UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-k
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000. Commission File Number 0-12668.
HILLS BANCORPORATION
(Exact name of Registrant as specified in its charter)
Iowa 42-1208067
- ---------------------------------------- -----------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
131 Main Street, Hills, Iowa 52235
- ----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 679-2291
Securities Registered pursuant to Section 12 (b) of the Act: None
Securities Registered pursuant to Section 12 (g) of the Act:
No par value common stock
-------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registrant S-K (229.405 of this chapter) is not contained herein, and will
not be contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
While it is difficult to determine the market value of shares owned by
nonaffiliates (within the meaning of such term under the applicable regulations
of the Securities and Exchange Commission), the Registrant estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 20, 2001 (based upon reports of beneficial ownership that approximately
82% of the shares are so owned by nonaffiliates and upon information
communicated informally to the Registrant by various purchasers and sellers that
the sale price for the common stock is generally $77 per share) was $94,425,000
The number of shares outstanding of the Registrant's common stock as of March
20, 2001 is 1,495,483 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 20, 2001 for the Annual Meeting of
the Shareholders of the Registrant to be held April 16, 2001 (the Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.
EXHIBIT INDEX
The exhibits index is on Page 68.
Part I
Item 1. Business
Hills Bancorporation (the "Company") is a multibank holding company principally
engaged in the business of banking. Its two wholly-owned subsidiary banks are
Hills Bank and Trust Company, Hills, Iowa ("Hills Bank and Trust") and Hills
Bank Kalona, Kalona, Iowa ("Hills Bank Kalona") (hereinafter collectively
referred to as the "Banks").
The Company was incorporated December 12, 1982 and all operations are conducted
within the state of Iowa. The Company became owner of 100% of the outstanding
stock of Hills Bank and Trust as of January 23, 1984 when stockholders of Hills
Bank and Trust exchanged their shares for shares of the Company. Effective July
1, 1996, the Company formed a new subsidiary, Hills Bank, which acquired for
cash all the outstanding shares of a bank in Lisbon, Iowa. Subsequently an
office of Hills Bank was opened in Mount Vernon, Iowa, a community that is
contiguous in Lisbon. In 2000, the charter of Hills Bank was relocated in Cedar
Rapids, Iowa, although Hills Bank continued to maintain offices in Lisbon and
Mount Vernon, Iowa. Effective November 17, 2000, Hills Bank was merged into
Hills Bank and Trust.
Hills Bank and Trust currently serves the communities of Iowa City, Coralville,
Hills and North Liberty, located near Interstate 80 and Interstate 380 in
Eastern Iowa. These communities have a combined population of approximately
80,000 and Johnson County, Iowa has a population of approximately 106,000. The
University of Iowa in Iowa City has over 27,000 students and 23,000 full and
part-time employees, including employees of the University of Iowa Hospitals and
Clinics. Johnson County, Iowa has one of the strongest economies in Iowa and has
had substantial economic growth in the past ten years. Johnson County is known
for its educational institutions, health care facilities, cultural and sports
events, and retail centers. As a result of the merger of Hills Bank into Hills
Bank and Trust in 2000, Hills Bank and Trust also now operates offices in Linn
County, Iowa located in Lisbon, Mount Vernon and Cedar Rapids, Iowa. Lisbon has
a population of approximately 1,500 and Mount Vernon, located two miles away,
has a population of 3,700. Both communities are strong economically and are easy
commuting distances to Cedar Rapids and Iowa City, Iowa. In addition, Mount
Vernon is the home of Cornell College, which has approximately 1,200 students.
Cedar Rapids has a metropolitan population of approximately 180,000 and is
located approximately 10 miles west of Lisbon, Iowa and approximately 25 miles
north of Iowa City on Interstate 380. The larger employers in Cedar Rapids are
Rockwell Collins with approximately 6,300 employees and Amana Appliances with
approximately 2,950 employees. Other major employers include Cedar Rapids
Community Schools (about 2,475 employees), St. Luke's Hospital (about 2,250
employees), and McLeodUSA (approximately 2,000 employees). There are several
additional employers in Cedar Rapids having from 1,000 to 2,000 employees each.
On September 20, 1996, another subsidiary, Hills Bank, Kalona, acquired cash,
certain assets and assumed the deposits of the Kalona, Iowa office of Boatmen's
Bank Iowa, N.A. Hills Bank Kalona is located in Kalona, Iowa (Washington
County), approximately 20 miles south of Iowa City. Kalona has a population of
approximately 2,000 people. Kalona is primarily an agricultural community, but
is located within easy driving distance for employment in Iowa City, which has a
population of approximately 60,000 people and Washington, Iowa, which as a
population of approximately 7,300 people.
The Banks are all full-service commercial banks extending their services to
individuals, business, governmental units and institutional customers primarily
in the communities of Hills, Iowa City, Cedar Rapids, Coralville, North Liberty,
Lisbon, Mount Vernon, and Kalona. This area includes all of Johnson County and
parts of Linn and Washington counties. All of the Banks are actively engaged in
all areas of commercial banking, including acceptance of demand; savings and
time deposits; making commercial, real estate, agricultural and consumer loans;
maintaining night and safe deposit facilities; and performing collection,
exchange and other banking services tailored for individual customers. Hills
Bank and Trust administers estates, personal trusts, and pension and
profit-sharing funds and, in connection therewith, provides for farm management
and investment advisory and custodial services for individuals, corporations and
nonprofit organizations. At this time, trust services are available only at the
Hills Bank and Trust locations. The loan activity of the Banks is diversified,
with commercial and agricultural loans, real estate loans, automobile,
installment and other consumer loans composing the majority of its loan
portfolio. In addition, the Banks earn substantial fees from originating
mortgages that are sold in the secondary residential real estate market without
mortgage servicing rights being retained.
Item 1. Business (Continued)
Each Bank has established formal loan origination policies. In general, the loan
origination policies require individual lenders to reduce the risk of credit
loss to the Bank by requiring that, among other things, minimum loan to value
ratios be maintained, evidence of appropriate levels of insurance be carried by
borrowers and documenting appropriate types and amounts of collateral and
sources of expected payment.
The Banks' business is not seasonal, except that loan origination fees are
higher during the spring and summer months. The Banks have not undertaken
significant new services during the current year that might exceed the limits of
their human resources and data processing capabilities.
The commercial banking business is highly competitive and the Banks compete with
other commercial banks, credit unions, brokerage firms, finance companies,
insurance companies and other financial institutions. Recent developments have
resulted in increasing competition for deposits and loans in the markets served
by the Banks. Although Hills Bank and Trust is the largest locally-owned bank
in Iowa City, as a result of relocations from smaller outlying cities and the
establishment of de nov banks, there are now nine commercial banks which operate
in Iowa City and Coralville.
In recent years, Wells Fargo Corporation, Firstar Corporation, Commercial
Federal Bank of America Corporation (formerly NationsBank) have acquired a
number of independent banks and smaller multibank holding companies in various
metropolitan areas of Iowa. Each operates under a single charter in Iowa. In
September 1998, the Company's largest competing bank in Iowa City, with assets
of approximately $550 million, was acquired by Mercantile Bancorporation and
effective January 2000 the Mercantile banks in Iowa were merged into Firstar
Bank Iowa. In 2000, Firstar Corporation and U. S. Bancorporation announced a
merger expected to be finalized in 2001 and Wells Fargo Corporation announced
its acquisition of Brenton Bancorporation that is expected to be completed in
2001 After the completion of its acquisition of Brenton Bancorporation, Wells
Fargo Corporation will have offices in Iowa City as well as in Cedar Rapids.
Hills Bank and Trust Company is in direct competition for deposits, loans and
other financial related business with other financial institutions in Johnson
County, Iowa. One of the largest competitors serving Johnson County is a branch
of Firstar Bank, which does not disclose local assets. Other independent
financial institutions are:
Assets As Of
December 31,
2000
-------------------
(In Millions)
Largest competing bank $ 389
Next largest competing bank 166
Largest competing credit union 234
Hills Bank Kalona competes with other banks in its trade territory and holds
less than 40% of the deposits in this community.
Item 1. Business (Continued)
Historically, Iowa's intrastate branching states have been rather restrictive
when compared with those of other states. Iowa's intrastate branching statutes
were relaxed in recent legislation that became effective on February 21,
2001(the "2001 Amendment"). The 2001 Amendment allows Iowa banks to move towards
statewide branching by allowing every Iowa bank with the approval of its primary
regulator, to establish three new bank offices anywhere in Iowa during the next
three years. The three offices are in addition to those offices allowed within
certain restricted geographic areas under prior Iowa law. Effective July 1,
2004, the 2001 Amendment repeals all limitations on bank office location and
effectively allows statewide branching. After that date, banks will be allowed
to establish an unlimited number of offices in any location in Iowa subject only
to regulator's approval.
The Financial Services Modernization Act ("FSMA") was enacted into law on
November 12, 1999. The most significant provision in this legislation is the
repeal of the restriction on banks affiliating with securities firms. The FSMA
would allow the creation of a "financial holding company" which can engage in a
number of financial activities including insurance and securities underwriting
and other agency activities, merchant banking and insurance company portfolio
investment activities. Activities that are ancillary to financial activities are
also allowed. Additionally, the FSMA amends the federal securities laws to
incorporate functional regulation of bank securities activities and provides for
the functional regulation of insurance activities by establishing which
insurance products banks and bank subsidiaries may provide as principal.
Furthermore, the FSMA provides reform in the Federal Home Loan Bank area by
providing that banks with less than $500 million in assets may use long-term
advances for loans to small business, small farms and small agri-businesses and
replaces the current $300 million funding formula for the REFCORP obligations of
the Federal Home Loan Banks to twenty percent (20%) of the Bank's annual net
earnings.
In the area of privacy, the FSMA requires clear disclosure by all financial
institutions of their privacy policy regarding the sharing of nonpublic
information with both affiliates and third parties. Further, the FSMA requires a
notice to consumers and an opportunity to "opt-out" of sharing of nonpublic
personal information with nonaffiliated third parties subject to certain limited
exceptions. The FSMA also provides reform in the area of ATMs, Community
Reinvestment, Community Banks and Deposit Production Offices. Specifically, the
FSMA requires ATM operators who impose a fee for use of an ATM by a noncustomer
to post a notice on the machine that a fee will be charged and on the screen
that a fee will be charged and the amount of the fee, and further requires a
notice when ATM cards are issued that surcharges may be imposed by other parties
when transactions are initiated from ATMs not operated by the card issuer. The
FSMA also clarifies that nothing in the act repeals any provision of the
Continuity Reinvestment Act ("CRA"); however, the FSMA requires full disclosure
of all CRA agreements and grants regulatory relief regarding the frequency of
CRA exams to small banks and savings and loans (those with no more than $250
million in assets),in the community bank area, the FSMA allows community banks
all the powers as a matter of right that large institutions have accumulated on
an ad hoc basis, including the ability to underwrite municipal bonds in several
years. Finally, the FSMA expands the prohibition of deposit production offices
contained in the Riegle-Neal Interstate bill to include all branches of an
out-of-state bank holding company.
Item 1. Business (Continued)
No material portion of the Banks' deposits have been obtained from a single
person or a few persons. Accordingly, management of the Banks have no reason to
believe that the loss of the deposits of any person or few persons would have a
materially adverse effect on the Banks' operations or erode its deposit base.
Approximately 4.5% of the Banks' loans have been made for agricultural purposes.
The agricultural sector of the economy has been cyclical with a general trend
toward fewer and larger farms. The Banks have not experienced a material adverse
effect on their business as a result of defaults on agricultural loans and
expect none in the future.
The Company does not engage in any business activities apart from its ownership
of the Banks and, therefore, does not encounter any competition for its services
other than as described above for the Banks.
The Company and the Banks have undertaken no material research activities during
the last three years relating to research and development activities.
The Company is regulated by the Federal Reserve Bank.
All the Banks are regulated by the Federal Deposit Insurance Corporation and the
State of Iowa Division of Banking.
The Company had no employees as of December 31, 2000 and the Banks had 250
regular and 82 part-time employees.
The following consolidated statistical information reflects selected balances
and operations of the Company and the Banks for the periods indicated.
