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, 1996 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, 1996 ----- ------------------ Common Stock, no par value 1,463,604 HILLS BANCORPORATION Index to Form 10-Q Part I FINANCIAL INFORMATION Page Number Item 1. Financial Statements Consolidated balance sheets, March 31, 1996 (unaudited) and December 31, 1995 Consolidated statements of income, (unaudited) for three months ended March 31, 1996 and 1995 Consolidated statement of stockholders' equity, (unaudited) for three months ended March 31, 1996 and 1995 Consolidated statements of cash flows (unaudited) for three months ended March 31, 1996 and 1995 Note to consolidated financial statements Item 2. Management's discussion and analysis of financial condition and results of operations 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 SIGNATURES HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands) March 31, 1996 December 31, Unaudited 1995 --------- ------------ ASSETS Cash and due from banks ............................... $ 10,163 $ 11,883 Investment securities: Available for sale (amortized cost March 31, 1996 $103,715; December 31, 1995 $99,621) ...................... 103,540 100,093 Held to maturity (fair value March 31, 1996 $22,371; December 31, 1995 $21,754) ...................... 22,180 21,443 Federal funds sold .................................... 11,345 16,080 Loans, net ............................................ 321,659 318,546 Property and equipment, net ........................... 7,041 6,996 Accrued interest receivable ........................... 4,966 4,446 Deferred income taxes, net ............................ 1,713 1,474 Other assets .......................................... 3,544 3,646 --------- --------- $ 486,151 $ 484,607 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest-bearing deposits .......................... $ 36,300 $ 42,927 Interest-bearing deposits ............................. 357,841 349,330 --------- --------- Total deposits .................................... $ 394,141 $ 392,257 Federal funds purchased and securities sold under agreements to repurchase ............... 9,728 10,019 Federal Home Loan Bank notes .......................... 30,727 30,727 Accrued interest payable .............................. 1,835 1,885 Other liabilities ..................................... 1,545 1,171 --------- --------- $ 437,976 $ 436,059 --------- --------- REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) ............................................ $ 5,719 $ 5,271 --------- --------- STOCKHOLDERS' EQUITY Capital stock, common, no par value; authorized 2,000,000 shares; issued 1,463,604 shares ........................... $ 8,925 $ 8,925 Retained earnings ..................................... 39,360 39,325 Unrealized gains (losses) on debt securities, net ..... (110) 298 --------- --------- $ 48,175 $ 48,548 Less, maximum cash obligation related to ESOP shares .. 5,719 5,271 --------- --------- $ 42,456 $ 43,277 --------- --------- $ 486,151 $ 484,607 ========= ========= * Derived from audited financial statements. See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1996 and 1995 (In Thousands, Except Per Share Data) 1996 1995 ------------------- Interest income: Interest and fees on loans .................. $ 6,999 $ 6,371 Interest on investment securities Taxable ................................... 1,418 1,234 Non-taxable ............................... 277 261 Other interest income ....................... 168 40 -------- --------- Total interest income ....................... $ 8,862 $ 7,906 -------- --------- Interest expense: Interest on deposits ........................ $ 4,243 $ 3,669 Interest on securities sold under agreements to repurchase ................. 100 92 Interest on FHLB notes ...................... 489 366 -------- --------- Total interest expense ...................... $ 4,832 $ 4,127 -------- --------- Net interest income ......................... $ 4,030 $ 3,779 Provision for loan losses ....................... 180 180 -------- -------- Net interest income after provision for loan losses .............. $ 3,850 $ 3,599 -------- --------- Other income: Real estate origination fees ................ $ 111 $ 19 Trust fees .................................. 185 151 Deposit account charges and fees ............ 375 373 Other fees and charges ...................... 281 250 -------- --------- $ 952 $ 793 -------- --------- Other expenses: Salaries and employee benefits .............. $ 1,550 $ 1,340 Occupancy expenses .......................... 212 190 Furniture and equipment ..................... 266 253 F.D.I.C. insurance .......................... 2 209 Office supplies and postage ................. 176 177 Other operating ............................. 601 541 -------- --------- $ 2,807 $ 2,710 -------- --------- Income before income taxes ............... $ 1,995 $ 1,682 Federal and state income taxes .................. $ 569 $ 465 -------- --------- Net income ............................... $ 1,426 $ 1,217 ======== ========= Per common share: Net income $ .97 $ .83 Dividend, January .......................... .95 .87 Weighted average of common outstanding stock ............. 1,473,069 1,472,397 See Note to Financial Statements HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended March 31, 1996 and 1995 (In Thousands) Capital Retained Unrealized ESOP Total Stock Earnings Losses Obligations ------- ------- -------- ---------- ----------- Balance, January 1, 1996 ................. $43,277 $ 8,925 $39,325 $ 298 $(5,271) Net income ............................... 1,426 0 1,426 0 0 Change related to ESOP shares ............ (448) 0 0 0 0 Cash dividends ($.97 per share) .......... (1,391) 0 (1,391) 0 (448) Unrealized gains (losses) on debt securities, net ........................ (408) 0 0 (408) 0 ------- ------- ------- ------- ------- Balance, March 31, 1996 .................. $42,456 $ 8,925 $39,360 $ (110) $(5,719) ======= ======= ======= ======= ======= Balance, January 1, 1995 ................. $36,447 $ 8,915 $35,336 $(2,594) $(5,210) Net income ............................... 