March 31, 2005

Dear Shareholders and Friends:

We are
pleased to report to you the results for the year of 2004 and encourage you to
read about the detailed results in the following pages. After dealing with asset
quality issues during the prior two years, it was rewarding to see the benefits
of the hard work put forth by our directors and staff to correct those problems.
In 2004, we accomplished our goals of increased profitability and asset growth
by posting our highest net income in our companys history and by
increasing total assets by $17.9 million.

In 2004, we
recorded a considerable improvement in earnings with $1,224,000 net income for
the year as compared to a $414,000 income for 2003. Most of the improvement was
a result of lower loan loss provision, and losses, which came through improved
asset quality, combined with higher net interest income. We were able to improve
our net interest income through higher balances of earning assets and reduced
cost of deposits.

Like most
financial institutions, our mortgage loan production dropped off in 2004 from
the record highs in 2003 due to higher interest rates in 2004. We were able to
partially offset that reduction of revenue through reduced non-interest
expenses. Despite taking a $238,000 charge for expenses related to a terminated
merger agreement, we were able to reduce non-interest expenses by
$177,000.

We have been
pleased to see our stock price increase with our improvements in operating
results during 2004. The stock opened 2004 at $10.58 per share and closed the
year at $13.10 per share for a 23.8% increase. The book value increased to $9.69
per share at December 31, 2004.

On August 31,
2004, we signed an agreement to merge with Blue River Bancshares, Inc.,
headquartered in Shelbyville, Indiana, which is adjacent to the market we
currently serve. After several months of working through the regulatory
application process, it became clear that regulatory approval would not be
obtained before the fall of 2005. On February 10, 2005 a mutual agreement to
terminate the merger was reached.

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 2005, we will continue to work on improving earnings with an eye to
growth. We will work on improving shareholder value through improvement of
return on equity 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 2005 to be another
good year for Heartland.

|Steve Bechman
President & CEO | Jeffrey L. Goben
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 2004 and 2003.
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. During 2004, the Banks
efforts resulted in lower provision for loan losses, net charge-offs and
non-performing loans compared to 2003. 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. 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. On March 21, 2005, the Banks board rescinded
that resolution based on improvements in asset quality, earnings and
capital.

Competition
with other depository and lending institutions has been increasing in the
Banks market area and includes over 30 federally insured banks, credit
unions, mortgage companies and consumer finance companies at December 31, 2004.
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.

Note:  Dollars amounts are in thousands, except per share data

2

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 to as net interest income.
Interest income from loans and investments is a function of the amount of loans
and investments outstanding during the period and the interest rates earned.
Interest expense related to deposits and borrowings is a function of the amount
of deposits and borrowings outstanding during the period and the interest rates
paid. Additional information regarding net interest income and non-interest
income is included in RESULTS OF OPERATIONS below. During 2004,
interest rates in general increased, but average yields earned and average rates
paid were generally lower than 2003 due to the declining rate environment
experienced in 2003. The average yields earned by Heartland on interest earning
assets declined by a lower amount than rates paid on interest bearing
liabilities causing Heartlands net interest income in 2004 to increase by
$433 from 2003 net interest income.

At
December 31, 2004, Heartland had $185,837 in total assets, an increase of
$17,908 or 10.66% from the December 31, 2003 total of $167,929. The increase in
assets was primarily comprised of an increase in net loans of $11,593 or 10.51%. Net loans
were $121,848 at December 31, 2004 compared to $110,255 at December 31, 2003. The increase
in loans was primarily due to the improved local economy and the removal of 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 increased $18,156 or 13.20%, during the year. Total deposits were
$155,662 at December 31, 2004 compared to $137,506 at December 31, 2003.
Deposits increased due to more aggressive pricing and marketing efforts by Heartland and
due to more favorable local market conditions caused by mergers involving banks in direct
competition with Heartland. Total shareholders equity was $13,506 and $12,552 at
December 31, 2004 and December 31, 2003. The increase in equity was due to $1,224 net
income partially offset by other comprehensive loss of $270 for the year ended December
31, 2004.

RESULTS OF OPERATIONS

Heartland experienced
an increase in average balances of loans and deposits during 2004. During 2004, interest
rates in general increased, but average yields earned and average rates paid were
generally lower than 2003 due to the declining rate environment experienced in 2003.
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 $1,224 or $.88 per share, for the year ended December 31, 2004 and net
income of $414, or $.30 per share, for the year ended December 31, 2003. Lower provision
for loan losses accounted for $544 (after tax) of the improvement in net income. Growth in
net interest income also contributed $287 (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 $954 for the year ended December 31, 2004 compared to
comprehensive income of $352 for the year ended December 31, 2003.

Note:  Dollars amounts are in thousands, except per share data

3

Interest
income of $9,236 was earned during the year ended December 31, 2004, compared to
$9,230 for the year ended December 31, 2003 and was primarily generated from
securities and loans. Increases in balances of interest earning assets accounted
for an increase in interest income of $57 partially offset by a $51 decline in
interest income due to declines in average yields earned on interest earning
assets. The increase due to volume of interest earning assets was caused by a
$280 increase in interest income due to higher average balances of investment
securities, partially offset by a $208 decrease in interest income due to lower
average balances of loans and a $15 decrease due to lower average balances of
other interest earning assets. The decline in interest income caused by lower
average yields on interest earning assets was due to a $266 decline in interest
income due to lower average yields earned on loans, partially offset by a $202
increase due to higher average yields earned on investment securities and a $13
increase due to higher average yields on other interest earning assets.
Contributing to the decrease in yields earned on loans, 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. Overall, the
average yield on earning assets declined 13 basis points to 5.48% for 2004 from
5.61% for 2003.

Interest
expense of $2,331 was incurred during the year ended December 31, 2004 and
$2,758 during the year ended December 31, 2003. Interest expense during 2004 and
2003 is primarily related to deposits. The decreases in rates paid on interest
bearing liabilities accounted for a decrease in interest expense of $442
partially offset by an increase in interest expense of $15 caused by higher
average interest bearing liabilities outstanding during the year. Higher volumes
of interest bearing DDA and savings deposits, short-term borrowings and other
borrowings caused an increase of $80 to interest expense, while the decline in
average volume of time deposits contributed a $65 decline toward the change in
interest expense. Lower average rates paid on time deposits and other borrowings
contributed a $465 decline in interest expense while higher average rates paid
on interest bearing demand and savings deposits and short-term borrowings caused
an increase in interest expense of $23. Overall, the average rate paid on
interest bearing liabilities declined 36 basis points to 1.61% for 2004 from
1.97% for 2003.

