UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996. Commission File Number 0-12668.
HILLS BANCORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Iowa 42-1208067
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
131 Main Street, Hills, Iowa 52235
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 679-2291
Securities Registered pursuant to Section 12 (b) of the Act: None
Securities Registered pursuant to Section 12 (g) of the Act:
No par value common stock
-------------------------
Title of Class
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. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registrant S-K (229.405 of this chapter) is not contained herein, and will
not be contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
While it is difficult to determine the market value of shares owned by
nonaffiliates (within the meaning of such term under the applicable regulations
of the Securities and Exchange Commission), the Registrant estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 14, 1997 (based upon reports of beneficial ownership that approximately
80% of the shares are so owned by nonaffiliates and upon information
communicated informally to the Registrant by various purchasers and sellers that
the sale price for the common stock is generally $40 per share) was $46,892,000.
The number of shares outstanding of the Registrant's common stock as of March
14, 1997 is 1,465,384 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated April 4, 1997, for the Annual Meeting of
the Shareholders of the Registrant to be held April 21, 1997 (the Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.
EXHIBIT INDEX
The exhibits index is on Page __.
PART I
Item 1. Business
Hills Bancorporation (the "Company") is a multi-bank holding company principally
engaged in the business of banking. Its three wholly-owned subsidiary banks are
Hills Bank and Trust Company, Hills, Iowa; Lisbon Bank and Trust Company,
Lisbon, Iowa; and Hills Bank Kalona, Kalona, Iowa (hereinafter referred to as
the "Banks").
The Company was incorporated December 12, 1982 and all operations are conducted
within the state of Iowa. The Company became owner of 100% of the outstanding
stock of Hills Bank and Trust Company as of January 23, 1984 when stockholders
of the Bank exchanged their shares for shares of the Company. Effective July 1,
1996, the Company acquired for cash all of the outstanding shares of LBC, Inc.,
which owned 100% of the outstanding shares of Alliance Bancorporation, which
held 100% of the outstanding shares of the Lisbon Bank and Trust Company,
Lisbon, Iowa. The Company chartered a new subsidiary bank, Hills Bank Kalona,
and on September 20, 1996, the subsidiary bank acquired cash, certain assets and
assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A.
The Banks are all full-service commercial banks extending their services to
individuals, business, governmental units, and institutional customers primarily
in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon and
Kalona and the surrounding area. This area includes parts of Johnson, Linn, and
Washington counties. All of the Banks are actively engaged in all areas of
commercial banking, including acceptance of demand; savings and time deposits;
making commercial, real estate, agricultural and consumer loans; maintaining
night and safe deposit facilities; and performing collection, exchange, and
other banking services tailored for individual customers. The Hills Bank and
Trust Company's trust department administers estates, personal trusts, and
pension and profit-sharing funds and, in connection therewith, provides for farm
management and investment advisory and custodial services for individuals,
corporations and nonprofit organizations. At this time, trust services are
available only at the Hills Bank and Trust Company's locations. The loan
activity of the Banks is diversified, with commercial and agricultural loans,
real estate loans, automobile, installment, and other consumer loans composing
the majority of its loan portfolio. In addition, the Banks earn substantial fees
from originating mortgages that are sold in the secondary residential real
estate market without mortgage servicing rights being maintained.
Each Bank has established formal loan origination policies. In general, the loan
origination policies require individual lenders to reduce the risk of credit
loss to the Bank by requiring that, among other things, minimum loan to value
ratios be maintained, evidence of appropriate levels of insurance be carried by
borrowers and documenting appropriate types and amounts of collateral and
sources of expected payment.
The Banks' business is not seasonal, except that loan origination fees are
higher during the spring and summer months. The Banks have not undertaken
significant new services during the current year that might exceed the limits of
their human resources and data processing capabilities.
Iowa City, Coralville, and North Liberty are located near Interstate 80 and
Interstate 380 in Eastern Iowa. The communities have a population of
approximately 80,000 and Johnson County, Iowa has a population of approximately
96,000. The University of Iowa has over 27,000 students and 15,000 employees,
including employees of The University of Iowa Hospitals and Clinics. Johnson
County, Iowa has one of the strongest economies in Iowa and has had substantial
economic growth in the past ten years. The area is known for its educational
institutions, health care facilities, cultural and sports events, and retail
centers.
Lisbon Bank and Trust Company is located in Lisbon, Iowa (Linn County),
approximately 25 miles north of Iowa City and does not conduct business in the
same trade territories as Hills Bank and Trust Company. Lisbon has a population
of approximately 1,500 and Mount Vernon, located two miles away, has 3,700
people. Both communities are strong economically and are easy commuting
distances to Cedar Rapids and Iowa City, Iowa. In addition, Mount Vernon is the
home of Cornell College, which has approximately 1,200 students.
Hills Bank Kalona is located in Kalona, Iowa (Washington County), approximately
20 miles south of Iowa City with a population of approximately 2,000 people.
Kalona is primarily an agriculture community, but is located within easy driving
distance for employment in Iowa City and Washington, Iowa.
The commercial banking business is highly competitive and the Company's banks
compete with other commercial banks, credit unions, brokerage firms, finance
companies, insurance companies, and other financial institutions.
Iowa's banking laws regarding interstate banking and interstate branching are
currently more restrictive than many other states. Prior to 1991, Iowa banking
law prohibited interstate banking altogether, except for certain grandfathered
rights extended to the largest bank holding company conducting business in Iowa,
Norwest Corporation, which is headquartered in Minnesota. Since January 1, 1991,
Iowa banking law has been less restrictive by allowing limited interstate
banking by permitting financial institutions whose operations are principally
conducted in Illinois, Missouri, Nebraska, South Dakota, Minnesota, or Wisconsin
to conduct business in Iowa by acquiring an existing Iowa banking organization.