The following tables show (1) average balances of assets and liabilities, (2)
interest income and expense on a tax equivalent basis, (3) interest rates and
differential and (4) changes in interest income and expense.
AVERAGE BALANCES
(Average Daily Basis)
December 31,
---------------------------
2000 1999 1998
---------------------------
ASSETS
Cash and due from banks .................... $ 20,347 $ 16,863 $ 13,441
Taxable securities ......................... 121,499 119,856 111,099
Nontaxable securities ...................... 38,026 34,699 30,122
Federal funds sold ......................... 11,358 9,796 23,279
Loans, net ................................. 600,215 508,293 438,072
Property and equipment, net ................ 13,675 11,633 10,410
Other assets ............................... 16,129 17,249 16,098
-------------------------------
$821,249 $718,389 $642,521
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits .......... 69,246 $ 62,317 $ 52,538
Interest-bearing demand deposits ............. 66,090 57,017 46,874
Savings deposits ............................. 154,121 152,507 131,988
Time deposits ................................ 309,565 274,507 262,111
Securities sold under agreements to repurchase
and federal funds purchased ................ 14,665 12,139 7,974
FHLB borrowings .............................. 128,043 86,880 75,262
Other liabilities ............................ 5,569 4,659 4,250
Redeemable common stock held by
Employee Stock Ownership Plan .............. 11,251 10,127 8,491
Stockholders' equity ......................... 62,699 58,236 53,033
-------------------------------
$821,249 $718,389 $642,521
===============================
INTEREST INCOME AND EXPENSE
Year Ended December 31,
------------------------------
2000 1999 1998
------------------------------
(In Thousands)
Loans (1) ................................ $ 50,267 $ 42,107 $ 38,039
Taxable securities ....................... 7,481 7,167 6,832
Nontaxable securities (1) ................ 2,624 2,373 2,112
Federal funds sold ....................... 698 455 1,209
-----------------------------
Total interest income ................. 61,070 52,102 48,192
-----------------------------
Expense:
Interest-bearing demand deposits ......... 1,566 1,175 997
Savings deposits ......................... 5,615 4,769 4,648
Time deposits ............................ 17,690 14,882 14,813
Securities sold under agreements
to repurchase .......................... 699 517 417
FHLB borrowings .......................... 7,494 4,970 4,379
-----------------------------
Total interest expense ................ 33,064 26,313 25,254
-----------------------------
Net interest income ................... $28,006 $25,789 $22,938
=============================
(1) Presented on a tax equivalent basis using a federal tax rate of 34% and
state tax rates of 3.7%
INTEREST RATES AND INTEREST DIFFERENTIAL
Year Ended December 31,
----------------------------
2000 1999 1998
----------------------------
Average yields:
Loans (1) ...................................... 8.34% 8.25% 8.64%
Loans (tax equivalent basis) ................... 8.37 8.28 8.68
Taxable securities .............................. 6.15 5.98 6.15
Nontaxable securities ........................... 4.55 4.51 4.63
Nontaxable securities (tax equivalent basis) .... 6.90 6.84 7.01
Federal funds sold .............................. 6.15 4.64 5.19
Interest-bearing demand deposits ................ 2.37 2.06 2.13
Savings deposits ................................ 3.64 3.13 3.52
Time deposits ................................... 5.71 5.42 5.65
Federal funds purchased and securities sold
under agreements to repurchase ................ 4.77 4.26 5.23
FHLB borrowings ................................. 5.85 5.72 5.82
Yield on average interest-earning assets ........ 7.92 7.75 8.00
Rate on average interest-bearing liabilities .... 4.92 4.51 4.82
Net interest spread (2).......................... 3.00 3.24 3.18
Net interest margin (3) ......................... 3.62 3.83 3.81
(1) Nonaccruing loans are not significant and have been included in the
average loan balances for purposes of this computation.
(2) Net interest spread is the difference between the yield on average
interest-earning assets and the yield on average interest-paying
liabilities stated on a tax equivalent basis using a federal and state
tax rate of 34% and 5%, respectively, for the three years presented.
(3) Net interest margin is net interest income, on a tax equivalent basis,
divided by average interest-earning assets.
CHANGE IN INTEREST INCOME AND EXPENSE
Change Due Change Due Total
To Volume To Rates Change
--------------------------------
(In Thousands)
Year ended December 31, 2000:
Change in interest income:
Loans ..................................... $ 7,697 $ 463 $ 8,160
Taxable securities ........................ 102 212 314
Nontaxable securities ..................... 230 21 251
Federal funds sold ........................ 80 163 243
--------------------------------
8,109 859 8,968
--------------------------------
Change in interest expense:
Interest-bearing demand deposits .......... 201 190 391
Savings deposits .......................... 52 794 846
Time deposits ............................. 1,979 829 2,808
Securities sold under agreements
to repurchase ........................... 116 66 182
Interest on FHLB borrowings ............... 2,408 116 2,524
--------------------------------
4,756 1,995 6,751
--------------------------------
Change in net interest income ............... $ 3,353 $(1,136) $ 2,217
================================
Year ended December 31, 1999:
Change in interest income:
Loans ...................................... $ 5,882 $(1,814) $ 4,068
Taxable securities ......................... 528 (193) 335
Nontaxable securities ...................... 337 (76) 261
Federal funds sold ......................... 6,110 (2,200) 3,910
================================
Change in interest expense:
Interest-bearing demand deposits ............ 212 (34) 178
Savings deposits ............................. 672 (551) 121
Time deposits ................................ 685 (616) 69
Securities sold under agreements
to repurchase ............................... 188 (88) 100
Interest on FHLB borrowings ................... 667 (76) 591
--------------------------------
Change in net interest income .............. $ 3,686 $ (835) $ 2,851
================================
Rate volume variances are allocated on a consistent basis using the absolute
values of changes in volume compared to the absolute values of the changes in
rates. Loan fees included in interest income are not material. Interest on
nontaxable securities and loans is shown at tax equivalent amounts.
LOANS
The following table shows the composition of loans (before deducting the
allowance for loan losses) as of December 31 for each of the last five years.
December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------
(In Thousands)
Agricultural ..............$ 28,560 $ 27,302 $ 32,318 $ 27,636 $ 23,133
Commercial and financial .. 37,832 36,848 39,438 33,616 30,650
Real estate, construction . 38,184 40,879 28,476 8,157 8,846
Real estate, mortgage ..... 499,010 439,072 338,871 332,655 279,134
Loans to individuals ...... 33,715 31,030 30,664 28,707 33,812
-----------------------------------------------------
Total .....................$637,301 $575,131 $469,767 $430,771 $375,575
=====================================================
There were no foreign loans outstanding for any of the years presented
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31,
2000:
Amount One Year One To Over Five
Of Loans Or Less(1) Five Years Years
-------------------------------------------
(In Thousands)
Commercial, financial and agricultural .. $ 66,392 $ 36,377 $ 26,747 $ 3,267
Real estate, construction and mortgage .. 537,194 78,785 206,074 252,335
Other ................................... 33,715 11,316 21,827 573
------------------------------------------
$637,301 $126,478 $254,648 $256,175
==========================================
Interest rates on loans are as follows:
Fixed rate .............................. $372,526 $102,314 $247,988 $ 22,224
Variable rate ........................... 264,775 24,164 6,660 233,951
------------------------------------------
$637,301 $126,478 $254,648 $256,175
==========================================
<FN>
(1) A significant portion of the commercial loans are six-month notes.
However, a significant amount of these notes are renewed when due.
</FN>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Company's nonaccrual, past due, restructured
and impaired loans as of December 31 for each of the years presented:
2000 1999 1998 1997 1996
------------------------------------------------
Nonaccrual loans ........... $ 618 $ -- $ 12 $ -- $ 339
Accruing loans past due
90 days or more .......... 2,143 1,320 945 954 1,092
Restructured loans ......... -- -- -- -- --
Impaired loans ............. 11,068 9,265 8,956 9,556 7,811
The Company does not have a significant amount of loans that are past due less
than 90 days on which there are serious doubts as to the ability of the
borrowers to comply with the loan repayment terms.
Loans are placed on nonaccrual status when management believes the collection of
future interest is not reasonably assured. Interest income was not materially
affected by this classification.
The Company has no individual borrower or borrowers engaged in the same or
similar industry exceeding 10% of total loans. The Company has no other
interest-bearing assets, other than loans, that meet the nonaccrual, past due,
restructured or potential problem loan criteria.
No allowance for losses has been recognized for impaired loans because partial
charge-offs have been taken to reduce the loan balances to the net present value
of the future cash flows or the fair value of the collateral if the loan is
collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for each of
the last five years:
Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------
(In Thousands)
Amount of loan loss allowance
at beginning of year ....... $ 9,750 $ 8,856 $ 8,010 $ 7,311 $ 6,740
Charge-offs:
Agriculture ................. 26 60 4 197 300
Commercial and financial .... 522 181 431 326 236
Real estate, mortgage ....... 254 104 132 215 127
Loans to individuals ........ 372 418 401 390 308
------------------------------------------------
1,174 763 968 1,128 971
------------------------------------------------
Recoveries:
Agriculture ................. 153 157 125 65 48
Commercial and financial .... 276 260 256 195 95
Real estate, mortgage ....... 118 30 100 377 215
Loans to individuals ........ 357 310 417 142 80
------------------------------------------------
904 757 898 779 438
------------------------------------------------
Net charge-offs ............... 270 6 70 349 533
------------------------------------------------
Allowances of acquired banks .. -- -- -- -- 350
------------------------------------------------
Provision for loan losses (1) . 948 900 916 1,048 754
------------------------------------------------
Balance of loan loss allowance
at end of year .............. $10,428 $ 9,750 $ 8,856 $ 8,010 $ 7,311
================================================
Ratio of net charge-offs
during year to average
loans outstanding............ 0.04% 0.00% 0.02% 0.09% 0.16%
================================================
The balance of the loan loss allowance has not been allocated by type of loan.
Management regularly reviews the loan portfolio and does not expect any unusual
material amount to be charged off during 2000 that would be significantly
different than the years ended December 31, 2000, 1999, 1998, 1997 and 1996.
(1) For financial reporting purposes, management regularly reviews the loan
portfolio and determines a provision for loan losses based upon the
impact of economic conditions on the borrower's ability to repay, past
collection experience, the risk characteristics of loan portfolio and
such other factors which deserve current recognition. The growth of the
loan portfolio is a significant element in the determination of the
provision for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Banks review a substantial part of the loans in the portfolio and classify
the loans into one or more categories. Based upon the risk category assigned,
the Banks allocate a percentage, as determined by management, for a required
allowance needed. The risk categories are similar to those used by federal and
state regulatory agencies and consist of the following:
(1) Pass
(2) Potential watch and watch
(3) Problem
(4) Substandard
(5) Doubtful
In addition, each bank's management also reviews and, where determined
necessary, provides allowances based upon reviews of specific borrowers and
provides general allowances for areas which management believes are of higher
credit risk (agricultural loans and constructed model real estate homes as of
December 31, 2000).
A summary of the components of the allowance for loan loss, by risk category, as
of December 31, 2000 and 1999 is as follows:
2000 1999
----------------
(In Thousands)
Pass ........................................ $ 1,316 $ 2,220
Potential watch and watch loans ............. 3,471 3,164
Substandard ................................. 2,521 2,416
Specific borrowers (agricultural loans) ..... 1,576 1,025
Constructed model real estate homes ......... 1,544 925
-----------------
$10,428 $ 9,750
=================
Anticipated charge-offs of the above categories are not determinable at December
31, 2000; however, management does not believe there are any categories of loans
where future charge-offs are likely to be higher than the allowances provided.
