Procedure"

(1) Filing claims. Any insured, beneficiary or other individual (hereinafter "Claimant") entitled to benefits under the Plan or under the Policy will file a Claim request with the Plan Administrator with respect to benefits under the Plan and with "New England Financial", with respect to benefits under the Policy. The Plan Administrator will, upon written request of a Claimant, make available copies of any claim forms or instructions provided by "New England Financial" or advise the Claimant where such forms or instructions may be obtained. (2) Notification to Claimant. If a claim request is wholly or partially denied, the Plan Administrator will furnish to the Claimant a notice of the decision within 90 days in writing and in a manner calculated to the understood by the Claimant, which notice will contain the following information: (a) The specific reason or reasons for the denial; (b) Specific reference to the pertinent Plan provisions upon which the denial is based; (c) A description of any additional material or information necessary for the Claimant to perfect the Claim and an explanation of why such material or information is necessary; and (d) An explanation of the Plan's claims review procedure describing the steps to be taken by a Claimant who wishes to submit his claim for review. (3) Review Procedure. A Claimant or his authorized representative may with respect to any denied claim: (a) Request a review upon written application filed within 60 days after receipt by the Claimant of notice of the denial of his claim; (b) Review pertinent documents; and (c) Submit issues and comments in writing Any request or submission will be in writing and will be directed to the Named Fiduciary (or his designee). The Named Fiduciary (or its designee) will have sole responsibility for the review of any denied claim and will take all steps appropriate in the light of its findings. (4) Decision on Review. The Named Fiduciary (or its designee) will render a decision upon review of a denied claim within 60 days after receipt of a request for review. If special circumstances warrant additional time, the decision will be rendered as soon as possible, but not later than 120 days after receipt of request for review. Written notice of any such extension will be furnished to the Claimant prior to the commencement of the Extension. The decision on review will be in writing and will include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, as will as specific references to the pertinent provisions of the Plan on which the decision is based. If the decision on review is not furnished to the Claimant within the time limits prescribed above, the claim will be deemed denied on review.

ARTICLE IX "Satisfaction of Claim" The Employee rights and interests, and rights and interests of any person taking under or through him, will be completely satisfied upon compliance by the Corporation with the provisions of the Agreement. ARTICLE X "Amendment and Assignment" This Agreement may be altered, amended or modified, including the addition of any extra policy provisions, by a written instrument signed by the Corporation and the Employee. Either party may, subject to the limitations of Article IV, assign its interest and obligations under this Agreement, provided, however, that any assignment will be subject to the terms of this Agreement. ARTICLE XI "Possession of Policy" The Corporation will keep possession of the Policy. The Corporation agrees from time to time to make the policy available to the Employee or to "New England Financial" for the purpose of endorsing or filing any change of beneficiary on the Policy but the Policy will promptly be returned to the Corporation. ARTICLE XII "Governing Law" This Agreement sets forth the entire Agreement of the parties hereto, and any and all prior agreements, to the extent inconsistent herewith, are hereby superseded. This Agreement will be governed by the laws of the State of Indiana. ARTICLE XIII "Interpretation" Where appropriate in this Agreement, words used in the singular will include the plural and words used in the masculine will include the feminine. IN WITNESS WHEREOF, the parties have hereunto set their hand and seals, the Corporation by its duly authorized officer, on the day and year first above written. Employee Officer

Exhibit 13. The Issuer's Annual Report to Shareholders for the year ended December 31, 2003. March 22, 2004 Dear Shareholders and Friends: We are pleased to report to you the results for the year of 2003 and encourage you to read about the detailed results in the following pages. The past couple of years have presented some unprecedented challenges for our young company from which we are emerging a stronger and more fundamentally sound bank. In 2003, we continued to work diligently to improve asset quality created by poor credit decisions and weak processes from previous years. We were also faced with the lowest level of interest rates in over 40 years, causing declining interest margins. With the focus on asset quality improvement and not on growth, total assets declined from $177 million at December 31, 2002 to $167 million at December 31, 2003. Despite the decline in total assets, we still have a solid hold on third place in terms of deposit market share in Johnson County among a total of 16 financial institutions. In fact, we showed a slight improvement to 12.18% at June 30, 2003 from 11.58% at June 30, 2002. The shrinkage of totals gave us an opportunity to restructure our deposit mix resulting in more core deposits and less interest bearing time deposits. This helped offset the effects that the lower interest rate environment had on our net interest margin. In 2003, we recorded a considerable improvement in earnings with $414,000 net income for the year as compared to a $1,213,000 loss for 2002. Most of the improvement was a result of lower loan loss provision, and losses on real estate acquired in foreclosure, which came through improved asset quality. Earning assets were positively impacted by reductions in non-performing loans. Our mortgage loan production has been fueled by refinancings due to low interest rates. Our hard working mortgage loan staff was positioned to handle the record number of refinances. The related gain on sale of mortgage loans continues to be an excellent source of non-interest income. During 2003, we originated $65 million in first residential mortgages and recorded over $1 million in gain on sale of loans. We realize that the refinancing activity will eventually slow, but feel that our reputation as a mortgage loan provider in the market will continue to provide us with a good source of revenue. In last year's annual report, we reported that the Bank entered into a formal order with the Federal Deposit Insurance Corporation and the Indiana Department of Financial Institutions that required us to address several regulatory concerns. I am pleased to announce that due to the efforts of extremely dedicated staff of employees and particularly the Board of Directors, we received written notification on February 23, 2004 from the regulatory agencies of their intent to release the Bank from the May 2002 order with our agreement to continue to operate under stipulations that we consider to be good business practice. We have been pleased to see our stock price increase with our improvements in operating results during 2003. The stock opened 2003 at $7.91 per share and closed the year at $10.58 per share for a 33.8% increase. The book value increased to $9.00 per share at December 31, 2003.

The past few months there have been three mergers announced that will affect banks in our market along with the announcement of openings of offices of three new banks to our market. Banking is a relationship business where the bank with the best people will eventually prevail over time. We have some top notch employees who excel in giving customer service. Our ability to compete with much larger banks as well as banks our size is dependent on our employees. Heartland has not changed its focus of delivering quality products and services to our community. Our commitment to be involved with the community and serve the needs of our customers the best way we know is stronger than ever. As we go through 2004, we will continue to work on improving asset quality with an eye to growth. We will work on improving shareholder value through improvement of earnings and increasing market share. We would like to thank our customers, employees and board members for their contributions, continued support and confidence in helping us through a couple of difficult years. Despite the uncertain economy, we are anticipating 2004 to be a good year for Heartland. Steve Bechman Jeffrey L. Goben President & CEO Executive Vice President, COO, Secretary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Dollar amounts are in thousands, except per share data.) MANAGEMENT OVERVIEW This discussion provides information concerning changes in the consolidated financial condition and results of operations of Heartland and the Bank for 2003 and 2002. The comments are intended to supplement and should be reviewed in conjunction with the consolidated financial statements, related notes and selected financial data presented elsewhere herein. Heartland Bancshares, Inc. ("Heartland" or the "Corporation") 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 operations 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 one office located in Franklin, two offices located in Greenwood, and one office located in Bargersville, Indiana. 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 is registered as a bank holding company with the Board of Governors of the Federal Reserve System ("FRB") and is subject to its regulation, examination and supervision. Improving asset quality and meeting regulatory requirements have been the primary objectives for the Bank over the past two years. Poor underwriting practices led to deterioration of the Bank's loan portfolio, which caused the banking regulators to issue additional requirements to be followed by the Bank. Additional information regarding those requirements is included under the caption "CAPITAL ADEQUACY" and in Note 13 to the Consolidated Financial Statements. During 2003, the Bank's efforts resulted in lower provision for loan losses, net charge-offs and non-performing loans compared to 2002. Detailed discussions of these areas can be found under the "RESULTS OF OPERATIONS" and "NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES" captions on the pages that follow. Effective May 11, 2002, with the consent of the Bank, the FDIC and DFI entered a formal order (May 2002 Order) under federal and state banking laws, under which the Bank and its Directors are required to take a number of affirmative steps to address regulatory concerns. On February 23, 2004, the Bank received written notification from the FDIC and the DFI indicating that the Bank would be released from the May 2002 Order subject to the stipulation that the Bank continue to maintain a Tier 1 capital to assets ratio at 8% or above; to limit growth in total assets to no more than three percent per quarter without regulatory approval and to maintain the levels of acquisition, development and construction loans at or below 125% of Tier 1 capital and commercial real-estate loans at or below 250% of Tier 1 capital. As of February 23, 2004, the Bank's Tier 1 capital ratio was 9.49%, total assets had declined to $166,178, acquisition, development and construction loans totaled 61.75% of Tier 1 capital and commercial real-estate loans totaled 203.51% of Tier 1 capital. On February 23, 2004 the Bank's board of directors adopted a resolution accepting the stipulations as presented by the FDIC and DFI and notified the FDIC and DFI of the resolution and intent to abide by the stipulations. 3.