Conversely, Iowa financial institutions may expand operations into Iowa's six
neighboring states, provided such expansion is accomplished by acquisition
rather than by branching. Interstate branching by out-of-state banks into Iowa
is still expressly prohibited by Iowa statutes. Iowa also currently has a
deposit concentration limit of 10% on the amount of deposits that any one
banking organization can control and continue to acquire banks, which applies to
both in-state and out-of-state banks. Iowa also has a 35% limit on the aggregate
amount of deposits all out-of-state banking organizations can control within
Iowa.
In recent years, Norwest Corporation, Mercantile Bancorporation, Firstar
Corporation and Nations Bank have acquired a number of independent banks and
smaller multi-bank holding companies in various metropolitan areas of Iowa. Each
operates under a single charter in Iowa. To date none of the Bank's local
competitors have been purchased by the larger regional or national bank holding
companies.
As with its law regarding interstate banking and branching, Iowa's intrastate
branching statutes are also rather restrictive when compared with those of other
states. Generally, bank branch offices may only be operated or acquired in
counties contiguous to or cornering upon the county in which the Bank has its
principal place of business. Also, a bank in Iowa may not establish a new branch
office in a city in which there exists an office of another bank, other than by
acquisition of an existing office or bank. Furthermore, the number of bank
branch offices allowed within a municipal corporation or an urban complex is
limited to four offices in populations of 100,000 or less, five offices in
populations of over 100,000 to 200,000, and six offices in areas with
populations over 200,000. However, some of Iowa's intrastate branching
limitations regarding geographic location of branch offices and the number of
branch offices which may be established in an urban complex may be overcome by
merging two or more affiliated banking organizations that have been in
continuous operation in Iowa for at least five years into a "united community
bank."
In September 1994, Congress passed interstate banking and branching legislation,
which (1) permitted nationwide interstate banking effective September 29, 1995,
(2) would permit interstate bank branching effective June 1, 1997, and (3)
increased each state's deposit concentration limit to 30%, subject to
ratification by each particular state. If Iowa elects to do so, it can continue
to (1) limit the means by which an out-of-state bank may acquire a bank within
the state, (2) prohibit out-of-state banks from branching into the state, and
(3) set its own deposit concentration limit.
Iowa law permits the acquisition of an Iowa bank holding Company or state bank
by an out-of-state bank holding company located anywhere in the United States.
Certain restrictions relating to deposit concentrations and rquirements of
operations have also beeen established for out-of-state bank holding companies
by the Iowa Legislature. The state law prohibits de novo entry and the
acquisition of individual branch offices by out-of-state bank holding companies.
No state bank may be directly or indirectly acquired by an out-of-state bank
holding company that has not been in continuous existence and operation for at
least five years.
Under the 1994 federal legislation describe above, national banks may branch
nationwide, effective June 1, 1997, even in states that have not extended the
privilege to their own state-chartered banks. Until then, the federal law gives
states the opportunity to enact legislation either opting in to interstate
branching or opting out. Opt-out legilstation would bar interstate branching
within a state's borders, by either national or state banks. Iowa hsas not yet
expressly elected to opt out or opt in. If the Iowa Legislature does not either
elect to opt in or opt out by June 1, 1997, national banks and out-of-state
banks, which are authorized by their particular state law, will be able to
branch in and out of Iowa no later than June 1, 1997. At this time, it is
uncertain what competitive impact any future interstate banking developments or
Iowa banking legislation might have upon the company and the banks.
Hills Bank and Trust Company is in direct competition for deposits, loans and
other financial related business with other financial institutions in Johnson
County, Iowa as follows:
Approximate
Assets As Of
December 31,
1996
------------
(In Millions)
Largest competing bank ........................................ $395
Next largest competing bank ................................... 321
Largest competing credit union ................................ 132
Hills Bank Kalona and Lisbon Bank and Trust Company compete with other banks in
their trade territories. Based upon deposits, their market share compared to the
other local banks was approximately 35% and 28%, respectively.
No material portion of the Banks' deposits have been obtained from a single
person or a few persons. Accordingly, management of the Banks have no reason to
believe that the loss of the deposits of any person or few persons would have a
materially adverse effect on the Banks' operations or erode its deposit base.
Approximately 6.2% of the Banks' loans have been made to farmers for
agricultural purposes. The agricultural sector of the economy has been cyclical
with a general trend toward fewer and larger farms. The Banks have not
experienced a material adverse effect on their business as a result of defaults
on agricultural loans and expects none in the future.
The Company does not engage in any business activities apart from its ownership
of the Banks and, therefore, does not encounter any competition for its services
other than as described above for the Banks.
The Company and the Banks have undertaken no material research activities during
the last three years relating to research and development activities.
The Company is regulated by the Federal Reserve Bank.
All the Banks are regulated by the Federal Deposit Insurance Corporation and the
State of Iowa Division of Banking.
The Company had no employees as of December 31, 1996, and the Banks had 173
regular and 54 part-time employees.
The following consolidated statistical information reflects selected balances
and operations of the Company and the Banks for the periods indicated. Average
refers to an average monthly basis for the periods stated.
The following tables show (1) average balances of assets and liabilities, (2)
interest income and expense on a tax equivalent basis, (3) interest rates and
differential and (4) changes in interest income and expense.