PART I
Item 1. Business (Continued)
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of
December 31, 2000, 1999 and 1998 and the maturities and weighted average yield
of the investment securities as of December 31, 2000:
December 31,
----------------------------
2000 1999 1998
----------------------------
(In Thousands)
Carrying value:
U. S. Treasury securities ..................... $ 18,318 $ 19,470 $ 33,340
Obligations of other U. S. Government
agencies and corporations ................... 95,036 94,302 78,083
Obligations of state and political subdivisions 39,923 36,496 33,580
-----------------------------
$153,277 $150,268 $145,003
==============================
December 31, 2000
----------------------------
Weighted
Carrying Average
Value Yield
----------------------------
(In Thousands)
Type and maturity grouping:
U. S. Treasury maturities:
Within 1 year ................................ $ 6,509 6.14%
From 1 to 5 years ............................ 11,809 6.22
---------
18,318
---------
Obligations of other U. S. Government agencies
and corporations, maturities:
Within 1 year .................................. 31,283 5.86%
From 1 to 5 years .............................. 63,260 6.30
From 5 to 10 years ............................. 493 6.05
--------
95,036
--------
Obligations of state and politicalsubdivisions,
maturities:
Within 1 year ................................. 4,349 6.79%
From 1 to 5 years ............................. 20,247 6.87
From 5 to 10 years ............................ 14,921 7.04
Over 10 years ................................. 406 7.86
--------
39,923
---------
Total ....................................... $153,277
=========
INVESTMENT SECURITIES
As of December 31, 2000, there were no investment securities of any issuer,
other than securities of the U. S. Government and U. S. Government agencies and
corporations, exceeding 10% of stockholders' equity.
The weighted average yield is based on the amortized cost of the investment
securities. The yields are computed on a tax-equivalent basis using a federal
tax rate of 34% and a state tax rate of 5%.
DEPOSITS
The following tables show the average deposits and rates paid on such deposits
for the years ended December 31, 2000, 1999 and 1998 and the composition of the
certificates issued in denominations in excess of $100,000 as of December 31,
2000:
December 31,
2000 Rate 1999 Rate 1998 Rate
---------------------------------------------
Average noninterest-bearing deposit .. $ 69,246 0.00% $ 62,317 0.00%$ 52,538 0.00%
Average interest-bearing demand
deposits ........................... 66,090 2.37 57,017 2.06 46,874 2.13
Average savings deposits ............. 154,121 6.21 152,507 3.13 131,988 3.52
Average time deposits ................ 309,565 5.93 274,507 5.42 262,111 5.65
----------------------------------------------
$599,022 6.57 $546,348 $493,511
==============================================
Time certificates issued in amounts
of $100,000 or more as of
December 31, 2000 with ............. Amount Rate
maturity in: ----------------
3 months or less ................... $ 6,527 5.75%
3 through 6 months ................. 10,069 6.21
6 through 12 months ................ 4,966 5.93
Over 12 months ..................... 25,091 6.57
--------
$ 46,653
========
There were no deposits in foreign banking offices.
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and
average assets for the years ended December 31, 2000, 1999 and 1998:
December 31,
----------------------------------------
2000 1999 1998
----------------------------------------
Return on assets 1.14% 1.18% 1.17%
Return on stockholders' equity 14.94 14.54 14.12
Dividend payout ratio 23.18 22.56 23.52
Stockholders' equity to assets ratio 7.63 8.11 8.25
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of federal funds purchased and securities sold under
agreements to repurchase during 2000, 1999 and 1998:
2000 1999 1998
-----------------------------------
(Amounts In Thousands)
Outstanding as of December 31 $ 16,561 $ 26,714 $ 10,554
Weighted average interest rate at year end 4.80% 4.28% 4.40%
Maximum month-end balance 16,678 27,815 10,547
Average month-end balance 14,665 12,139 7,974
Weighted average interest rate for 4.77% 4.26% 5.23%
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates during 2000, 1999 and 1998:
2000 1999 1998
--------------------------------------
Outstanding as of December 31 $ 120,668 $ 108,700 $ 75,732
Weighted average interest rate a 5.79% 5.66% 5.68%
Maximum month-end balance 148,700 108,700 85,764
Average month-end balance 128,043 86,880 75,262
Weighted average interest rate for the year 5.85% 5.72% 5.82%
Item 2. Properties
The Company's office and the main bank of Hills Bank and Trust are located at
131 Main Street, Hills, Iowa. This is a brick building containing approximately
45,000 square feet. A portion of the building was built in 1977, a two-story
addition was completed in 1984, and in February 2001, the Company completed a
two-story brick addition. With the completion of the 31,000 square foot
addition, all bank processing and administrative systems, including trust, were
consolidated in Hills, Iowa. A majority of these operations were located
previously in the Coralville office and sixty- five full-part and part-time
employees relocated.
The other offices of Hills Bank and Trust are as follows:
1. Iowa City office located at 1401 South Gilbert Street is a one-story brick
building containing approximately 15,400 square feet. The branch has
five drive-up teller lanes and a drive-up, 24-hour automatic teller machine.
The Bank's trust department customer service representatives are located
here. This building was constructed in 1982 and has been expanded several
times, most recently in 1998.
2. Coralville office is a two story building built in 1972 that contained
approximately 16,700 square feet of space. This
3. A 2,800 square foot branch bank in North Liberty, Iowa was opened for
business in 1986. That office is a full-service
4. The Bank leases an office at 132 East Washington Street in downtown Iowa City
with approximately 2,500 square feet. The office has two 24-hour automatic
teller machines and two private offices in addition to a tellers and customer
service area. The lease expires in 2001, but the Bank has an option for an
additional five years.
5. In June 1999, the Bank opened an office at 2400 Towncrest Drive on the
eastside of Iowa City. The office is approximately 1,100 square feet and the
lease expire in June 2002.
6. The Lisbon office is a two-story brick building in Lisbon, Iowa with
approximately 3,000 square feet of banking retail space located on the first
floor. The building was extensively remodeled in 1996 and has one drive-up
lane and a walk-up, 24-hour automatic teller machine.
7. Hills Bank and Trust constructed and opened its Mount Vernon office location
in February 1998 with the completion of a full-service, 4,200 square
foot office, with four drive-up and a drive-up, automatic teller machine.
8. In February 2000, the Bank opened a 2,900 square foot branch office in
downtown Cedar Rapids which is leased.
Hills Bank Kalona owns a 6,400 square foot building in Kalona that contains a
walk-up 24-hour automatic teller machine and one drive-up lane. This is an older
building that has been remodeled a number of times including a major renovation
in late 1998.
All of the properties owned by the Bank are free and clear of any mortgages or
other encumbrances of any type.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Neither the Company nor the Banks hold any properties that are the subject of
hazardous waste clean-up investigations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the three months
ended December 31, 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
There is no established trading market for the Company's common stock. Its stock
is not listed with any exchange or quoted in an automated quotation system of a
registered securities association, nor is there any broker/dealer acting as a
market maker for its stock. A bid and ask price is quoted in an Iowa City local
paper and the quotes are provided by a local broker. The Company's stock is not
actively traded. As of December 31, 2000, the Company had 1,270 shareholders.
Based on the Company's stock transfer records and information informally
provided to the Company, its stock trading transactions have been as follows:
Number High Low
Of Shares Number Of Selling Selling
Year Traded Transactions Price Price
- -------------------------------------------------------------------------------
2000 14,187 16 $ 77.00 $ 70.00
1999 6,415 22 70.00 58.00
1998 2,320 12 58.00 48.00
The Company paid aggregate annual cash dividends in 2000 and 1999 of $2,171,000
and $1,910,000, respectively, or $1.45 per share in 2000 and $1.30 per share in
1999. In January 2001, the Company declared and paid a dividend of $1.60 per
share totaling $2,393,000. The decision to declare any such cash dividends in
the future and the amount thereof rests within the discretion of the Board of
Directors and will remain subject to, among other things, certain regulatory
restrictions imposed on the payment of dividends by the Banks, and the future
earnings, capital requirements and financial condition of the Company.
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
2000 1999 1998 1997 1996
------------------------------------------------------------------
YEAR-END TOTALS
Total assets .................... $ 875,750 $ 773,966 $ 689,787 $ 603,102 $ 539,452
Investment securities ........... 161,066 156,198 149,350 138,064 132,635
Federal funds sold .............. 28,065 206 36,811 2,447 1,107
Loans, net ...................... 626,873 565,381 460,911 422,761 368,264
Deposits ........................ 652,706 562,086 534,151 479,770 450,061
Federal Home Loan Bank borrowings 120,668 108,700 75,732 50,764 25,795
Redeemable common stock ......... 11,550 10,953 9,301 7,682 6,416
Stockholders' equity ............ 68,524 60,264 56,452 51,500 47,335
EARNINGS
Interest income ................. $ 59,992 $ 51,121 $ 47,289 $ 42,743 $ 37,516
Interest expense ................ 33,064 26,313 25,254 22,502 19,951
Provision for loan losses ....... 948 900 916 1,048 754
Other income .................... 7,514 6,437 5,811 5,938 3,868
Other expenses .................. 20,069 18,309 16,438 15,500 12,057
Applicable income taxes ......... 4,059 3,570 3,006 2,545 2,478
Net income ...................... 9,366 8,466 7,486 7,086 6,144
PER SHARE Net income:
Net income:
Basic ......................... $ 6.26 $ 5.70 $ 5.10 $ 4.83 $ 4.19
Diluted ....................... 6.21 5.66 5.02 4.78 4.15
Cash dividends .................. 1.45 1.30 1.20 1.05 0.95
Book value as of December 31 .... 45.82 40.29 38.42 35.08 32.30
Increase (decrease) in book value
due to:
ESOP obligation and debt ....... (7.72) (7.32) (6.33) (5.23) (4.38)
Unrealized gains (losses) on
debt securities .............. 0.47 (0.66) 0.81 0.33 0.46
SELECTED RATIOS
Return on average assets ........ 1.14% 1.18% 1.17% 1.24% 1.22%
Return on average equity ........ 14.94 14.54 14.12 14.62 13.97
Net interest margin ............. 3.62 3.83 3.81 3.93 3.86
Average stockholders' equity to
average total assets .......... 7.63 8.11 8.25 8.47 8.72
Dividend payout ratio ........... 23.18 22.56 23.52 21.69 22.62
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Special Note Regarding Forward Looking Statements
The discussion following contains certain forward-looking statements with
respect to the financial condition, the results of operations and business of
the Company. These statements involve certain risks and uncertainties, which are
often inherent in the ongoing operation of financial institutions such as the
Company's subsidiary banks.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate," "target," "goal," "objective," "intend," "estimate" and
similar expressions.
The risks involved in the operations and strategies of the Company include
competition from other financial institutions, changes in interest rates,
changes in economic or market conditions as well as events and trends affecting
specific assets, the effect of credit quality and market perceptions of value on
the fair values of financial instruments and regulatory factors. These risks,
which are not inclusive, cannot be accurately estimated.
For example, a financial institution may accept deposits at fixed interest
rates, at different times and for different terms, and lend funds at fixed
interest rates, at different times and for different terms. In doing so, it
accepts the risk that its cost of funds may rise while the use of those funds
may be at a fixed rate. Similarly, although market rates of interest may
decline, the financial institution may have committed, by virtue of the term of
a deposit, to pay what essentially becomes an above-market rate.
Loans, and the allowance for loan losses, carry the risk that borrowers will not
repay all funds in a timely manner, as well as the risk of total loss. The
collateral pledged as security for loans may or may not have the value which has
been attributed to it. The loan loss reserve, while believed to be adequate, may
prove inadequate if one or more large-balance borrowers, or numerous mid-balance
borrowers, or a combination of both, experience financial difficulty for a
variety of reasons. These reasons may relate to the financial circumstances of
an individual borrower, or may be caused by negative economic circumstances of
an individual borrower, or may be caused by negative economic circumstances at
the local, regional, national or international level which are beyond the
control of the borrowers or the lender.
Because the business of banking is of a highly regulated nature, the decisions
of governmental entities can have a major effect on operating results.
All of these uncertainties, as well as others, are present in the operations and
business of the Company, and stockholders are cautioned that the Company's
actual results may differ materially from those included in the forward-looking
statements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Financial Position
Year End Amounts (In Thousands) .. 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------
Loans, net of allowance for losses $626,873 $565,381 $460,911 $422,761 $368,264
Investment securities ............ 161,066 156,198 149,350 138,064 132,635
Deposits ......................... 652,706 562,086 534,151 479,770 450,061
Federal Home Loan Bank borrowings 120,668 108,700 75,732 50,764 25,795
Stockholders' equity ............. 68,524 60,264 56,452 51,500 47,335
Total assets ..................... 875,750 773,966 689,787 603,102 539,452
For the year 2000, net loans increased $61.5 million, and $60 million of the
increase was in real estate mortgage loans. Stable interest rates and new real
estate development projects contributed to loan growth.