Note: Dollar amounts in thousands, except per share data. Competition with other depository and lending institutions has been increasing in the Bank's market area and includes at least 30 federally insured banks, credit unions, mortgage companies and consumer finance companies at December 31, 2003. The most significant challenge facing Heartland is achieving growth in the face of the high and rising level of competition and within the regulatory constraints previously discussed. Heartland's efforts to meet this challenge include providing exceptional customer service to existing customers and seeking new customer opportunities through personal involvement in the local communities and additional awareness by potential customers in our market area through marketing efforts. Heartland's profitability is significantly influenced by the difference between income on its loans and investments and the cost of its deposits and borrowings. This difference is referred 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. Additional information regarding net interest income and non-interest income is included in "RESULTS OF OPERATIONS" below. During 2003, interest rates in general declined. The interest yields earned by Heartland on interest earning assets declined more rapidly and more significantly than rates paid on interest bearing liabilities causing Heartland's net interest income in 2003 to decline by $225 from 2002 net interest income. At December 31, 2003, Heartland had $167,929 in total assets, a decrease of $8,883 or 5.02% from the December 31, 2002 total of $176,812. The decline in assets was primarily comprised of a decline in net loans of $6,167 or 5.30%. Net loans were $110,255 at December 31, 2003 compared to $116,422 at December 31, 2002. The decline in loans was primarily due to more stringent lending standards used by Heartland and to the formal order that the Bank executed with its regulators in May 2002 (the "May 2002 Order") that required that the Bank to reduce the dollar amount of certain types of loans. Total deposits declined $10,893 or 7.34%, during the year. Total deposits were $137,506 at December 31, 2003 compared to $148,399 at December 31, 2002. Deposits were allowed to decline due to the decline in loans. Total shareholders' equity was $12,552 and $12,200 at December 31, 2003 and December 31, 2002. The increase in equity was due to $414 net income partially offset by other comprehensive loss of $62 for the year ended December 31, 2003. RESULTS OF OPERATIONS Heartland experienced a decline in average balances of loans and deposits during 2003. Market rates for loans and deposits were generally lower in 2003 compared to 2002. Changes in interest income and interest expense between the two periods discussed relate primarily to the difference in average loans and deposits and the decline in interest rates unless otherwise stated in the following discussion. Heartland recorded net income of $414 or $.30 per share, for the year ended December 31, 2003 and net loss of $(1,213), or $(.87) per share, for the year ended December 31, 2002. Lower provision for loan losses accounted for $1,484 (after tax) of the improvement in net income. Growth in non-interest income also contributed $198 (after tax) to the improvement in net income. Comprehensive income consists of net income and other comprehensive income such as unrealized gains and losses on securities available for sale, which is also recognized as a separate component of equity. Comprehensive income was $352 for the year ended December 31, 2003 compared to comprehensive loss of $(1,063) for the year ended December 31, 2002. Note: Dollar amounts in thousands, except per share data.

4.

Interest income of $9,230 was earned during the year ended December 31, 2003, compared to $10,972 for the year ended December 31, 2002 and was primarily generated from securities and loans. Decreases in yields earned on interest earning assets accounted for $1,405 of the decline and the decrease in average loans and other interest earning assets outstanding during the year accounted for $337 of the decline. Contributing to the decrease in yields earned on interest-earning assets, and to the decrease in average loans, was the requirement of the May 2002 Order that the Bank decrease the dollar volume of certain types of higher-yielding loans. The increase in average securities outstanding contributed an additional $564 to offset the decrease in interest income from other earning assets. Overall, the average yield on earning assets declined 96 basis points to 5.61% for 2003 from 6.57% for 2002. Interest expense of $2,758 was incurred during the year ended December 31, 2003 and $4,207 during the year ended December 31, 2002. Interest expense is primarily related to deposits during 2003 and 2002. The decreases in rates paid on interest bearing liabilities accounted for $1,164 of the decrease and the decrease in average deposits and short-term borrowings outstanding during the year accounted for $285 of the decrease in interest expense. Overall, the average rate paid on interest bearing liabilities declined 87 basis points to 1.97% for 2003 from 2.84% for 2002. Net interest income for the year ended December 31, 2003 was $6,472 compared to $6,765 for the year ended December 31, 2002. The following tables depict for the years ended December 31, 2003 and 2002, certain information related to Heartland's average balance sheets and its average yields on assets and 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. Non-accrual loan balances are included in the average balances of loans. Yields on non-taxable securities are not presented on a tax-equivalent basis.
Year Ended December 31, 2003 ----------------Average Yield/ Balance Rate ---------Interest earning assets Short-term investments Taxable securities Non-taxable securities Loans Total interest earning assets $ 9,396 28,920 3,101 123,084 -------1.56% 3.00 4.00 6.57 Year Ended December 31, 2002 ----------------Average Yield/ Balance Rate ---------$12,992 15,893 2,626 135,433 ------$166,944 ======== 1.77% 6.07 4.68 7.13

$164,501 ========

5.61

6.57

Interest bearing liabilities Interest-bearing demand, Money Market and Savings Deposits $ 64,362 Time deposits 62,676 Short-term borrowings 4,272 Other borrowings 8,999 -------Total interest bearing liabilities $140,309 ========

0.77% 2.96 0.61 4.23

$63,002 70,929 4,872 9,155 ------$147,958 ========

1.54% 3.81 1.52 5.05

1.97

2.84

Note: Dollar amounts in thousands, except per share data.

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Average yield on interest-earning assets Average rate paid on interest-bearing liabilities Net interest spread Net interest margin (net interest income divided by average total interest-earning assets) Return on average assets Return on average equity

2003 ---5.61% 1.97 3.64 3.93 0.24 3.35

2002 ---6.57% 2.84 3.73 4.05 (.68) (9.26)

The decrease in the average yield on interest-earning assets and the average cost of interest bearing liabilities followed the falling interest rates in the economy during 2003. In addition, the average yield on interest-earning assets during 2003 was adversely affected by the Bank's compliance with the May 2002 Order, which required that the Bank reduce the outstanding balances of certain higher-yielding types of loans during 2003. See Note 13 to Heartland's consolidated financial statements. The net interest margin decreased to 3.93% in 2003 from 4.05% in 2002. The net interest margin is calculated by dividing net interest income by average total interest earning assets. The average yield on interest earning assets fell 9 basis points more than the cost of interest bearing liabilities causing the net interest margin to decline. The decline in net interest margin was partially offset as the ratio of interest bearing liabilities to interest earning assets decreased, to 85.3% for 2003 from 88.6% for 2002. The provision for loan losses was $692 for the year ended December 31, 2003 and $3,150 for the year ended December 31, 2002. Net charge-offs were $889 during the year ended December 31, 2003 and $3,052 during the year ended December 31, 2002. Non performing loans decreased to $3,023 at December 31, 2003 from $5,633 at the end of 2002. Impaired loans decreased to $1,945 at December 31, 2003 from $4,689 at December 31, 2002. The allowance for loan losses was 2.91% of gross loans at December 31, 2003 and was 2.92% of gross loans at December 31, 2002 and covers non-performing loans 1.1x at year-end 2003, compared to 0.6x in 2002. For more detail on this area, see "NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES" below. Non-interest income was $2,222 for the year ended December 31, 2003 and $1,944 for the year ended December 31, 2002 and consists primarily of miscellaneous fees, service charges, gain on sale of loans and other income. Gains related to the sale, service released, of loans increased to $1,009 in 2003 from $712 in 2002, as interest rates fell and the fixed rate, residential real estate loan market improved. Net securities gains in 2003 and 2002 were $1 and $57. Other income was $211 and $186 for 2003 and 2002 and included items such as increase in cash surrender value of life insurance, income from other real estate owned and miscellaneous other income items. Salaries and benefits expense for the year ended December 31, 2003 was $4,306 compared to $3,948 for the year ended December 31, 2002. The number of full time equivalent employees was increased in the lending area to implement changes in the credit process, in part to comply with the May 2002 Order, which accounted for $102 of the increase in salaries and benefits expense. Wages and commissions paid to mortgage lending staff also increased by $207 due to higher volumes of mortgage loans originated. The remaining increase in salaries and benefits was attributable to higher wages paid to other existing staff. Occupancy and equipment expenses of $695 and $680 were incurred during the years ended December 31, 2003 and 2002. Those expenses consist primarily of lease payments for the branch and operations facilities, depreciation and utilities expenses. Note: Dollar amounts in thousands, except per share data.

6.

Data processing expense was $708 for the year ended December 31, 2003 compared to $817 for the year ended December 31, 2002. The decrease in data processing expenses is related to $56 of one time costs associated with transferring the Bank's loan files to an imaging system in 2002. The remainder of the decline in data processing expense was due to lower volumes of loans and deposits and lower contracted charges from data processing vendors. FDIC Insurance was $124 for 2003 compared to $227 for 2002. The decrease is due to the change in the Bank's risk assessment by the FDIC. Professional fees increased to $425 during 2003 from $374 during 2002 due to increased loan collection issues. The increases were due in part to the compliance requirements of the May 2002 Order. Loss on sale and write-down of other real estate was $11 for 2003 compared to $525 for 2002. Other real estate consists of properties obtained in the process of collection of loans. At the time other real estate is obtained, the estimated fair value of the property is recorded as an asset and, if deemed uncollectable, the remaining balance of the loan is recorded as a charge against the allowance for loan losses. Subsequent declines in estimated fair value are recorded as expense. When the property is subsequently sold, any shortfall to the recorded value is recognized as loss on sale. During 2002, Heartland recorded write-downs and losses on the sale of several parcels of other real estate. Loan collection, repossession and other real estate expense was $314 for 2003 and $213 for 2002. The increase is primarily due to the payment of $105 for real estate taxes owed on the property securing one large commercial loan during 2003. The remaining expenses of $829 for the year ended December 31, 2003 and $825 for the year ended December 31, 2002, relate to various other items such as printing, supplies, advertising, loan expenses, postage, insurance and training. Heartland recorded income tax expense of $176 for 2003 compared to income tax benefit of $837 in 2002. The effective tax rate for 2003 was 29.83%, compared to (40.8) %, in 2002. The change in the effective tax rate is primarily due to the net loss before taxes in 2002 and secondarily due to the increased average balance and related interest income on non-taxable securities and income from the increase in cash surrender value of life insurance. LENDING ACTIVITIES The following table sets forth information concerning the composition of the Bank's loan portfolio in dollar amounts stated in thousands and percentages of loans at December 31.
2003 Percent of Amount Gross loans ---------------TYPE OF LOAN Commercial loans and leases $ 64,799 Real estate construction and land development 10,748 Residential mortgages (1-4 family homes) 24,668 Consumer 13,341 -------Gross loans $113,556 ======== 57.06% 9.47 21.72 11.75 -------100.00% ======== $ 2002 Percent of Amount Gross loans ------ ----------66,861 12,489 23,952 16,618 --------$ 119,920 ========= 55.76% 10.41 19.97 13.86 -------100.00% ========

Note: Dollar amounts in thousands, except per share data.