AVERAGE BALANCES
(Daily Average Basis)
Year Ended December 31,
----------------------------
1996 1995 1994
----------------------------
(In Thousands)
ASSETS
Cash and due from banks ..................................................... $ 9,987 $ 9,795 $ 9,951
Taxable securities .......................................................... 107,106 95,747 102,608
Nontaxable securities ....................................................... 22,291 19,528 18,775
Federal funds sold .......................................................... 9,159 8,980 5,181
Loans, net .................................................................. 337,630 311,592 277,774
Property and equipment, net ................................................. 7,516 6,685 5,861
Other assets ................................................................ 11,091 7,484 7,560
----------------------------
$504,780 $ 459,811 $ 427,710
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits ......................................... $ 39,929 $ 36,085 $ 34,409
Interest-bearing demand deposits ............................................ 37,310 37,249 45,220
Savings deposits ............................................................ 102,849 74,146 71,291
Time deposits ............................................................... 234,825 226,251 209,602
Securities sold under agreements to repurchase
and federal funds purchased .............................................. 7,607 9,424 5,832
FHLB borrowings ............................................................. 28,914 28,965 17,473
Debt of ESOP plan ........................................................... -- -- 73
Other liabilities ........................................................... 3,509 2,978 2,680
Redeemable common stock held by
Employee Stock Ownership Plan ............................................ 5,844 5,241 4,913
Stockholders' equity ........................................................ 43,993 39,472 36,217
----------------------------
$504,780 $ 459,811 $ 427,710
============================
INTEREST INCOME AND EXPENSE
Year Ended December 31,
---------------------------
1996 1995 1994
---------------------------
(In Thousands)
Income:
Loans (1) ....................................... $ 29,966 $ 27,506 $ 23,473
Taxable securities .............................. 6,190 5,189 5,158
Nontaxable securities (1) ....................... 1,692 1,567 1,575
Federal funds sold .............................. 485 519 212
--------------------------
Total interest income ................ 38,333 34,781 30,418
--------------------------
Expense:
Interest-bearing demand deposits ................ 819 894 1,039
Savings deposits ................................ 3,668 2,618 1,625
Time deposits ................................... 13,275 12,673 10,857
Securities sold under agreements to repurchase .. 326 409 204
FHLB borrowings ................................. 1,863 1,874 1,105
Interest portion of Employee Stock Ownership Plan
contribution ................................. -- -- 4
--------------------------
Total interest expense ............... 19,951 18,468 14,834
--------------------------
Net interest income .................. $ 18,382 $ 16,313 $ 15,584
==========================
(1) Presented on a tax equivalent basis using a federal tax rate of 34%.
INTEREST RATES AND INTEREST DIFFERENTIAL
Year Ended
December 31,
---------------------
1996 1995 1994
---------------------
Average yields:
Taxable securities .................................. 5.78% 5.42% 5.03%
Nontaxable securities ............................... 5.01 5.29 5.54
Nontaxable securities (tax equivalent basis) ........ 7.59 8.02 8.39
Loans (1) ........................................... 8.80 8.74 8.34
Loans (tax equivalent basis) ........................ 8.87 8.83 8.45
Federal funds sold .................................. 5.30 5.78 4.09
Interest-bearing demand deposits .................... 2.20 2.40 2.30
Savings deposits .................................... 3.57 3.53 2.28
Time deposits ....................................... 5.65 5.60 5.18
Securities sold under agreements to repurchase ...... 4.29 4.34 3.50
Interest on FHLB borrowings ......................... 6.44 6.47 6.32
Yield on average interest earning assets ............ 8.05 7.98 7.52
Rate on average interest-bearing liabilities ........ 4.85 4.91 4.24
Net interest spread (2) ............................. 3.20 3.07 3.28
Net interest margin (3) ............................. 3.86 3.74 3.85
(1) Nonaccruing loans are not significant and have been included in the
average loan balances for purposes of this computation.
(2) Net interest spread is the difference between the yield on average
interest-earning assets and the yield on average interest-paying
liabilities stated on a tax equivalent basis using a federal and state tax
rate of 34% and 5%, respectively, for the three years presented.
(3) Net interest margin is net interest income, on a tax equivalent basis,
divided by average interest-earning assets.
CHANGE IN INTEREST INCOME AND EXPENSE
Change Due Change Due Total
------------------------------
To Volume To Rates Change
------------------------------
Year ended December 31, 1996: Change in interest income:
Loans ............................................ $2,334 $ 126 $2,460
Taxable securities ............................... 642 359 1,001
Nontaxable securities ............................ 212 (87) 125
Federal funds sold ............................... 10 (44) (34)
-----------------------------
3,198 354 3,552
-----------------------------
Change in interest expense:
Interest-bearing demand deposits ................. 1 (76) (75)
Savings deposits ................................. 1,020 30 1,050
Time deposits .................................... 487 115 602
Securities sold under agreements to repurchase ... (78) (5) (83)
Interest on FHLB borrowings ...................... (3) (8) (11)
-----------------------------
1,427 56 1,483
-----------------------------
Change in net interest income ....................... $1,771 $ 298 $2,069
=============================
Year ended December 31, 1995: Change in interest income:
Loans ............................................ $2,945 $1,088 $4,033
Taxable securities ............................... (356) 387 31
Nontaxable securities ............................ 62 (70) (8)
Federal funds sold ............................... 196 111 307
-----------------------------
2,847 1,516 4,363
-----------------------------
Change in interest expense:
Interest-bearing demand deposits ................. (189) 44 (145)
Savings deposits ................................. 68 925 993
Time deposits .................................... 899 917 1,816
Securities sold under agreements to repurchase ... 148 57 205
Interest on FHLB borrowings ...................... 742 27 769
Other ............................................ (2) (2) (4)
-----------------------------
1,666 1,968 3,634
-----------------------------
Change in net interest income ....................... $1,181 $ (452) $ 729
=============================
Rate/volume variances are allocated on a consistent basis using the absolute
values of changes in volume compared to the absolute values of the changes in
rates. Loan fees included in interest income are not material. Interest on
nontaxable securities and loans is shown at tax equivalent amounts.
LOANS
The following table shows the composition of loans (before deducting the reserve
for loan losses) as of December 31 for each of the last five years.
