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 September 30, 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 October 31, 2001
- -------------------------- -------------------
Common Stock, no par value 1,498,348
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated balance sheets, September 30, 2001 (unaudited)
and December 31, 2000
Consolidated statements of income, (unaudited) for three
and nine months ended September 30, 2001 and 2000
Consolidated statements of comprehensive income, (unaudited) for three
and nine months ended September 30, 2001 and 2000.
Consolidated statements of stockholders' equity, (unaudited)
for nine months ended September 30, 2001 and 2000
Consolidated statements of cash flows (unaudited) for nine
months ended September 30, 2001 and 2000
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of financial condition
and results of operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II
OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to 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)
September 30, December 31,
2001 2000*
---------------------------
Unaudited
ASSETS
Cash and due from banks .................................. $ 27,875 $ 25,669
Investment securities:
Available for sale (amortized cost
September 30, 2001 $158,862;
December 31, 2000 $136,661) ......................... 164,956 137,768
Held to maturity (fair value
September 30, 2001 $13,436;
December 31, 2000 $15,676) .......................... 13,046 15,509
Stock of Federal Home Loan Bank ....................... 7,809 7,789
Federal funds sold ....................................... 9,584 28,065
Loans, net ............................................... 665,405 626,873
Property and equipment, net .............................. 19,329 16,499
Accrued interest receivable .............................. 7,702 7,522
Deferred income taxes, net ............................... 1,294 3,286
Other assets ............................................. 7,863 6,770
---------------------
$924,863 $875,750
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ............................. $ 82,609 $ 76,087
Interest-bearing deposits ................................ 609,051 576,619
---------------------
Total deposits ........................................ $691,660 $652,706
Federal funds purchased and securities
sold under agreements to repurchase ................... 17,736 16,561
Federal Home Loan Bank notes ............................. 120,637 120,668
Accrued interest payable ................................. 2,814 2,865
Other liabilities ........................................ 3,505 2,876
---------------------
$836,352 $795,676
---------------------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ................................................ $ 11,860 $ 11,550
---------------------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued September 30, 2001 1,498,348 shares;
December 31, 2000 1,495,483 shares .................... $ 10,332 $ 10,197
Retained earnings ........................................ 74,336 69,179
Accumulated other comprehensive income,
unrealized gains (losses) on investment securities, net 3,843 698
---------------------
$ 88,511 $ 80,074
Less maximum cash obligation related to
ESOP shares ........................................... 11,860 11,550
---------------------
$ 76,651 $ 68,524
---------------------
$924,863 $875,750
=====================
<FN>
* Derived from audited financial statements
</FN>
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2001 and 2000
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
----------------- -----------------
2001 2000 2001 2000
-------------------------------------
Interest Income:
Interest and fees on loans .......... $13,398 $12,950 $39,567 $36,813
Interest on investment securities:
Taxable ........................... 1,957 1,832 5,727 5,567
Non-taxable ....................... 493 439 1,425 1,284
Interest on federal funds sold ...... 184 79 996 346
-------------------------------------
Total interest income ............... $16,032 $15,300 $47,715 $44,010
-------------------------------------
Interest Expense:
Interest on deposits ................ $ 6,577 $ 6,536 $20,504 $17,870
Interest on securities sold under
agreements to repurchase .......... 147 162 490 424
Interest on FHLB borrowings ......... 1,785 1,854 5,298 5,704
-------------------------------------
Total interest expense .............. $ 8,509 $ 8,552 $26,292 $23,998
-------------------------------------
Net interest income ................. $ 7,523 $ 6,748 $21,423 $20,012
Provision for loan losses .............. 225 237 675 711
-------------------------------------
Net interest income after provision
for loan loss ....................... 7,298 6,511 20,748 19,301
-------------------------------------
Other income:
Loan origination fees ............... $ 219 $ 110 $ 702 $ 222
Trust fees .......................... 567 590 1,777 1,757
Deposit account charges and fees .... 793 652 2,295 1,851
Other fees and charges .............. 729 534 1,921 1,710
-------------------------------------
$ 2,308 $ 1,886 $ 6,695 $ 5,540
-------------------------------------
Other expenses:
Salaries and employee benefits ...... $ 2,938 $ 2,659 $ 8,627 $ 7,939
Occupancy ........................... 490 414 1,348 1,085
Furniture and equipment ............. 681 517 1,929 1,512
Office supplies and postage ......... 322 254 905 754