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Generally, declines in loan totals from December 31, 2002 to December 31, 2003 were a result of principal repayments by borrowers and loan charge-offs. The Bank was required during 2002 and 2003 to reduce certain types of loans by agreement with its regulatory agencies. See "Capital Adequacy". During 2002, Heartland implemented lending practices more stringent than previously in place. Heartland also implemented more aggressive collection practices. The new lending and collection practices combined to effectively limit new loan production and to accelerate repayment of some existing loans in 2002 and 2003 and may continue to have a similar effect on loan totals in the foreseeable future. COMMERCIAL LENDING. Commercial loans include loans secured by commercial real estate; and loans for business purchases, operations, inventory and lines of credit. At December 31, 2003, commercial loans totaled $64,799 or 57.06% of the Bank's total loan portfolio. Commercial loans totaled $66,861 or 55.76% of the Bank's loan portfolio at December 31, 2002. The decline in the dollar amount of commercial loans outstanding during 2003 was due in part to compliance with the May 2002 Order. See Note 13 to Heartland's consolidated financial statements for a discussion of the May 2002 Order. REAL ESTATE CONSTRUCTION AND LAND DEVELOPMENT LOANS. Real estate construction and land development loans are secured by real estate and include commercial and residential construction loans and loans to develop land. At December 31, 2003, real estate construction and land development loans totaled $10,748 or 9.46% of the Bank's total loan portfolio compared to $12,489 or 10.41% of the bank's total loan portfolio at December 31, 2002. The Bank was required during 2002 to reduce these types of loans by agreement with its regulatory agencies. 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. The Bank also occasionally originates and retains fixed rate mortgages. At December 31, 2003 the Bank's fixed rate residential mortgage loans totaled $1,831 compared to $493 at December 31, 2002. At December 31, 2003, the Bank's residential mortgage loans totaled $24,668 or 21.72% of the Bank's total loan portfolio compared to $23,952 or 19.97% of the Bank's total loans at December 31, 2002. The Bank also originates fixed rate mortgages and sells them, servicing released, to various investors. At yearend 2003, the Bank held $2,058 of such loans that had been closed and were in the process of being delivered to secondary market buyers. 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, 2003 the Bank's consumer loans totaled approximately $13,341 or 11.75% of the Bank's total loan portfolio compared to $16,618 or 13.86% of the Bank's total loans at December 31, 2002. NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES Nonperforming assets consist of nonperforming loans, real estate owned (acquired in foreclosure), and other repossessed assets. Nonperforming loans include non-accrual loans and accruing loans that are contractually past due 90 days or more as to interest or principal payments. 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 assets totaled $4,455 and $6,426 at December 31, 2003 and 2002. At December 31, 2003, there were no outstanding balances of restructured loans. Note: Dollar amounts in thousands, except per share data.

8.

The provision for loan losses is calculated as the amount needed in order to maintain the balance in the allowance for loan losses at the level estimated by the calculation of allocated allowance. During the year ended December 31, 2003, the provision for loan losses was $692 compared to $3,150 in 2002. Provision for loan losses recorded in 2003 was lower than 2002 primarily due to lower net charge-offs and declines in total loans and non-performing loans. During 2003, Heartland recorded $889 of net charge-offs compared to $3,052 in 2002. Total loans declined by $6,364 and non-performing loans declined by $2,610 during 2003. Provision expense was lower than net-charge-offs in 2003 due to specific allocation of allowance at December 31, 2002 for charge-offs recorded in 2003, declines in allowance for loan losses allocated to groups of loans, changes in the amount of allowance allocated to specific loans and changes in management's risk grades assigned to loans, which are derived from the borrowers' ability to repay, collateral values, economic conditions and other factors. Such allocations declined primarily due to declines in total loan balances and non-performing loan balances during 2003. Changes to the allocation factors used for groups of loans for which allowance is allocated by loan type and risk grade did not cause a material change in the actual dollar amount of allowance allocated to those loans. The allowance is maintained at an amount that we believe to be sufficient to absorb probable incurred losses in the loan portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by our senior management. On a monthly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the board of directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for current provisions for loan losses. Our loan quality monitoring process includes assigning loan grades to all loans and the use of a watch list to identify loans of concern. 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 analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual problem loans, generally based on our analysis of the collateral securing those loans. Specific allocations totaled $1,768 at December 31, 2003 compared to $1,895 at December 31, 2002. The decline is due to $444 of charge-offs, $182 reduction based on decline in balances and improvements in expected repayments of related loans, partially offset by $499 increases in allocations due to increases in balances and deteriorations in expected repayment of certain loans. Portions of the allowance are allocated to pools of loans, based upon a variety of factors including industry loss averages for similarly sized institutions, our own loss history, trends in delinquent and non-performing loans, and economic trends affecting our market. These components are added together and compared to the balance of our allowance at the evaluation date. Total allocation to pools of loans was $1,603 at December 31, 2002 and was $1,534 at December 31, 2003. The decline is due to $659 in charge-offs, $62 due to reduction of balances, partially offset by $652 additional allocation due to declines in internal evaluation of repayment ability of loans within the pools and general economic considerations. At December 31, 2003 the balance of the allowance for loan losses was $3,301 or 2.91% of gross loans outstanding, compared to $3,498 or 2.92% of gross loans outstanding at December 31, 2002. Note: Dollar amounts in thousands, except per share data.

9.

DEPOSIT ACTIVITIES The Bank offers several types of deposit programs designed to attract both short-term and long-term savings by providing an 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. Total deposits were $137,506 at December 31, 2003 compared to $148,399 at December 31, 2002. The bank attempts to manage the total balances of certificates of deposit outstanding in conjunction with the changes in balances of loans outstanding. Due to the decline in loan balances outstanding during 2003, the Bank offered interest rates on interest bearing time deposits that were typically below market competition, which allowed balances of such deposits to decline. However, in order to limit the continued outflow of interest bearing time deposits, the Bank occasionally offered interest rates at or above competitive rates on maturing time deposits in 2003. While time deposits totaling $54,407 were outstanding at December 31, 2002 and scheduled to mature in 2003, time deposits declined by only $18,694 during 2003. This practice was not detrimental to earnings in 2003 because the renewal rates, although higher than current market rates in existence at the time of maturity, were lower than the original rates on the maturing deposits. 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. BANK Liquidity and Interest Rate Sensitivity Liquidity is a measure of the Bank'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 the Bank's net interest income. The Bank manages both its liquidity and interest sensitivity through a coordinated asset/liability management program directed by the Asset Liability Committee. Due to the additional potential liquidity risks associated with public knowledge of the May 2002 Order, the Bank utilizes a liquidity plan that includes heightened liquidity ratios to be maintained and procedures for daily monitoring of liquidity needs, trends and changes in deposits. 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. The Bank has provided for its liquidity needs by maintaining adequate balances in money market assets, through maturing loans and investments in its securities portfolio and by maintaining various short-term borrowing sources. At December 31, 2003, the Bank had $35,108 or 20.9% of total assets in securities available-for-sale, of which $16,689 were pledged to secure borrowings and for other purposes. The Bank also had $8,081 or 4.8% of total assets in cash and cash equivalents and an additional $2,000 available from unused federal funds purchased agreements with two large commercial banks. The Bank also has the ability to borrow from the Federal Home Loan Bank of Indianapolis with various repayment terms ranging from 1 day to 15 years. Such borrowings are secured by investment securities. Note: Dollar amounts in thousands, except per share data.

10.

Liquidity needs primarily arise from the need to fund loan growth and the need to meet the withdrawal needs of depositors. During the year ended December 31, 2003, loans declined throughout the year and provided cash inflows. The cash provided was used to increase securities available for sale and cash surrender value of life insurance and to fund declines in deposits. Life insurance policies held by the Bank are considered investments by the bank as alternatives to loans or securities available for sale, and were purchased with the intent to provide tax free income to the Bank. The Bank is the owner and beneficiary of the policies. The amount recorded as an asset is the net cash surrender value and income on the policies is added to the value of the policy. During 2003 an additional $1,533 was invested in life insurance policies. Total assets were not increased and total cash was not decreased by the purchases. The funds used to purchase the policies would have been used to purchase available for sale securities. Therefore, the capital position of the Bank is not significantly impacted. The policies may be liquidated at any time and therefore do not significantly impact liquidity. The policies are managed by the president and chief financial officer with oversight from the Bank's asset liability committee. Management monitors the published ratings and financial performance of the policy issuers to verify ability to pay potential claims. The total income recorded from life insurance policies held in 2003 was $105 compared to $30 in 2002. Management is not aware of any trends or any know demands, commitments events or uncertainties that may materially affect liquidity during 2004 or the foreseeable future. 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. The Bank 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. The Bank employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. A simulation model is used to measure the Bank'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 Heartland and the Bank are 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. Note 13 to the consolidated financial statements includes a table of Heartland's and the Bank's capital ratios and the related requirements. The most restrictive capital adequacy requirement in place during 2003 and 2002 was from an agreement with the Bank's regulators. Effective May 11, 2002, with the consent of the Bank, the FDIC and DFI entered a formal order under federal and state banking laws, under which the Bank and its Directors were required to take a number of affirmative steps to address regulatory concerns, including but not limited to, maintaining the Bank's ratio of Tier 1 capital to assets at 8% or above; committing not to declare or pay dividends to the Corporation that would result in the Bank's violation of the required capital ratio; limiting growth in total assets to no more than three percent in any three month period without advance approval by the regulators, or more than 12% annually; adopting and implementing plans to resolve certain criticized assets; eliminating or restricting future lending to borrowers whose loans have been criticized by the regulators; and adopting and implementing plans to reduce the volume of the Bank's acquisition, development and construction loans, commercial real-estate loans and high loan-to-value loans, as defined by FDIC Regulation Part 365, in relation to its capital. See note 13 to the consolidated financial statements. Note: Dollar amounts in thousands, except per share data.