December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
(In Thousands)
Agricultural ............................. $ 23,133 $ 19,000 $ 17,826 $ 17,117 $ 16,430
Commercial and financial ................. 30,650 26,810 26,024 24,721 24,121
Real estate, construction ................ 8,846 7,937 6,933 7,006 4,759
Real estate, mortgage .................... 279,134 239,899 225,342 195,527 185,869
Loans to individuals ..................... 33,812 31,640 30,906 24,380 22,787
--------------------------------------------------------------------
Total ...................... $375,575 $325,286 $307,031 $268,751 $253,966
====================================================================
There were no foreign loans outstanding for any of the years presented
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31,
1996:
One
Amount One Year To Five Over Five
Of Loans Or Less(1) Years Years
------------------------------------------
(In Thousands)
Commercial, financial and agricultural ........................ $ 53,783 $ 25,131 $ 22,221 $ 6,431
Real estate, construction and mortgage ........................ 287,980 60,152 126,626 101,202
Other ......................................................... 33,812 8,366 22,953 2,493
----------------------------------------
$375,575 $ 93,649 $171,800 $110,126
========================================
Interest rates on loans are as follows:
Fixed rate ................................................. $257,273 $ 74,432 $160,734 $ 22,107
Variable rate .............................................. 118,302 19,217 11,066 88,019
----------------------------------------
$375,575 $ 93,649 $171,800 $110,126
========================================
(1) A significant portion of the commercial loans are six-month notes.
However, a significant amount of these notes are renewed when due.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Company's nonaccrual, past due, restructured
and impaired loans as to interest or principal payment as of December 31 for
each of the years presented:
1996 1995 1994 1993 1992
--------------------------------------
(In Thousands)
Nonaccrual loans ....................... $ 339 $ 489 $ -- $ -- $ 47
Accruing loans past due 90 days
or more ............................. 1,092 417 822 1,064 463
Restructured loans
Impaired loans ......................... 7,811 5,465 N/A N/A N/A
The Company does not have a significant amount of loans which are past due less
than 90 days on which there are serious doubts as to the ability of the
borrowers to comply with the loan repayment terms.
Loans are placed on nonaccrual status when management believes the collection of
future interest is not reasonably assured. Interest income was not materially
affected by this classification.
The Company has no individual borrower or borrowers engaged in the same or
similar industry exceeding 10% of total loans. The Company has no other
interest-bearing assets, other than loans, that meet the nonaccrual, past due,
restructured or potential problem loan criteria.
No allowance for losses has been recognized for impaired loans because the loans
have been charged off to the net present value of the future cash flows or the
fair value of the collateral if the loan is collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for each of
the last five years:
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------
(In Thousands)
Amount of loan loss allowance at
beginning of year ............................ $6,740 $6,210 $5,775 $5,190 $4,650
--------------------------------------------------------------
Agriculture .................................. 300 101 423 270 444
Commercial and financial ..................... 236 387 334 326 418
Real estate, mortgage ........................ 127 180 172 165 97
Loans to individuals ......................... 308 254 131 300 441
--------------------------------------------------------------
971 922 1,060 1,061 1,400
--------------------------------------------------------------
Recoveries:
Agriculture .................................. 48 218 368 247 131
Commercial and financial ..................... 95 226 206 213 93
Real estate, mortgage ........................ 215 149 154 87 522
Loans to individuals ......................... 80 137 126 178 135
--------------------------------------------------------------
438 730 854 725 881
--------------------------------------------------------------
Net charge-offs ................................. 533 192 206 336 519
--------------------------------------------------------------
Allowances of acquired banks .................... 350 -- -- -- --
--------------------------------------------------------------
Provision for loan losses (1) ................... 754 722 641 921 1,059
--------------------------------------------------------------
Balance of loan loss allowance
at end of year ............................... $7,311 $6,740 $6,210 $5,775 $5,190
==============================================================
Ratio of net charge-offs during year
to average loans outstanding ................. 0.16% 0.06% 0.07% 0.13% 0.22%
===============================================================
The balance of the loan loss allowance has not been allocated by type of loan.
Management regularly reviews the loan portfolio and does not expect any unusual
material amount to be charged off during 1997 that would be significantly
different than the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
(1) For financial reporting purposes, management regularly reviews the loan
portfolio and determines a provision for loan losses based upon the impact
of economic conditions on the borrower's ability to repay, past collection
experience, the risk characteristics of the loan portfolio and such other
factors which deserve current recognition. For income tax purposes, the
allowance is maintained at the maximum allowable amount.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Banks review and place in risk categories specific borrowings. Based upon
the risk category assigned, the Banks allocate a percentage, as determined by
management, for a required allowance needed. The risk categories are similar to
those used by federal and state regulatory agencies and consist of the
following:
(1) Potential Watch and Watch
(2) Problem
(3) Substandard
(4) Doubtful
In addition, each bank's management also reviews and, where determined
necessary, allows for specific allowances based upon reviews of specific
borrowers and provides general allowances for areas which management believes
are of higher credit risk (agricultural loans and constructed model real estate
homes as of December 31, 1996).
A summary of the components of the allowance for loan loss, by risk element, as
of December 31, 1996 and 1995 is as follows:
1996 1995
-----------------
(In Thousands)
Potential Watch and Watch Loans ............... $1,769 $1,460
Substandard ................................... 1,337 900
Specific borrowers ............................ 2,009 1,875
Constructed model real estate homes ........... 858 729
Agricultural loans ............................ 250 250
Anticipated charge-offs of the above categories are not determinable at December
31, 1996; however, the Banks have no reason to expect actual charge-offs to be
significantly different from historical charge-offs.
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of
December 31, 1996, 1995 and 1994 and the maturities and yield of the investment
securities as of December 31, 1996:
December 31,
----------------------------
1996 1995 1994
----------------------------
(In Thousands)
Carrying value:
U. S. Treasury securities .................................................. $ 45,213 $ 41,275 $ 52,475
Obligations of other U. S. Government agencies and corporations ............ 57,397 55,537 36,458
Obligations of states and political subdivisions ........................... 23,447 21,443 19,255
Federal Home Loan Bank stock ............................................... 3,398 3,281 1,862
Other ...................................................................... 3,180 -- --
----------------------------
$132,635 $121,536 $110,050
============================
December 31, 1996
---------------------------
Weighted
Carrying Average
Value Yield
---------------------------
(In Thousands)
Type and maturity grouping:
U. S. Treasury maturities:
Within 1 year ........................................................... $10,202 5.80%
From 1 to 5 years ....................................................... 35,011 6.14
--------
Total ........................................................... 45,213
--------
Obligations of other U. S. Government agencies and corporations, maturities:
Within 1 year ........................................................... 9,100 6.25
From 1 to 5 years ....................................................... 47,913 6.05
From 5 to 10 years ...................................................... 384 7.20
--------
Total ........................................................... 57,397
--------
Obligations of states and political subdivisions, maturities:
Within 1 year ........................................................... 2,728 8.71
From 1 to 5 years ....................................................... 11,241 7.30
From 5 to 10 years ...................................................... 9,217 7.22
Over 10 years ........................................................... 261 7.55
--------
Total ........................................................... 23,447
--------
Other:
Within 1 year .............................................................. 200 5.99
From 1 to 5 years .......................................................... 694 7.53
Over 10 years .............................................................. 1,406 6.91
Marketable equity security ................................................. 880
Federal Home Loan Bank stock ............................................... 3,398 7.00
--------
Total ........................................................... 6,578
--------
$132,635
========
INVESTMENT SECURITIES
The yields are computed on a tax-equivalent basis using a federal tax rate of
34% and a state tax rate of 5%.
As of December 31, 1996, there were no investment securities of any issuer,
other than securities of the U. S. Government and U. S. Government agencies and
corporations, exceeding 10% of stockholders' equity.
The weighted average yield is based on the amortized cost of the investment
securities.
DEPOSITS
The following tables show the average deposits and rates paid on such deposits
for the years ended December 31, 1996, 1995 and 1994 and the composition of the
certificates issued in excess of $100,000 as of December 31, 1996:
December 31,
-------------------------------------------------------------------------
1996 Rate 1995 Rate 1994 Rate
-------------------------------------------------------------------------
Average noninterest-bearing deposit $ 39,929 0.00% $ 36,085 0.00% $ 34,409 0.00%
Average interest-bearing demand
deposits 37,310 2.20 37,249 2.40 45,220 2.30
Average savings deposits 102,849 3.57 74,146 3.53 71,291 2.28
Average time deposits 234,825 5.65 226,251 5.60 209,602 5.18
--------------- --------------- --------------
$ 414,913 $ 373,731 $ 360,522
============== ============== ==============
Time certificates issued in amounts
of $100,000 or more as of
December 31, 1996 with Amount Rate
------------------------
maturity in:
3 months or less $ 7,885 5.50%
3 through 6 months 5,196 4.61
6 through 12 months 3,410 4.22
Over 12 months 16,145 6.25
---------------
$ 32,636
==============
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and
average assets for the years ended December 31, 1996, 1995 and 1994.
December 31,
------------------------------
1996 1995 1994
------------------------------
Return on assets ........................... 1.22% 1.14% 1.15%
Return on stockholders' equity ............. 13.97 13.32 13.62
Dividend payout ratio ...................... 22.62 24.12 23.83
Stockholders' equity to assets ratio ....... 8.72 8.58 8.47
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of federal funds purchased and securities sold under
agreements to repurchase during 1996, 1995 and 1994:
1996 1995 1994
----------------------------
(Amounts In Thousands)
Outstanding as of December 31 ............. $ 6,071 $10,019 $ 7,043
Weighted average interest rate at year end 4.31% 4.25% 3.85%
Maximum month-end balance ................. 9,112 12,028 10,652
Average month-end balance ................. 7,607 9,424 5,832
Weighted average interest rate for the year 4.29% 4.34% 3.50%
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding month-end balances, weighted average
interest rates at year end, maximum month-end balances, average balances and
weighted average interest rates during 1996, 1995 and 1994:
1996 1995 1994
---------------------------
Outstanding as of December 31 ............. $25,795 $30,727 $20,758
Weighted average interest rate at year end 6.42% 6.29% 6.30%
Maximum month-end balance ................. 30,826 35,758 20,758
Average month-end balance ................. 28,914 28,965 17,473
Weighted average interest rate for the year 6.44% 6.47% 6.32%
PART I
Item 2. Properties
The Company's office and the main bank of Hills Bank and Trust Company is
located at 131 Main Street, Hills, Iowa. The Hills office is a brick building
containing approximately 14,200 square feet, a portion of which was built in
1977 and remodeled in 1986. A two-story addition was completed in 1984.
The branch offices of Hills Bank and Trust Company are as follows:
1. Iowa City office located at 1401 South Gilbert Street is a one-story brick
building containing approximately 11,400 square feet. The branch has five
drive-up teller lanes and a drive-up 24-hour automatic teller machine. The
Bank's trust department is located here.
2. Coralville office is a two-story building built in 1972 that contains
approximately 16,700 square feet of space. This office is equipped with
four drive-up teller lanes and one 24-hour automatic teller machine.
3. A 2,800 square foot renovated and expanded building in North Liberty, Iowa
was opened for business in 1986. That office is a full-service location
including three drive-up teller lanes and a drive-up automatic teller
machine.
4. The Bank leases an office at 132 East Washington Street in downtown Iowa
City with approximately 2,500 square feet. The office has two 24-hour
automatic teller machines and two private offices in addition to a tellers'
and customer service area. The Bank has options to renew the lease in 2001.
The only office of Lisbon Bank and Trust Company is a two-story brick building
with approximately 3,000 square feet of banking retail space located on the
first floor. The building was extensively remodeled in 1996 and has one drive-up
lane and a walk-up 24-hour automatic teller machine.
Hills Bank Kalona in Kalona is a 6,400 square foot building that contains a
walk-up 24-hour automatic teller machine and one drive-up lane. This is an older
building that has been remodeled a number of times.
All of the above properties, with the exception of the East Washington Street
branch which is being leased, are owned by the Bank, free and clear of any
mortgages or other encumbrances of any type.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
The Bank holds no properties which are the subject of hazardous waste clean up
investigations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the three months
ended December 31, 1996.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
There is no established trading market for the Company's common stock. Its stock
is not listed with any exchange or quoted in an automated quotation system of a
registered securities association, nor is there any broker/dealer acting as a
market maker for its stock. A bid and ask price is quoted in an Iowa City local
paper and the quotes are provided by a local broker. The Company's stock is not
actively traded.
On April 17, 1996, the Company effected 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.
During 1996, the Company's stock transfer records reflect that 5,716 shares were
traded in a total of 29 transactions. While the Company has no direct knowledge
of the selling price for these shares, based upon information informally related
by shareholders, it believes that in 1996 the range of selling price of shares
was $33.34 to $40 per share. During 1995, 5,322 shares were traded in a total of
15 transactions. The 1995 price of these shares was believed to be in the $27.60
to $31.30 range. In 1994, 7,586 shares were traded in 13 transactions. As of
December 31, 1996, the Company has 1,004 shareholders.
The Company paid aggregate annual cash dividends in 1996 and 1995 of $1,391,000
and $1,268,000, respectively, or $.95 per share in 1996 and $.87 per share in
1995. In January 1997, the Company declared and paid a dividend of $1.05 per
share totaling $1,539,000. The decision to declare any such cash dividends in
the future and the amount thereof rests within the discretion of the Board of
Directors and will remain subject to, among other things, certain regulatory
restrictions imposed on the payment of dividends by the Banks, and the future
earnings, capital requirements and financial condition of the Company.
The Iowa Banking Act was amended effective January 1, 1991 to permit the
acquisition of assets of certain Iowa banks and Iowa-based bank holding
companies by regional bank holding companies subject to newly enacted statutory
criteria and the prior approval of the Iowa Superintendent of Banking
(Superintendent). The 1991 legislation changed but did not repeal the
pre-existing Iowa law which permits the acquisition of Iowa banks by bank
holding companies within limitations based upon the ratio of the aggregate
amount of Iowa-based time and demand deposits of the controlled banks to the
total of the time and demand deposits of all Iowa banks.
As a result of the 1991 amendments, Iowa law permitted an Iowa-based bank
holding company to exempt itself for a specific period of time from acquisition
by a regional bank holding company if a resolution was passed by its Baord of
Directors and filed with the Superintendent before January 1, 1991. On December
21, 1990, the Board of Directors adopted a resolution exempting the Company for
a period ending June 30, 1990, unless renewed as provided under Iowa law. A
certified copy of the resolution has been filed annually with the
Superintendent, the latest extending the exemption from December 31, 1995 to
December 31, 1996. This exemption is no longer available to the Comapny after
December 31, 1996. Prior to July 1, 1996, Iowa law also prohibited a regional
bank holding company from acquiting an Iowa-based bank holding company unless
each of its subsidiary banks has been in existence and continously operated as a
bank for five or more years. This provision was repealed effective July 1, 1996.
Beginning July 1, 1996, an out-of-state bank or out-of-state bank holding
company may not directly or indirectly acquire all or substantially all of the
assets of a bank located in Iowa unless the bank has been in continous existence
and operation for at least five years. On August 13, 1996, the Comapny
incorporated a de novo bank, Hill Bank Kalona, to acquire certain assets and
assume certain liabilities of the Kalona branch office in Baotman's Bank Iowa,
N.A. See Note 14 to the Company's audited financial statements.
PART II
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
1996 1995 1994 1993 1992
----------------------------------------------------------------
YEAR-END TOTALS
Total assets .................................. $539,452 $484,607 $444,912 $417,043 $393,581
Investment securities ......................... 132,635 121,536 110,050 126,894 106,073
Federal funds sold ............................ 1,107 16,080 7,500 3,768 19,893
Loans, net .................................... 368,264 318,546 300,821 262,976 248,776
Deposits ...................................... 450,061 392,257 372,838 353,486 334,052
Federal Home Loan Bank notes .................. 25,795 30,727 20,758 15,790 15,000
Redeemable common stock ....................... 6,416 5,271 5,210 4,616 4,234
Stockholders' equity .......................... 47,335 43,277 36,447 35,943 32,009
EARNINGS
Interest income ............................... $ 37,516 $ 33,978 $ 29,583 $ 29,031 $ 30,593
Interest expense .............................. 19,951 18,468 14,834 15,520 17,546
Provision for loan losses ..................... 754 722 641 921 1,059
Other income .................................. 3,868 3,438 3,311 4,181 3,433
Other expenses ................................ 12,057 10,975 10,640 10,299 9,163
Applicable income taxes ....................... 2,478 1,994 1,845 1,799 1,837
Net income .................................... 6,144 5,257 4,934 4,673 4,421
PER SHARE
Net income .................................... $ 4.15 $ 3.57 $ 3.36 $ 3.20 $ 3.04
Cash dividends ................................ 0.95 0.87 0.80 0.73 0.65
Book value as of December 31 .................. 34.30 29.57 24.91 24.57 22.01
Increase (decrease) in book value
due to:
ESOP obligation and debt ................... (4.38) (3.60) (3.56) (3.29) (3.18)
Unrealized gains (losses) on
debt securities .......................... 0.46 0.20 (1.77) 0.19 --
SELECTED RATIOS
Return on average assets ...................... 1.22% 1.14% 1.15% 1.16% 1.19%
Return on average equity ...................... 13.97 13.32 13.62 13.91 14.64
Net interest margin ........................... 3.86 3.74 3.85 3.73 3.91
Average stockholders' equity to
average total assets ....................... 8.72 8.58 8.47 8.32 8.12
Dividend payout ratio ......................... 22.62 24.12 23.83 22.92 21.38
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Position
Year End Amounts (In Thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------- ----------------------------------------------------------------
Loans, net of allowance for losses ............. $368,264 $318,546 $300,821 $262,976 $248,776
Investment securities .......................... 132,635 121,536 110,050 126,894 106,073
Deposits ....................................... 450,061 392,257 372,838 353,486 334,052
Federal Home Loan Bank notes ................... 25,795 30,727 20,758 15,790 15,000
Stockholders' equity ........................... 47,335 43,277 36,447 35,943 32,009
Total assets ................................... 539,452 484,607 444,912 417,043 393,581
Total assets increased 11.32% in 1996, compared to an increase of 8.92% in 1995.
The higher growth in assets in 1996 was attributable to strong loan demand and
the acquisition of approximately $39 million of investment securities, federal
funds sold and loans acquired in two purchase business transactions that
occurred in the third quarter. Approximately 42% of the total loan growth in
1996 was attributable to the purchase business transactions. Deposits increased
14.74% in 1996 compared to an increase of 5.21% in 1995. Of the $57.8 million
increase in 1996, approximately $39 million was deposits acquired in the
purchases.
Components of Net Income Per Share
Dollars Per Share 1996 1995 1994
- --------------------------------------------------------------------------
Net interest income ............................ $ 11.87 $ 10.53 $ 10.04
Provision for loan losses ...................... (0.51) (0.49) (0.44)
Noninterest income ............................. 2.61 2.34 2.25
Noninterest expense ............................ (8.14) (7.46) (7.24)
-----------------------
Income before income taxes ....... 5.83 4.92 4.61
Income tax expense ............................. (1.68) (1.35) (1.25)
-----------------------
Net income ....................... $ 4.15 $ 3.57 $ 3.36
=======================
Net income per share in 1996 resulted from increases in net interest income and
noninterest income, but were partially offset by higher noninterest expense.
Increases in 1995 compared to 1994 were similar. Both 1996 and 1995 benefited
from low provisions for loan losses, a result of a strong local economy and a
loan portfolio that is concentrated in well secured real estate loans.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Financial Review
Net Interest Income
Net interest income is the excess of the interest and fees received on
interest-earning assets over the interest expense of the interest-bearing
liabilities. The measure is shown on a tax-equivalent basis to make the interest
earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 1996 as follows:
INTEREST INCOME
----------------------------------------------------
Increase (Decrease)
Change In Change In ------------------------------
Average Average Volume Rate Net
Balance Rate Changes Changes Change
----------------------------------------------------
(Amounts in Thousands)
Loans, net ................................................. $ 26,038 0.04 $ 2,334 $ 126 $ 2,460
Taxable securities ......................................... 11,359 0.36 642 359 1,001
Nontaxable securities ...................................... 2,763 (0.43) 212 (87) 125
Federal funds sold ......................................... 179 (0.48) 10 (44) (34)
-------- ------------------------------
$ 40,339 $ 3,198 $ 354 $ 3,552
======== ==============================
INTEREST EXPENSE
----------------------------------------------------
Interest-bearing demand deposits ........................... $ 61 (0.20) $ 1 $ (76) $ (75)
Savings deposits ........................................... 28,703 0.04 1,020 30 1,050
Time deposits .............................................. 8,574 0.05 487 115 602
Securities sold under agreements to repurchase ............. (1,817) (0.05) (78) (5) (83)
FHLB borrowings ............................................ (51) (0.03) (3) (8) (11)
-------- ------------------------------
$ 35,470 $1,427 $ 56 $ 1,483
======== ==============================
Change in net interest income .............................. $1,771 $ 298 $2,069
==============================
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Yield on average interest-earning assets ........................................... 8.05% 7.98% 7.52%
Rate on average interest-bearing liabilities ....................................... 4.85 4.91 4.24
-------------------------------------
Net interest spread ................................................................ 3.20 3.07 3.28
Effect of noninterest-bearing funds ................................................ 0.66 0.67 0.57
-------------------------------------
Net interest margin (tax equivalent interest income divided by
average interest-earning assets) ................................................ 3.86% 3.74% 3.85%
=====================================
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Loan Losses
The provision for loan losses was $754,000, $722,000 and $641,000 for 1996, 1995
and 1994. Charge-offs, net of recoveries were $533,000 for 1996, $192,000 for
1995 and $206,000 for 1994.
The allowance for loan losses totaled $7,311,000 at December 31, 1996 compared
to $6,740,000 at December 31, 1995. The percentage of the allowance to
outstanding loans was 1.95% and 2.07% at December 31, 1996 and 1995,
respectively. Agricultural loans totaled $23,133,000 at December 31, 1996.
Management has an ongoing concern about agricultural loans due to unpredictable
commodity prices, the effects of weather on crop projection, and continued
uncertainties regarding government programs.
Therefore, the allowance for loan losses has been established to reflect this
concern.
The economy remains strong in the Banks' trade areas of Johnson, Washington and
Linn counties, Iowa. Unemployment remains low, the University of Iowa enrollment
is stable, the University of Iowa Hospitals and Clinics and, for the most part,
area businesses have maintained stable employment levels. The allowance for loan
losses is an estimate by the Banks to reserve for loan losses based upon
management's evaluation of the total loan portfolio and current economic
conditions. There are no known trends or uncertainties that are reasonably
likely to have a material effect on the allowance for loan losses in the
near-term.
