FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa I.R.S. Employer Identification
------------------------------
No. 42-1208067
131 MAIN STREET, HILLS, IOWA
Telephone number: (319) 679-2291
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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
SHARES OUTSTANDING
CLASS AT April 30, 2001
- -------------------------- ------------------
Common Stock, no par value 1,495,483
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated balance sheets, March 31, 2001 (unaudited)
and December 31, 2000
Consolidated statements of income, (unaudited) for three
months ended March 31, 2001 and 2000
Consolidated statements of comprehensive income, (unaudited) for
three months ended March 31, 2001 and 2000.
Consolidated statements of stockholders' equity, (unaudited)
for three months ended March 31, 2001 and 2000
Consolidated statements of cash flows (unaudited) for three
months ended March 31, 2001 and 2000
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of fin
Part II
OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities and use of proceeds
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other information
Item 6. Exhibits and reports on Form 8-K
COMPUTATION OF EARNINGS PER SHARE
SIGNATURES
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares)
March 31,
2001 December 31,
Unaudited 2000*
-----------------------
ASSETS
Cash and due from banks .............................. $ 22,308 $ 25,669
Investment securities:
Available for sale (amortized cost
March 31, 2001 $154,141;
December 31, 2000 $136,661) ..................... 157,590 137,768
Held to maturity (fair value
March 31, 2001 $15,548;
December 31, 2000 $15,676) ...................... 15,216 15,509
Stock of Federal Home Loan Bank ................... 7,809 7,789
Federal funds sold ................................... 21,785 28,065
Loans, net ........................................... 627,936 626,873
Property and equipment, net .......................... 17,949 16,499
Accrued interest receivable .......................... 7,382 7,522
Deferred income taxes, net ........................... 2,242 3,286
Other assets ......................................... 6,854 6,770
---------------------
$887,071 $875,750
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ......................... $ 72,514 $ 76,087
Interest-bearing deposits ............................ 590,523 576,619
---------------------
Total deposits .................................... $663,037 $652,706
Federal funds purchased and securities
sold under agreements to repurchase ............... 15,176 16,561
Federal Home Loan Bank notes ......................... 120,668 120,668
Accrued interest payable ............................. 2,822 2,865
Other liabilities .................................... 3,904 2,876
---------------------
$805,607 $795,646
---------------------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ............................................ $ 11,550 $ 11,550
---------------------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued March 31, 2001 - 1,495,483 shares;
December 31, 2000 - 1,495,483 shares .............. $ 10,197 $ 10,197
Retained earnings .................................... 69,093 69,179
Accumulated other comprehensive income,
unrealized gains on investment securities, net .... 2,174 698
--------------------
$ 81,464 $ 80,074
Less, maximum cash obligation related to
ESOP shares ....................................... 11,550 11,550
---------------------
$ 69,914 $ 68,524
---------------------
$887,071 $875,750
=====================
* Derived from audited financial statements.
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2000
(In Thousands, Except Per Share Data)
2001 2000
---------------------
Interest income:
Interest and fees on loans ...................... $12,994 $11,638
Interest on investment securities:
Taxable ....................................... 1,788 1,833
Non-taxable ................................... 457 416
Interest on federal funds sold .................. 513 172
---------------------
Total interest income ........................... $15,752 $14,059
---------------------
Interest expense:
Interest on deposits ............................ $ 7,070 $ 5,406
Interest on securities sold under
Interest on FHLB borrowings ..................... 1,747 1,953
---------------------
Total interest expense .......................... $ 9,000 $ 7,492
---------------------
Net interest income ............................. $ 6,752 $ 6,567
Provision for loan losses .......................... 225 273
---------------------
Net interest income after provision
Other income:
Loan origination fees ........................... $ 146 $ 47
Trust fees ...................................... 594 589
Deposit account charges and fees ................ 710 569
Other fees and charges .......................... 613 584
---------------------
$ 2,063 $ 1,789
---------------------
Other expenses:
Salaries and employee benefits .................. $ 2,783 $ 2,660
Occupancy ....................................... 439 340
Furniture and equipment ......................... 608 486
Office supplies and postage ..................... 282 241
Other operating ................................. 1,139 1,168
---------------------
$ 5,251 $ 4,895
---------------------
Income before income taxes ...................... $ 3,339 $ 3,188
Federal and state income taxes ..................... 1,032 984
---------------------
Net income ...................................... $ 2,307 $ 2,204
=====================
Earnings per common share:
Basic ......................................... $ 1.54 $ 1.47
Diluted ....................................... 1.53 1.46
