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, 2003
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa I.R.S. Employer Identification
No. 42-1208067
131 MAIN STREET, HILLS, IOWA 52235
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [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, 2003
- --------------------------------------------------------------------------------
Common Stock, no par value 1,515,778
1
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated balance sheets, March 31, 2003 (unaudited)
and December 31, 2002. 3
Consolidated statements of income, (unaudited) for three
months ended March 31, 2003 and 2002. 4
Consolidated statements of comprehensive income, (unaudited)
for three months ended March 31, 2003 and 2002. 5
Consolidated statements of stockholders' equity, (unaudited)
for three months ended March 31, 2003 and 2002. 6
Consolidated statements of cash flows (unaudited) for three
months ended March 31, 2003 and 2002. 7
Notes to consolidated financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 13
Item 4. Evaluation of Disclosures Controls 13
Part II
OTHER INFORMATION
Item 1. Legal proceedings 14
Item 2. Changes in securities and use of proceeds 14
Item 3. Defaults upon senior securities 14
Item 4. Submission of matters to vote of security holders 14
Item 5. Other information 14
Item 6. Exhibits and reports on Form 8-K 14
Signatures and Certifications 15-17
2
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Shares)
March 31,
2003 December 31,
(Unaudited) 2002*
-------------------------
ASSETS
Cash and due from banks ............................ $ 31,103 $ 32,647
Investment securities:
Available for sale (amortized cost
March 31, 2003 $186,216;
December 31, 2002 $190,313) ................... 193,159 197,807
Held to maturity (fair value
March 31, 2003 $7,591;
December 31, 2002 $8,303) ..................... 7,347 8,022
Stock of Federal Home Loan Bank .................... 8,382 8,382
Federal funds sold ................................. 54,244 32,514
Loans, net ......................................... 816,133 780,857
Property and equipment, net ........................ 22,063 21,500
Accrued interest receivable ........................ 7,076 7,278
Deferred income taxes, net ......................... 2,051 1,971
Other assets ....................................... 7,192 7,569
----------------------
$1,148,750 $1,098,547
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ....................... $ 110,184 $ 107,833
Interest-bearing deposits .......................... 733,703 694,488
----------------------
Total deposits .................................. $ 843,887 $ 802,321
Securities sold under agreements to repurchase ..... 27,827 20,798
Federal Home Loan Bank ("FHLB") borrowings ......... 167,606 167,606
Accrued interest payable ........................... 1,982 2,134
Other liabilities .................................. 6,232 4,653
----------------------
$1,047,534 $ 997,512
----------------------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) .......................................... $ 13,609 $ 12,951
----------------------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued March 31, 2003 - 1,501,054 shares;
December 31, 2002 - 1,501,054 shares ............ $ 10,541 $ 10,541
Retained earnings .................................. 86,301 85,773
Accumulated other comprehensive income ............. 4,374 4,721
----------------------
$ 101,216 $ 101,035
Less maximum cash obligation related to
ESOP shares ..................................... 13,609 12,951
----------------------
$ 87,607 $ 88,084
----------------------
$1,148,750 $1,098,547
======================
* Derived from audited financial statements.
See Notes to Financial Statements.