In 1999, net loans increased $104.5 million, primarily in real estate mortgage
loans, as demand remained high and rates continued to be attractive. The large
increase in loans was primarily driven by a strong local economy, the sale of a
local competing bank and favorable interest rates.
Total assets increased 13.15% in 2000, compared to an increase of 12.20% in
1999. The growth in assets in 2000 and 1999 was primarily attributable to strong
loan demand for real estate mortgage loans.
In 2000, the rates paid on deposits were higher than in 1999, and Bank deposits
became more attractive to investors as stock market returns were down
significantly from recent years. In addition, in February 2000, the Company
extended to new market areas in Cedar Rapids, Iowa, with a downtown location and
the results of deposit growth has exceeded expectations during the first year of
operations.
Deposits increased 16.12% in 2000 compared to an increase of 5.23% in 1999. The
banks continued to compete for deposits in market areas where the total deposit
growth continues to be weak. Federal Home Loan Bank borrowings increased by a
net $12.0 million in 2000 and $33 million in 1999 with the advances used to fund
the loan growth.
Components of Diluted Earnings Per Share
2000 1999 1998
----------------------------------------
Net interest income ............... $ 17.85 $ 16.59 $ 14.78
Provision for loan losses ......... (0.63) (0.60) (0.61)
Noninterest income ................ 4.98 4.30 3.90
Noninterest expense ............... (13.30) (12.24) (11.03)
----------------------------------------
Income before income taxes 8.90 8.05 7.04
Income tax expense ................ (2.69) (2.39) (2.02)
----------------------------------------
Net income ................ $ 6.21 $ 5.66 $ 5.02
========================================
For the year ended December 31, 2000, net income increased by $900,000 from the
1999 results. Net interest income for 2000 was $2.1 million higher than 1999 and
was primarily the result of a significant increase in the volume of average
earning assets during the year of approximately $100 million. Other income for
2000 increased over the prior year by $1,077,000 and other expenses increased in
2000 by $1,760,000.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In 1999, the increase in net income was due primarily to increased net interest
income, primarily resulting from a large increase in earning assets. The 1999
increase in noninterest income totaling $941,000 included increases in trust
fees ($286,000), deposit charges and fees ($375,000) and other charges and fees
($487,000).
The Company consistently benefited from low provisions for loan losses, a result
of a strong local economy and a loan portfolio that is concentrated in
well-secured real estate loans.
Net Interest Income
Net interest income is the excess of the interest and fees received on
interest-earning assets over the interest expense of the interest-bearing
liabilities. The measure is shown on a tax-equivalent basis to make the interest
earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 2000 as follows:
INTEREST INCOME
---------------------------
Increase (Decrease)
Change In Change In ---------------------------
Average Average Volume Rate Net
Balance Rate Changes Changes Change
---------------------------------------------------
(Amounts In Thousands)
Loans, net .............................. $91,922 0.09% $ 7,697 $ 463 $ 8,160
Taxable securities ...................... 1,643 0.17 102 212 314
Nontaxable securities ................... 3,327 0.06 230 21 251
Federal funds sold ...................... 1,562 1.51 80 163 243
--------- --------------------------------
$98,454 $ 8,109 $ 859 $ 8,968
========= ================================
INTEREST EXPENSE
--------------------------------
Interest-bearing demand deposits ........ $ 9,073 0.31% $ 201 190 391
Savings deposits ........................ 1,614 0.51 52 794 846
Time deposits ........................... 35,058 0.29 1,979 829 2,808
Federal funds purchased and securities
sold under agreements to repurchase ... 2,526 0.51 116 66 182
FHLB borrowings ......................... 41,163 0.13 2,408 116 2,524
-------- ------------------------------
$89,434 $ 4,756 $ 1,995 $ 6,751
======== ==============================
Change in net interest income ........... $ 3,353 $ (1,136) $ 2,217
==============================
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Net interest income changes for 1999 were as follows:
Change In Effect Of Effect Of
Average Volume Rate Net
Balance Changes Changes Change
-----------------------------------------------
Interest-earning assets .............................. $ 70,072 $ 6,110 $ (2,200) $3,910
Interest-bearing liabilities ......................... 58,841 2,424 (1,365) 1,059
-----------------------------------------------
Change in net interest income ........................ $ 3,686 $ (835) $2,851
==================================
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) ......................... 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Yield on average interest-earning assets ............. 7.92% 7.75% 8.00%
Rate on average interest-bearing liabilities ......... 4.92 4.51 4.82
Net interest spread .................................. 3.00 3.24 3.18
Effect of noninterest-bearing funds .................. 0.62 0.59 0.63
Net interest margin (tax equivalent interest income
divided by average interest-earning assets) ........ 3.62% 3.83% 3.81%
=================================
Loan Losses
The provision for loan losses totaled $948,000, $900,000 and $916,000 for 2000,
1999 and 1998, respectively. Charge-offs, net of recoveries were $270,000 for
2000, $6,000 for 1999 and $70,000 for 1998.
The allowance for loan losses totaled $10,428,000 at December 31, 2000 compared
to $9,750,000 at December 31, 1999. The percentage of the allowance to
outstanding loans was 1.64% and 1.70% at December 31, 2000 and 1999,
respectively.
Agricultural loans totaled $28,560,000 and $27,302,000 at December 31, 2000 and
1999, respectively. Management has assessed the risks for agricultural loans
higher than the other loans due to unpredictable commodity prices, the effects
of weather on crops and uncertainties regarding government support programs.
Therefore, the allowance for loan losses includes general and specific reserves
for these loans.
Loan concentrations, quality and loan terms had no significant changes in 2000
except that agricultural loans experienced a $1,300,000 increase from 1999 and
$60,000,000 of the 2000 loan growth was in real estate mortgages. Therefore, the
estimation methods and assumptions used in determining the 2000 allowance were
consistent with 1999 and nearly all the additional allowance for loan losses was
allocated to new loans. Net loss experience for the past three years has been
consistently low, but the overall growth of the loan portfolio results in an
increased allowance for loan losses. There were no significant changes in the
elements of the allowance in the past two years or the methodology in
determining the allowance. The estimated loss rates were consistently used in
2000 and 1999 because asset quality was comparable.
There are no known trends or uncertainties that are reasonably likely to have a
material effect on the allowance for loan losses in the near-term.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Other Income
Dollars Per Share, Based on Weighted Average Diluted Shares Outstanding 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Real estate origination fees .......................................... $ 0.2 $ 0.39 $ 0.54
Trust fees ............................................................ 1.58 1.36 1.17
Deposit account charges and fees ...................................... 1.70 1.47 1.23
Other fees and charges ................................................ 1.49 1.29 0.96
Investment securities gains (losses) .................................. -- (0.21) --
-------------------------------
$ 4.98 $ 4.30 $ 3.90
===============================
Total other income increased $1,077,000 for the year ended December 31, 2000
compared to the same period one year ago. Loan origination fees for the year
2000 are $276,000 less than 1999 as a result of higher interest rates in 2000
for these types of loans. Trust fees, deposit account charges and other fees
increased $1,038,000 for 2000 and resulted from volume increases in trust assets
and deposit accounts. During 1999, the Company had a reduction of other income
by $315,000, which represented investment securities losses taken to replace
lower yielding securities with higher yielding securities of similar risk and
maturity. For the year 2000, no gains and losses on sale of investment
securities occurred.
Other income for 1999 increased by $626,000 to $6,437,000. Loan origination fees
were $592,000 compared to $799,000 for 1998. The decrease was due primarily to
fewer loan refinancings after interest rates increased in the second half of
1999. Trust fees increased $286,000 for the year to $2,029,000 due to more trust
assets under management. Deposit account charges and fees increased $375,000 for
1999 and other fees and charges increased $487,000.
Other Expenses
Dollars Per Share, Based on Weighted Average Diluted Shares Outstanding 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
...................................................................
Salaries and employees benefits ....................................... $ 7.06 $ 6.56 $ 5.75
Occupancy ............................................................. 0.94 0.84 0.76
Furniture and equipment ............................................... 1.43 1.26 1.13
Office supplies and postage ........................................... 0.75 0.74 0.79
Other ................................................................. 3.12 2.84 2.60
$ 13.30 $ 12.24 $ 11.03
===============================
Other expenses increased $1,760,000. Of the increase, salaries and benefits
accounted for $844,000, occupancy and furniture and equipment expense $431,000
and all other expenses $485,000. The salaries and employee benefits increase
were the direct result of salary adjustments in the first quarter of 2000 and
the two new offices added during the last sixteen months. The Iowa City eastside
location of Hills Bank and Trust Company opened in June 1999 and the Cedar
Rapids office opened in February 2000. The two new locations also accounted for
a portion of the increase in occupancy expense and other expense increases were
in marketing and business promotion. Also during 2000, the bank introduced an
on-line banking product and incurred increased product promotion expense.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Other expenses for 1999 increased to $18,309,000 from $16,438,000 in 1998.
Salaries and benefits accounted for $1,232,000 of the increase for the year.
This is a result of new staff additions during 1999 including staff for the new
branch, salary adjustments in January 1999 and significant increases in medical
insurance claims in 1999 compared to 1998. All other expenses increased from
$7,863,000 in 1999 to $8,502,000 for the year ended December 31, 1999. The major
category that increased was furniture and equipment, which was $1,687,000 in
1998 and $1,893,000 in 2000 and was the result of depreciation and amortization
of major computer hardware and software additions in 1999.
Income Taxes
Income tax expense was $4,059,000, $3,570,000 and $3,006,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. The corresponding percentage of
income taxes compared to income before income taxes is 30.23% in 2000, 29.66% in
1999 and 28.65% in 1998.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after January 1,
2001. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. Management believes that adoption of this
Statement will not have an effect on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This Statement replaces FASB Statement No. 125 in its entirety.
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but carries
over most of Statement 125's provisions without reconsideration. The Statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. Management believes that adoption
of this Statement will not have an effect on the Company's financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Interest Rate Sensitivity and Liquidity Analysis
At December 31, 2000, the Company's interest rate sensitivity report is as
follows (in thousands):
Repricing Days
Maturities ------------------------------------------ More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
----------------------------------------------------------------------------
Earning assets:
Federal funds sold ..... $ 28,065 $ -- $ -- $ -- $ -- $ -- $ 28,065
Investment
securities ............. -- 1,685 7,610 9,184 23,906 110,892 153,277
Loans .................... -- 51,535 29,723 38,044 57,606 460,393 637,301
---------------------------------------------------------------------------
Total ............. 28,065 53,220 37,333 47,228 81,512 571,285 818,643
---------------------------------------------------------------------------
Sources of funds:
Interest-bearing
checking and
savings accounts ..... 50,618 -- -- -- -- 181,965 232,583
Certificates of
deposit .............. -- 17,967 27,718 69,689 59,147 169,515 344,036
Other borrowings -
FHLB .................. -- 20,000 -- 10,000 -- 90,668 120,668
Repurchase
agreements and
federal funds ......... 16,561 -- -- -- -- -- 16,561
---------------------------------------------------------------------------
67,179 37,967 27,718 79,689 59,147 442,148 713,848
Other sources,
primarily
noninterest-
bearing .................. -- -- -- -- -- 76,087 76,087
---------------------------------------------------------------------------
Total sources ....... 67,179 37,967 27,718 79,689 59,147 518,235 789,935
---------------------------------------------------------------------------
Repricing
differences .............. $(39,114) $ 15,253 $ 9,615 $(32,461) $ 22,365 $ 53,050 $ 28,708
============================================================================
A portion of the interest-bearing checking, savings and money market accounts
has been included in the above table as maturing immediately based upon
management's estimate using a financial model and the rest of these deposits are
shown as more than one year. The classifications are used because the Banks'
historical data indicates that these have been very stable deposits without much
interest rate fluctuation. Historically, these accounts would not need to be
adjusted upward as quickly in a period of rate increases so the interest risk
exposure would be less than the repricing schedule indicates.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Inflation
Inflation has an impact on the growth of total assets and has resulted in the
need to increase equity capital to maintain an appropriate equity to asset
ratio. The results of operations have been affected by inflation, but the effect
has been minimal.