11.

On February 23, 2004, the Bank received written notification from the FDIC and the DFI indicating that the Bank would be released from the May 2002 Order subject to the stipulation that the Bank continue to maintain a Tier 1 capital to assets ratio at 8% or above; to limit growth in total assets to no more than three percent per quarter without regulatory approval and to maintain the levels of acquisition, development and construction loans at or below 125% of Tier 1 capital and commercial real-estate loans at or below 250% of Tier 1 capital. As of February 23, 2004, the Bank's Tier 1 capital ratio was 9.49%, total assets had declined to $166,178, acquisition, development and construction loans totaled 61.75% of Tier 1 capital and commercial real-estate loans totaled 203.51% of Tier 1 capital. On February 23, 2004 the Bank's board of directors adopted a resolution accepting the stipulations as presented by the FDIC and DFI and notified the FDIC and DFI of the resolution and intent to abide by the stipulations. Heartland and the Bank intend to maintain the required capital levels by accumulating additional retained earnings and restricting growth in total assets. Management is not aware of any material trends in capital resources. Additionally, there are no expected material changes in the mix and relative cost of capital resources of Heartland or the Bank. PARENT COMPANY LIQUIDITY Liquidity management for Heartland, the parent company of the Bank, centers on the ability of Heartland to meet its obligations to the holders of the $5,155 subordinated debentures (also referred to as the "trust preferred securities"). Heartland's parent-company liquidity and capital resources are restricted by resolutions adopted by its Board of Directors at the request of the Federal Reserve Bank of Chicago pursuant to its supervisory authority under the Bank Holding Company Act. These resolutions prohibit Heartland from incurring debt, paying dividends to Heartland's shareholders, purchasing Heartland's outstanding common stock, or paying interest on the trust preferred securities, without approval of the Reserve Bank. Heartland expects to rely upon liquid assets of the parent company as its short-term source of funds to meet its obligations with respect to the trust preferred securities, and to rely upon dividends from the Bank as the primary long-term source of funds to meet such obligations. At December 31, 2003, Heartland had sufficient liquid assets at the parent-company level to pay the interest payable on the trust preferred securities during 2004, and Heartland may elect to defer the payment of interest on such securities for certain periods of time in any event. Heartland therefore does not expect that the maintenance requirements with respect to the Bank's capital ratio and related Bank dividend limitations that are included in the stipulations of the May 2002 Order or Board resolutions will be material to parent-company liquidity during 2004. Heartland had approximately $1,717 of parent-company cash that would have been available at December 31, 2003, for the payment of interest and other obligations on the subordinated debentures. In addition, at December 31, 2003 the Bank's Tier 1 capital to total assets ratio was 8.91% (% using average assets) and it could have paid dividends of $1,582 without violating the capital ratio maintenance provisions of the regulatory order that is discussed under the "Capital Adequacy" caption above. Note: Dollar amounts in thousands, except per share data.

12.

CRITICAL ACCOUNTING POLICIES The financial condition and results of operations for Heartland presented in Consolidated Financial Statements, accompanying notes to the Consolidated Financial Statements, selected financial data appearing elsewhere within this report, and are to a large degree, dependent upon Heartland's accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change. Included within the summary of significant accounting policies disclosed in Note 1 of the Notes to Consolidated Financial Statements are accounting policies that management feels are critical to the fair presentation of the consolidated financial statements. The critical accounting policies and estimates that Heartland has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses. Any significant deviation from Heartland's existing accounting on any or all of these areas could impact the future financial performance of Heartland. Allowance for Loan Losses Heartland maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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. A provision for loan losses is charged to operations based on management's periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond Heartland's control. Heartland has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio. Additional detailed explanation of the allowance for loan losses is found under the header "NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES" above. Due to the imprecise nature of estimating the allowance for loan losses, Heartland's allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates Heartland's judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period. OFF BALANCE SHEET ARRANGEMENTS 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. For more detail on these arrangements, see Note 14 of the Notes to Consolidated Financial Statements. Note: Dollar amounts in thousands, except per share data.

13.

SERVICE AREA The Bank's primary service area is Johnson County, Indiana. Johnson County lies on the Southern border of Marion County and Indianapolis, Indiana. The Bank has one branch in Franklin and two in Greenwood, which are the two largest cities in the county. The Bank also operates from a fourth 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 1,394,172 shares of Common Stock issued and outstanding to approximately 1,200 shareholders (including beneficial owners who held their shares in street name) on March 22, 2004. The number of shareholders of record was 302 on March 22, 2004 and 307 at December 31, 2003 and January 1, 2004. 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 quarters indicated as reported on the NASD Over-the-Counter Bulletin Board.
High ---...... First Quarter 2002 Second Quarter 2002 Third Quarter 2002 Fourth Quarter 2002 First Quarter 2003 Second Quarter 2003 Third Quarter 2003 Fourth Quarter 2003 $8.65 9.65 9.50 8.30 8.94 9.58 10.00 10.94 Low --$7.80 8.45 7.50 7.51 7.91 8.00 8.95 9.80

The prices quoted above represent prices between dealers and do not include adjustments for mark-ups, markdowns or commissions and do not necessarily represent actual transactions. Heartland has not paid cash dividends since its inception and does not anticipate doing so in the foreseeable future. 14.

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, 2003 and 2002. o Consolidated Statements of Operations for the years ended December 31, 2003 and 2002. o Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003 and 2002. o Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002. o Notes to consolidated financial statements. 15.

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, 2003 and 2002 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Crowe Chizek and Company LLC Indianapolis, Indiana March 3, 2004 16.

HEARTLAND BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 (Dollar amounts in thousands)

2003 ---ASSETS Cash and due from banks Federal funds sold Total cash and cash equivalents Time deposits with other financial institutions Securities available-for-sale Loans held for sale Loans, net of allowance of $3,301 and $3,498 Premises and equipment, net Federal Home Loan Bank stock Cash surrender value of life insurance Accrued interest receivable and other assets $ 8,081 2,636 -------10,717 500 35,108 2,058 110,255 2,509 638 2,384 3,760 -------$167,929 ========

2002 ---$ 10,198 15,034 -------25,232 500 19,566 7,156 116,422 2,673 608 960 3,695 -------$176,812 ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities Noninterest-bearing deposits Interest-bearing demand and savings deposits Interest-bearing time deposits Total deposits Repurchase agreements Federal Home Loan Bank advances Subordinated debentures Accrued interest payable and other liabilities Total liabilities Shareholders' equity Common stock, no par value: 10,000,000 shares authorized; 1,394,172 shares issued and outstanding Additional paid-in capital Accumulated deficit Accumulated other comprehensive income

$ 19,343 67,408 50,755 -------137,506 7,812 4,000 5,155 904 -------155,377

$ 18,542 60,408 69,449 -------148,399 6,251 4,000 5,155 807 -------164,612

1,394 11,360 (441) 239 -------12,552 -------$167,929 ========

1,394 11,360 (855) 301 -------12,200 -------$176,812 ========

See accompanying notes.

17.

HEARTLAND BANCSHARES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

2003 ---Interest income Loans, including related fees Securities: Taxable Non-taxable Short-term investments $ 8,091

2002 ---$ 9,654 965 123 230 ------10,972

868 124 147 -------9,230

Interest expense Deposits Short-term borrowings Other borrowings

Net interest income Provision for loan losses

2,351 26 381 -------2,758 -------6,472 692 -------5,780

3,671 74 462 ------4,207 ------6,765 3,150 ------3,615

Net interest income after provision for loan losses Noninterest income Deposit service charges and fees Commissions on investment sales Gain on sale of securities Gain on sale of loans, net Other

634 367 1 1,009 211 -------2,222

600 389 57 712 186 ------1,944

Noninterest expense Salaries and employee benefits Occupancy and equipment, net Data processing FDIC insurance Professional fees Loss on sale and write-down of other real estate Loan collection, repossession and other real estate expense Other

4,306 695 708 124 425 11 314 829 -------7,412 -------590 176 -------$ 414 ======== $ .30 ========

3,948 680 817 227 374 525 213 825 ------7,609 ------(2,050) (837) ------$(1,213) ======= $ (.87) =======

Income/(loss) before income taxes Income taxes

Net income/(loss)

Basic and diluted earnings/(loss) per share

See accompanying notes.

18.