Net interest
income for the year ended December 31, 2004 was $6,905 compared to $6,472 for
the year ended December 31, 2003. The net interest margin increased to 4.09% for
2004 compared to 3.93% for 2003.

The following
tables depict for the years ended December 31, 2004 and 2003, 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.

Note:  Dollars amounts are in thousands, except per share data

4

|                             | Year Ended
December 31, 2004 |  | Year Ended
December 31, 2003
|---------------------------- | ---------------------------- |  | ----------------------------
|
|Interest earning assets      |                              |  |                             
|Short-term investments       |                              |  | $                           
|Taxable securities           |                              |  |                             
|Non-taxable securities       |                              |  |                             
|Loans                        |                              |  |                             
|                             |                              |  |                             
|Total interest earning       |                              | 
|assets                       |                              |  | $                           
|                             |                              |  |                             
|Interest bearing liabilities |                              | 
|Interest-bearing demand,     |                              | 
|Money Market and Savings     |                              | 
|Deposits                     |                              |  | $                           
|Time deposits                |                              |  |                             
|Short-term borrowings        |                              |  |                             
|Other borrowings             |                              |  |                             
|                             |                              |  |                             
|Total interest bearing       |                              | 
|liabilities                  |                              |  | $                           
|                             |                              |  |                             

|                                                  | 2004  | 2003 
|------------------------------------------------- | ----- | -----
|Average yield on interest-earning assets          | 5.48% | 5.61%
|Average rate paid on interest-bearing liabilities | 1.61  | 1.97 
|Net interest spread                               | 3.87  | 3.64 
|Net interest margin (net interest income divided 
|by average total interest-earning assets)         | 4.09  | 3.93 
|Return on average assets                          | 0.68  | 0.24 
|Return on average equity                          | 9.46  | 3.35 

The net
interest margin increased to 4.09% in 2004 from 3.93% in 2003. 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 13 basis
points less than the decline in average rates paid on interest bearing
liabilities and the ratio of interest bearing liabilities to interest earning
assets increased slightly, to 85.96% for 2004 from 85.29% for 2003 resulting in
the increase in net interest margin.

The provision
for loan losses was ($200) for the year ended December 31, 2004 and $692 for the
year ended December 31, 2003. Net charge-offs were $610 during the year ended
December 31, 2004 and $889 during the year ended December 31, 2003.
Non-performing loans decreased to $1,495 at December 31, 2004 from $3,023
at the end of 2003. Impaired loans decreased to $851 at December 31, 2004 from
$1,945 at December 31, 2003. The allowance for loan losses was 2.00% of gross
loans at December 31, 2004 and was 2.91% of gross loans at December 31, 2003 and
covers non-performing loans 1.67x at year-end 2004, compared to 1.1x in 2003.
For more detail on this area, see NONPERFORMING ASSETS AND ALLOWANCE FOR
LOAN LOSSES below.

Note:  Dollars amounts are in thousands, except per share data

5

Non-interest
income was $1,960 for the year ended December 31, 2004 and $2,222 for the year
ended December 31, 2003 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 decreased to $463 in 2004 from $1,009 in 2003, as
interest rates rose and the fixed rate, residential real estate loan refinancing
market declined. Net securities gains in 2004 and 2003 were $64 and $1. Gain on
the sale of other real estate was $132 in 2004 compared to $(11) in 2003. Other
income was $210 and $205 for 2004 and 2003 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, 2004 was $4,097 compared to
$4,306 for the year ended December 31, 2003. The number of full time equivalent
employees was decreased in the lending area as loan quality improved, which
accounted for $127 of the decrease in salaries and benefits expense. Wages and
commissions paid to mortgage lending staff also decreased by $150 due to lower
volumes of mortgage loans originated. Those decreases were partially offset by
higher wages paid to other existing staff.

Occupancy and
equipment expenses of $735 and $695 were incurred during the years ended
December 31, 2004 and 2003. Those expenses consist primarily of lease
payments for the branch and operations facilities, depreciation and utilities
expenses. The increase was primarily due to higher lease expense on existing
facilities and the addition and replacement of certain equipment during
2004.

Data
processing expense was $644 for the year ended December 31, 2004 compared to
$708 for the year ended December 31, 2003. The decrease in data processing
expenses is related to lower rates paid for certain transaction and account
based fees due to the renewal of certain contracts with data processing
providers.

FDIC
Insurance was $65 for 2004 compared to $124 for 2003. The decrease is due to the
change in the Banks risk assessment by the FDIC.

Professional
fees increased to $643 during 2004 from $425 during 2003 due to $238 of expenses
related to the terminated merger with Blue River Bancshares, Inc. and related
strategic planning costs, partially offset by a reduction of professional fees
related to loan collections.

Loan collection,
repossession and other real estate expense was $109 for 2004 and $314 for 2003.
The decrease is primarily due to the reduction of other real estate owned and
the related costs such as real estate taxes.

The remaining
expenses of $942 for the year ended December 31, 2004 and $840 for the year
ended December 31, 2003, relate to various other items such as director fees,
printing, supplies, advertising, loan expenses, postage, insurance and training.
The increase is primarily due to a $50 expense accrued for the potential loss
related to forged checks cashed by the Bank for one deposit account holder, a
$34 increase in director fees and a $37 increase in advertising
expense.

Heartland
recorded income tax expense of $606 for 2004 compared to $176 in 2003. The
effective tax rate for 2004 was 33.11%, compared to 29.83%, in 2003. The change
in the effective tax rate is primarily due to the decline in interest income on
non-taxable securities and income from the increase in cash surrender value of
life insurance as a percentage of the total net income before taxes in 2004
compared to 2003.