Other operating ..................... 1,265 1,183 3,705 3,514
-------------------------------------
$ 5,696 $ 5,027 $16,514 $14,804
-------------------------------------
Income before income taxes .......... $ 3,910 $ 3,370 $10,929 $10,037
Federal and state income taxes ......... 1,230 1,034 3,408 3,098
-------------------------------------
Net income .......................... $ 2,680 $ 2,336 $ 7,521 $ 6,939
=====================================
Earnings per common share:
Basic ............................. $ 1.79 $ 1.56 $ 5.02 $ 4.63
Diluted ........................... 1.77 1.55 4.98 4.60
Cash dividends per common share ........ -- -- $ 1.60 $ 1.45
See Notes to Financial Statements
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2001 and 2000
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2001 2000 2001 2000
-------------------- --------------------
Net income ............................. $ 2,680 $ 2,336 $ 7,521 $ 6,939
Other comprehensive income:
Unrealized gains on debt securities . 2,490 1,133 4,988 903
Income tax effect of unrealized gains (920) (419) (1,843) (334)
--------------------------------------------
Other comprehensive income ... 1,570 714 3,145 569
--------------------------------------------
Comprehensive Income ................ $ 4,250 $ 3,050 $ 10,666 $ 7,508
============================================
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2001 and 2000
(In Thousands)
Less
Maximum
Accumulated Cash
Other Obligation
Capital Retained Comprehensive To ESOP
Stock Earnings Income Shares Total
--------------------------------------------------------
Balance, December 31, 2000 .......... $10,197 $69,179 $ 698 $(11,550) $ 68,524
Net income ........................ - - 7,521 - - - - 7,521
Cash dividends ($1.60 per share) .. - - (2,393) - - - - (2,393)
Change related to ESOP shares ..... - - - - - - (310) (310)
Issuance of 2,865 shares of common
stock .......................... 135 - - - - - - 135
Income tax benefit related to stock
based compensation ............. - - 29 - - - - 29
Other comprehensive income ........ - - - - 3,145 - - 3,145
--------------------------------------------------------
Balance, September 30, 2001 ......... $10,332 $74,336 $ 3,843 $(11,860) $ 76,651
========================================================
Balance, December 31, 1999 .......... $10,214 $61,984 $ (981) $(10,953) $ 60,264
Net income ........................ - - 6,939 - - - - 6,939
Change related to ESOP shares ..... - - - - - - (782) (782)
Cash dividends ($1.45 per share) .. - - (2,169) - - - - (2,169)
Other comprehensive income ........ - - - - 569 - - (569)
--------------------------------------------------------
Balance, September 30, 2000 ......... $10,214 $66,754 $ (412) $(11,735) $ 64,821
========================================================
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000
(In Thousands)
2001 2000
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 7,521 $ 6,939
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 1,486 1,020
Provision for loan losses .................................................. 675 711
Compensation paid by issuance of common stock .............................. 91 - -
Deferred income taxes ...................................................... 149 147
(Increase) decrease in accrued interest receivable ......................... (180) (1,271)
Amortization of bond discount .............................................. 102 52
(Increase) decrease in other assets ........................................ (1,329) 168
Amortization of intangibles ................................................ 236 258
Increase in accrued interest and other liabilities ......................... 578 523
--------------------
Net cash provided by operating activities ............................... $ 9,329 $ 8,547
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 42,587 $ 21,531
Held to maturity ........................................................... 2,463 1,651
Purchase of investment securities, available for sale .......................... (64,909) (24,974)
Federal funds sold, net ........................................................ 18,481 5,304)
Loans made to customers, net of collections .................................... (39,207) (57,904)
Purchases of property and equipment ............................................ (4,316) (3,712)
--------------------
Net cash (used in) investing activities .................................... $(44,901) $(68,712)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ............................................ $ 38,954 $ 59,318
Net increase (decrease) in fed funds purchased and
securities sold under agreements to repurchase ............................. 1,175 (14,337)
Borrowings from FHLB ........................................................... - - 40,000
Payments on FHLB notes ......................................................... (31) (23,031)
Stock options exercised ........................................................ 44 - -
Income tax benefits on stock options exercised ................................. 29 - -
Dividends paid ................................................................. (2,393) (2,169)
--------------------
Net cash provided by financing activities .................................. $ 37,778 $ 59,781
--------------------