HEARTLAND BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

Retained Accumulated Additional Earnings/ Other Total Common Paid-in (Accumulated Comprehensive Shareholders' Stock Capital Deficit) Income Equity ---------------------------Balance January 1, 2002 $1,394 $ 11,360 $ 358 $ 151 $13,263

Comprehensive income/(loss) Net loss for 2002 Change in unrealized gain/(loss) on securities available for sale, net Total comprehensive income/(loss) Balance December 31, 2002 ----1,394 -----11,360

(1,213)

(1,213)

150

150 -----(1,063) -----12,200

---(855)

--301

Comprehensive income/(loss) Net income for 2003 Change in unrealized gain/(loss) on securities available for sale, net Total comprehensive income/(loss) ----Balance December 31, 2003 $1,394 ====== -------$ 11,360 ========

414

414

(62)

(62) -----352 -----$12,552 =======

-----$ (441) ======

-----$ 239 ======

See accompanying notes.

19.

HEARTLAND BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003 and 2002 (Dollar amounts in thousands) -----------------------------------------------------------------------------2003 2002 ------Cash flows from operating activities Net income/(loss) $ 414 $ (1,213) Adjustments to reconcile net income/(loss) to net cash from operating activities Depreciation and amortization 572 316 Gain on sale of securities, net (1) (57) Loss on sale and write-down of other real estate 11 525 Provision for loan losses 692 3,150 FHLB stock dividends (30) Gain on sales of loans, net (1,009) (712) Loans originated for sale (64,716) (50,404) Proceeds from loans sold 70,823 48,557 Increase in cash surrender value of life insurance (105) (30) Change in assets and liabilities: Accrued interest receivable and other assets 581 (435) Accrued interest payable and other liabilities 130 98 ------------Net cash from operating activities 7,362 (205) Cash flows from investing activities Purchase of securities available-for-sale Proceeds from sales, calls and maturities of securities available-for-sale Loans made to customers, net of payments collected Purchase of FHLB stock Proceeds from sale of other real estate Purchases of bank owned life insurance Redemption of bank owned life insurance Net purchases of property and equipment Net cash from investing activities Cash flows from financing activities Net change in deposit accounts Net change in repurchase agreements Draws on FHLB advances Repayments on FHLB advances Net cash from financing activities

(41,756) 25,835 2,798 1,987 (1,533) 214 (90) -------(12,545)

(17,164) 15,514 21,585 (96) 1,106 (120) -------20,825

(10,893) 1,561 3,000 (3,000) -------(9,332) -------(14,515) 25,232 -------$ 10,717 ========

(12,592) 697 -------(11,895) -------8,725 16,507 -------$ 25,232 ========

Net change in cash and cash equivalents Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures of cash flow information Cash paid during the period for:
Interest Income taxes Supplemental disclosure of non-cash activities: Transfer from loans to other real estate $ 2,817 (393) 2,677 $ 4,290 92 2,079

$

$

See accompanying notes.

20.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (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. As further discussed in Note 8, a trust that had previously been consolidated with the Corporation is now reported separately. The Corporation is engaged in the business of commercial and retail banking, with operations conducted through its main office located in Franklin, Indiana and additional branch locations in Greenwood and Bargersville, 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 accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported and disclosed in the financial statements, and future results could differ from these estimates. 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 in other comprehensive income, net of tax. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Loans Held For Sale: Loans held for sale are mortgage loans closed by the Bank and in the process of being delivered to loan brokers. These loans are carried at the lower of cost or market, on an aggregate basis. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff 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.

(Continued) 21.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interest income is not reported when full loan repayment is in doubt, typically when payments are significantly past due. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of 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. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired 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. Premises and Equipment: Premises 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. Estimated useful lives range from 3 years to 40 years. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

(Continued) 22.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Company Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized, and was carried at $2,384 and $960 at December 31, 2003 and 2002 and shown in other assets. 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: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 ---Net income/(loss) as reported Deduct: Stock-based compensation expense determined under fair value based method Pro forma net income/(loss) $ 414 $ 2002 ---(1,213)

65 ---------$ 349 ==========

17 --------$ (1,230) =========

Basic and diluted earnings/(loss) per share as reported Pro forma basic and diluted earnings/(loss) per share

$

.30 .25

$

(.87) (.88)

The pro forma effects are computed using an option pricing model, using the following weighted-average assumptions as of grant date.
2003 ---Risk-free interest rate Expected option life Expected stock price volatility Dividend yield 3.12% 6.0 years 12.58% 0.00% 2002 ---3.55% 5.0 years 13.37% 0.00%

(Continued) 23.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments, such as standby letters of credit, that are considered financial guarantees in accordance with FASB Interpretation Number 45, are not significant. Statement of Cash Flows: Cash and cash equivalents are defined to include cash on hand, amounts due from banks, and federal funds sold. The Corporation reports net cash flows for customer loan transactions, deposit transactions, and short-term borrowings. 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. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. 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 and is recognized as a separate component 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. See footnote 13. 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.

(Continued) 24.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Segment Reporting: Internal financial information is primarily reported and aggregated in one line of business, banking. 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. Adoption of New Accounting Standards: During 2003, the Company adopted FASB Statement 143, Accounting for Asset Retirement Obligations, FASB Statement 145, Rescission of FAS Statement 4, 44 and 64, Amendment of FAS Statement 13, and Technical Corrections, FASB Statement 146, Accounting for Costs Associated with Exit or Disposal Activities, FASB Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, FASB Statement 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits and FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees. Adoption of the new standards did not materially affect the Company's operating results or financial condition. The Corporation also adopted FASB Interpretation 46, Consolidation of Variable Interest Entities. Interpretation 46, as revised in December 2003, changes the accounting model for consolidation from one based on consideration of control through voting interests. Whether to consolidate an entity will now also consider whether that entity has sufficient equity at risk to enable it to operate without additional financial support, whether the equity owners in that entity lack the obligation to absorb expected losses or the right to receive residual returns of the entity, or whether voting rights in the entity are not proportional to the equity interest and substantially all the entity's activities are conducted for an investor with few voting rights. See Note 8 for details on the impact of this Interpretation. Newly Issued But Not Yet Effective Accounting Standards: No new accounting standards have been issued that are not yet effective that would have a material impact on the Corporation's financial condition or results of operations.

(Continued) 25.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 2 - SECURITIES The fair value of securities available for sale and the related gains and losses recognized in other comprehensive income/loss were as follows:
Gross Gross Unrealized Unrealized Gains Losses ----------

Fair Value ----2003 U.S. Government and government sponsored entities Obligations of states and political subdivisions Mortgage backed securities Corporate obligations

$17,417 4,499 12,076 1,116 ------$35,108 =======

$

93

$

(47)

143 148 84 -------$ 468 ========

(29) ------$ (76) =======

2002 U.S. Government and government sponsored entities Obligations of states and political subdivisions Mortgage backed securities Corporate obligations

$ 7,937 2,709 7,826 1,094 ------$19,566 =======

$

104

$

-

119 212 54 -------$ 489 ========

(2) ------$ (2) =======

During 2003 and 2002, gross proceeds from sales of securities were $2,002 and $3,035. Recognized gains were $1 and $57. There were no recognized losses. The fair value of securities at December 31, 2003, by contractual maturity, is shown below.
Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage backed securities $ 2,022 17,904 1,905 1,201 12,076 --------

$ 35,108

Securities with a carrying value of $16,689 and $15,900 at December 31, 2003 and 2002 were pledged to secure borrowings and for other purposes.

(Continued) 26.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 2 - SECURITIES (Continued) Securities with unrealized losses at year end 2003 not recognized in income presented by length of time in an unrealized loss position are as follows:
Less than 12 Months ------------------Fair Unrealized Value Loss -------12 Months or More Total --------------------Fair Unrealized Fair Unrealized Value Loss Value Loss ----- -----------

Description of Securities -------------------------

US Government and government sponsored entities $2,977 Mortgage backed securities 2,890 ------

$ (47) (29) -----

-------

$

$

-----

$2,977 2,890 ------

$ (47) (29) -----

Total temporarily impaired $5,867 $ (76) $ - $ - $5,867 $ (76) Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates change. NOTE 3 - LOANS Loans at year end are comprised of the following:
2003 ---Commercial loans and leases Real estate construction and land development Residential real estate Consumer Subtotal Less: Allowance for loan losses $ 64,799 10,748 24,668 13,341 -------113,556 (3,301) -------$110,255 ======== 2002 ---$ 66,861 12,489 23,952 16,618 -------119,920 (3,498) -------$116,422 ========

Certain of the Corporation's officers and directors were loan customers of the Bank. The balance of loans outstanding to these individuals was $973 and $1,880 at December 31, 2003 and 2002. New loans originated and advances on existing loans during 2003 were $1,184 and repayments were $2,091.

(Continued) 27.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 4 - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows:
2003 ---Beginning balance Provision charged to operations Loans charged-off Recoveries on loans previously charged-off $ 3,498 692 (1,103) 214 -------$ 2002 ---3,400 3,150 (3,702) 650 --------

Ending balance

$ 3,301 ========

$ 3,498 ========

Information about impaired loans is as follows: 2003 ---Year-end loans with no allowance for loan losses allocated $ Year-end loans with allowance for loan losses allocated Amount of the allowance allocated Average of impaired loans during the year Interest income recognized during impairment Cash-basis interest income received during impairment Non-performing loans: Loans on non accrual status at year end Loans delinquent greater than 90 days and still accruing at year end 1,945 437 3,765 3,023 $ 2002 ---4,689 812 4,239 4,857 776

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows:
2003 ---Land Buildings and improvements Leasehold improvements Furniture and equipment Total Accumulated depreciation $ 205 1,793 312 1,358 -------3,668 (1,159) -------$ 2002 ---205 1,793 312 1,332 -------3,642 (969) --------

Premises and equipment, net

$ 2,509 ========

$ 2,673 ========

Depreciation expense was $254 and $300 for 2003 and 2002.