1,217 0 1,217 0 0 Change related to ESOP shares ............ (55) 0 0 0 (55) Cash dividends ($.95 per share) .......... (1,268) 0 (1,268) 0 0 Unrealized gains (losses) on debt securities, net ................... 1,129 0 0 1,129 0 ------- ------- ------- ------- ------- Balance, March 31, 1995 .................. $37,470 $ 8,915 $35,285 $(1,465) $(5,265) ======= ======= ======= ======= ======= See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1996 and 1995 (In Thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................................... $ 1,426 $ 1,217 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................... 206 202 Provision for loan losses .................................................. 180 180 (Increase) decrease in accrued interest receivable ......................... (520) (397) Amortization of bond discount .............................................. 135 138 (Increase) in other assets ................................................. 102 (12) Increase in accrued interest and other liabilities ......................... 324 451 -------- -------- Net cash provided by operating activities .................................. $ 1,853 $ 1,779 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale ......................................................... $ 2,000 $ 4,000 Held to maturity ........................................................... 300 330 Purchase of investment securities: Available for sale ......................................................... (6,214) (3,510) Held to maturity ........................................................... (1,052) (551) Federal funds sold, net ........................................................ 4,735 6,712 Loans made to customers, net of collections .................................... (3,293) (6,563) Purchases of property and equipment ............................................ (251) (379) -------- -------- Net cash (used in) investing activities .................................... $ (3,775) $ 39 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits ........................................ $ 1,884 $ (8,049) Net increase (decrease) in securities sold under agreements to repurchase .......................................... (291) 1,498 Borrowings from FHLB ....................................................... - - - - 5,000 Dividends paid ............................................................. (1,391) (1,268) -------- -------- Net cash provided by financing activities ............................... $ 202 $ (2,819) -------- -------- Increase in cash and due from banks ..................................... $ (1,720) $ (1,001) CASH AND DUE FROM BANKS Beginning .................................................................. $ 11,883 10,805 -------- -------- Ending ..................................................................... $ 10,163 $ 9,804 ======== ======== SUPPLEMENTAL DISCLOSURES Cash payments for: Interest paid to depositors and others .................................. $ 4,293 $ 3,698 Interest paid on other obligations ...................................... 589 458 Non-cash financing transactions: Increase in maximum cash obligation related to ESOP shares ......................................................... 448 (55) Net unrealized gains (losses) on debt securities ........................ (647) 1,129 See Notes to Financial Statements. HILLS BANCORPORATION NOTE 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. 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 31 --------------------- 1996 1995 --------------------- Agricultural ......................................... $ 18,991 $ 19,000 Commercial and financial ............................. 28,307 26,810 Real estate, construction ............................ 8,510 7,937 Real estate, mortgage ................................ 241,075 239,899 Loans to individual .................................. 31,618 31,640 -------- -------- $328,501 $325,286 Less allowance for loan losses ....................... 6,842 6,740 -------- -------- $321,659 $318,546 ======== ======== Transactions in the allowance for loan losses are as follows: (In thousands) Three months ended March 31 ------------------- 1996 1995 Balance, beginning ......................... $6,740 $6,210 Provision charged to expense ............. 180 180 Net charge-offs .......................... (78) (72) ------ ------ Balance, ending ............................ $6,842 $6,318 ====== ====== The following summarizes the Company's nonaccrual, past due, restructured and impaired loans: (In thousands) March 31 ---------------- 1996 1995 ---------------- Nonaccrual .................................... $ 389 $ 0 Accruing loans, past due 90 days or more ...... 1,475 1,625 Restructured .................................. 0 0 Impaired ...................................... 5,350 5,460 There are no impaired loans as of March 31, 1996 Note 3. Stock Split On April 17, 1996, the Company affected a three for one stock split in the form of a stock dividend when it issued a stock dividend of two additional shares for each share then held. The number of shares outstanding and per share information has been retroactively restated for all periods presented. PART I, ITEM 2. HILLS BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATION The consolidated balance sheet of Hills Bancorporation as of March 31, 1996 reflects total assets of $486.2 million which is an increase of $1.5 million from December 31, 1995. Net loans are $321.7 million which represents an increase of $3.1 million from December 31, 1995. Compared to one year ago, total assets have increased from $444.9 million to $486.2 million for an increase of $41.3 million. Also during this time, net loans increased $14.5 million to $321.7 million as of March 31, 1996. These loan increases were primarily single family residential loans in the Iowa City and Coralville area. Investment securities total $125.7 million as of March 31, 1996, an increase of $4.2 million from December 31, 1995 and a $14.3 million increase in investment securities since March 