Increase (decrease) in cash and due from banks ............................. $ 2,206 $ (384)
CASH AND DUE FROM BANKS
Beginning .................................................................. 25,669 21,765
--------------------
Ending ..................................................................... $ 27,875 $ 21,381
====================
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors and others ..................................... $ 20,555 $ 17,375
Interest paid on other obligations ......................................... 5,788 6,128
Non-cash financing transaction,
increase in maximum cash obligation related
to ESOP shares ............................................................ 310 782
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)
September 30
2001 2000
----------------------
Agricultural ......................... $ 35,077 $ 29,090
Commercial and financial ............. 39,349 37,292
Real estate, construction ............ 39,113 44,340
Real estate, mortgage ................ 529,272 489,453
Loans to individuals ................. 33,123 32,447
----------------------
$675,934 $632,622
Less allowance for loan losses ....... 10,529 10,048
----------------------
$665,405 $622,574
======================
Transactions in the allowance for loan losses are as follows:
(In thousands)
Nine Months
Ended September 30
-------------------------
2001 2000
-------------------------
Balance, beginning ........................... $ 10,428 $ 9,750
Provision charged to expense ............... 675 711
Net charge-offs ............................ (574) (413)
-------- --------
Balance, ending .............................. $ 10,529 $ 10,048
======== ========
The following summarizes the Company's nonaccrual, past due, restructured and
impaired loans:
(In thousands)
September 30
2001 2000
-------------------
No accrual ........................................... $1,896 $ 98
Accruing loans, past due 90 days or more ............. 1,812 2,215
Restructured loan .................................... - - - - - -
Impaired loans ....................................... 9,901 8,908
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.
Note 4. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets." Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. The provisions of the Statements are generally
effective January 1, 2002. The Company anticipates that the amortization of
substantially all goodwill will be suspended on January 1, 2001. Annual goodwill
amortization totals $261,000.
In July 2001, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues." The bulletin does not change accounting guidance for the Allowance for
Loan Losses, but does provide significant interpretation of the manner in which
institutions should develop and document their methodology for calculating the
allowance for loan losses, as well as measuring the adequacy of such. Management
is in the early stages of comparing its documentation and methodology to
determine what changes and adjustments to the allowance for loan losses will be
needed. This process is anticipated to be completed in the 4th quarter of 2001.
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
In September, 2001 Hills Bank and Trust Company signed a contract for the
construction of its second office in Cedar Rapids. The new 7,200 square foot one
story building will have three drive-up lanes and a drive-up ATM. The location
of the office will be on Williams Boulevard in Southwest Cedar Rapids.
Construction started the first week of October and it is expected that the
office will open in the second quarter of 2002. The total estimated cost or
land, building and equipment is approximately $1,700,000.
Also, the new Eastside Iowa City office is progressing well and completion is
expected at 2621 Muscatine Avenue in December, 2001. This will be a 5,800 square
foot one story building and similar to the new Cedar Rapids office will have
three drive-up lanes and a new drive-up ATM.
Financial Position
Total assets at September 30, 2001 are $924.9 million, an increase of
$83.1million from total assets of $841.8 million at September 30, 2000. This
increase in assets included an increase in net loans from September 30, 2000 to
September 30, 2001 of $42.8 million with primarily all the increase in real
estate loans. Loan growth in these types of loans including 1-4 family home
loans is consistent with loan growth over the last few years. Investment
securities increased $27.1 million from one year ago and was mainly in the area
of U.S. Government Agency securities. The asset growth was funded primarily by
deposit growth of $70.3 million. Due to the continued loan demand and challenges
for funding sources, asset-liability management continues to be very important.
The asset-liability 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 the current year, as of October 2, 2001, the Federal Reserve has lowered the
federal funds borrowing rates 400 basis points with nine changes. The rate on
January 1, 2001 was 6.50% and as of October 2, 2001 is 2.50%. The rate is at its
lowest level since 1962. The changes in these rates have a direct effect on the
financial market in terms of interest rates on U.S. Treasury and Agency
securities which the Banks invest in and use as indices for setting both loan
and deposit rates. Through September 30, 2001, the declining interest rates have
not had an adverse effect on the Company's net interest income.