3
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2003 and 2002
(Amounts in Thousands, Except Per Share Amounts)
2003 2002
---------------------
Interest income:
Loans, including fees ........................... $13,431 $12,927
Investment securities:
Taxable ....................................... 1,680 1,917
Nontaxable .................................... 602 516
Federal funds sold .............................. 101 161
---------------------
Total interest income ........................... $15,814 $15,521
---------------------
Interest expense:
Deposits ........................................ $ 4,560 $ 5,951
Securities sold under ........................... 93 123
FHLB borrowings ................................. 2,242 1,916
---------------------
Total interest expense .......................... $ 6,895 $ 7,990
---------------------
Net interest income ............................. $ 8,919 $ 7,531
Provision for loan losses .......................... 484 236
---------------------
Net interest income after provision ............. $ 8,435 $ 7,295
---------------------
Other income:
Loan origination fees ........................... $ 865 $ 377
Trust fees ...................................... 619 619
Deposit account charges and fees ................ 873 730
Other fees and charges .......................... 812 671
---------------------
$ 3,169 $ 2,397
---------------------
Other expenses:
Salaries and employee benefits .................. $ 3,680 $ 3,277
Occupancy ....................................... 456 417
Furniture and equipment ......................... 734 717
Office supplies and postage ..................... 326 281
Other ........................................... 1,369 1,189
---------------------
$ 6,565 $ 5,881
---------------------
Income before income taxes ...................... $ 5,039 $ 3,811
Federal and state income taxes ..................... 1,658 1,188
---------------------
Net income ...................................... $ 3,381 $ 2,623
=====================
Earning per share:
Basic ......................................... $ 2.25 $ 1.75
Diluted ....................................... 2.23 1.74
See Notes to Financial Statements
4
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2003 and 2002
(Amounts in Thousands)
2003 2002
--------------------
Net income ......................................... $3,381 $2,623
Other comprehensive income:
unrealized holding gains (losses)
arising during the period, net of
income taxes 2003 ($204); 2002 $494 ............. (347) (842)
--------------------
Comprehensive income ............................... $3,034 $1,781
====================
See Notes to Financial Statements.
5
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2003 and 2002
(Amounts in Thousands, Except Share Amounts)
Accumu-
lated Maximum
Other Cash
Compre- Obligation
Capital Retained hensive To ESOP
Stock Earnings Income Shares Total
---------------------------------------------------
Balance, December 31, 2002 ........ $10,541 $85,773 $4,721 $(12,951) $ 88,084
Change related to ESOP shares .. - - - - - - - - - (658) (658)
Net income ..................... - - - 3,381 - - - - - - 3,381
Cash dividends ($1.90 per share) - - - (2,853) - - - - - - (2,853)
Other comprehensive income ..... - - - - - - (347) - - - (347)
---------------------------------------------------
Balance, March 31, 2003 ............ $10,541 $86,301 $4,374 $(13,609) $ 87,607
===================================================
Balance, December 31, 2001 $ ....... $10,397 $ 76,931 $3,021 $(12,194) $ 78,155
Change related to ESOP shares - - - - - - - - - 297 297
Net income ..................... - - - 2,623 - - - - - - 2,623
Cash dividends ($1.75 per share) - - - (2,622) - - - - - - (2,622)
Other comprehensive income ..... - - - - - - (842) - - - (842)
---------------------------------------------------
Balance, March 31, 2002 ............ $10,397 $ 76,932 $2,179 $(11,897) $ 77,611
===================================================
See Notes to Financial Statements.
6
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Amounts in Thousands)
2003 2002
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 3,381 $ 2,623
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 565 570
Amortization ............................................................... - - - 42
Provision for loan losses .................................................. 484 236
Deferred income taxes ...................................................... 124 88
(Increase) decrease in accrued interest receivable ......................... 202 (110)
Amortization of bond discount .............................................. 166 68
(Increase) decrease in other assets ........................................ 377 (760)
Increase in accrued interest and other liabilities ......................... 1,427 1,608
--------------------
Net cash provided by operating activities ............................... $ 6,726 $ 4,365
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 16,500 $ 11,776
Held to maturity ........................................................... 675 544
Purchase of investment securities available for sale ........................... (12,569) (21,119)
Federal funds sold, net ........................................................ (21,730) (26,557)
Loans made to customers, net of collections .................................... (35,760) (26,560)
Purchases of property and equipment ............................................ (1,128) (1,116)
--------------------
Net cash (used in) investing activities ................................. $(54,012) $(63,032)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ....................................................... $ 41,566 $ 57,968
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ......................... 7,029 (4,868)
Dividends paid ................................................................. (2,853) (2,622)
--------------------
Net cash provided by financing activities .................................. $ 45,742 $ 50,478
--------------------
Decrease in cash and due from banks ........................................ $ (1,544) $ (8,189)
--------------------
CASH AND DUE FROM BANKS
Beginning .................................................................. 32,647 37,070
--------------------
Ending ..................................................................... $ 31,103 $ 28,881
====================
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors ............................................. $ 4,712 $ 5,971
Interest paid on other obligations ...................................... 2,335 2,039
Income taxes ............................................................ 725 - - -
Non-cash financing activity,
increase (decrease) in maximum cash obligation
related to ESOP shares .................................................. 658 (297)
See Notes to Financial Statements.