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2001 and 2000
(In Thousands, Except Per Share Data)
2001 2000
--------------------
Net Income ........................................... $ 2,307 $ 2,204
Other comprehensive income:
Unrealized gains (losses) on debt securities ...... 2,342 (367)
Income tax effect of unrealized gains (losses) .... (866) 136
------- -------
Comprehensive Income ................................. $ 3,783 $ 1,973
======= =======
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2001 and 2000
(In Thousands, Except Per Share Data)
Less
Accum- Maximum
mulated Cash
Compre- Obligation
Capital Retained hensive To ESOP
Stock Earnings Income Shares Total
---------------------------------------------------
Balance, December 31, 2000 $ ..... $10,197 $69,179 $ 698 $(11,550) $ 68,524
Net income ..................... -- 2,307 -- -- 2,307
Cash dividends ($1.60 per share) -- (2,393) -- -- (2,393)
Other comprehensive income ..... -- -- 1,476 -- 1,476
---------------------------------------------------
Balance, March 31, 2001 ......... $10,197 $69,093 $2,174 $(11,550) $ 69,914
===================================================
Balance, December 31, 1999 $ ..... $10,214 $61,984 $ (981) $(10,953) $ 60,264
Net income ..................... -- 2,204 -- -- 2,204
Change related to ESOP shares .. -- -- -- (156) (156)
Cash dividends ($1.45 per share) -- (2,169) -- -- (2,169)
Other comprehensive income ..... -- -- (231) -- (231)
---------------------------------------------------
Balance, March 31, 2000 .......... $10,214 $62,019 $(1,212) $(11,109) $ 59,912
====================================================
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000
(In Thousands)
2001 2000
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 2,307 $ 2,204
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 482 340
Provision for loan losses .................................................. 225 273
Deferred income taxes ...................................................... 178 163
(Increase) decrease in accrued interest receivable ......................... 140 (152)
Amortization of bond discount .............................................. 19 21
(Increase) decrease in other assets ........................................ (169) 1,111
Amortization of intangibles ................................................ 85 86
Increase in accrued interest and other liabilities ......................... 985 566
--------------------
Net cash provided by operating activities .............................. $ 4,252 $ 4,612
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 18,747 $ 6,746
Held to maturity ........................................................... 293 399
Purchase of investment securities, available for sale .......................... (36,266) (9,515)
Federal funds sold, net ........................................................ 6,280 (15,004)
Loans made to customers, net of collections .................................... (1,288) (14,646)
Purchases of property and equipment ............................................ (1,932) (1,522)
--------------------
Net cash (used in) investing activities ................................ $(14,166) $(33,542)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ....................................................... $ 10,331 $ 18,971
Net (decrease) in fed funds purchased and
securities sold under agreements to repurchase ............................... (1,385) (14,945)
Borrowings from FHLB ........................................................... -- 40,000
Payments on FHLB notes ......................................................... -- (15,000)
Dividends paid ................................................................. (2,393) (2,169)
--------------------
Net cash provided by financing activities .............................. $ 6,553 $ 26,857
--------------------
(Decrease) in cash and due from banks ................................... $ (3,361) $ (2,073)
CASH AND DUE FROM BANKS
Beginning .................................................................... 25,669 21,765
--------------------
Ending ....................................................................... $ 22,308 $ 19,692
====================
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors and others ...................................... $ 7,113 $ 5,437
Interest paid on other obligations .......................................... 1,930 2,086
Non-cash financing transaction,
increase in maximum cash obligation related
to ESOP shares ........................................................... -- 156
See Notes to Financial Statements.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Interim Financial Statements
Interim consolidated financial statements have not been examined by independent
public accountants, but include all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary for a
fair presentation of the results for these periods. The results of operation for
the interim periods are not necessarily indicative of the results for a full
year.
In reviewing these financial statements, reference should be made to the Notes
to Financial Statements contained in the Financial Statements for the year ended
December 31, 2000.
There were no changes in accounting policies which had a significant effect on
the interim consolidated financial statements for the periods presented.
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 demand deposits, NOW accounts, savings accounts, and federal
funds purchased and sold are reported net since their original maturities are
less than three months. Cash flows from loans and time deposits are presented as
net increases or decreases.