Liquidity and Capital Resources
On an unconsolidated basis, Hills Bancorporation (the holding company) had cash
balances of $1,583,000 as of December 31, 2000. In 2000, the holding company
received dividends of $2,170,000 from its subsidiary banks and used those funds
to pay dividends to its stockholders of $2,171,000.
As of December 31, 2000 and 1999, stockholders' equity, before deducting for the
maximum cash obligation related to ESOP, was $80,074,000 and $71,217,000,
respectively. This measure of equity as a percent of total assets was 9.14% at
December 31, 2000 and 9.20% at December 31, 1999. As of December 31, 2000, total
equity was 7.82% of assets compared to 7.79% of assets at the prior year end.
The ability of the Company to pay dividends to its shareholders is dependent
upon the earnings and capital adequacy of the subsidiary banks, which affects
the Banks' dividends to the Company. The Banks are subject to certain statutory
and regulatory restrictions on the amount they may pay in dividends. In order to
maintain acceptable capital ratios in the subsidiary banks, certain of their
retained earnings are not available for the payment of dividends. Retained
earnings available for the payment of dividends to the Company total
approximately $3,070,000 as of December 31, 2000.
The Company and the Banks are subject to the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the Banks are subject to Prompt
Corrective Action Rules as determined and enforced by the Federal Reserve. These
regulations establish minimum capital requirements which member banks must
maintain.
As of December 31, 2000, risk-based capital standards require 8% of
risk-weighted assets. At least half of that 8% must consist of Tier I core
capital (common stockholders' equity, noncumulative perpetual preferred stock
and minority interest in the equity accounts of consolidated subsidiaries), and
the remainder may be Tier II supplementary capital (perpetual debt,
intermediate-term preferred stock, cumulative perpetual, long-term and
convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of
risk-weighted assets). Total risk-weighted assets are determined by weighing the
assets according to their risk characteristics. Certain off-balance sheet items
(such as standby letters of credit and firm loan commitments) are multiplied by
"credit conversion factors" to translate them into balance sheet equivalents
before assigning them risk weightings. Any bank having a capital ratio less than
the 8% minimum required level must, within 60 days, submit to the Federal
Reserve a plan describing the means and schedule by which the Bank shall achieve
the applicable minimum capital ratios.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Each of the Banks is an insured state bank, incorporated under the laws of the
state of Iowa. As such, the Banks are subject to regulation, supervision and
periodic examination by the Superintendent of Banking of the State of Iowa (the
"Superintendent"). Among the requirements and restrictions imposed upon state
banks by the Superintendent are the requirements to maintain reserves against
deposits, restrictions on the nature and amount of loans, which may be made by
state banks, and restrictions relating to investments, opening of bank offices
and other activities of state banks. Changes in the capital structure of state
banks must also be approved by the Superintendent. One of the most significant
standards of operation of state banks is the six and one-half percent (6 1/2%)
primary capital to total assets ratio generally required by the Superintendent.
This ratio was reduced in 1999 from the eight percent (8%) ratio formerly
required. In certain instances, the Superintendent may mandate higher capital,
but the Superintendent has not imposed such a requirement on the Bank. The
Superintendent defines the term "primary capital" to mean the sum of
stockholders' equity and the allowance for loan losses less any intangible
assets. In determining the primary capital ratio, the Superintendent uses the
total assets as of the date of computation. At December 31, 2000, the primary
capital to total assets ratio of each of the Banks exceeded the ratio required
by the Superintendent.
A comparison of the Company's capital as of December 31, 2000 with minimum
requirements is presented below:
Actual Requirements
---------------------------
Tier I Risk-Based Capital ..............13.09 4%
Total Risk-Based Capital .............. 14.35 8
Leverage Ratio ......................... 8.91 3
Each of the Banks is classified as "well capitalized" by FDIC capital
guidelines.
On a consolidated basis, 2000 cash flows from operations provided $12,702,000,
net increases in deposits provided $90,620,000 and Federal Home Loan Bank
borrowings provided $29,847,000. These cash flows were invested in net loans of
$62,440,000, net securities of $2,245,000 and net federal funds sold increase of
$27,859,000. In addition, $6,501,000 was used to purchase property and
equipment.
At December 31, 2000, the Company had total outstanding loan commitments and
unused portions of lines of credit totaling $91,060,000. Management believes
that its liquidity levels are sufficient, but the Company may slow down the
growth of its assets by selling more loans in the secondary market or by selling
portions of loans to other banks through participation agreements.
As of December 31, 2000, the Company estimates that additional construction
expenditures for two construction projects to be completed in 2001 will total
$1,648,000 and will not require outside financing.
Commitments and Trends
The Company has no material commitments or plans that will materially affect its
liquidity or capital resources. Property and equipment may be acquired in cash
purchases, or they may be financed if favorable terms are available.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures
The Company's primary market risk exposure is to changes in interest rates. The
Company's asset/liability management, or its management of interest rate risk,
is focused primarily on evaluating and managing net interest income given
various risk criteria. Factors beyond the Company's control, such as market
interest rates and competition, may also have an impact on the Company's
interest income and interest expense. In the absence of other factors, the
Company's overall yield on interest-earning assets will increase as will its
cost of funds on its interest-bearing liabilities when market rates increase
over an extended period of time. Inversely, the Company's yields and cost of
funds will decrease when market rates decline. The Company is able to manage
these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time.
The Banks maintain an asset/liability committee, which meets at least quarterly
to review the interest rate sensitivity position and to review various
strategies as to interest rate risk management. In addition, the Banks use a
simulation model to review various assumptions relating to interest rate
movement. The model attempts to limit rate risk even if it appears the Banks'
asset and liability maturities are perfectly matched and a favorable interest
margin is present.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to mitigate the
Company's interest rate sensitivity. The program emphasizes the origination of
adjustable rate loans, which are held in the portfolio, the investment of excess
cash in short or intermediate term interest-earning assets, and the solicitation
of passbook or transaction deposit accounts which are less sensitive to changes
in interest rates and can be repriced rapidly.
Based on the data following, net interest income should decline with
instantaneous increases in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Company's interest rate spread and margin. This would result
from an increase in the Company's cost of funds that would not be immediately
offset by an increase in its yield on earning assets that would tend to reduce
net interest income. In times of decreasing interest rates, fixed rate assets
could increase in value and the lag in repricing of interest rate sensitive
assets could be expected to have a positive effect on the Company's net interest
income.
The following table provides quantitative information with respect to interest
sensitive assets and liabilities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
The following table provides information about the Company's loans, investment
securities and deposits that are sensitive to changes in interest rates. The
table presents principal cash flows and related weighted average interest rates
by expected maturity dates.
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---------------------------------------------------------------------------------------------
Assets:
Loans, fixed:
Balance ........$ 102,314 $39,097 $ 88,444 $ 84,448 $ 35,999 $ 22,224 $372,526 $359,675
Average
interest rate 8.72% 8.33% 8.26% 7.80% 8.56% 7.28% 8.26%
Loans, variable:
Balance ........ $ 24,164 $ 1,637 $ 1,809 $ 2,199 $ 1,016 $ 233,950 264,775 264,775
Average
interest rate . 9.61% 9.59% 9.74% 9.51% 9.87% 8.06% 8.24%
Investments (1):
Balance ...... $ 70,200 29,297 32,416 20,877 11,591 24,750 189,131 161,233
Average
interest rate 6.01% 6.10% 6.39% 6.80% 6.56% 6.85% 6.32%
Liabilities:
Liquid
deposits (2):
Balance ...... $ 232,583 -- -- -- -- -- $ 232,583 $232,583
Average
interest rate 3.49% 0.00% 0.00% 0.00% 0.00% 0.00% 3.49%
Deposits,
certificates:
Balance ....... $ 174,521 113,745 35,869 15,799 4,102 -- $ 344,036 350,657
Average
interest rate 5.64% 6.54% 6.10% 6.38% 5.96% 0.00% 6.02%
(1) Includes all available-for-sale investments, held-to-maturity investments,
federal funds and Federal Home Loan Bank stock.
(2) Includes passbook accounts, NOW accounts, Super NOW accounts and money
market funds.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included on Pages 32 through
60.
Independent Auditor's Report
To the Board of Directors and Stockholders
Hills Bancorporation
Hills, Iowa
We have audited the accompanying consolidated balance sheets of Hills
Bancorporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the years ended December 31, 2000, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hills Bancorporation
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 2000, 1999 and
1998 in conformity with generally accepted accounting principles.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa
February 16, 2001
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(In Thousands, Except Shares)
ASSETS ................................................................... 2000 1999
---------------------
......................................................................
Cash and due from banks (Note 9) ......................................... $ 25,669 $ 21,765
Investment securities (Note 2):
Available for sale (amortized cost 2000 $136,661; 1999 $133,516) ....... 137,768 131,961
Held to maturity (fair value 2000 $15,676; 1999 $18,362) ............... 15,509 18,307
Stock of Federal Home Loan Bank .......................................... 7,789 5,930
Federal funds sold ....................................................... 28,065 206
Loans, net of allowance for loan losses 2000 $10,428; 1999 $9,750
(Notes 3 and 10) ....................................................... 626,873 565,381
Property and equipment, net (Note 4) ..................................... 16,499 11,646
Accrued interest receivable .............................................. 7,522 6,376
Deferred income taxes, net (Note 8) ...................................... 3,286 3,954
Other assets ............................................................. 6,770 8,440
--------------------
$ 875,750 $ 773,966
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
........................................................................