(Continued) 28.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 6 - DEPOSITS Interest-bearing time deposits issued in denominations of $100 or greater totaled $14,157 and $26,418 at December 31, 2003 and 2002. Scheduled maturities of time deposits for the next five years are as follows:
2004 2005 2006 2007 2008 Thereafter $ 27,815 17,297 2,840 2,112 691 -------$ 50,755 ========

Time deposits from governmental and other public entities such as school corporations and hospitals in the Bank's market area totaled $2,536 at December 31, 2003 and $2,418 at December 31, 2002. Certain of the Corporation's officers and directors were deposit customers of the Bank. The balance of deposits with these individuals was $2,110 and $11,481 at December 31, 2003 and 2002. NOTE 7 - REPURCHASE AGREEMENTS AND FHLB ADVANCES Securities sold under agreements to repurchase are secured by pledged securities with a carrying amount of $8,787 and $9,212 at year-end 2003 and 2002. Securities sold under agreements to repurchase are financing arrangements that have daily maturities and variable interest rates. Information concerning securities sold under agreements to repurchase is summarized as follows:
2003 ---Average daily balance during the year Average interest rate during the year Maximum month-end balance during the year Weighted average interest rate at year end $ $ 4,194 0.62% 7,812 0.60% 2002 ---$ 4,855 1.52% $ 7,364 .75%

Federal Home Loan Bank (FHLB) advances are payable at maturity, generally with a prepayment penalty. They are collateralized by pledged securities with a carrying amount of $5,136 and interest bearing deposits of $1,505 at December 31, 2003. Interest is payable monthly.

(Continued) 29.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 7 - REPURCHASE AGREEMENTS AND FHLB ADVANCES (Continued) FHLB advances are comprised of the following individual advances at December 31:
Maturity date ------------Interest Rate ------------1.49% 2.36 3.68 4.66 3.08 $ 2003 ---2,000 1,000 1,000 -------$ 4,000 ======== $ 2002 ---1,000 2,000 1,000 ------$ 4,000 =======

July 14, 2004 December 29, 2005 November 1, 2004 July 14, 2003 October 30, 2003

NOTE 8 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES On December 18, 2001, a trust formed by the Corporation issued $5,000 of floating rate trust preferred securities as part of a pooled offering of such securities. The Corporation issued subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the trust. Issuance costs of $156 paid from the proceeds are being amortized over the first five years of the securities. Distributions on the securities are payable quarterly in arrears at the annual rate of LIBOR plus 3.60%. The rate cannot exceed 12.50%. The Trust Preferred Securities, which mature December 18, 2031, are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable prior to the maturity date at the option of the Corporation on or after December 18, 2006. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The Corporation has the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

(Continued) 30.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 8 - SUBORDINATED DEBENTURES AND TRUST PREFERRED SECURITIES (Continued) Prior to 2003, the trust was consolidated in the Corporation's financial statements, with the trust preferred securities issued by the trust reported in liabilities as "guaranteed preferred beneficial interests" and the subordinated debentures eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trust is no longer consolidated with the Corporation. Accordingly, the Corporation does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Corporation and held by the trust, as these are no longer eliminated in consolidation. Accordingly, the amounts previously reported as "guaranteed preferred beneficial interests" in liabilities have been recaptioned "subordinated debentures" and continue to be presented in liabilities on the balance sheet for all periods presented. The effect of no longer consolidating the trust does not significantly affect financial statement classifications, and does not change the Corporation's equity or net income. 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 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 after entering the plan. The 401(k) contribution charged to expense was $79 and $65 for 2003 and 2002. NOTE 10 - STOCK OPTION PLANS At December 31, 2003, the Corporation maintained three stock option plans: an employee plan (under which options may be granted through 2007), a non-employee director plan (under which options may be granted through January 2008) and a non-employee director plan (under which no new options may be granted after September, 2003). Under the terms of these plans, options for up to 305,780 shares of the Corporation's common stock may be granted to employees and directors of the Corporation and its subsidiaries with 28,804 shares still available for grant at December 31, 2003. The exercise price of options granted to employees under the employee plan is 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.

(Continued) 31.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 10 - STOCK OPTION PLANS (Continued) Employee options are immediately exercisable with respect to 20 percent of the shares covered by the option and 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 ten years after date of grant. Non-employee director options issued under the expired non-employee director plan provided for a vesting schedule, and the holders of all options granted under that plan that were outstanding at December 31, 2003, have satisfied that vesting schedule and all of such options are now exercisable in full. Non-employee director options issued under the currently active non-employee director plan are immediately exercisable. The option plans provide usual and customary provisions providing for the adjustment of the exercise price and number and type of shares subject to grants under the plans in the event of certain corporate events, and the acceleration of the rights of an optionee to exercise unvested stock options in certain events. A summary of the Corporation's stock option activity, and related information follows:
2 0 0 3 ------WeightedAverage Exercise Options Price ----------Outstanding - beginning of period Granted Exercised Forfeited 135,044 83,500 --------218,544 ========= 182,044 ========= $ 9.07 9.07 -----2 0 0 2 ------WeightedAverage Exercise Options Price ----------147,735 5,500 (18,191) -------135,044 ========= 125,021 ========= $ 9.07 9.07 9.07 ------

Outstanding-end of period

$ 9.07 ======= $ 9.07 ======

$ 9.07 ========= $ 9.07 =========

Exercisable at end of period

Weighted average remaining life of outstanding options Weighted average fair value of options granted during the year

6.19 years

5.41 years

$ 1.53 ========

$ 1.11 =======

(Continued) 32.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 11 - INCOME TAXES Income tax expense/(benefit) was as follows:
2003 ---Current Deferred Total 170 6 -------$ 176 ======== $ $ 2002 ---(653) (184) ------$ (837) =======

Effective tax rates differ from federal statutory rates applied to pre-tax income due to the following:
2003 ---Federal statutory rate times financial statement income/(loss) Effect of: Tax-exempt income State taxes, net of federal tax effect Other, net Total $ 201 $ 2002 ---(697)

(38) 34 (21) -------$ 176 ========

(38) (111) 9 ------$ (837) =======

Year-end deferred tax assets and liabilities were due to the following:
2003 ---Deferred tax assets: Allowance for loan losses Deferred compensation State net operating loss carryforward Other $ 896 105 40 55 -------1,096 2002 ---$ 950 69 83 44 ------1,146

Deferred tax liabilities: Depreciation Cash to accrual adjustment Net unrealized gains on securities Other

Total

(93) (107) (153) (57) -------(410) -------$ 686 ========

(87) (213) (186) (1) ------(487) ------$ 659 =======

The Corporation has a net operating loss carryforward for state income tax purposes of $719 expiring in 2017.

(Continued)

33.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 12 - EARNINGS PER SHARE The following illustrates the computation of basic and diluted earnings per share.
2003 ---Basic earnings per share Net income/ (loss) $ 414 ========== 1,394,172 ========== $ .30 ========== 2003 ---Dilutive earnings per share Net income/ (loss) $ 414 ========== 1,394,172 2,277 --------1,396,449 ========== $ .30 ========== 2002 ---$ (1,213) ========= 1,394,172 ========= $ (.87) ========== 2002 ---$ (1,213) ========= 1,394,172 --------1,394,172 ========= $ (.87) ==========

Weighted average shares outstanding

Basic earnings per share

Weighted average shares outstanding Dilutive effect of assumed exercise of stock options Diluted average shares outstanding

Diluted earnings per share

Outstanding stock options for 135,044 shares of common stock were not considered dilutive for computing diluted earnings per share in 2002, but were included in dilutive effect of assumed exercise of stock options in 2003. NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS The Bank and the Corporation are 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 promulgated by the FDIC affect the Bank and 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.

(Continued) 34.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS (Continued) At year-end 2003 and 2002, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. Actual capital levels and minimum required levels were:
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Adequacy Purposes Action Regulations ----------------- -----------------Amount Ratio Amount Ratio -------------------

Actual -----Amount Ratio ---------2003 - Bank Total capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Tier 1 capital (to average assets) 2003 - Corporation Total capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Tier 1 capital (to average assets)

$17,056 15,523 15,523

14.11% 12.84 8.91

$9,669 4,835 6,970

8.00% 4.00 4.00

$12,087 7,252 8,713

10.00% 6.00 5.00

$18,846 16,497 16,497

15.55% 13.62 9.46

$9,693 4,847 6,675

8.00% 4.00 4.00

N/A N/A N/A

2002 - Bank Total capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Tier 1 capital (to average assets) 2002 - Corporation Total capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Tier 1 capital (to average assets)

$16,509 14,935 14,935

12.96% 11.73 8.35

$10,188 5,094 7,150

8.00% 4.00 4.00

$12,735 7,641 8,938

10.00% 6.00 5.00

$18,473 14.48% 15,865 12.44 15,865 8.86

$10,205 5,103 7,159

8.00% 4.00 4.00

N/A N/A N/A

(Continued) 35.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS (Continued) On May 11, 2002, with the consent of the Bank, the FDIC and the Indiana Department of Financial Institutions (DFI) entered a formal order under federal and state banking laws, under which the Bank and its Directors are required to take a number of affirmative steps to address regulatory concerns, including but not limited to, maintaining the Bank's ratio of Tier 1 capital to assets at 8% or above; committing not to declare or pay dividends to the Corporation that would result in the Bank's violation of the required capital ratio; limiting growth in total assets to no more than three percent in any three month period without advance approval by the regulators, or more than 12% annually; adopting and implementing plans to resolve certain criticized assets; eliminating or restricting future lending to borrowers whose loans have been criticized by the regulators; and adopting and implementing plans to reduce the volume of the Bank's acquisition, development and construction loans, commercial real-estate loans and high loan-to-value loans, as defined by FDIC Regulation Part 365, in relation to its capital. On February 23, 2004, Heartland received written notification from the FDIC and the DFI indicating that the Bank would be released from the May 2002 Order subject to the stipulation that the Bank continue to maintain a Tier 1 capital to assets ratio at 8% or above; to limit growth in total assets to no more than three percent per quarter without regulatory approval and to maintain the levels of acquisition, development and construction loans at or below 125% of Tier 1 capital and commercial real-estate loans at or below 250% of Tier 1 capital. On February 23, 2004 the Bank's board of directors adopted a resolution accepting the stipulations as presented by the FDIC and DFI and notified the FDIC and DFI of the resolution and intent to abide by the stipulations. Heartland's parent-company liquidity and capital resources are restricted by resolutions adopted by its Board of Directors at the request of the Federal Reserve Bank of Chicago pursuant to its supervisory authority under the Bank Holding Company Act. These resolutions prohibit Heartland from incurring debt, paying dividends to Heartland's shareholders, purchasing Heartland's outstanding common stock, or paying interest on the trust preferred securities, without approval of the Reserve Bank.

(Continued) 36.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES The Bank leases certain facilities and land under operating leases expiring through 2016. The related lease expense was $311 and $310 for 2003 and 2002. Future minimum lease payments are as follows:
2004 2005 2006 2007 2008 Thereafter $ 313 288 289 313 290 2,015 --------

Total minimum lease payments

$ 3,508 ========

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:
2 0 0 3 ------Fixed Variable Rate Rate ------$ 2,310 $ 8,440 24,580 1,267 2 0 0 2 ------Fixed Variable Rate Rate ------$ 3,538 21,953 1,347

Commitments to make loans Unused lines of credit Letters of credit

$

Interest rates on fixed rate loan commitments ranged from 5.00% to 6.50% at December 31, 2003. 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 $1,540 and $950 at December 31, 2003 and 2002. These reserves do not earn interest.

(Continued) 37.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (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:
2 0 0 3 ------Carrying Fair Value Value --------Financial assets: Cash and cash equivalents $ 10,717 Time deposits with other financial institutions 500 Securities available-for-sale 35,108 Loans held for sale 2,058 Loans, net 110,255 FHLB stock 638 Accrued interest receivable 711 $ 10,717 500 35,108 2,096 111,625 638 711 2 0 0 2 ------Carrying Fair Value Value --------$ 25,232 500 19,566 7,156 116,422 608 718 $ 25,232 500 19,566 7,263 118,352 608 718

Financial liabilities: Deposits Repurchase agreements FHLB advances Trust preferred securities Accrued interest payable

$(137,506) (7,812) (4,000) (5,155) (92)

$(137,928) (7,812) (4,018) (5,155) (92)

$(148,399) (6,251) (4,000) (5,155) (151)

$(149,134) (6,251) (4,048) (5,155) (151)

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 of loans held for sale is based on market quotes. 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 fixed rate IRAs, time certificates of deposit, and borrowings 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) 38.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (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
2003 ---ASSETS Cash Investment in bank Investment in unconsolidated subsidiary Other assets $ 1,717 15,760 155 128 -------$ 2002 ---1,752 15,236 155 221 --------

$ 17,760 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Subordinated debentures Other liabilities Total liabilities Shareholders' equity

$ 17,364 ========

$

5,155 53 -------5,208 12,552 --------

$

5,155 9 -------5,164 12,200 --------

$ 17,760 ========

$ 17,364 ========

CONDENSED STATEMENTS OF INCOME
2003 ---Interest and dividend income Interest expense Other expense Tax benefit $ 41 (252) (74) 113 -------$ 2002 ---29 (297) (63) 132 --------

Income/(loss) before equity in undistributed earnings of bank Equity in undistributed earnings/(loss) of bank

(172) 586 --------

(199) (1,014) --------

Net income/(loss)

$ 414 ========

$ (1,213) ========

(Continued)

39.

HEARTLAND BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (Dollar amounts in thousands, except per share data)

NOTE 16 - PARENT COMPANY STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS
2003 ---Cash flows from operating activities Net income/(loss) Adjustments to reconcile net income/(loss) to net cash from operating activities Equity in undistributed (earnings)/ loss of bank Other assets and other liabilities, net Net cash from operating activities Net change in cash and cash equivalents Beginning cash and cash equivalents 2002 ----

$

414

$(1,213)

(586) 137 -------(35) (35) 1,752 -------$ 1,717 ========

1,014 (71) ------(270) (270) 2,022 ------$ 1,752 =======

Cash and cash equivalents at end of period

NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes were as follows:
2003 ---Unrealized holding gains and losses on securities available-for-sale Reclassification adjustment for gains and losses later recognized in income Net unrealized gains and losses Tax effect Other comprehensive income (loss) $ (94) $ 2002 ---296

(1) -------(95) 33 -------$ (62) ========

(57) ------239 (89) ------$ 150 =======

37.

DIRECTORS AND OFFICERS OF HEARTLAND COMMUNITY BANK
Directors: Gordon R. Dunn, Chairman of the Board Patrick A. Sherman, Vice Chairman Officers: Steve Bechman, President and Chief Executive Officer Mary Carter, Assistant Vice Manager Sharon Acton, Director John Norton, Director Robert Richardson, Director J. Michael Jarvis, Director Steve Bechman, Director Jeffrey L. Goben, Director

President

and

Branch

Jeffrey L. Goben, Executive Vice President, Chief Operating Officer and Secretary John M. Morin, Senior Vice President, Consumer Loans Eric Johnson, Chief Credit Officer Jeff Joyce, Vice President and Controller R. Trent McWilliams, Vice President, Business Development Tony Anderson, Vice President, Mortgage Loans Pam Fender, Vice President, Deposit Operations Robert Maher, Vice President, CD Brokerage Program Alexa McKnight, Assistant Vice President Terri Webb, Assistant Vice President Lisa Shirar, Compliance Officer

Jeff Tillman, Assistant Vice President,

David Mote, Assistant Vice President, Mortgage Loans Judy Peel, Assistant Vice President, Loan Officer Pat Purtell, Assistant Vice President, Loan Officer Connie Hann, Mortgage Loan Officer Melissa Duke, Commercial Loan Officer Ken Yedlick, Commercial Loan Officer Kathee Pruitt, Branch Manager Trudy Holtsclaw, Branch Manager Tonia Bussinger, Collections Officer Michael Yovanoff, Portfolio Manager

41.

Banking Facilities Franklin: 420 North Morton Street (US 31) Franklin, Indiana 46131 Phone (317) 738-3915 FAX (317) 738-7315 Bargersville: 507 Three Notch Lane Bargersville, Indiana 46106 Phone (317) 422-1370 FAX (317) 422-1495 Operations and Commercial Loan Center 460 North Morton Street (US 31) Franklin, Indiana 46131 Phone (317) 738-3915 FAX (317) 736-5022 World Wide Web: www.HeartlandCommunityBank.com Investor Relations/Analyst Contact Jeff D. Joyce, Chief Financial Officer Phone (317) 738-2854 FAX (317) 736-5022 Jeff.Joyce@hcb-in.com Greenwood: 489 South State Road 135 Greenwood, Indiana 46142 Phone (317) 881-3915 FAX (317) 859-3849 Greenwood: 800 South US 31 Greenwood, Indiana 46143 Phone (317) 885-7371 FAX (317) 885-7305

42.

21. Subsidiaries of the Issuer and names under which the Issuer is doing business.
Jurisdiction of Organization -----------Indiana Connecticut

Name ---Heartland Community Bank Heartland Statutory Trust (IN)

Assumed Names ------------Heartland Investment Services

Exhibit 31.1 Section 302 Certification for President and Chief Executive Officer I, Steven L. Bechman, President and Chief Executive Officer of Heartland Bancshares, Inc., certify that: 1. I have reviewed this annual report on Form 10-KSB of Heartland Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [clause omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting
Date:__03/29/2004_____ _/s/ Steven L. Bechman Steven L. Bechman, Chief Executive Officer

Exhibit 31.2 Section 302 Certification for Chief Financial Officer Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer I, Jeffery D. Joyce, Chief Financial Officer, of Heartland Bancshares, Inc., certify that: 1. I have reviewed this annual report on Form 10-KSB of Heartland Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [clause omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting
Date: ___ 03/29/2004________ _/s/ Jeffery D. Joyce Jeffery D. Joyce, Chief Financial Officer

Exhibit 32.1 Section 906 Certification for President and Chief Executive officer Certification I, Steve Bechman, the Chief Executive Officer of Heartland Bancshares, Inc., certify that (i) the Annual Report on Form 10-KSB for the Annual period ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Annual Report on Form 10-KSB for the annual period ended December 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of Heartland Bancshares, Inc.
__/s/ Steven L. Bechman_________

_Steven L. Bechman______________ _March 29, 2004 _______________

Exhibit 32.2 Section 906 Certification for Chief Financial Officer Certification I, Jeffery Joyce, the Chief Financial Officer of Heartland Bancshares, Inc., certify that (i) the Annual Report on Form 10-KSB for the Annual period ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Annual Report on Form 10-KSB for the annual period ended December 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of Heartland Bancshares, Inc.
__/s/ Jeffery D. Joyce ____