In addition, the stock market is usually affected by the overall interest rate
climate. Prior to the terrorist attacks the national economy was already
experiencing some slowdown and the stock market had dropped significantly in the
last year. In our trade areas some employers have announced possible layoffs but
it is difficult to project at this time what influence it will have on Hills
Bancorporation. Loan growth has remained strong in the first nine months of 2001
and with low rates, loans sold on the secondary market have generated
significant fee income for the Company.
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 September 30, 2001 totaled $76,651,000. The total
stockholders' equity of Hills Bancorporation as of September 30, 2001 before the
reduction for the ESOP shares, totaled 9.57% of total assets. Under risk-based
capital rules, the total risk based capital is 14.85% 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 September 30, 2001.
Net cash provided from Company operations is another primary source of
liquidity. For the nine months ended September 30, 2001 and 2000, net cash
provided by operating activities was $9,329,000 and $8,547,000, respectively.
The Company's trend of increasing cash flows from operations is expected to
continue 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 September 30, 2001, the Company had advances of $120,637,000
from the FHLB of Des Moines. These advances were used as a means of providing
both long and short-term, fixed-rated funding for certain assets and managing
interest rate risk. The Company had additional borrowing capacity available from
the FHLB of approximately $186,000,000 at September 30, 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 September 30, 2001.
Results of Operations
Net income for the quarter and nine months ended September 30, 2001 compared to
the same periods in 2000, had increases of $344,000 and $582,000, respectively.
For both periods the changes were primarily the result of significant increases
in net interest income, which was the result of growth in average earning assets
from the prior year. Average earning assets were approximately $79 million
higher for the nine months ended September 30, 2001 compared to the same period
in 2000. Total other income increased $422,000 and $1,155,000 for the quarter
and nine months ended September 30, 2001 compared to the same period one year
ago. Loan origination fees for the nine months in 2001 are $480,000 more than
2000 as a result of lower interest rates in 2001 for these types of loans. Trust
fees are approximately $150,000 lower than expected due to the continued
declines in market value in assets under management primarily the result of loss
in stock value. The majority of trust fees are based on a percentage of the
market value of the account. Deposit account charges and other fees increased
$336,000 for the three months and $655,000 for the nine months and were the
direct results of volume increases in deposit accounts opened and some changes
in fees charged.
Other expenses for the quarter ended September 30, 2001 were $5,696,000 compared
to $5,027,000 for the same time frame in 2000. For the nine months ended
September 30, 2001 other expenses were $16,514,000, an increase of $1,710,000
from the first nine months in 2000. The major changes for the nine months were
salaries and benefits which accounted for $688,000 and were the direct result of
salary adjustments in 2001 and staff additions at various locations. The new
operations center in Hills and the Coralville expansion accounted for the major
change in the occupancy and furniture and equipment expenses which increased
$680,000. This increase included $314,000 of additional depreciation expense for
the new buildings and new equipment, including computer upgrades throughout the
Banks.
Earnings per share, both basic and diluted, increased for the quarter ended
September 30, 2001 compared to 2000. For the period ending September 30, 2001
basic and diluted earnings per share were $1.79 and $1.77 in comparison to $1.56
and $1.55 for the quarter ended September 30, 2000. The earnings per share for
the nine months ended September 30, 2001 and September 30, 2000 were $5.02 and
$4.63 for basic earnings per share and $4.98 and $4.60 for diluted earnings per
share.
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, 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.
PART 1, ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Company's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit
gathering. Interest rate risk measures the impact on earnings from changes in
interest rates and the effect on current fair market values of the Company's
assets, liabilities and off-balance sheet contracts. The objective is to measure
this risk and manage the balance sheet to avoid unacceptable potential for
economic loss. Management continually develops and applies strategies to
mitigate market risk. Exposure to market risk is reviewed on a regular basis by
the asset/liability committee at the bank. 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.
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings.
Item 2. Changes in Securities
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 ended September 30, 2001.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
See exhibit II - 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 September 30, 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)
November 14, 2001 /s/ Dwight O. Seegmiller
- ----------------- -------------------------------------------
Date Dwight O. Seegmiller, President
(Duly authorized officer of the registrant)
November 14, 2001 /s/ James G. Pratt
- ----------------- -------------------------------------------
Date James G. Pratt, Treasurer
(Principal Financial Officer)