Liabilities
Noninterest-bearing deposits ............................................. $ 76,087 $ 66,794
Interest-bearing deposits (Note 5) ....................................... 576,619 495,292
---------------------
Total deposits ........................................................ 652,706 562,086
Federal funds purchased and securities sold under agreements to repurchase 16,561 26,714
Federal Home Loan Bank borrowings (Note 6) ............................... 120,668 108,700
Accrued interest payable ................................................. 2,865 2,040
Other liabilities ........................................................ 2,876 3,209
---------------------
795,676 702,749
=====================
Commitments and Contingencies (Notes 7 and 13)
Redeemable Common Stock Held By Employee Stock
Ownership Plan (ESOP) (Note 7) ........................................... 11,550 10,95
---------------------
Stockholders' Equity (Note 9)
Capital stock, no par value; authorized 10,000,000 shares;
issued 2000 1,495,483 shares; 1999 1,495,941 shares .................... 10,197 10,214
Retained earnings ........................................................ 69,179 61,984
Accumulated other comprehensive income (loss) ............................ 698 (981)
---------------------
80,074 71,217
Less maximum cash obligation related to ESOP shares (Note 7) ............. 11,550 10,953
---------------------
68,524 60,264
---------------------
$ 875,705 $ 773,966
=====================
See Notes to Financial Statements
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(In Thousands, Except Per Share Amounts)
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Interest income:
Loans, including fees ....................................... $ 50,081 $ 41,933 $ 37,854
Investment securities:
Taxable ................................................... 7,481 7,167 6,832
Nontaxable ................................................ 1,732 1,566 1,394
Federal funds sold .......................................... 698 455 1,209
-----------------------------
Total interest income ............................... 59,992 51,121 47,289
-----------------------------
Interest expense:
Deposits .................................................... 24,871 20,826 20,458
Securities sold under agreements to repurchase .............. 699 517 417
FHLB borrowings ............................................. 7,494 4,970 4,379
-----------------------------
Total interest expense .............................. 33,064 26,313 25,254
-----------------------------
Net interest income ................................. 26,928 24,808 22,035
Provision for loan losses (Note 3) ............................ 948 900 916
-----------------------------
Net interest income after provision for loan losses 25,980 23,908 21,119
-----------------------------
Other income:
Loan origination fees ....................................... 316 592 799
Trust fees .................................................. 2,388 2,029 1,743
Deposit account charges and fees ............................ 2,566 2,203 1,828
Other fees and charges ...................................... 2,244 1,928 1,441
Net gains (losses) on sale of investment securities (Note 2) -- (315) --
-----------------------------
7,514 6,437 5,811
-----------------------------
Other expenses:
Salaries and employee benefits .............................. 10,651 9,807 8,575
Occupancy ................................................... 1,417 1,249 1,137
Furniture and equipment ..................................... 2,156 1,893 1,687
Office supplies and postage ................................. 1,128 1,111 1,178
Other ....................................................... 4,717 4,249 3,861
-----------------------------
20,069 18,309 16,438
-----------------------------
Income before income taxes ............................ 13,425 12,036 10,492
Federal and state income taxes (Note 8) ...................... 4,059 3,570 3,006
-----------------------------
Net income ........................................... $ 9,366 $ 8,466 $ 7,486
===============================
Earnings per share:
Basic ....................................................... $ 6.26 $ 5.70 $ 5.10
Diluted ..................................................... 6.21 5.66 5.02
See Notes to Financial Statements
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)
2000 1999 1998
- -------------------------------------------------------------------------------------------
Net income ................................................. $ 9,366 $ 8,466 $ 7,486
----------------------------
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during the year,
net of income taxes 2000 $983; 1999 $(1,385); 1998 $413 .. 1,679 (2,364) 700
Reclassification adjustments for net (gains) losses realized
in net income, net of income taxes 2000 none;
1999 $116; 1998 none ....................................... -- 198 --
----------------------------
Other comprehensive income (loss) .......................... 1,679 (2,166) 700
----------------------------
Comprehensive income ....................................... $11,045 $ 6,300 $ 8,186
============================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Notes 7 and 9)
Years Ended December 31, 2000, 1999 and 1998
(In Thousands, Except Share Amounts)
Cash
Accumulated Obligation
Other Related
Capital Retained Comprehensive To ESOP
Stock Earnings Income (Loss) Shares Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 9,070 $ 49,627 $ 485 $ (7,682) $ 51,500
Issuance of 1,931 shares of
common stock ..................... 78 -- -- -- 78
Redemption of 242 shares
of common stock .................. (8) -- -- -- (8)
Change related to ESOP shares ...... -- -- -- (1,619) (1,619)
Net income ......................... -- 7,486 -- -- 7,486
Income tax benefit related to
stock based compensation ......... -- 76 -- -- 76
Cash dividends ($1.20 per share) ... -- (1,761) -- -- (1,761)
Other comprehensive income ........... -- -- 700 -- 700
--------------------------------------------------------------
Balance, December 31, 1998 ........... 9,140 55,428 1,185 (9,301) 56,452
Issuance of 26,665 shares of
common stock ..................... 752 -- -- -- 752
Redemption of 167 shares
of common stock .................. (8) -- -- -- (8)
Change related to ESOP shares ...... -- -- -- (1,652) (1,652)
Net income ......................... -- 8,466 -- -- 8,466
Income tax benefit related to
stock based compensation ......... 330 -- -- -- 330
Cash dividends ($1.30 per share) ... -- (1,910) -- -- (1,910)
Other comprehensive
income (loss) .................... -- -- (2,166) -- (2,166)
----------------------------------------------------------------
Balance, December 31, 1999 ........... 10,214 61,984 (981) (10,953) 60,264
Redemption of 458 shares
of common stock .................. (23) -- -- -- (23)
Change related to ESOP shares ...... -- -- -- (597) (597
Net income ......................... -- 9,366 -- -- 9,366
Income tax benefit related to
stock based compensation ......... 6 -- -- -- 6
Cash dividends ($1.45 per share) ... -- (2,171) -- -- (2,171)
Other comprehensive income ......... -- -- 1,679 -- 1,679
----------------------------------------------------------------
Balance, December 31, 2000 ............ $ 10,197 $ 69,179 $ 698 $(11,550) $ 68,524
================================================================
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income .................................................. $ 9,366 $ 8,466 $ 7,486
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................ 1,648 1,484 1,325
Amortization ................................................ 261 261 261
Provision for loan losses ................................... 948 900 916
Net (gains) losses on sale of investment securities ......... -- 315 --
Compensation paid by issuance of common stock ............... -- 94 70
Deferred income taxes ....................................... (315) (847) (15)
(Increase) in accrued interest receivable ................... (1,146) (491) (444)
Amortization of bond discount ............................... 39 339 300
(Increase) in other assets .................................. 1,409 (1,329) (425)
Increase (decrease) in accrued interest and other liabilities 492 1,652 (781)
----------------------------------
Net cash provided by operating activities .............. 12,702 10,844 8,693
----------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities:
Available for sale .......................................... 27,115 29,278 27,300
Held to maturity ............................................ 2,798 2,862 2,607
Proceeds from sales of available-for-sale securities ........ -- 17,013 --
Purchases of investment securities available for sale ....... (32,158) (60,090) (40,380)
Federal funds sold, net ..................................... (27,859) 36,605 (34,364)
Loans made to customers, net of collections ................. (62,440) (105,370) (39,066)
Purchases of property and equipment ......................... (6,501) (1,937) (3,081)
-----------------------------------
Net cash (used in) investing activities ............... (99,045) (81,639) (86,984)
-----------------------------------
Cash Flows from Financing Activities
Net increase in deposits .................................... 90,620 27,935 54,381
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase .............. (10,153) 16,160 1,546
Borrowings from FHLB ........................................ 40,000 50,000 40,000
Payments on FHLB borrowings ................................. (28,032) (17,032) (15,032)
Stock options exercised ..................................... -- 650 --
Income tax benefits related to stock based compensation ..... 6 330 76
Redemption of common stock .................................. (23) -- --
Dividends paid .............................................. (2,171) (1,910) (1,761)
----------------------------------
Net cash provided by financing activities ................... 90,247 76,133 79,210
==================================
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000, 1999 and 1998
(In Thousands)
2000 1999 1998
- --------------------------------------------------------------------------------
Increase in cash and due from banks ......... $ 3,904 $ 5,338 $ 919
Cash and due from banks:
Beginning ........................................ 21,765 16,427 15,508
---------------------------
Ending ........................................... $25,669 $21,765 $16,427
===========================
Supplemental Disclosures
Cash payments for:
Interest paid to depositors and others ......... $24,046 $20,824 $20,470
Interest paid on other obligations ............. 8,193 5,487 4,796
Income taxes ................................... 4,424 3,755 3,544
Noncash financing transactions:
Increase in maximum cash obligation related to
ESOP shares .................................... $ 597 $ 1,652 $ 1,619
See Notes to Financial Statements.
Hills Bancorporation
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a multibank
holding company engaged in the business of banking. The Company's wholly-owned
subsidiary commercial banks are Hills Bank and Trust Company, Hills, Iowa and
Hills Bank Kalona, Kalona, Iowa. The Banks are all full-service commercial banks
extending their services to individuals, businesses, governmental units and
institutional customers primarily in the communities of Hills, Iowa City,
Coralville, North Liberty, Lisbon, Mount Vernon, Kalona and Cedar Rapids, Iowa.
The Banks compete with other financial institutions and nonfinancial
institutions providing similar financial products. Although the loan activity of
the Banks is diversified with commercial and agricultural loans, real estate
loans, automobile, installment and other consumer loans, each Bank's credit is
concentrated in real estate loans.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for loan losses, fair values of
securities and other financial instruments, and stock-based compensation expense
involve certain significant estimates made by management. These estimates are
reviewed by management routinely and it is reasonably possible that
circumstances that exist at December 31, 2000 may change in the near-term future
and that the effect could be material to the consolidated financial statements.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Investment securities: Held-to-maturity securities consist solely of debt
securities, which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities not classified as
trading or held to maturity. Available-for-sale securities are stated at fair
value, and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders' equity. There were
no trading securities as of December 31, 2000 and 1999.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual
lives of those securities. The method of amortization results in a constant
effective yield on those securities (the interest method). Realized gains and
losses on investment securities are included in income, determined on the basis
of the cost of the specific securities sold.
Loans: Loans are stated at the amount of unpaid principal, reduced by the
allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance when management
believes the collectability of principal is unlikely. The allowance for loan
losses is maintained at a level considered adequate to provide for losses that
can be reasonably anticipated. The allowance is increased by provisions charged
to expense and is reduced by net charge-offs. The Banks make continuous reviews
of the loan portfolio and considers current economic conditions, historical loss
experience, review of specific problem loans and other factors in determining
the adequacy of the allowance.
Loans are considered impaired when, based on current information and events, it
is probable the Banks will not be able to collect all amounts due. The portion
of the allowance for loan losses applicable to impaired loans has been computed
based on the present value of the estimated future cash flows of interest and
principal discounted at the loans effective interest rate or on the fair value
of the collateral for collateral dependent loans. The entire change in present
value of expected cash flows of impaired loans or of collateral value is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest income on impaired loans is recognized on
the cash basis.
The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due.
Loan fees and origination costs are reflected in the statement of income as
collected or incurred. Compared to the net deferral method, this practice had no
significant effect on income.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded when they are funded.
Property and equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using primarily
declining-balance methods over the estimated useful lives of 7-40 years for
buildings and improvements and 3-20 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the liability
method whereby deferred tax assets are recognized for deductible temporary
differences and net operating loss, and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some or all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Intangible assets: Intangible assets consist principally of goodwill, which
represents the excess of cost over fair value of net assets acquired in business
combinations of two banks in 1996 accounted for under the purchase method.
Goodwill is amortized on a straight-line basis over the estimated period to be
benefited, 15 years. The carrying value of goodwill is reviewed periodically for
impairment. Goodwill totaled $2,760,000 and $3,021,000, net of accumulated
amortization of $1,137,000 and $876,000 as of December 31, 2000 and 1999,
respectively, and is included in other assets.
Stock options: Compensation expense for stock issued through stock option and
award plans is accounted for using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under this method, compensation is measured as the difference
between the estimated fair value of the stock at the date of award less the
amount required to be paid for the stock. The difference, if any, is charged to
expense over the periods of service.
Common stock held by ESOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares are
not readily traded and could be put to the Company for cash.
Trust assets: Trust assets, other than cash deposits, held by the Banks in
fiduciary or agency capacities for its customers are not included in these
statements since they are not assets of the Company.
Earnings per share: Basic per-share amounts are computed by dividing net income
(the numerator) by the weighted-average number of common shares outstanding (the
denominator). Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock unless the effect is to reduce the loss
or increase the income per common share from continuing operations.
Following is a reconciliation of the denominator:
Year Ended December 31,
------------------------------------
2000 1999 1998
------------------------------------
Weighted average number of shares ........................... $1,495,906 $1,483,540 $1,467,772
Potential number of dilutive shares ......................... 12,875 11,784 22,702
------------------------------------
Total shares to compute diluted earnings per share .......... $1,508,781 $1,495,324 $1,490,474
====================================
There are no potentially dilutive securities that have not been included in the
determination of diluted shares.
Statement of cash flows: For purposes of reporting cash flows, cash and due from
banks includes cash on hand and amounts due from banks (including cash items in
process of clearing). Cash flows from loans originated by the Banks, deposits
and federal funds purchased and securities sold under agreements to repurchase
are reported net.
Recently issued accounting standards:
Recently issued accounting standards are not expected to materially affect the
Company's financial statements.
Fair value of financial instruments: In cases where quoted market prices are not
available, fair values of financial instruments are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from fair value
disclosure. Accordingly, the aggregate fair value amounts presented in Note 11
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Off-balance sheet instruments: Fair values for outstanding letters of credit
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The fair value of the outstanding letters of credit is not
believed to be significant. Unfunded loan commitments are not valued since
the loans are generally priced at market at the time of funding.
Cash and cash equivalents and federal funds sold: The carrying amounts
reported in the balance sheet for cash and short-term instruments approximate
their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are determined using estimated future cash
flows, discounted at the interest rates currently being offered for loans
with similar terms to borrowers with similar credit quality. The carrying
amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying
amounts, which represent the amount payable on demand. The carrying amounts
for variable-rate, fixed-term money market accounts and certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds sold and
securities sold under agreements to repurchase approximate their fair values.
Long-term borrowings: The fair values of the Banks' long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses,
based on the Banks' current incremental borrowing rates for similar types of
borrowing arrangements.