7
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 operations
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 audited Financial Statements for the
year ended December 31, 2002, included in Hills Bancorporation (the "Company")
Form 10-K filed with the Securities Exchange Commission on March 24, 2003.
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:
March 31
-------------------
2003 2002
-------------------
(Amounts in
thousands)
Agricultural ............................................. $ 40,737 $ 33,111
Commercial and financial ................................. 47,097 39,966
Real estate:
Construction ......................................... 51,839 38,103
Mortgage # ......................................... 655,101 575,616
Loans to individuals ..................................... 33,889 32,485
-------------------
$828,663 $719,281
Less allowance for loan losses ........................... 12,530 10,265
-------------------
$ 816,133 $709,016
===================
# Includes loans held for sale with a cost and fair value of $17,394 and
$3,650 as of March 31, 2003 and 2002 respectively.
Changes in the allowance for loan losses are as follows:
Three Months
Ended March 31
----------------------
2003 2002
----------------------
(Amounts in thousands)
Balance, beginning ................................. $ 12,125 $ 9,950
Provision charged to expense ..................... 484 236
Recoveries ....................................... 342 512
Loans charged off ................................ (421) (433)
-------- --------
Balance, ending .................................... $ 12,530 $ 10,265
======== ========
8
Non-performing loan information for the three months ended March 31, was as
follows:
2003 2002
----------------------
(Amounts in thousands)
Impaired loans, non-accrual ............................ $4,760 $4,283
Loans past due ninety days or more and still accruing .. 1,659 2,362
Restricted loans ....................................... - - - - - -
Note 3. Earnings Per Share
Basic earnings per share amounts are computed by dividing net income (the
numerator) by the weighted average number of common shares outstanding (the
denominator) during the period. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock equivalents unless the effect
is to reduce the loss or increase the income per common share from continuing
operations.
Note 4. Recent Accounting Pronouncements
The FASB has issued Statement No. 143, "Accounting for Asset Retirement
Obligations" which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
For the Company, the Statement is effective January 1, 2003, but its
implementation didl not have any impact on the financial statements.
The FASB has issued Statement No. 145, "Rescission of FASB Statements No. 4,44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement is applicable to debt extinguishments and their classification;
certain sale-leaseback transactions and intangible assets of motor carriers.
Implementation of these provisions of the Statement had no effect and is not
expected to have a material impact on the Company's financial statements.
The FASB has issued Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
Implementation of the Statement is not expected to have a material impact on the
Company's financial statements.
The FASB has issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others"- an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34." This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of the
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. Implementation of these provisions of the
Interpretation is not expected to have a material impact on the Company's
consolidated financial statements. The disclosure requirements of the
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002, and have been adopted in the
consolidated financial statements for December 31, 2002.
9
HILLS BANCORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial condition
of Hills Bancorporation and subsidiary ("Company") at March 31, 2003,
(unaudited) when compared with December 31, 2002 and the results of operations
for the three months ended March 31, 2003 and 2002 (unaudited). The accompanying
unaudited financial statements should be read in conjunction with the Hills
Bancorporation consolidated financial statements and related notes appearing in
the 2002 annual report previously filed on Form 10-K.
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 bank.
Forward-looking statements discuss matters that are not facts and are typically
identified by the words "believe," "expect," "anticipate," " target," " goal,"
"objective," " intend," "estimate," " will," "can," "would," "should," "could,"
"may" and similar expressions. They discuss expectations about the future and
are not guarantees. Forward-looking statements speak only as of the date they
are made, and the Company undertakes no obligation to update them to reflect
changes that occur after the date they are made.
There are several factors - many of which are beyond the control of the Company
or its subsidiary Bank that could cause results to differ significantly from
expectations. Some of these factors are described below. There are factors other
than those described below that could cause results to differ from expectations.