Note:  Dollars amounts are in thousands, except per share data

6

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.

|                                              | 2004 |  | 2003
|--------------------------------------------- | ---- |  | ----
|
|TYPE OF LOAN                                  |      |  |     
|Commercial                                    |      |  | $   
|Real estate construction and land development |      |  |     
|Residential mortgages                         |      |  |     
|Consumer                                      |      |  |     
|                                              |      |  |     
|Gross loans                                   |      |  | $   
|                                              |      |  |     

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, 2004, commercial loans totaled $72,101 or
57.99% of the Banks total loan portfolio. Commercial loans totaled $64,799
or 57.06% of the Banks loan portfolio at December 31, 2003. The increase
in the dollar amount of commercial loans outstanding during 2004 was due to new
loan originations and advances on existing loans in excess of principal
repayments by borrowers and loan charge-offs.

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, 2004, real estate construction and land development loans totaled
$9,740 or 7.83% of the Banks total loan portfolio compared to $10,748 or
9.47% of the Banks total loan portfolio at December 31, 2003. The Bank was
required during 2002 to reduce these types of loans by agreement with its
regulatory agencies and continued to limit the origination of these types of
loans in 2003 and 2004 based on the internal lending policies.

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, 2004 the Banks fixed rate residential
mortgage loans totaled $3,976 compared to $1,831 at December 31, 2003. At
December 31, 2004, the Banks residential mortgage loans totaled
$29,663 or 23.86% of the Banks total loan portfolio compared to $24,668 or
21.72% of the Banks total loans at December 31, 2003.

The Bank also
originates fixed rate mortgages and sells them, servicing released, to various
investors. At year-end 2004, the Bank held $929 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, 2004 the Banks consumer loans totaled approximately
$12,835 or 10.32% of the Banks total loan portfolio compared to $13,341 or
11.75% of the Banks total loans at December 31, 2003.

Note:  Dollars amounts are in thousands, except per share data

7

NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN

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 $1,495 and $3,023 at December 31, 2004 and 2003. At
December 31, 2004, there were no outstanding balances of restructured loans.

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, 2004, the provision for loan losses was
($200) compared to $692 in 2003. Provision for loan losses recorded in 2004 was lower than
2003 primarily due to lower net charge-offs, declines in non-performing loans and
improvements in the credit quality underlying the loan portfolio. During 2004, Heartland
recorded $610 of net charge-offs compared to $889 in 2003. Non-performing loans declined
by $1,528 during 2004.

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 $1,336 at December 31, 2004 compared to $1,768 at
December 31, 2003. The decline is due to $384 of charge-offs, $603 reduction based on
decline in balances and improvements in expected repayments of related loans, partially
offset by $557 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 managements risk grades assigned to
loans, industry loss averages for similarly sized institutions, our own loss history,
trends in delinquent and non-performing loans, and economic trends affecting our market.
Total allocation to pools of loans was $1,534 at December 31, 2003 and was $1,155 at
December 31, 2004. The decline is due to $779 in charge-offs, partially offset by $400
additional allocation due to increased balances and declines in internal evaluation of
repayment ability of loans within the pools and general economic considerations.

At December 31, 2004
the balance of the allowance for loan losses was $2,491 or 2.00% of gross loans
outstanding, compared to $3,301 or 2.91% of gross loans outstanding at December 31, 2003.

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.

Note:  Dollars amounts are in thousands, except per share data

8

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 $155,662 at December 31, 2004 compared to $137,506 at
December 31, 2003, an increase of $18,156 or 13.20%. 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 increase in loan balances outstanding during
2004, the Bank offered interest rates on interest bearing time deposits that were
typically above market competition for time deposits in amounts above $100, which caused
balances of such deposits to increase. This practice was not detrimental to earnings in
2004 because the rates, although higher than current market rates in existence at the time
of origination, were lower than the original rates on certain maturing deposits and were
low enough to allow a spread to rates earned on new loans.

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, 2004, the Bank
had $42,162 or 22.69% of total assets in securities available-for-sale, of which $19,442
were pledged to secure borrowings and for other purposes. The Bank also had $12,021 or
6.47% of total assets in cash and cash equivalents and an additional $3,000 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.

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, 2004, deposits increased by
$18,156 throughout the year and provided cash inflows compared cash outflows of $12,378
for loans made to customers, net of repayments. The excess cash provided was used to
increase securities available for sale.

Note:  Dollars amounts are in thousands, except per share data

9

Management is not aware
of any trends or any known demands, commitments events or uncertainties that may
materially affect liquidity during 2005 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 2004 was from an internally adopted board
resolution. 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. 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. On
December 31, 2004, the Bank was in compliance with all such stipulations. On March 21,
2005, the Banks board rescinded that resolution based on improved asset quality,
earnings and capital.

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.

Note:  Dollars amounts are in thousands, except per share data

10

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, 2004, Heartland had sufficient liquid assets at the parent-company level to
pay the interest payable on the trust preferred securities during 2005, 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 Board resolutions will be material to parent-company
liquidity during 2005.

Heartland had
approximately $1,339 of parent-company cash that would have been available at December 31,
2004, for the payment of interest and other obligations on the subordinated debentures.

In addition, at
December 31, 2004 the Banks Tier 1 capital to total assets ratio was 9.21% (8.93%
using average assets) and it could have paid dividends of $2,152 without violating the
capital ratio maintenance provisions of the board resolution that is discussed under the
Capital Adequacy caption above.

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.

Note:  Dollars amounts are in thousands, except per share data

11

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 15 of the Notes to
Consolidated Financial Statements.

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
1,407,646 shares of Common Stock issued and outstanding to approximately 1,100
shareholders (including beneficial owners who held their shares in street name)
on March 18, 2005. The number of shareholders of record was 335 on March
18, 2005.

Note:  Dollars amounts are in thousands, except per share data

12

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    | Low    
|------------------- | ------- | -------
|First Quarter 2003  | $  8.94 | $  7.91
|Second Quarter 2003 | 9.58    | 8.00   
|Third Quarter 2003  | 10.00   | 8.95   
|Fourth Quarter 2003 | 10.94   | 9.80   
|First Quarter 2004  | 12.70   | 10.40  
|Second Quarter 2004 | 13.00   | 11.40  
|Third Quarter 2004  | 14.10   | 11.60  
|Fourth Quarter 2004 | 13.70   | 12.80  

The prices
quoted above represent prices between dealers and do not include adjustments for
mark-ups, mark-downs or commissions and do not necessarily represent actual
transactions.