31, 1995. Federal funds sold decreased during the first quarter of 1996 by $4.7 million and have increased from March 31, 1995 to March 31, 1996 by $10.6 million. Interest rates on investment securities increased during the last part of the quarter ending March 31, 1996 resulting in a net change in unrealized losses on investment securities of $647,000. This had the effect of decreasing stockholders' equity by $408,000 at March 31, 1996. Comparing the change in unrealized losses between March 31, 1995 to March 31, 1996 an increase in equity of $1,355,000 was shown. Deposits (when federal funds purchased and securities sold under agreements to repurchase are included) as of March 31, 1996 totaled $403.9 million, an increase of $1.6 million for the first three months. March 31, 1996 deposits, including repos, have grown $30.6 million from March 31, 1995. Borrowings from the FHLB have increased from $25,758,000 to $30,727,000 during the last twelve months with no increase in borrowings occurring in the first quarter of 1996. Asset-liability management encompasses both the management of interest rate sensitivity and the maintenance of adequate liquidity. Management attempts to provide the optimal 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. In January 1996, Hills Bancorporation paid a dividend of $.95 per share, a 9.62% increase from the $.87 paid in January 1995. The total dividend of $1,391,000 is deducted from stockholders' equity and is reflected in the resulting stockholders' equity as of March 31, 1996 of $42,456,000. Stockholders' equity at March 31, 1996 and December 31, 1995 reflects an adjustment for unrealized gain (losses) on debt securities, net of income taxes. The total stockholders' equity of Hills Bancorporation before the reduction for the ESOP shares as a percent of total assets is 9.91%. Under risk-based capital rules, total capital is 14.59% of risk-adjusted assets, compared to the current 8% requirement. The consolidated net income for the three months ended March 31, 1996 was $1,426,000 compared to $1,217,000 for the same period ended March 31, 1995. This is an increase of $209,000 representing earnings per share for the three months of $.97 compared to $.83 for the same three months in 1995. Net interest income for 1996 is up by $251,000 over 1995 and is primarily the result of earning assets being $34.9 million higher in 1996 compared to 1995. The provisions for loan losses are the same for both quarters presented and is reflective of management's overall opinion of the loan portfolio at this time, the growth of the loan portfolio, and the level of the reserve as of March 31, 1996. Other income of the bank was $952,000 compared to $793,000 for the three months ended March 31, 1996 and 1995, respectively. Loan origination fees amounted to $111,000 for the three month period ended March 31, 1996 compared to only $19,000 in 1995. The Trust Department fees were $185,000 and $151,000 for the three months ending March 31, 1996 and 1995, respectively and represents primarily an increase in accounts under management. Other expenses have increased from $2,710,000 for the three months ended March 31, 1995 to $2,807,000 for the period ended March 31, 1996. Of this net increase of $97,000, salaries and employee benefits accounted for a $210,000 increase. This is a combination of salary increases and the number of full-time equivalent employees increasing from March 31, 1995 to March 31, 1996 by ten employees. For the quarter ending March 31, 1996 compared to the same period in 1995, the major increase in net income is accounted for by a reduction of F.D.I.C. insurance premiums. The premium for 1996 will be $2,000 for the year compared to $424,000 for 1995. The occupancy, furniture and equipment, office supplies and the other operating expenses totaled $1,255,000 for the three months ending March 31, 1996 compared to $1,161,000 for the same period in 1995. Federal and state income taxes for 1996 are more than in 1995, primarily the result of increased income before taxes. The Bank's principal sources of funds continues to be prepayment of loan principal and current amortized loan payments. In addition, funds are provided from current operations. All of the funds are used to fulfill loan commitments, make short-term investments, and fund any deposit withdrawals needed. In February 1996, the Company announced the stock purchase of a Lisbon, Iowa bank holding company and the purchase of certain assets and assumption of deposits of the Kalona, Iowa branch office of Boatmen's Bank of Iowa, Inc. The Lisbon bank has approximately $16.5 million in assets. The Kalona office has deposits of about $22 million. It is expected that both banks will be owned by the Company and operated as separately chartered banks. Both acquisitions are subject to various regulatory approvals, including a separate state bank charter for the Kalona Bank since it is presently an office location of Boatmen's Bank. It is anticipated that both acquisitions will be completed in the third quarter of 1996. The acquisitions of the two banks is expected to require an investment of approximately $6,000,000 and the funds for the acquisitions are expected to be provided by deposit growth and the maturities of investment securities. Other than the previously mentioned acquisitions, the Company has no material commitments or plans which will materially affect its liquidity or capital resources. The acquisition of property and equipment may be in cash purchases, or they may be financed if favorable terms are available. 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 March 31, 1996. 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 See exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended March 31, 1996. 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 14, 1996 /s/ Dwight O. Seegmiller - ------------------------------ ------------------------------- Date Dwight O. Seegmiller, President (Duly authorized officer of the registrant) /s/ James G. Pratt ------------------------------------------- James G. Pratt, Treasurer (Principal Financial Officer)