Note 2. Loans
The following tables set forth the composition of loans and the allowance for
loan losses:
(In thousands)
March
---------------------------
2001 2000
---------------------------
Agricultural ............................... $ 30,441 $ 27,876
Commercial and financial ................... 36,572 38,872
Real estate, construction .................. 39,548 35,456
Real estate, mortgage ...................... 499,578 456,388
Loans to individuals ....................... 32,129 30,961
--------- ---------
$ 638,268 $ 589,553
Less allowance for loan losses ............. (10,332) (9,799)
--------- ---------
$ 627,936 $ 579,754
========= =========
Transactions in the allowance for loan losses are as follows:
(In thousands)
Three Months
Ended March 31,
-------------------------
2001 2000
-------------------------
Balance, beginning .......................... $ 10,428 $ 9,750
Provision charged to expense .............. 225 273
Net charge-offs ........................... (321) (224)
-------------------------
Balance, ending .............................. $ 10,332 $ 9,799
=========================
The following summarizes the Company's nonaccrual, past due, restructured and
impaired loans:
(In thousands)
March 31
-------------------
2001 2000
-------------------
Nonaccrual ................................... $ 618 $ --
Accruing loans, past due 90 days or more ..... 3,019 2,103
Restructured loan ............................ -- --
Impaired loans ............................... 12,858 8,367
Note 3. Earnings Per Share
Basic net income per share amounts are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the period plus the number of
potential dilutive common shares attributable to the Company's stock option
plan.
PART I, ITEM 2.
HILLS BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
Forward looking information relating to the financial results or strategies of
the Company are made in the Management's Discussion and Analysis. The following
paragraphs identify forward looking statements and the risks that need to be
considered when reading those statements.
Forward looking statements include such words as believe, expect, anticipate,
target, goal, objective and other words with similar meaning. The Company is
under no obligation to update such statements.
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 and changes in regulatory factors.
These risks, which are not all inclusive, cannot be estimated.
Recent Activities
During the first three months of 2001 the Company moved to its new bank
operations center in Hills, Iowa that centralized all bank operations. Also the
expansion of 6,000 square feet and remodeling of the Coralville office location
was completed and this will assist in serving customers in that market area.
Financial Position
Total assets of Hills Bancorporation are $887.1 million at March 31, 2001 and
that is an increase of $83.7 million from March 31, 2000. This increase in
assets includes a net increase in loans since March 31, 2000 of $48.2 million or
8.31%. Net loans outstanding totaled $627.9 million at March 31, 2001.
Investment securities increased from one year ago by $22.4 million and this and
the loan volume was funded by deposit and securities sold under agreement
increases of $85.4 million. The majority of the increase in loans were real
estate loans secured by mortgages and were primarily 1-4 family real estate
loans. Investment rates on U.S. Treasury securities in 2001 continued to
decrease. For example, most rates with maturities up to 10 years are 150 to 200
basis points less than one year ago. These rates have a direct effect on
investment securities rates, loan rates including secondary market loans and on
cost of funds which consist of both deposits and borrowings from the Federal
Home Loan Bank. Due to the continued loan demand and challenges for funding
sources, asset-liability management continues to be very important. The
asset-liability management encompasses both the management of interest rate
sensitivity and the maintenance of adequate liquidity. Interest rate sensitivity
management attempts to provide the optimal level of net interest income while
managing exposure to risks associated with interest rate movements. Liquidity
management involves planning to meet anticipated funding needs. Management
monitors the rate sensitivity and liquidity positions on an on-going basis and,
when necessary, appropriate action is taken to minimize any adverse effects of
rapid interest rate movements or any unexpected liquidity concerns. The Company
believes it will be able to maintain sufficient liquidity.
In January 2001, Hills Bancorporation paid a dividend of $2,393,000 or $1.60 per
share, a 10.34% increase from the $1.45 paid in January 2000. After payment of
the dividend and adjustment for accumulated other comprehensive income,
stockholders' equity as of March 31, 2001 totaled $69,914,000. The total
stockholders' equity of Hills Bancorporation as of March 31, 2001 before the
reduction for the ESOP shares, totaled 9.18% of total assets. Under risk-based
capital rules, our total risk based capital is 13.98% of risk adjusted assets,
and substantially in excess of required minimums.
Liquidity
The Company actively monitors and manages its liquidity position with the
objective of maintaining sufficient cash flows to fund operations, meet client
commitments, take advantage of market opportunities and provide a margin against
unforeseeable liquidity needs. Federal funds sold, loans held for sale and
investment securities available for sale are readily marketable assets.
Maturities of all investment securities are managed to meet the Company's normal
liquidity needs. Investment securities available for sale may be sold prior to
maturity to meet liquidity needs, to respond to market changes or to adjust the
Company's interest rate risk position. Readily marketable assets, as defined
above, comprised 17.8% of the Company's total assets at March 31, 2001.