Heartland has
not paid cash dividends since its inception. However, payment of cash dividends
is periodically considered by the Companys board of directors.

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 Registered Public Accounting Firm
on consolidated financial statements.

o    Consolidated Balance
Sheets at December 31, 2004 and 2003.

o    Consolidated Statements of Income for the years ended
December 31, 2004 and 2003.

o    Consolidated Statements of Changes in
Shareholders Equity for the years ended December 31, 2004 and
2003.

o    Consolidated Statements of Cash Flows for the years
ended December 31, 2004 and 2003.

o    Notes to consolidated financial statements.

13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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,
2004 and 2003 and the related consolidated statements of income, 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 the standards of the Public Company Accounting Oversight Board (United
States). 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, 2004 and
2003, and the results of its operations and its cash flows for the years then ended in
conformity with U. S. generally accepted accounting principles.

/s/  Crowe Chizek and Company LLC           
Crowe Chizek and Company LLC

Indianapolis, Indiana
March 2, 2005

---

14

HEARTLAND BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollar amounts in thousands)

---

|                                                    | 2004 |  | 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 $2,491 and $3,301        |      |  |     
|Premises and equipment, net                         |      |  |     
|Federal Home Loan Bank stock                        |      |  |     
|Cash surrender value of life insurance              |      |  |     
|Accrued interest receivable and other assets        |      |  |     
|                                                    |      |  |     
|                                                   
|                                                    |      |  | $   
|                                                    |      |  |     
|                                                   
|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                          |      |  |     
|Retained earnings/(accumulated deficit)             |      |  |     
|Accumulated other comprehensive income (loss)       |      |  |     
|                                                    |      |  |     
|                                                    |      |  |     
|                                                    |      |  |     
|                                                   
|                                                    |      |  | $   
|                                                    |      |  |     

---

See accompanying notes.

15

HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands, except per share data)

---

|                                                            | 2004 |  | 2003
|----------------------------------------------------------- | ---- |  | ----
|Interest income                                             |      |  |     
|Loans, including related fees                               |      |  | $   
|Securities:                                                 |      | 
|Taxable                                                     |      |  |     
|Non-taxable                                                 |      |  |     
|Short-term investments                                      |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                           
|Interest expense                                            |      | 
|Deposits                                                    |      |  |     
|Short-term borrowings                                       |      |  |     
|Other borrowings                                            |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                           
|Net interest income                                         |      |  |     
|                                                           
|Provision for loan losses                                   |      |  |     
|                                                            |      |  |     
|                                                           
|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 other real estate                           |      |  |     
|Gain on sale of loans, net                                  |      |  |     
|Other                                                       |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                           
|Noninterest expense                                         |      | 
|Salaries and employee benefits                              |      |  |     
|Occupancy and equipment, net                                |      |  |     
|Data processing                                             |      |  |     
|FDIC insurance                                              |      |  |     
|Professional fees                                           |      |  |     
|Loan collection, repossession and other real estate expense |      |  |     
|Other                                                       |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                            |      |  |     
|                                                           
|Income before income taxes                                  |      |  |     
|Income taxes                                                |      |  |     
|                                                            |      |  |     
|                                                           
|Net income                                                  |      |  | $   
|                                                            |      |  |     
|                                                           
|Basic earnings per share                                    |      |  | $   
|                                                            |      |  |     
|                                                           
|Diluted earnings per share                                  |      |  | $   
|                                                            |      |  |     

---

See accompanying notes.

16

HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands, except per share data)

---

|                          | Common
Stock |   | Additional
Paid-in
Capital |       | Retained
Earnings/
(Accumulated
Deficit) |             | Accumulated
Other
Comprehensive
Income(Loss) |  | Total
Shareholders'
Equity
|------------------------- | ------------ | - | -------------------------- | ----- | ---------------------------------------- | ----------- | -------------------------------------------- |  | --------------------------
|Balance January 1, 2003   |              | $ |                            | 1,394 |                                          | $    11,361 |                                              |  | $                         
|                         
|Comprehensive income      |              |  
|Net income for 2003       |              |   |                            |       |                                          |             |                                              |  |                           
|Change in unrealized      |              |  
|gain/(loss) on securities |              |  
|available for sale, net   |              |   |                            |       |                                          |             |                                              |  |                           
|                          |              |   |                            |       |                                          |             |                                              |  |                           
|Total comprehensive       |              |  
|income                    |              |   |                            |       |                                          |             |                                              |  |                           
|                          |              |   |                            |       |                                          |             |                                              |  |                           
|                         
|Balance December 31, 2003 |              |   |                            | 1,394 |                                          | 11,361      |                                              |  |                           
|                         
|Comprehensive income      |              |  
|Net income for 2004       |              |   |                            |       |                                          |             |                                              |  |                           
|Change in unrealized      |              |  
|gain/(loss) on securities |              |  
|available for sale, net   |              |   |                            |       |                                          |             |                                              |  |                           
|                          |              |   |                            |       |                                          |             |                                              |  |                           
|Total comprehensive       |              |  
|income                    |              |   |                            |       |                                          |             |                                              |  |                           
|                          |              |   |                            |       |                                          |             |                                              |  |                           
|                         
|Balance December 31, 2004 |              | $ |                            | 1,394 |                                          | $    11,361 |                                              |  | $                         
|                          |              |   |                            |       |                                          |             |                                              |  |                           

---

See accompanying notes.

17

HEARTLAND BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

|                                                        | 2004 |  | 2003
|------------------------------------------------------- | ---- |  | ----
|Cash flows from operating activities                    |      |  |     
|Net income                                              |      |  | $   
|Adjustments to reconcile net income to net              |      | 
|cash from operating activities                          |      | 
|Depreciation and amortization                           |      |  |     
|Gain on sale of securities, net                         |      |  |     
|(Gain)/loss on sale of other real estate                |      |  |     
|Provision for loan losses                               |      |  |     
|FHLB stock dividends                                    |      |  |     
|Gain on sales of loans, net                             |      |  |     
|Loans originated for sale                               |      |  |     
|Proceeds from loans sold                                |      |  |     
|Increase in cash surrender value of life insurance      |      |  |     
|Change in assets and liabilities:                       |      | 
|Accrued interest receivable and other assets            |      |  |     
|Accrued interest payable and other liabilities          |      |  |     
|                                                        |      |  |     
|Net cash from operating activities                      |      |  |     
|                                                       
|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      |      |  |     
|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                      |      |  |     
|                                                        |      |  |     
|                                                       
|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                |      |  | $   

---

See accompanying notes.