Note 2.
Investment Securities
The amortized cost and fair value of investment securities available for sale
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------------------------------------------------------
(Amounts In Thousands)
December 31, 2000:
U. S. Treasury ................................ $ 18,070 $ 249 $ (1) $ 18,318
U. S. Government agencies and
corporations ................................ 94,439 720 (123) 95,036
State and political subdivisions .............. 24,152 331 (69) 24,414
---------------------------------------------------------
Total ..................................... $136,661 $ 1,300 $ (193) $137,768
=========================================================
December 31, 1999:
U. S. Treasury ............................... $ 19,525 $ 24 $ (79) $ 19,470
U. S. Government agencies and
corporations ............................... 95,389 8 (1,095) 94,302
State and political subdivisions ............. 18,602 8 (421) 18,189
---------------------------------------------------------
Total ..................................... $133,516 $ 40 $ (1,595) $131,961
=========================================================
The amortized cost and fair value of debt securities held to maturity are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------
(Amounts In Thousands)
December 31, 2000:
State and political subdivisions ............. $ 15,509 $ 168 $ (1) $15,676
=====================================================
December 31, 1999:
State and political subdivisions ............. $ 18,307 $ 93 $ (38) $18,362
=====================================================
The contractual maturity distribution of investment securities as of December
31, 2000 is summarized as follows:
Available For Sale Held To Maturity
-------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------
(Amounts In Thousands)
Due in one year or less ..................... $ 39,008 $ 38,961 $ 3,170 $ 3,180
Due after one year through five years ....... 82,534 83,446 11,894 12,038
Due after five years through ten years ...... 14,769 15,008 395 407
Due over ten years .......................... 350 353 50 51
-----------------------------------------
Total .............................. $136,661 $137,768 $ 15,509 $ 15,676
=========================================
As of December 31, 2000, investment securities with a carrying value of
$54,522,000 were pledged to collateralize public and trust deposits, short-term
borrowings and for other purposes, as required or permitted by law.
Net gains or losses from the sale of investment securities were as follows:
Year Ended December 31,
---------------------------------------
2000 1999 1998
---------------------------------------
(Amounts In Thousands)
Gross gains ......................... $-- $ 4 $--
Gross (losses) ....................... -- (319) --
---------------------------------------
Net gains (losses) ......... $-- $(315) $--
=======================================
Note 3. Loans
The composition of loans is as follows:
December 31,
----------------------
2000 1999
----------------------
(Amounts In Thousands)
Agricultural .............................. $ 28,560 $ 27,302
Commercial and financial ................. 37,832 36,848
Real estate:
Construction ............................ 38,184 40,879
Mortgage ............................... 499,010 439,072
Loans to individuals ..................... 33,715 31,030
---------------------
637,301 575,131
---------------------
Less allowance for loan losses ............ 10,428 9,750
---------------------
$626,873 $565,381
=====================
Changes in the allowance for loan losses are as follows:
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
---------------------------------
2000 1999 1998
---------------------------------
(Amounts In Thousands)
Balance, beginning .................... $ 9,750 $ 8,856 $ 8,010
Provision charged to expenses ......... 948 900 916
Recoveries ............................ 904 757 898
Loans charged off ..................... (1,174) (763) (968)
---------------------------------
Balance, ending ....................... $ 10,428 $ 9,750 $ 8,856
=================================
Information about impaired loans as of and for the years ended December 31, 2000
and 1999 is as follows:
2000 1999
------------------------
(Amounts In Thousands)
Loans receivable for which there is a related allowance for credit losses ...... $ -- $ --
Loans receivable for which there is no related allowance for credit losses ..... 11,068 9,750
-----------------------
Total impaired loans ................................................... $ 11,068 $ 9,750
=======================
Related allowance for credit losses ............................................ $ -- $ --
Average balance ................................................................. 10,409 9,110
Interest income recognized ..................................................... 977 814
No allowance for credit losses has been recognized for impaired loans because
partial charge-offs have been taken to reduce the loan balances to the net
present value of the future cash flows or to the fair value of the collateral if
the loan is collateral dependent.
Note 4. Property and Equipment
The major classes of property and equipment and the total accumulated
depreciation are as follows:
December 31,
--------------------
2000 1999
--------------------
(Amounts In Thousands)
Furniture and equipment .................... 13,939 12,129
--------------------
$29,683 $23,182
Less accumulated depreciation .............. 13,184 11,536
--------------------
Net ................................ $16,499 $11,646
====================
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows
December 31,
----------------------
2000 1999
----------------------
(Amounts In Thousands)
----------------------
NOW and other demand ................. $ 70,980 $ 62,081
Savings .............................. 161,603 155,001
Time, $100,000 and over ............. 46,653 30,442
Other time .......................... 297,383 247,768
---------------------
$576,619 $495,292
=====================
Note 6. Federal Home Loan Bank Borrowings
As of December 31, 2000, the borrowings were as follows:
(In Thousands)
------------
Due August 17, 2005, 7.12% ..................... $10,000
Due January 14, 2008, 5.22% .................... 10,000
Due February 4, 2008, 5.38% .................... 10,000
Due February 4, 2008, 5.25% .................... 100
Due April 30, 2008, 5.40% ...................... 10,000
Due August 11, 2008, 6.00% ..................... 10,000
Due June 15, 2009, 5.66% ....................... 10,000
Due June 15, 2009, 6.04% ....................... 10,000
Due October 6, 2009, 5.85% ..................... 568
Due October 6, 2009, 6.22% ..................... 10,000
Due January 8, 2010, 6.28% ..................... 10,000
Due January 8, 2010, 6.61% ..................... 10,000
Due January 19, 2010, 5.77% .................... 20,000
---------
$ 120,668
=========
The borrowings are collateralized by 1-4 family mortgage loans with a face
amount of $150,835,000. As of December 31, 2000, the Company held Federal Home
Loan Bank stock with a cost of $7,789,000.
Note 7. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes
discretionary cash contributions. The Company's contribution to the ESOP totaled
$70,000, $64,000 and $58,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
In the event a terminated plan participant desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at their fair value. To the extent that shares of common stock held
by the ESOP are not readily traded, a sponsor must reflect the maximum cash
obligation related to those securities outside of stockholders' equity. As of
December 31, 2000, 150,005 shares held by the ESOP, at a fair value of $77 per
share, have been reclassified from stockholders' equity to liabilities.
The Company has a profit-sharing plan with a 401(k) feature, which provides for
discretionary annual contributions in amounts to be determined by the Board of
Directors. The profit-sharing contribution totaled $562,000, $509,000 and
$461,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has a Stock Option and Incentive Plan for certain key employees and
directors whereby shares of common stock have been reserved for awards in the
form of stock options or stock awards. The Plan approved by the shareholders in
April 2000 replaces the 1993 Stock Incentive Plan that expired in 1999. Under
the new Stock Option and Incentive Plan, the aggregate number of options cannot
exceed 66,000 shares. A Stock Option Committee may grant options at prices equal
to the fair value of the stock at the date of the grant. Options expire 10 years
from the date of the grant. Directors may exercise options immediately and
officers' rights under the plan vest over a five-year period from the date of
the grant. No compensation expense has been charged to expense using the
intrinsic value based method as prescribed by APB No. 25. Had compensation
expense been determined based on the grant date fair values of the awards, as
prescribed by SFAS No. 123, reported net income and earnings per share would
have been as follows:
Years Ended December 31,
-----------------------------
2000 1999 1998
-----------------------------
Pro forma net income (in thousands) ....... $ 9,361 $ 8,461 $ 7,481
Pro forma earnings per share:
Basic ................................... 6.26 5.70 5.10
Diluted ................................. 6.21 5.66 5.02
The fair value of each grant is established at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the last grants in 1997: Dividend rate 2.19%; price volatility
of 4.64%; risk-free interest rate of 6.63% and an expected life of 5 years.
A summary of the stock options is as follows:
Weighted
Average
Number Exercise
Of Shares Price
----------------------
Balance, December 31, 1998 .......... 45,540 $ 26.48
Exercised ........................... (25,078) 25.93
Balance, December 31, 1999 .......... 20,462 27.15
Exercised ........................... -- --
----------------------
Balance, December 31, 2000 .......... 20,462 $ 27.15
======================
Other pertinent information related to the options outstanding at December 31,
2000 is as follows:
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- -------------------------------------------------------------------
$ 25.33 12,330 15 Months 12,330
26.17 6,077 18 Months 6,077
41.00 2,055 63 Months 2,055
------ -----
20,462 20,462
====== ======
As of December 31, 2000, 66,000 options were available for future grants.
The committee is also authorized to grant awards of common stock and authorized
the issuance of none, 1,587 and 902 shares of common stock to a group of
employees in 2000, 1999 and 1998, respectively.
Note 8.
Income Taxes
Income taxes for the years ended December 31, 2000, 1999 and 1998 are summarized
as follows:
2000 1999 1998
--------------------------------
(Amounts In Thousands)
Current:
Federal .................. $ 3,648 $ 3,707 $ 2,435
State .................... 726 710 586
Deferred ................. (315) (847) (15)
--------------------------------
$ 4,059 $ 3,570 $ 3,006
================================
Deferred income tax liabilities and assets arose from the following temporary
differences:
December 31,
----------------------------
2000 1999 1998
----------------------------
(Amounts In Thousands)
Deferred income tax assets:
Allowance for loan losses .................... $3,860 $3,597 $3,079
Unrealized losses on investment securities ... -- 574 --
Deferred compensation ........................ 433 311 156
Certain accrued expenses ..................... 198 190 211
Other ........................................ 90 112 --
------------------------
Gross deferred tax assets ................. 4,581 4,784 3,446
------------------------
Deferred income tax liabilities:
Property and equipment ....................... 750 700 677
FHLB dividends ............................... 130 130 130
Unrealized gains on investment securities .... 409 -- 696
Other ........................................ 6 -- 105
------------------------
Gross deferred tax liabilities ............ 1,295 830 1,608
------------------------
Net deferred income tax asset ............. $3,286 $3,954 $1,838
========================
The net change in the deferred income taxes for the years ended December 31,
2000, 1999 and 1998 is reflected in the financial statements as follows:
Year Ended December 31,
--------------------------
2000 1999 1998
--------------------------
(Amounts In Thousands)
Statement of income ..................... $ (315) $ (847) $ (15)
Statement of stockholders' equity ....... 983 (1,269) 413
--------------------------
$ 668 $ (2,116) $ 398
==========================
The income tax provisions for the years ended December 31, 2000, 1999 and 1998
are less than the amounts computed by applying the maximum effective federal
income tax rate to the income before income taxes because of the following
items:
2000 1999 1998
------------------------------------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------------------------------------------
(Amounts In Thousands)
Expected provision ...... $ 4,699 35.0% $ 4,213 35.0% $ 3,672 35.0%
Tax-exempt interest ..... (712) (5.3) (647) (5.3) (596) (5.7)
Interest expense
limitation ............ 111 1.0 120 1.0 102 1.0
State income taxes,
net of federal
income tax
benefit ............... 479 3.6 468 3.9 398 3.8
Income tax credits ...... (345) (2.6) (345) (2.9) (345) (3.3)
Other ................... (173) (1.3) (239) (2.0) (225) (2.2)
------------------------------------------------
$ 4,059 30.4% $ 3,570 29.7% $ 3,006 28.6%
================================================
Note 9. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends
and Cash Restrictions
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk-based capital standards include requirements for a minimum Tier 1 capital
to assets ratio (leverage ratio). In addition, regulatory agencies consider the
published capital levels as minimum levels and may require a financial
institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 2000 with the minimum
requirements is presented below.
Minimum
Actual Requirements
---------------------------
Tier 1 Risk-Based Capital .................... 13.09% 4.00%
Total Risk-Based Capital ..................... 14.35 8.00
Leverage Ratio .............................. 8.91 3.00
According to FDIC capital guidelines, each of the Banks is classified as "Well
Capitalized." The ability of the Company to pay dividends to its stockholders is
dependent upon dividends paid by the Banks. The Banks are subject to certain
statutory and regulatory restrictions on the amount they may pay in dividends.