Net cash provided from Company operations is another primary source of
liquidity. For the three months ended March 31, 2001, and 2000, net cash
provided by operating activities was $4,252,000 and $4,612,000, respectively.
The Company's trend of increasing cash flows from operations is expected to
resume in the foreseeable future due to the Company's growth.
The Company has historically maintained a stable deposit base and a relatively
low level of large deposits, which result in a low dependence on volatile
liabilities. As of March 31, 2001, the Company had advances of $120,668,000 from
the FHLB of Des Moines. These advances were used as a means of providing both
long- and short-term, fixed-rate funding for certain assets and managing
interest rate risk. The Company had additional borrowing capacity available from
the FHLB of approximately $93 million at March 31, 2001.
The combination of high levels of potentially liquid assets, low dependence on
volatile liabilities and additional borrowing capacity provided sufficient
liquidity for the Company at March 31, 2001.
Results of Operations
Net income was $2,307,000 and $2,204,000 for the three months ended March 31,
2001 and 2000, respectively. This is an increase of $103,000 or 4.67%. The
increase is due to a $185,000 increase in net interest income and an increase in
other income of $274,000. The increase in net interest income is due primarily
to average earning assets for the first quarter of 2001 being approximately
$80.0 million higher than the balances in 2000 for the three months ended March
31, 2000. The increase in net interest income was less than expected based on
the change in the volume of earning assets, due to a decline in the net interest
margin, primarily a result of a higher cost of funds. Due to lower secondary
market interest rates, loan origination fees were up for the quarter by $99,000
to $146,000. Deposit account charges increased over the quarter from one year
ago by $141,000 or 24.78% due primarily to volume increases in the number of
deposit accounts and some increases in service charges.
Other expenses increased from the prior year quarter by $356,000. $123,000 of
this increase was in salaries and employee benefits attributable to additional
staff and salary adjustments in the first quarter of 2001 compared to the same
quarter in 2000. Occupancy and furniture and equipment expenses increased
$221,000 to a total for the quarter of $1,047,000 and is primarily the result of
additional depreciation on new property and equipment additions in 2000 and
2001.
Earnings per share, both basic and diluted increased for the quarter ended March
31, 2001 compared to 2000. For the period ended March 31, 2001 basic and diluted
earnings per share were $1.54 and $1.53 in comparison to $1.47 and $1.46 for the
quarter ended March 31, 2000.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is comprised
primarily of interest rate risk arising from its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that the Company's primary market risk exposures and
how those exposures have been managed to-date in 2001 changed significantly when
compared to 2000.
Asset/Liability Management
The Company has a fully integrated asset/liability management system to assist
in managing the balance sheet. The process, which is used to project the results
of alternative investment decisions, includes the development of simulations
that reflect the effects of various interest rate scenarios on net interest
income. Management analyzes the simulations to manage interest rate risk, the
net interest margin and levels of net interest income.
The goal is to structure the balance sheet so that net interest margin
fluctuates in a narrow range during periods of changing interest rates. The
Company currently believes that net interest income would fall by less than 5
percent if interest rates increased or decreased by 300 basis points over a
one-year time horizon. This is within the Company's policy limits.
To improve net interest income and lessen interest rate risk, management
continues its strategy of de-emphasizing fixed-rate portfolio residential real
estate loans with long repricing periods. The Company continues to focus on
reducing interest rate risk by emphasizing growth in variable-rate consumer and
commercial loans. Other actions include the use of fixed-rate Federal Home Loan
Bank (FHLB) advances as alternatives to certificates of deposit and active
management of the available for sale investment securities portfolio to provide
for cash flows that will facilitate interest rate risk management.
The highly competitive banking environment in Iowa also greatly impacts the
Company's net interest margin. The effect of competition on net interest income
is difficult to predict.
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings.
Item 2. Changes in Securities and use of proceeds.
There were no changes in securities.
Item 3. Defaults upon Senior Securities.
Hills Bancorporation has no senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ending March 31, 2001.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
See exhibit 11 - Statement Re Computation of Earnings Per
Common Share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
HILLS BANCORPORATION
(Registrant)
May 15, 2001 /s/ Dwight O. Seegmiller
- ----------------- -------------------------------
Date Dwight O. Seegmiller, President
(Duly authorized officer of the
registrant)
May 15, 2001
- ------------------ /s/ James G. Pratt
Date -------------------------------
James G. Pratt, Treasurer
(Principal Financial Officer)