18

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description
of Business:    The consolidated financial statements
include the accounts of Heartland Bancshares, Inc. (Corporation) and its
wholly-owned subsidiary, Heartland Community Bank (Bank), after elimination of
significant intercompany transactions and accounts.

The
Corporation 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 U.S. generally accepted accounting principles, 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 is
reported on the level yield method and 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.

Declines in
the fair value of securities below their cost that are other than temporary are
reflected as realized losses.  In estimating other-than-temporary losses,
management considers: (1) the length of time and extent that fair value has been
less than cost, (2) the financial condition and near term prospects of the
issuer, and (3) the Corporations ability and intent to hold the security
for a period sufficient to allow for any anticipated recovery in fair
value.

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.

---

(Continued)

19

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, and an
allowance for loan losses. Interest income is reported on the interest method
and includes loan fees.

Interest
income is not reported when full loan repayment is in doubt, typically when
payments are 90 days or more 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:    Land is carried at cost. 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.

---

(Continued)

20

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

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.

|                                          | 2004 | 2003
|----------------------------------------- | ---- | ----
|Net income as reported                    |      |     
|Deduct:  Stock-based compensation expense |      |     
|determined under fair value based method  |      |     
|                                          |      |     
|Pro forma net income                      |      |     
|                                          |      |     
|Basic earnings per share as reported      |      |     
|Diluted earnings per share as reported    |      |     
|Pro forma basic earnings per share        |      |     
|Pro forma diluted earnings per share      |      |     

The pro forma effects are computed using an option pricing model, using the
following weighted-average assumptions as of grant date for 2003; there were no
options granted in 2004.

|                                |          
|------------------------------- | ---------
|Risk-free interest rate         | 3.12%    
|Expected option life            | 6.0 years
|Expected stock price volatility | 12.58%   
|Dividend yield                  | 0.00%    

---

(Continued)

21

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes:
    Income tax expense is the sum of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.

Financial
Instruments:     Financial instruments include credit
instruments, such as commitments to make loans and standby letters of credit,
issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay.

Statement
of Cash Flows:    Cash and cash equivalents are defined
to include cash on hand, amounts due from banks, and federal funds sold. 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 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 Note
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)

22

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

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.

Newly
Issued But Not Yet Effective Accounting Standards:

FAS 123, Revised,
requires all public companies to record compensation cost for stock options provided to
employees in return for employee service. The cost is measured at the fair value of the
options when granted, and this cost is expensed over the employee service period, which is
normally the vesting period of the options. This will apply to awards granted or modified
after the first quarter or year beginning after December 15, 2005. Compensation cost will
also be recorded for prior option grants that vest after the date of adoption. The effect
on results of operations will depend on the level of future option grants and the
calculation of the fair value of the options granted at such future date, as well as the
vesting periods provided, and so cannot currently be predicted. Existing options that will
vest after adoption date are expected to result in additional compensation expense of
approximately $0 during the balance of 2005, $12 in 2006, and $12 in 2007. There will be
no significant effect on financial position as total equity will not change.

---

(Continued)

23

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FAS 153
modifies an exception from fair value measurement of nonmonetary exchanges.
Exchanges that are not expected to result in significant changes in cash flows
of the reporting entity are not measured at fair value. This supersedes the
prior exemption from fair value measurement for exchanges of similar productive
assets, and applies for fiscal years beginning after June 15, 2005. Heartland
does not expect the implementation of this standard to have a material effect on
future financial condition or results of operations.

SOP 03-3
requires that a valuation allowance for loans acquired in a transfer, including
in a business combination, reflect only losses incurred after acquisition and
should not be recorded at acquisition. It applies to any loan acquired in a
transfer that showed evidence of credit quality deterioration since it was made.
Heartland does not expect the implementation of this standard to have a material
effect on future financial condition or results of operations.

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:

|                                    | Fair
Value |  | Gross
Unrealized
Gains |        | Gross
Unrealized
Losses
|----------------------------------- | ---------- |  | ---------------------- | ------ | -----------------------
|2004                                |            |  |                        |        |                        
|U.S. Government and government      |            | 
|sponsored entities                  |            |  | $                      | 16,981 |                        
|Obligations of states and political |            | 
|subdivisions                        |            |  |                        | 5,423  |                        
|Mortgage backed securities          |            |  |                        | 18,559 |                        
|Corporate obligations               |            |  |                        | 1,081  |                        
|Equity securities                   |            |  |                        | 118    |                        
|                                    |            |  |                        |        |                        
|                                    |            |  | $                      | 42,162 |                        
|                                    |            |  |                        |        |                        
|2003                                |            | 
|U.S. Government and government      |            | 
|sponsored entities                  |            |  | $                      | 17,417 |                        
|Obligations of states and political |            | 
|subdivisions                        |            |  |                        | 4,499  |                        
|Mortgage backed securities          |            |  |                        | 12,076 |                        
|Corporate obligations               |            |  |                        | 1,116  |                        
|                                    |            |  |                        |        |                        
|                                    |            |  | $                      | 35,108 |                        
|                                    |            |  |                        |        |                        

---

(Continued)

24

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 2  SECURITIES (Continued)

During 2004
and 2003, gross proceeds from sales of securities were $4,700 and $2,002.
Recognized gains were $64 and $1 and had a tax effect of $25 and $0. There were
no recognized losses.

The fair
value of debt securities at December 31, 2004, 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             | 
|                                       | 
|                                      
|                                       | 
|                                       | 

Securities
with a carrying value of $19,442 and $16,689 at December 31, 2004 and 2003
were pledged to secure borrowings and for other purposes.