To maintain acceptable capital ratios in the Banks, certain of their retained
earnings are not available for the payment of dividends. To maintain a ratio of
capital to assets of 8%, retained earnings of $3,070,000 as of December 31, 2000
are available for the payment of dividends to the Company.
Each of the Banks is required to maintain reserve balances in cash or with the
Federal Reserve Bank. Reserve balances totaled $9,662,000 and $7,938,000 as of
December 31, 2000 and 1999, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and the Banks and companies with which the
directors are affiliated and certain principal officers are customers of, and
have banking transactions with, the Banks in the ordinary course of business.
Such indebtedness has been incurred on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons.
The following is an analysis of the changes in the loans to related parties
during the years ended December 31, 2000 and 1999:
Year Ended December 31,
------------------------
2000 1999
------------------------
(Amounts In Thousands)
Balance, beginning ................. $ 10,733 $ 10,981
Advances ......................... 8,725 5,732
Collections ...................... (6,161) (5,980)
------------------------
Balance, ending .................... $ 13,297 $ 10,733
========================
Deposits from related parties are accepted subject to the same interest rates
and terms as those from nonrelated parties.
Note 11.
Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company's financial
instruments as of December 31, 2000 and 1999 are as follows:
2000 1999
-------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------
(Amounts In Thousands)
Cash and due from banks ................ $ 25,669 $ 25,669 $ 21,765 $ 21,765
Federal funds sold ..................... 28,065 28,065 206 206
Investment securities .................. 161,066 161,233 156,198 156,253
Loans .................................. 626,873 624,450 565,381 568,331
Accrued interest receivable ............ 7,522 7,522 6,376 6,376
Deposits ............................... 652,706 659,327 562,086 565,040
Federal funds purchased and securities
sold under agreements to repurchase .. 16,561 16,561 26,714 26,714
Borrowings from Federal Home Loan
Bank ................................. 120,668 121,325 108,700 109,112
Accrued interest payable ............... 2,865 2,865 2,040 2,040
Face Amount Face Amount
-------------------------------------------------
Off-balance sheet instruments:
Loan commitments ................. $ 91,060 $ -- $ 83,894 $ --
Letters of credit ................ 10,993 -- 10,711 --
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company
only):
BALANCE SHEETS
December 31, 2000 and 1999
(Amounts In Thousands)
ASSETS ................................................ 2000 1999
- --------------------------------------------------------------------------------
...................................................
Cash .................................................. $ 1,583 $ 1,419
Investment securities available for sale .............. 499 499
Investment in subsidiary banks ........................ 77,711 68,790
Other assets .......................................... 529 833
---------------------
Total assets ................................. $ 80,322 $ 71,541
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities ........................................... $ 248 $ 324
---------------------
Redeemable common stock held by ESOP .................. 11,550 10,953
---------------------
Stockholders' equity:
Capital stock ....................................... 10,197 10,214
Retained earnings ................................... 69,179 61,984
Accumulated other comprehensive income (loss) ....... 698 (981)
---------------------
80,074 71,217
Less maximum cash obligation related to ESOP shares ... 11,550 10,953
---------------------
Total stockholders' equity ................... 68,524 60,264
---------------------
Total liabilities and stockholders' equity ... $ 80,322 $ 71,541
=====================
STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(Amounts In Thousands)
2000 1999 1998
- --------------------------------------------------------------------------------
Interest on investment securities .............. $ 30 $ 16 $ 17
Dividends received from subsidiaries ........... 2,170 1,911 2,762
Other expenses ................................. (119) (121) (113)
-----------------------------
Income before income taxes and equity
in subsidiaries' undistributed income ..... 2,081 1,806 2,666
Income tax benefit ............................. 43 37 39
-----------------------------
2,124 1,843 2,705
Equity in subsidiaries' undistributed income ... 7,242 6,623 4,781
-----------------------------
Net income ................................ $ 9,366 $ 8,466 $ 7,486
=============================
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(Amounts In Thousands)
2000 1999 1998
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ........................................... $ 9,366 $ 8,466 $ 7,486
Noncash items included in net income:
Undistributed earnings of subsidiaries ............... (7,242) (6,623) (4,781)
(Increase) decrease in other assets .................. 304 (180) 357
Increase (decrease) in liabilities ................... (76) 90 (84)
------------------------------
Net cash provided by operating activities ......... 2,352 1,753 2,978
------------------------------
Cash flows from investing activities:
Investment in subsidiary banks ....................... -- -- (1,000)
Proceeds from maturities of investment securities .... -- 303 300
Purchase of investment securities .................... -- (499) (303)
------------------------------
Net cash (used in) investing activities ........... -- (196) (1,003)
------------------------------
Cash flows (used in) financing activities:
Stock issued (redeemed) .............................. (23) 744 --
Income tax benefits related to stock based
compensation ....................................... 6 330 76
Dividends paid ....................................... (2,171) (1,910) (1,761)
------------------------------
Net cash (used in) financing activities ............ (2,188) (836) (1,685)
------------------------------
Increase in cash ................................... 164 721 290
Cash balance:
Beginning ............................................ 1,419 698 408
------------------------------
Ending ............................................... $ 1,583 $ 1,419 $ 698
==============================
Note 13. Commitments and Contingencies
Concentrations of credit risk: All of the Banks' loans, commitments to extend
credit, unused lines of credit and outstanding letters of credit have been
granted to customers within each Bank's market area. Investments in securities
issued by state and political subdivisions within the state of Iowa totaled
approximately $15,877,000. The concentrations of credit by type of loan are set
forth in Note 3. Outstanding letters of credit were granted primarily to
commercial borrowers. Although the Banks have a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economic conditions in Johnson County, Iowa.
Contingencies: In the normal course of business, the Company and Banks are
involved in various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a material adverse
effect on the accompanying financial statements.
Financial instruments with off-balance sheet risk: The Banks are parties to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit, credit card participations and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, credit card
participations and standby letters of credit is represented by the contractual
amount of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance sheet
instruments. A summary of the Banks' commitments at December 31, 2000 and 1999
is as follows:
2000 1999
---------------------
(Amounts In Thousands)
Firm loan commitments and unused portion of lines of credit:
Home equity loans ........................................... $ 4,693 $ 3,628
Credit card participations .................................. 12,639 10,695
Commercial, real estate and home construction ............... 33,562 35,882
Commercial lines ............................................ 40,166 33,689
Outstanding letters of credit ................................. 10,993 10,711
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties. Credit card participations are the unused portion of the holders'
credit limits. Such amounts represent the maximum amount of additional unsecured
borrowings.
Outstanding letters of credit are the conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party and
collateralize the customer's borrowing arrangement with other creditors. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Banks deem necessary.
Note 14. Quarterly Results of Operations (unaudited, in thousands, except per
share amounts)
Quarter Ended
----------------------------------------------
March June September December Year
2000:
Total interest income .......... $14,059 $14,651 $15,300 $15,982 $59,992
Net interest income after
provisions for loan losses .... 6,294 6,496 6,511 6,679 25,980
Net income ..................... 2,204 2,399 2,336 2,427 9,366
Basic earnings per share ....... 1.47 1.60 1.56 1.63 6.26
Diluted earnings per share ..... 1.46 1.59 1.55 1.61 6.21
1999:
Total interest income .......... $12,054 $12,471 $13,006 $13,590 $51,121
Net interest income after
provisions for loan losses ... 5,582 5,943 6,173 6,210 23,908
Net income ..................... 2,079 2,081 2,118 2,188 8,466
Basic earnings per share ....... 1.41 1.40 1.41 1.48 5.70
Diluted earnings per share ..... 1.39 1.39 1.40 1.48 5.66
Part II
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is contained in the Registrant's Proxy
Statement under the heading "Information Concerning Nominees for Election as
Directors" and "Information Concerning Directors Other Than Nominees," which
sections are incorporated herein by this reference.
The following table sets forth the name, age and principal occupation of the
Executive Officers of the Registrant and Executive Officers of the Bank. All
officers of the Registrant and the Bank are elected annually for one-year terms
of office.
Year First
Elected
Position With Registrant Or Bank And Officer Of
Principal Occupation And Employment Registrant
Name Age During The Past Five Years (Bank)
- ------------------------------------------------------------------------------------------------------------------------
Dwight O. Seegmiller 48 Director of Registrant and Bank; President, Registrant and Bank 1986 (1975)
Willis M. Bywater 62 Director of Registrant and Bank; Chairman of the Board, Bank; 1997
Vice President of the Registrant; Executive Officer and Shareholder
of Economy Advertising Company
James G. Pratt 52 Treasurer of Registrant; Senior Vice President from January 1986 1985 (1982)
to present
Thomas J. Cilek 54 Secretary of Registrant; Senior Vice President of Bank from 1988 (1986)
August 1986 to present
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Executive Compensation and Benefits," which section
is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management" and "Report on Executive Compensation," which sections are
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Loans To and Certain Other Transactions With
Executive Officers and Directors," which section is incorporated herein by this
reference.
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Form 10-K
Reference
---------
(a) 1. Financial Statements
Independent auditor's report on the financial statements .............................
Consolidated balance sheets as of December 31, 2000 and 1999 .........................
Consolidated statements of income for the years ended
December 31, 2000, 1999 and 1998
Consolidated statements of comprehensive income for the years ended
December 31, 2000, 1999 and 1998 .....................................................
Consolidated statements of stockholders' equity for the years ended
December 31, 2000, 1999 and 1998 .....................................................
Consolidated statements of cash flows for the years ended
December 31, 2000, 1999 and 1998 .....................................................
Notes to financial statements ........................................................
(a) 2. Financial Statements Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits
Exhibit 3 - Articles of Incorporation and Bylaws filed as Exhibit 3 of
Form 10-K for the year ended December31, 1993 are incorporated by
reference.
Exhibit 10(a) - Material Contract (Employee Stock Ownership Plan) filed
as Exhibit 10(a) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(b) - Material Contract (1993 Stock Incentive Plan) filed as
Exhibit 10(b) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(c) - Material contract (1995 Deferred Compensation Plans)
filed as Exhibit 10(c) in Form 10-K for the year ended December 31,
1995 is incorporated by reference.
Exhibit 10(d) - Material contract (2000 Stock Option and Incentive
Plan)filed as Exhibit 10(d) in Form 10-K for the year ended December
31, 2000 is incorporated by reference.
Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per
Share is attached on Page 66
Exhibit 21 - Subsidiaries of the Registrant is attached on Page 67
Exhibit 23 - Consent of Accountants is attached on Page 68
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months
December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HILLS BANCORPORATION
3/27/01 By /s/ Dwight O. Seegmiller
- ---------------------------- --------------------------------------
Date Dwight O. Seegmiller,
Director and President
3/27/01 By /s/ James G. Pratt
- ---------------------------- --------------------------------------
James G. Pratt,
Treasurer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
3/27/01 /s/Willis M. Bywater
- ---------------------------- -----------------------------------------
Date Willis M. Bywater, Director
3/27/01 /s/ Thomas J. Gill
- --------------------------- ----------------------------------------
Date Thomas J. Gill, Director
3/27/01 /s/Donald H. Gringer
- --------------------------- ----------------------------------------
Date Donald H. Gringer, Director
3/27/01 /s/ Michael E. Hodge
- --------------------------- ----------------------------------------
Date Michael E. Hodge, Director
3/27/01 /s/ Richard W. Oberman
- --------------------------- ----------------------------------------
Date Richard W. Oberman, Director
3/27/01 /s/ Theodore H. Pacha
- --------------------------- ----------------------------------------
Date Theodore H. Pacha
3/27/01 /s/ Ann M. Rhodes
- --------------------------- ----------------------------------------
Date Ann M. Rhodes, Director
3/27/01 /s/ Ronald E. Stutsman
- --------------------------- ----------------------------------------
Date Ronald E. Stutsman, Director
3/27/01 /s/ Sheldon E. Yoder
- --------------------------- ----------------------------------------
Date Sheldon E. Yoder, Director
HILLS BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBIT INDEX
Page Number
In The Sequential
Exhibit Numbering System
Number Description For 2000 Form 10-K
- -------------------------------------------------------------------------------
11 Statement Re Computation of Basic and Diluted
Earnings Per Share
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants