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 June 30, 1996 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 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 July 31, 1996 - -------------------------- ------------------ Common Stock, no par value 1,463,604 HILLS BANCORPORATION Index to Form 10-Q Part I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets, June 30, 1996 (unaudited) and December 31, 1995 Consolidated statements of income, (unaudited) for three and six months ended June 30, 1996 and 1995 Consolidated statement of stockholders' equity, (unaudited) Consolidated statements of cash flows (unaudited) for three and six months ended June 30, 1996 and 1995 Notes 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 COMPUTATION OF EARNINGS PER SHARE SIGNATURES HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands) June 30, December 31, 1996 1995* --------- ------------ Unaudited ASSETS Cash and due from banks ............................... $ 10,269 $ 11,883 Investment securities: Available for sale (amortized cost June 30, 1996 $105,705; December 31, 1995 $99,621) ...................... 104,884 100,093 Held to maturity (fair value June 30, 1996 $20,980; December 31, 1995 $21,754) ...................... 21,036 21,443 Federal funds sold .................................... 9,962 16,080 Loans, net ............................................ 327,681 318,546 Property and equipment, net ........................... 6,945 6,996 Accrued interest receivable ........................... 4,468 4,446 Deferred income taxes, net ............................ 1,951 1,474 Other assets .......................................... 3,683 3,646 --------- --------- $ 490,879 $ 484,607 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest-bearing deposits .......................... $ 40,228 $ 42,927 Interest-bearing deposits ............................. 362,330 349,330 --------- --------- Total deposits .................................... $ 402,558 $ 392,257 Federal funds purchased and securities sold under agreements to repurchase ............... 5,066 10,019 Federal Home Loan Bank notes .......................... 30,727 30,727 Accrued interest payable .............................. 1,826 1,885 Other liabilities ..................................... 1,380 1,171 --------- --------- $ 441,557 $ 436,059 --------- --------- REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) ............................................ $ 5,802 $ 5,271 --------- --------- STOCKHOLDERS' EQUITY Capital stock, common, no par value; authorized 1996 10,000,000 shares; 1995 2,000,000 shares; issued 1996 1,463,604 shares; 1995 487,773 shares ....................... $ 8,925 $ 8,925 Retained earnings ..................................... 40,915 39,325 Unrealized gains (losses) on debt securities, net ..... (518) 298 --------- --------- $ 49,322 $ 48,548 Less maximum cash obligation related to ESOP shares ... 5,802 5,271 --------- --------- $ 43,520 $ 43,277 --------- --------- $ 490,879 $ 484,607 ========= ========= * Derived from audited financial statements. See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended June 30, 1996 and 1995 (In Thousands, Except Per Share Data) Three Months Ended Six Months Ended June 30 June 30 --------------------- ------------------------ 1996 1995 1996 1995 ------- --------- ---------- ---------- Interest Income: Interest and fees on loans ............................... $ 7,123 $ 6,848 $ 14,122 $ 13,259 Interest on investment securities Taxable ................................................ 1,478 1,210 2,896 2,404 Non-taxable ............................................ 269 260 546 521 Other interest income .................................... 133 63 301 103 ------- --------- ---------- ---------- Total interest income .................................... $ 9,003 $ 8,381 $ 17,865 $ 16,287 ------- --------- ---------- ---------- Interest Expense: Interest on deposits ..................................... $ 4,253 $ 4,061 $ 8,496 $ 7,730 Interest on securities sold under agreements to repurchase ............................... 67 76 167 168 Interest on FHLB borrowings .............................. 488 468 977 834 ------- --------- ---------- ---------- Total interest expense ................................. $ 4,808 $ 4,605 $ 9,640 $ 8,732 ------- --------- ---------- ---------- Net interest income .................................... $ 4,195 $ 3,776 $ 8,225 $ 7,555 Provision for loan losses .................................... 180 180 360 360 ------- --------- ---------- ---------- Net interest income after provision for loan losses ............................ $ 4,015 $ 3,596 $ 7,865 $ 7,195 ------- --------- ---------- ---------- Other Income: Real estate origination fees ............................. $ 94 $ 57 $ 205 $ 76 Trust fees ............................................... 223 177 408 328 Deposit account charges and fees ......................... 397 410 772 783 Other fees and charges ................................... 246 224 527 474 -------- --------- ---------- ---------- $ 960 $ 868 $ 1,912 $ 1,661 -------- --------- ---------- ---------- Other Expenses: Salaries and employee benefits ........................... $ 1,513 $ 1,369 $ 3,063 $ 2,709 Occupancy expenses ....................................... 207 186 419 376 Furniture and equipment .................................. 254 271 520 524 F.D.I.C. insurance ....................................... 0 203 1 412 Office supplies and postage .............................. 186 167 362 344 Other operating .......................................... 619 655 1,221 1,196 -------- --------- ---------- ---------- $ 2,779 $ 2,851 $ 5,586 $ 5,561 -------- --------- ---------- ---------- Income before income taxes ............................. $ 2,196 $ 1,613 $ 4,191 $ 3,295 Federal and state income taxes ............................... 641 447 1,210 912 -------- --------- ---------- ---------- Net Income ............................................. $ 1,555 $ 1,166 $ 2,981 $ 2,383 ======== ========= ========== ========== Per common share: Net income .............................................. $ 1.05 $ .79 $ 2.02 $ 1.62 Dividend, January ................... 0 0 .95 .87 Weighted average of common outstanding stock .............................. 1,474,643 1,472,397 1,476,216 1,472,397 See Notes to Financial Statements HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended June 30, 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 $(5,271) Net income ................................. 2,981 0 2,981 0 0 Change related to ESOP shares .............. (531) 0 0 0 (531) Cash dividends ($.95 per share) ............ (1,391) 0 (1,391) 0 0 Unrealized gains (losses) on debt securities, net .......................... (816) 0 0 (816) 0 ------- ------- ------- ------- ------- Balance, June 30, 1996 ..................... $43,520 $ 8,925 $40,915 $ (518) $(5,802) ======= ======= ======= ======= ======= Balance, January 1, 1995 ................... $36,447 $ 8,915 $35,336 $(2,594) $(5,210) Net income ................................. 2,383 0 2,383 0 0 Change related to ESOP shares .............. (116) 0 0 0 (116) Cash dividends ($.87 per share) ............ (1,268) 0 (1,268) 0 0 Unrealized gains (losses) on debt securities, net ..................... 2,309 0 0 2,309 0 ------- ------- ------- ------- ------- Balance, June 30, 1995 ..................... $39,755 $ 8,915 $36,451 $ (285) $(5,326) ======= ======= ======= ======= ======= See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1996 and 1995 (In Thousands) 1996 1995 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................................... $ 2,981 $ 2,383 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................... 412 405 Provision for loan losses .................................................. 360 360 (Increase) decrease in accrued interest receivable ......................... (22) (377) Amortization of bond discount .............................................. 266 257 (Increase) in other assets ................................................. (37) (94) Increase in accrued interest and other liabilities ......................... 150 351 -------- -------- Net cash provided by operating activities .................................. $ 4,110 $ 3,285 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale ......................................................... $ 6,000 $ 8,000 Held to maturity ........................................................... 2,852 2,127 Purchase of investment securities Available for sale ......................................................... (12,321) (9,319) Held to maturity ........................................................... (2,474) (1,481) Federal funds sold, net ........................................................ 6,118 1,875 Loans made to customers, net of collections .................................... (9,495) (15,527) Purchases of property and equipment ............................................ (361) (618) -------- -------- Net cash (used in) investing activities .................................... $ (9,681) $(14,943) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits ........................................ $ 10,301 $ (3,806) Net increase (decrease) in securities sold under agreements to repurchase .......................................... (4,953) 1,776 Borrowings from FHLB ....................................................... 0 15,000 Dividends paid ............................................................. (1,391) (1,268) -------- -------- Net cash provided by financing activities ............................... $ 3,957 $ 11,702 -------- -------- Increase (decrease) in cash and due from banks .......................... $ (1,614) $ 44 CASH AND DUE FROM BANKS Beginning .................................................................. $ 11,883 10,805 -------- -------- Ending ..................................................................... $ 10,269 $ 10,849 ======== ======== SUPPLEMENTAL DISCLOSURES Cash payments for: Interest paid to depositors and others .................................. $ 8,555 $ 7,596 Interest paid on other obligations ...................................... 1,144 1,002 Non-cash financing transactions: Increase in maximum cash obligation related to ESOP shares ......................................................... 531 116 Net unrealized gains (losses) on debt securities ........................ (816) 2,309 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. 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) June 30 ------------------------- 1996 1995 -------- -------- Agricultural ......................... $ 18,983 $ 18,016 Commercial and financial ............. 26,501 27,776 Real estate, construction ............ 8,707 9,068 Real estate, mortgage ................ 248,745 236,349 Loans to individuals ................. 31,641 30,924 -------- -------- $334,577 $322,133 Less allowance for loan losses ....... 6,896 6,529 -------- -------- $327,681 $315,604 ======== ======== Transactions in the allowance for loan losses are as follows: (In thousands) Six months ended June 30 ------------------ 1996 1995 ------ ------ Balance, beginning .......................... $6,740 $6,210 Provision charged to expense............... 360 360 Net charge-offs ........................... (204) (41) Balance, ending ............................. $6,896 $6,529 ====== ====== The following summarizes the Company's nonaccrual, past due, restructured and impaired loans: (In thousands) June 30 ------------------- 1996 1995 ------ ------ Nonaccrual ...................................... $ 339 $ 205 Accruing loans, past due 90 days or more ........ 777 1,062 Restructured loan ............................... 0 0 Impaired loans .................................. 5,820 * * Not determined prior to adoption of FASB Statement No. 114. 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 June 30, 1996 reflects total assets of $490.9 million which is an increase of $6.3 million from December 31, 1995. Net loans are $327.7 million which represents an increase of $9.1 million from December 31, 1995. Compared to one year ago, total assets have increased from $461.7 million to $490.9 million for an increase of $29.2 million. Also since June 1995, net loans increased $11.7 million to $327.7 million as of June 30, 1996. These loan increases were primarily single family residential loans in the Iowa City and Coralville area. Investment securities total $125.9 million as of June 30, 1996, an increase of $4.4 million from December 31, 1995 and a $11.8 million increase in investment securities since June 30, 1995. Federal funds sold decreased during the first half of 1996 by $6.1 million and have increased from June 30, 1995 to June 30, 1996 by $4.3 million. Interest rates on investment securities increased during the six months ended June 30, 1996 resulting in a net change in unrealized losses on investment securities of $1,293,000. This had the effect of decreasing stockholders' equity by $816,000 at June 30, 1996. Comparing this component of equity between June 30, 1995 to June 30, 1996 a decrease of $233,000 was shown. Deposits (when federal funds purchased and securities sold under agreements to repurchase are included) as of June 30, 1996 totaled $407.6 million, an increase of $5.3 million in six months. June 30, 1996 deposits, including repos, have grown $29.8 million since June 30, 1995. Borrowings from the FHLB have decreased from $35,758,000 to $30,727,000 during the last twelve months with no increase in borrowings occurring in the first half of 1996. Significant changes in the balance sheet are subject to asset-liability management, which 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. In January 1996, Hills Bancorporation paid a dividend of $.95 per share, a 9.20% increase from the $.87 paid in January 1995. Stockholders' equity at June 30, 1996 and December 31, 1995 reflects an adjustment for unrealized gains (losses) on debt securities, net of income taxes. The total stockholders' equity as of June 30, 1996 (before the reduction for the ESOP shares) as a percent of total assets was 10.05%. Under risk-based capital rules, total capital is 14.34% of risk-adjusted assets, compared to the current 8% requirement. The consolidated net income for the six months ended June 30, 1996 was $2,981,000 compared to $2,383,000 for the same period ended June 30, 1995. This is an increase of $598,000 representing an earnings per share for the six months of $2.02 compared to $1.62 for the same six months in 1995. Net interest income for 1996 is up by $908,000 over 1995 and is primarily the result of earning assets being $33.7 million higher in 1996 compared to 1995. The provisions for loan losses are the same for both periods presented and is reflective of management's assessment of the loan portfolio. Net income for the three months ended June 30, 1996 and 1995 was $1,555,000 and $1,166,000; respectively. This represents an increase in earnings per common share of $.26 from $.79 per share to $1.05 per share. The primary factors for the increases are an increase of net interest income (due to a higher volume of earning assets) and F.D.I.C. insurance savings of $203,000. Other income of the bank was $1,912,000 compared to $1,661,000 for the six months ended June 30, 1996 and 1995, respectively. Loan origination fees amounted to $205,000 for the six month period ended June 30, 1996 compared to only $76,000 in 1995. Trust fees were $408,000 and $328,000 for the six months ended June 30, 1996 and 1995, respectively and represents primarily an increase in accounts under management. Other expenses have increased from $5,561,000 for the six months ended June 30, 1995 to $5,586,000 for the period ended June 30, 1996. Of this net increase of $25,000, salaries and employee benefits accounted for a $354,000 increase. This is a combination of salary increases and the number of full-time equivalent employees increasing from June 30, 1995 to June 30, 1996 by eight employees. For the six months ended June 30, 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 from $412,000 in 1995 to $1,000 in 1996. Occupancy, furniture and equipment, office supplies and the other operating expenses totaled $2,522,000 for the six months ending June 30, 1996 compared to $2,440,000 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. It is expected that both banks will be owned by the Company and operated as separately chartered banks. Both acquisitions were subject to various regulatory approvals, including a separate state bank charter for the Kalona Bank. The acquisition of the Lisbon holding company was completed on July 12, 1996 and the total assets of its bank were $17.3 million. The Kalona branch office at Boatmen's Bank has deposits of about $22 million. It is expected that the Kalona acquisition 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. The funds for the acquisitions are expected to be provided from federal funds sold and the maturities of investment securities. Other than these 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 At the Annual Meeting held on April 15, 1996, the security holders approved the following: (a) To adopt a proposed amendment to the Restated Articles of Incorporation increasing the authorized capital stock of the Company from 2,000,000 to 10,000,000 shares of common stock without par value. This enabled the Company to effect a 3-for-1 stock split on April 17, 1996. (b) Elected William H. Olin, DDS; Theodore H. Pacha; Ann Marie Rhodes; and Ronald E. Stutsman to three-year terms to the Board of Directors expiring at the 1999 Annual Meeting. 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 June 30, 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) August 13, 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)