Securities
with unrealized losses at year end not recognized in income presented by length
of time in a continuous unrealized loss position are as follows:

|2004                          | Less than 12 Months |  | 12 Months or More |        | Total
|----------------------------- | ------------------- |  | ----------------- | ------ | -----
|
|US Government and             |                     |  |                   |        |      
|government sponsored entities |                     |  | $                 | 9,012  |      
|Obligations of states and     |                     | 
|political subdivisions        |                     |  |                   | 3,028  |      
|Mortgage backed securities    |                     |  |                   | 12,214 |      
|                              |                     |  |                   |        |      
|Total temporarily impaired    |                     |  | $                 | 24,254 |      
|                              |                     |  |                   |        |      
|                             
|
|
|US Government and             |                     | 
|government sponsored entities |                     |  | $                 | 2,977  |      
|Mortgage backed securities    |                     |  |                   | 2,890  |      
|                              |                     |  |                   |        |      
|Total temporarily impaired    |                     |  | $                 | 5,867  |      
|                              |                     |  |                   |        |      

---

(Continued)

25

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 2  SECURITIES (Continued)

Unrealized
losses on securities have not been recognized into income because the securities
are of high credit quality, management has the 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:

|                                              | 2004 |  | 2003
|--------------------------------------------- | ---- |  | ----
|Commercial                                    |      |  | $   
|Real estate construction and land development |      |  |     
|Residential real estate                       |      |  |     
|Consumer                                      |      |  |     
|                                              |      |  |     
|Subtotal                                      |      |  |     
|Less:  Allowance for loan losses              |      |  |     
|                                              |      |  |     
|                                              |      |  | $   
|                                              |      |  |     
|                                              |      | 

Certain of the
Corporations officers and directors were loan customers of the Bank. The balance of
loans outstanding to these individuals was $1,084 and $973 at December 31, 2004
and 2003. New loans originated and advances on existing loans during 2004 were $503,
repayments were $207 and decreases due to the resignation of officers and directors total
$185.

NOTE 4  ALLOWANCE FOR LOAN LOSSES

The activity
in the allowance for loan losses is as follows:

|                                           | 2004 |  | 2003
|------------------------------------------ | ---- |  | ----
|Beginning balance                          |      |  | $   
|Provision charged to operations            |      |  |     
|Loans charged-off                          |      |  |     
|Recoveries on loans previously charged-off |      |  |     
|                                           |      |  |     
|Ending balance                             |      |  | $   
|                                           |      |  |     

---

(Continued)

26

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)

Information about impaired loans is as follows:

|                                                      | 2004 |  | 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                        |      |  |     

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:

|                            | 2004 |  | 2003
|--------------------------- | ---- |  | ----
|Land                        |      |  | $   
|Buildings and improvements  |      |  |     
|Leasehold improvements      |      |  |     
|Furniture and equipment     |      |  |     
|                            |      |  |     
|Total                       |      |  |     
|Accumulated depreciation    |      |  |     
|                            |      |  |     
|                           
|Premises and equipment, net |      |  | $   
|                            |      |  |     

Depreciation
expense was $268 and $254 for 2004 and 2003.

---

(Continued)

27

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 6  DEPOSITS

Interest-bearing time deposits issued in denominations of $100 or greater
totaled $25,394 and $14,157 at December 31, 2004 and 2003.

Scheduled
maturities of time deposits for the next five years are as follows:

|     | 
|---- | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 
|     | 
|     | 
|     | 

Time deposits from
governmental and other public entities such as school corporations and hospitals in the
Banks market area totaled $12,162 at December 31, 2004 and $2,536 at
December 31, 2003.

NOTE 7  REPURCHASE AGREEMENTS AND FHLB ADVANCES

Securities
sold under agreements to repurchase are secured by pledged securities with a
carrying amount of $10,111 and $8,787 at year-end 2004 and 2003. 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:

|                                           | 2004 |  | 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 |      |  |     

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 $7,054 and interest bearing
deposits of $749 at December 31, 2004. Interest is payable monthly. The advances
outstanding at December 31, 2004 and 2003 are primarily fixed rate.

---

(Continued)

28

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 7  REPURCHASE AGREEMENTS AND FHLB ADVANCES (Continued)

FHLB advances are
comprised of the following individual advances at December 31:

|Maturity date     | Interest Rate | 2004 |  | 2003
|----------------- | ------------- | ---- |  | ----
|July 14, 2006     |               |      |  | 3   
|December 29, 2005 |               |      |  | 2   
|July 14, 2005     |               |      |  | 2   
|February 28, 2005 |               |      |  | 2   
|July 14, 2004     |               |      |  | 1   
|November 1, 2004  |               |      |  | 3   
|                  |               |      |  |     
|                  |               |      |  |     
|                  |               |      |  |     

NOTE 8  SUBORDINATED DEBENTURES

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 rate as of December 31, 2004 was 6.11%.

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.

Under FASB
Interpretation No. 46, as revised in December 2003, the trust is not 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.

---

(Continued)

29

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

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 after completion of one year of employment and are
fully vested after the completion of 6 years of service with the Bank. The
401(k) contribution charged to expense was $73 and $79 for 2004 and
2003.

NOTE 10  STOCK OPTION PLANS

At December
31, 2004, 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 33,904 shares still available for grant at
December 31, 2004. 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.

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, 2004, 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.