_Jeffery D. Joyce___________ _March 29, 2004 ____________

Exhibit 99.1 The Issuer's 2004 Proxy Statement. HEARTLAND BANCSHARES, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 17, 2004 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, May 17, 2004, 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 2007 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 22, 2004, are entitled to notice of and to vote at the Annual Meeting. Appetizers 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 29, 2004 Franklin, Indiana (ANNUAL REPORT ENCLOSED)

PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS OF HEARTLAND BANCSHARES, INC. May 17, 2004 This Proxy Statement is being furnished to shareholders on or about March 29, 2004, 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, May 17, 2004, 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 22, 2004, the record date for the Annual Meeting, there were 1,394,172 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 eight members, is divided into three classes 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: 2004 - J. Michael Jarvis, Robert Richardson and Patrick A. Sherman; 2005 - Steve Bechman and Gordon R. Dunn; and 2006 - Sharon Acton, Jeffrey L. Goben and John Norton. Each Director will be elected by a plurality of the votes cast in the election. Shares present but not voted for any nominee do not affect the determination of whether a nominee has received a plurality of the votes cast. It is the intention of the persons named in the accompanying form of proxy to vote such proxy for the election to the Board of Directors of J. Michael Jarvis, Robert Richardson and Patrick A. Sherman, 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).

The following table presents certain information as of March 22, 2004, 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.
Name, Present Principal Occupation and Age -----------------Percent of Common Shares Outstanding -----------

Shares Beneficially Owned -----

Sharon Acton1 Retired Age 57 Steve Bechman President and Chief Executive Officer of the Company and Bank Age 52 Gordon R. Dunn Retired Age 82 Jeffrey L. Goben Executive Vice President and Chief Operating Officer of the Company and Bank Age 51 J. Michael Jarvis6* Owner and Consultant to Jarvis Enterprises (Real estate venture) Age 61 John Norton8 President and Owner, Norton Farms, Inc. Age 56

15,4552

1.10%

66,0153

4.62

35,4594

2.52

50,6825

3.56

25,6907

1.82

22,0789

1.57

Name, Present Principal Occupation and Age ------------------

Shares Beneficially Owned ----19,12910

Percent of Common Shares Outstanding ----------1.36

Robert Richardson* Vice President, General Manager Meridian IQ (logistics company) Age 42 Patrick A. Sherman* President and Part Owner, Sherman & Armbruster P.C. (a public accounting firm) Age 56 All Directors and Executive Officers as a group (12 persons)

21,33311

1.51

297,74912,13

18.86%

*Nominee 1 During 2002, Ms. Acton retired from her position as Manager of the Franklin/Greenwood District of Cinergy/PSI, where she was employed for 33 years. 2 Includes 14,718 shares Ms. Acton has the right to acquire upon the exercise of stock options. 3 Includes 15,417 shares that Mr. Bechman holds jointly with his spouse and 34,146 shares that he has the right to acquire upon the exercise of stock options. 4 Includes 1,102 shares that Mr. Dunn holds jointly with his spouse, 5,512 shares held in a trust for which Mr. Dunn acts as trustee, 1,401 shares held by Mr. Dunn's spouse and 14,718 shares that Mr. Dunn has the right to acquire upon the exercise of stock options. 5 Includes 9,879 shares that Mr. Goben holds jointly with his wife and 28,633 shares that he has the right to acquire upon the exercise of stock options. 6 During 2002, Mr. Jarvis sold his ownership in and retired from his position as president of Power Investments, Inc., a Franklin based engine remanufacturer. 7 Includes 10,972 shares Mr. Jarvis holds jointly with his spouse and 14,718 shares Mr. Jarvis has the right to acquire upon the exercise of stock options. 8 Mr. Norton is owner and president of Norton Farms, Inc., a grain farming operation located in Franklin, Indiana. 9 Includes 110 shares held by Mr. Norton's spouse and 14,718 shares that Mr. Norton has the right to acquire upon the exercise of stock options. 10 Includes 14,718 shares that Mr. Richardson has the right to acquire upon the exercise of stock options. 11 Includes 14,718 shares that Mr. Sherman has the right to acquire upon the exercise of stock options. 12 Includes 184,948 shares that Directors and executive officers have the right to acquire upon the exercise of stock options and 45,219 shares held jointly with or as custodian for family members. 13 Does not include 4,500 shares Mr. Bechman may acquire, 4,500 shares Mr. Goben may acquire or 11,100 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. The Board of Directors consists of six non-employee directors and two employee directors.

Compensation of Directors During 2003, non-employee Directors of the Bank received $300 per month (the Chairman received $500 per month) regardless of attendance at Board meetings. Directors did not receive any additional compensation for serving on the Company's Board or on Board committees of the Company or Bank. In January 2003, the Board of Directors of the Company adopted the 2003 Non-Employee Director Stock Option Plan, and reserved an aggregate of 50,000 shares of the Corporation's authorized but unissued common shares for grants thereunder. In conjunction with the adoption of this Plan, the Company's Board of Directors, as additional consideration for the services of its non-employee members in 2002 and prior years, awarded stock options to each of the six non-employee directors with respect to 7,000 shares each (an aggregate of 42,000 shares) at an exercise price of $9.07 per share. The numbers and types of shares subject to these options, and the exercise price per share, are subject to usual and customary adjustment in accordance with the Plan upon certain events. These options are exercisable immediately and will expire January 20, 2013, to the extent not then exercised. The Board of Directors in January 2003 also amended the 1997 Stock Option Plan for Nonemployee Directors, and correspondingly amended all option grants to the non-employee directors that were then outstanding under that plan. These amendments eliminated the termination or expiration provisions of that plan; as a result of the January 2003 amendment, options that were granted under the 1997 plan will not become null or void under any circumstance prior to the tenth anniversary of the date of option grant. The January 2003 amendments to the 1997 plan also made certain other technical changes to the 1997 plan (and options outstanding thereunder) to conform those provisions to the provisions of the 2003 Stock Option Plan for Nonemployee Directors. The January 2003 amendments to the 1997 non-employee director plan did not change the number of shares or the exercise price of any of the options that were outstanding under that plan.

EXECUTIVE COMPENSATION The following table sets forth information regarding compensation paid to the Company's Chief Executive Officer and the Company's Executive Vice President, who were the only executive officers whose salary and bonus for 2003 exceeded $100,000.
Summary Compensation Table Long Term Compensation Awards Securities Underlying Options/ All Other SAR s (#) Compensation($) --------- --------------7,500 0 0 7,500 0 0 $ 30,082 1 $ 30,082 1 $ 29,749 1 $ 23,508 2 $ 23,508 2 $ 23,236 2

Annual Compensation

Name and Principal Position -----------------Steve Bechman, Chief Executive Officer

Year ---2003 2002 2001 2003 2002 2001

Salary ($) Bonus ($) -------------------$126,500 $126,500 $126,500 $ 102,000 $ 102,000 $ 99,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Jeff Goben, Executive Vice President

1 Includes $29,301 for 2003, 2002 and 2001 that the Company contributed to a defined benefit retirement plan in favor of Mr. Bechman and $781 for 2003, $781 for 2002 and $448 for 2001 of economic benefit of premiums paid by the Company with respect to term life insurance for the benefit of Mr. Bechman under a splitdollar life insurance agreement between the Company and Mr. Bechman. 2 Includes $22,886 for 2003, 2002 and 2001 that the Company contributed to a defined benefit retirement plan in favor of Mr. Goben and $622 for 2003, $622 for 2002 and $350 for 2001 of economic benefit of premiums paid by the Company with respect to term life insurance for the benefit of Mr. Goben under a split-dollar life insurance agreement between the Company and Mr. Goben. Aggregated Option/SAR Exercises In Last Fiscal Year and Fiscal Year-End Option/SAR Values No option exercises occurred during 2003. The following table sets forth information with respect to the value of options held by Mr. Bechman and Mr. Goben as of December 31, 2003.
Number of Value of Unexercised Unexercised In-the-Money Options/SARs Options/SARs at at Fiscal Year-End ($) Fiscal Year-End (#) Exercisable/Unexercisab Exercisable/Unexercisable ----------------------- ------------------------34,146/4,500 51,560 / 6,795 28,633/4,500 43,236 / 6,795

Name ---Steve Bechman Jeff Goben

Certain Relationships And Related Transactions During 2003, 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 LLC ("Crowe Chizek") served as auditors for the Company in 2003. Although it is anticipated that Crowe Chizek will be selected, the Audit Committee has not yet considered the appointment of auditors for 2004. 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. 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. HOUSEHOLDING The Company intends to satisfy the delivery requirements for proxy and information statements with respect to two or more security holders sharing the same address by delivering a single proxy statement or information statement to those security holders. Shareholders may obtain additional material if desired by contacting the Company in writing at 420 N. Morton Street, Franklin, Indiana 46131.

Exhibit 99.2 Form of Proxy for 2004 Annual Meeting. PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE 2004 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, May 17, 2004, at 6:30 p.m., local time, and any adjournments thereof, as provided herein: 1. ELECTION OF DIRECTORS
q FOR all nominees listed below to serve until the Annual Meeting of Shareholders in the year 2007 as set forth in the Proxy Statement dated March 29, 2004 (except as marked to the contrary below--see

"Instructions"): J. Michael Jarvis Robert Richardson Patrick A. Sherman 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.) 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.)