Any factor described below could by itself, or together with one or more other
factors, adversely affect the business, earnings and/ or financial condition of
the Company and its subsidiary Bank.
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.
There risks, which are not all inclusive, cannot be estimated.
FINANCIAL CONDITION AT MARCH 31, 2003 COMPARED TO DECEMBER 31, 2002.
Assets and Liabilities Review
Total assets grew to $1.149 billion at March 31, 2003, compared to total assets
of $1.099 billion at December 31, 2002. The asset growth of $50.2 million
included a net increase in federal funds sold of $21.7 million and net loan
growth of $35.3 million. The loan growth will be reduced to $17.4 million of
secondary market loans will be sold in April 2003 compared to $3.7 million of
March 31, 2002. Interest rates, which help drive both new loan growth and
secondary market loans, including refinances, continue to be at record low
levels compared to the last forty years. Overall, the local economy remains in
good condition but weaknesses have been seen with some layoffs in employment.
Budget restraints continue to affect the University of Iowa and state government
spending. In addition, the national economy has not directly affected the
Company, but obviously the war in Iraq and other national economic news will
affect the financial markets.
The growth of deposits in the first quarter of 2003 has been $41.6 million and a
total of $48.6 million when repurchase agreements are included. In the deposit
totals for both years presented, the balances include temporary public funds,
which are not considered core deposits. These funds were $20 million at March
31, 2003 and $28 million at March 31, 2002. Borrowings from the FHLB remained
static at $167.6 million for the two periods presented.
Dividends and Equity
In January 2003, Hills Bancorporation paid a dividend of $2,853,000 or $1.90 per
share, a 8.57% increase from the $1.75 paid in January 2002. After payment of
the dividend and the adjustment for accumulated other comprehensive income,
stockholders' equity as of March 31, 2003 totaled $87,607,000. The total
stockholders' equity of Hills Bancorporation as of March 31, 2003, before the
reduction for the ESOP shares, totaled 8.81% of total assets. Under risk-based
capital rules, the total risk based capital is 12.49% of risk-adjusted assets,
and substantially in excess of required minimums.
10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002.
Net income, net interest income and other income
The increase in net income of $758,000 is accounted for by three significant
items, which are increased earning assets, improved net interest margin and
increases in secondary market loans sold. Net interest income increased by
$1,388,000. This increase is due to two factors. The first is that average
earning assets for the first three months of 2003 were $121.8 million higher
than the first three months of 2002. The second factor is that the net interest
rate margin is approximately 14 basis points higher in the first quarter of 2003
than it was one year ago. Due to continued low interest rates there were
substantial increases in loan origination fees that total $865,000 for the
quarter ended March 31, 2003 compared to $377,000 for the same period in 2002.
Trust fees were unchanged at $619,000 in total revenues for each of the two
quarters shown. The number of trust accounts under management increased as of
March 31, 2003 compared to the period ended March 31, 2002, but the decline in
stock value, had the effect of reducing otherwise expected increases in fees
since they are based on asset value. In addition, deposit account charges and
other fees increased $284,000 to a total of $1,685,000. Approximately $170,000
is due to changes in the fee structure on deposit accounts and additional net
new accounts in the last year. Credit card processing fees increased $114,000
but is offset by an increase in processing fee expenses of $127,000.
Provision for loan losses and allowance for loan losses
The provision for loan losses increased $248,000 to $484,000 for the quarter
ending March 31, 2003 compared to an expense of $236,000 for the quarter ended
March 31, 2002. The increase is due primarily to the deterioration of several
loans that are in the swine production segment of agricultural loans, which
required an increase in the allowance for loan losses.
The allowance for loan losses totaled $12,530,000 at March 31,2003 compared to
$10,265,000 at March 31, 2002. The percentage of the allowance to outstanding
loans was 1.51% and 1.43% at March 31, 2003 and 2002, respectively. The increase
in the allowance was based on management's consideration of a number of factors,
including loan concentrations, loans with higher credit risks (primarily
agricultural loans) and overall increases in net loans outstanding. The
methodology used in 2003 is consistent with the prior years.