---

(Continued)

30

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 10  STOCK OPTION PLANS (Continued)

A summary of
the Corporations stock option activity, and related information
follows:

|                                | 2 0 0 4 | 2 0 0 3
|------------------------------- | ------- | -------
|
|Outstanding - beginning         |         |        
|of period                       |         |        
|Granted                         |         |        
|Exercised                       |         |        
|Forfeited                       |         |        
|                                |         |        
|                               
|Outstanding-end of period       |         |        
|                                |         |        
|                               
|Exercisable at end of period    |         |        
|                                |         |        
|                               
|Weighted average remaining life |         |        
|of outstanding options          |         |        
|                               
|Weighted average fair value of  |         |        
|options granted during the year |         |        
|                                |         |        

---

(Continued)

31

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 11  INCOME TAXES

Income tax expense was as follows:

|                                                                                                        | 2004 |  | 2003
|------------------------------------------------------------------------------------------------------- | ---- |  | ----
|                                                                                                       
|Current                                                                                                 |      |  | $   
|Deferred                                                                                                |      |  |     
|                                                                                                        |      |  |     
|Total                                                                                                   |      |  | $   
|                                                                                                        |      |  |     
|                                                                                                       
|Effective tax
rates differ from federal statutory rates applied to pre-tax income due to the
following:
|                                                                                                       
|
|                                                                                                       
|Federal statutory rate times financial statement income                                                 |      |  | $   
|Effect of:                                                                                              |      | 
|Tax-exempt income                                                                                       |      |  |     
|State taxes, net of federal tax effect                                                                  |      |  |     
|Other, net                                                                                              |      |  |     
|                                                                                                        |      |  |     
|Total                                                                                                   |      |  | $   
|                                                                                                        |      |  |     
|                                                                                                       
|Year-end deferred tax assets and liabilities were due to the
following:                                
|                                                                                                       
|
|                                                                                                       
|Deferred tax assets:                                                                                    |      | 
|Allowance for loan losses                                                                               |      |  | $   
|Deferred compensation                                                                                   |      |  |     
|State net operating loss carryforward                                                                   |      |  |     
|Net unrealized loss on securities                                                                       |      |  |     
|Other                                                                                                   |      |  |     
|                                                                                                        |      |  |     
|                                                                                                        |      |  |     
|                                                                                                       
|Deferred tax liabilities:                                                                               |      | 
|Depreciation                                                                                            |      |  |     
|Cash to accrual adjustment                                                                              |      |  |     
|Net unrealized gains on securities                                                                      |      |  |     
|Other                                                                                                   |      |  |     
|                                                                                                        |      |  |     
|                                                                                                        |      |  |     
|                                                                                                        |      |  |     
|                                                                                                       
|Total                                                                                                   |      |  | $   
|                                                                                                        |      |  |     

---

(Continued)

32

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 12  EARNINGS PER SHARE

The following
illustrates the computation of basic and diluted earnings per share.

|                                                     | 2004 |  | 2003
|---------------------------------------------------- | ---- |  | ----
|Basic earnings per share                             |      |  |     
|Net income                                           |      |  | $   
|                                                    
|Weighted average shares outstanding                  |      |  |     
|                                                     |      |  |     
|                                                    
|Basic earnings per share                             |      |  | $   
|                                                     |      |  |     
|                                                    
|
|Dilutive earnings per share                          |      | 
|Net income                                           |      |  | $   
|                                                    
|Weighted average shares outstanding                  |      |  |     
|Dilutive effect of assumed exercise of stock options |      |  |     
|                                                     |      |  |     
|Diluted average shares outstanding                   |      |  |     
|                                                     |      |  |     
|                                                    
|Diluted earnings per share                           |      |  | $   
|                                                     |      |  |     

There were no
stock options considered anti-dilutive for computing diluted earnings per share
in 2004 and 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)

33

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 13  CAPITAL REQUIREMENTS AND REGULATORY MATTERS (Continued)

At year-end
2004 and 2003, 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:

|                                         | Actual | Minimum Required
For Capital
Adequacy Purposes | Minimum Required
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
|---------------------------------------- | ------ | ---------------------------------------------- | ----------------------------------------------------------------------------------
|
|                                        
|2004 - Bank                              |        |                                                |                                                                                   
|Total capital (to risk weighted assets)  |        | $18,737                                        |                                                                                   
|Tier 1 capital (to risk weighted assets) |        | 17,088                                         |                                                                                   
|Tier 1 capital (to average assets)       |        | 17,088                                         |                                                                                   
|                                        
|2004 - Corporation                       |       
|Total capital (to risk weighted assets)  |        | $20,185                                        |                                                                                   
|Tier 1 capital (to risk weighted assets) |        | 18,048                                         |                                                                                   
|Tier 1 capital (to average assets)       |        | 18,048                                         |                                                                                   
|                                        
|2003 - Bank                              |       
|Total capital (to risk weighted assets)  |        | $17,056                                        |                                                                                   
|Tier 1 capital (to risk weighted assets) |        | 15,523                                         |                                                                                   
|Tier 1 capital (to average assets)       |        | 15,523                                         |                                                                                   
|                                        
|2003 - Corporation                       |       
|Total capital (to risk weighted assets)  |        | $18,846                                        |                                                                                   
|Tier 1 capital (to risk weighted assets) |        | 16,497                                         |                                                                                   
|Tier 1 capital (to average assets)       |        | 16,497                                         |                                                                                   

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)

34

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 13  CAPITAL REQUIREMENTS AND REGULATORY MATTERS
(Continued)

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 were 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. 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. On March 21, 2005, the Banks board rescinded
that resolution based on improvements in asset quality, earnings and
capital.

NOTE 14  TERMINATED MERGER AGREEMENT

On August 31,
2004, Heartland and Blue River Bancshares, Inc. (Blue River) entered
into an Agreement of Affiliation and Merger (the Merger Agreement)
that provided for Heartland to merge with and into Blue River. The banking
subsidiaries of Heartland and Blue River, Heartland Community Bank and Shelby
County Bank, respectively, also agreed to merge their operations pursuant to the
Merger Agreement. Pursuant to the Merger Agreement, Heartland and Blue River
each granted the other, pursuant to reciprocal stock option agreements, the
right to purchase a number of its authorized but unissued common stock that
represented 19.9% of its outstanding common stock as of August 31, 2004.
Effective February 10, 2005, Heartland and Blue River mutually agreed to
terminate the Merger Agreement and the mergers, including the related reciprocal
stock option agreements and other immaterial agreements incident thereto.
Heartland recorded $238 of expenses in 2004 related to the terminated
merger.

---

(Continued)

35

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 15  COMMITMENTS AND CONTINGENT LIABILITIES

The Bank
leases certain facilities and land under operating leases expiring through 2016.
The related lease expense was $312 and $311 for 2004 and 2003. Future minimum
lease payments are as follows:

|                             | 
|---------------------------- | 
|2005                         | 
|2006                         | 
|2007                         | 
|2008                         | 
|2009                         | 
|Thereafter                   | 
|                             | 
|                            
|Total minimum lease payments | 
|                             | 

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 4 |  | 2 0 0 3
|------------------------- | ------- |  | -------
|
|Commitments to make loans |         |  | $      
|Unused lines of credit    |         |  |        
|Letters of credit         |         |  |        

Interest
rates on fixed rate loan commitments ranged from 4.25% to 8.00% at December 31,
2004.

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.

The cash
balance required to be maintained on hand or on deposit with the Federal Reserve
was $1,234 and $1,540 at December 31, 2004 and 2003. These reserves do not earn
interest.

---

(Continued)

36

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 16  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 4 |  | 2 0 0 3
|----------------------------- | ------- |  | -------
|
|Financial assets:             |         |  |        
|Cash and cash equivalents     |         |  | $      
|Time deposits with other      |         | 
|financial institutions        |         |  |        
|Securities available-for-sale |         |  |        
|Loans held for sale           |         |  |        
|Loans, net                    |         |  |        
|FHLB stock                    |         |  |        
|Accrued interest receivable   |         |  |        
|                             
|Financial liabilities:        |         | 
|Deposits                      |         |  | $      
|Repurchase agreements         |         |  |        
|FHLB advances                 |         |  |        
|Subordinated debentures       |         |  |        
|Accrued interest payable      |         |  |        

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)

37

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 17  PARENT COMPANY STATEMENTS

Presented
below are condensed balance sheets and statements of income and cash flows for
the parent company.

CONDENSED BALANCE SHEETS

|                                                                                 | 2004 |  | 2003
|-------------------------------------------------------------------------------- | ---- |  | ----
|ASSETS                                                                           |      |  |     
|Cash                                                                             |      |  | $   
|Investment in bank                                                               |      |  |     
|Investment in unconsolidated subsidiary                                          |      |  |     
|Other assets                                                                     |      |  |     
|                                                                                 |      |  |     
|                                                                                
|                                                                                 |      |  | $   
|                                                                                 |      |  |     
|                                                                                
|LIABILITIES AND SHAREHOLDERS' EQUITY                                             |      | 
|Subordinated debentures                                                          |      |  | $   
|Other liabilities                                                                |      |  |     
|                                                                                 |      |  |     
|Total liabilities                                                                |      |  |     
|Shareholders' equity                                                             |      |  |     
|                                                                                 |      |  |     
|                                                                                
|                                                                                 |      |  | $   
|                                                                                 |      |  |     
|                                                                                
|CONDENSED STATEMENTS OF INCOME                                                  
|                                                                                
|
|                                                                                
|Interest and dividend income                                                     |      |  | $   
|Interest expense                                                                 |      |  |     
|Other expenses                                                                   |      |  |     
|Tax benefit                                                                      |      |  |     
|                                                                                 |      |  |     
|Income/(loss) before equity in undistributed earnings of bank                    |      |  |     
|Equity in undistributed earnings of bank                                         |      |  |     
|                                                                                 |      |  |     
|                                                                                
|Net income                                                                       |      |  | $   
|Change in unrealized gain(loss) on subsidiary securities available for sale, net |      |  |     
|                                                                                 |      |  |     
|                                                                                
|Comprehensive income                                                             |      |  | $   
|                                                                                 |      |  |     

---

(Continued)

38

HEARTLAND BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2004 and 2003
(Dollar amounts in thousands)

---

NOTE 17  PARENT COMPANY STATEMENTS (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

|                                                | 2004 |  | 2003
|----------------------------------------------- | ---- |  | ----
|Cash flows from operating activities            |      |  |     
|Net income                                      |      |  | $   
|Adjustments to reconcile net income to net cash |      | 
|from operating activities                       |      | 
|Equity in undistributed earnings 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             |      |  |     
|                                                |      |  |     
|                                               
|Cash and cash equivalents at end of period      |      |  | $   
|                                                |      |  |     

NOTE 18  OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes were as follows:

|                                       | 2004 |  | 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)      |      |  | $   
|                                       |      |  |     

39

DIRECTORS AND OFFICERS OF HEARTLAND COMMUNITY BANK

Directors:

|Gordon R. Dunn,
Chairman of the Board
Patrick A. Sherman,
Vice Chairman | Sharon Acton,
Director
John Norton,
Director | J. Michael Jarvis,
Director
Jeffrey L. Goben,
Director | Steve Bechman,
Director
|----------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------ | -----------------------

Officers:

|Steve Bechman,
President and Chief Executive Officer
Jeffrey L. Goben,
Executive Vice President,
Chief Operating Officer and Secretary
Jacqueline McNeelan,
Senior Vice President and Senior Lending 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
Chad Riddle,
Vice President, Commercial Loans
Steven Vance,
Assistant Vice President, Commercial Loans
Lisa Shirar,
Compliance Officer
Melodie Yarnell,
Human Resources Officer
Jennifer Bryant,
Loan Officer | Mary Carter,
Assistant Vice President and Branch Manager
Jeff Tillman,
Assistant Vice President
Alexa McKnight,
Assistant Vice President, Branch Operations
David Mote,
Assistant Vice President, Mortgage Loans
Judy Peel,
Assistant Vice President, Loan Officer
Pat Purtell,
Assistant Vice President, Loan Officer
Terri Webb,
Assistant Vice President, Loan Operations
Melissa Duke,
Assistant Vice President, Commercial Loans
Kathee Pruitt,
Assistant Vice President and Branch Manager
Trudy Holtsclaw,
Branch Manager
Connie Hann,
Mortgage Loan Officer
Bev Doty,
Executive Assistant
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

BANKING FACILITIES

|Franklin:
420 North Morton Street (US 31)
Franklin, Indiana 46131
Phone (317) 738-3915
FAX (317) 738-7315Bargersville:
507 Three Notch Lane
Bargersville, Indiana 46106
Phone (317) 422-1370
FAX (317) 422-1495Operations and Commercial Loan Center
460 North Morton Street (US 31)
Franklin, Indiana 46131
Phone (317) 738-3915
FAX (317) 736-5022World Wide Web:
www.HeartlandCommunityBank.comInvestor 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) 859-3849Greenwood:
800 South US 31
Greenwood, Indiana 46143
Phone (317) 885-7371
FAX (317) 885-7305
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41