The University of Iowa continues to have a dominant effect on the economy of the
Bank's primary trade area, Johnson County, Iowa, and in 2003 and 2002, the
University has helped the local economy remain strong even when the national
economy has experienced weaknesses. However, in the last eighteen months the
economy of the state of Iowa has weakened and the University continues to suffer
from budget cuts. For its fiscal year beginning July 1, 2003 the University
expects continued budget constraints. The possible effects on the local economy
cannot be predicted, but are likely to weaken the economy in future years.
Other expenses and income taxes expense
Total other expenses increased by $684,000 compared to the first quarter of
2002. The increase included $403,000 of additional salaries and employee
benefits expense. Full-time equivalent employees increased by eighteen which was
principally the result of opening the new Cedar Rapids office in March, 2002 and
the new Marion office in February, 2003. Also other expenses other than salaries
and benefits increased a total of $281,000 or 10.79%. Credit card processing
fees, which composed part of the other expenses, increased $127,000 and was
offset by $114,000 of increased fee income of credit card processing included in
the other income section.
Income tax expense was $1,658,000 and $1,188,000 for the three months ended
March 31, 2003 and 2002, respectively. The corresponding percentage of income
taxes compared to income before income taxes is 32.90% in 2003 and 31.17% in
2002.
Earnings per share
Earnings per share, both basic and diluted, increased for the quarter ended
March 31, 2003 compared to 2002. For the period ended March 31, 2003 basic and
diluted earnings per share were $2.25 and $2.23 in comparison to $1.75 and $1.74
for the quarter ended March 31, 2002.
11
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 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, to respond
to market changes or to adjust the Company's interest rate risk position.
Federal funds sold and investment securities available for sale comprised 21.5%
of the Company's total assets at March 31, 2003.
Net cash provided from operations is another primary source of liquidity. For
the three months ended March 31, 2003 and 2002, net cash provided by operating
activities was $6,726,000 and $4,365,000 respectively.
The Company has historically maintained a stable deposit base and a relatively
low level of large deposits, which has mitigated the volatility in liquidity. As
of March 31, 2003, the Company had advances of $167,606,000 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 $116 million at March 31, 2003.
As additional liquidity, the Company has the ability to borrow up to $10 million
from the Federal Reserve Bank of Chicago, and two lines of credit with two banks
totaling $82 million, that does require the pledging of investment securities
when drawn upon.
The combination of high levels of potentially liquid assets, low dependence on
volatile liabilities and additional borrowing capacity provided sufficient
liquidity for the Company through March 31, 2003.
12
HILLS BANCORPORATION
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk Management
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 2003 changed significantly when compared to 2002.
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 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 re-pricing 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 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
ITEM 4.
EVALUATION OF DISCLOSURE CONTROLS
Based on their evaluation of the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report, the undersigned officers of the registrant have concluded
that such disclosure controls and procedures are adequate. There were no
significant changes in internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, subsequent to the
date of the most recent evaluation by the undersigned officers of the registrant
of the design and operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data.
13
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no materials pending legal proceedings.
Item 2. Changes in Securities and Use in 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 ended March 31, 2003
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit II - Statement Re Computation of Earnings Per Common
Share
Exhibit 99.1 Section 906 Certification by Dwight O.
Seegmiller
Exhibit 99.2 Section 906 Certification by James O. Pratt
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended March 31, 2003.
14
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 thereunto duly authorized.
HILLS BANCORPORATION
Date 05/13/03 By /s/ Dwight O. Seegmiller
--------- --------------------------------
Dwight O. Seegmiller, President
Date 05/13/03 By /s/ James G. Pratt
--------- --------------------------------
James G. Pratt, Treasurer and
Chief Accounting Officer
15
CERTIFICATIONS
I, Dwight O. Seegmiller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 05/13/03 By /s/ Dwight O. Seegmiller
--------- -------------------------------
Dwight O. Seegmiller, President
16
CERTIFICATIONS
I, James G. Pratt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 05/13/03 By /s/ James G. Pratt
--------- --------------------------------
James G. Pratt, Treasurer and
Chief Accounting Officer
17