Other Income
Dollars Per Share 1996 1995 1994
- ------------------------------------------------------------------------------
Real estate origination fees ........................ $ 0.22 $ 0.20 $ 0.27
Trust fees .......................................... 0.61 0.51 0.46
Deposit account charges and fees .................... 1.11 1.09 1.02
Other fees and charges .............................. 0.71 0.62 0.65
Investment securities (losses) ...................... (0.04) (0.08) (0.15)
----------------------
$ 2.61 $ 2.34 $ 2.25
======================
Total other income increased $430,000 or 12.5% in 1996, primarily due to
$153,000 more in trust fees and $154,000 more in other fees and charges. Total
other income increased $127,000 in 1995 compared to 1994, which was primarily
due to higher trust fees and deposit account charges. Trust fees have increased
in 1996, 1995 and 1994 because of new accounts and the effect of higher balances
under management. Other deposit account charges and fees were relatively flat in
1996 due to competitive pressures. There were $57,000 in investment securities
losses in 1996 following modest losses of $111,000 and $215,000 in 1995 and
1994, respectively.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Other Expenses
Dollars Per Share 1996 1995 1994
- --------------------------------------------------------------------------------
Salaries and employees benefits ......................... $ 4.15 $ 3.73 $ 3.49
Occupancy ............................................... 0.60 0.54 0.48
Furniture and fixtures .................................. 0.75 0.75 0.67
FDIC insurance .......................................... 0.01 0.29 0.54
Supplies and postage .................................... 0.55 0.49 0.44
Other ................................................... 2.08 1.66 1.62
--------------------
$ 8.14 $ 7.46 $ 7.24
====================
Total other expenses increased $1,082,000 or 9.86% in 1996 following increases
of 3.15% and 3.31% for 1995 and 1994, respectively. In 1996 an increase of
$645,000 in salaries and employee benefits was partially offset by a decrease of
$416,000 in FDIC insurance after the first full year in which the lower FDIC
insurance rates became effective. Salaries increased $487,000 in 1996, due
partly to an increase of 28 full-time equivalent employees, primarily
attributable to additional positions added at the acquired banks. The increase
in employees occurred in early July and late September 1996. For 1995 there were
eleven full-time equivalents added. Medical insurance has had only modest
increases in the past three years. Occupancy and furniture and fixtures had
total increase of $117,000 in 1996 due to the added locations and the
acquisition of new data processing equipment.
Income Taxes
Income tax expense was $2,478,000, $1,994,000 and $1,845,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The corresponding percentage of
tax expense compared to income before income taxes is 28.7% in 1996, 27.5% in
1995 and 27.2% in 1994.
Impact of Recently Issued Accounting Standards
The adoption of new accounting standards had no effect on financial position or
results of operations in 1996, and the adoption of several recently issued
standards is not expected to have a significant effect.
Liquidity and Capital Resources
An important factor in the earnings performance of the Banks is the ability to
maintain a proper balance between rate sensitive assets and rate sensitive
liabilities. Liquidity management involves the ability to meet the cash flow
requirements of depositors desiring to withdraw funds or borrowers needing
funds. The Banks maintain an asset/liability committee which meets at least
quarterly to review the interest rate sensitivity position and to review various
strategies as to interest rate risk management. In addition, the Banks use a
simulation model to review various assumptions relating to interest rate
movement. The model attempts to limit rate risk even if it appears the Banks'
asset and liability maturities are perfectly matched and a favorable interest
margin is present.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Interest Rate Sensitivity
At December 31, 1996, the Company's interest rate sensitivity report is as
follows (in thousands):
Repricing Days
Maturities ------------------------------------------------- More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
-------------------------------------------------------------------------------------------
Earning assets:
Federal funds sold ............ $ 1,107 $ -- $ -- $ -- $ -- $ -- $ 1,107
Investment
securities ................. -- 125 2,200 7,457 12,448 109,489 131,719
Loans ......................... -- 40,619 17,538 34,703 49,739 232,453 375,052
------------------------------------------------------------------------------------------
Total earning
assets ................ 1,107 40,744 19,738 42,160 62,187 341,942 507,878
------------------------------------------------------------------------------------------
Sources of funds:
Interest-bearing
checking and
savings accounts ........... 51,448 -- -- -- -- 106,606 158,054
Certificates of
deposit .................... -- 22,128 39,023 24,490 25,854 134,358 245,853
Other borrowings -
FHLB ....................... -- -- -- -- 5,000 20,795 25,795
Repurchase
agreements ................. 6,071 -- -- -- -- -- 6,071
-------------------------------------------------------------------------------------------
57,519 22,128 39,023 24,490 30,854 261,759 435,773
Other sources ................. -- -- -- -- -- 72,105 72,105
-------------------------------------------------------------------------------------------
Total sources ............ 57,519 22,128 39,023 24,490 30,854 333,864 507,878
-------------------------------------------------------------------------------------------
Repricing
differences ................ $(56,412) $18,616 $(19,285) $17,670 $31,333 $ 8,078 $ --
===========================================================================================
A portion of the interest-bearing checking, savings, and money market accounts
have been included in the above table as maturing immediately and the rest of
these deposits are shown as more than one year. The classifications are used
because the Banks' historical data indicates that these have been very stable
deposits without much interest rate fluctuation. Historically, these accounts
would not need to be adjusted upward as quickly in a period of rate increases so
the interest risk exposure would be less than the repricing schedule indicates.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Inflation
Inflation has an impact on the growth of total assets and has resulted in the
need to increase equity capital to maintain an appropriate equity to asset
ratio. The results of operations have been affected by inflation, but the effect
has been minimal.
Capital
As of December 31, 1996 and 1995, stockholders' equity before deducting for the
maximum cash obligation related to ESOP was $53,751,000 and $48,548,000,
respectively. This measure of equity as a percent of total assets was 9.96% at
December 31, 1996 and 10.02% at December 31, 1995. These ratios are competitive
with the Company's peers. As of December 31, 1996, total equity was 8.77% of
assets compared to 8.93% of assets at the prior year end. The ability of the
Company to pay dividends to its shareholders is dependent upon the earnings and
capital adequacy of the subsidiaries banks, which affects the Banks' dividends
to the Company. The Banks are subject to certain statutory and regulatory
restrictions on the amount they may pay in dividends. In order to maintain
acceptable capital ratios in the subsidiary banks, certain of their retained
earnings are not available for the payment of dividends. Retained earnings
available for the payment of dividends to the Company total approximately
$4,900,000 as of December 31, 1996.
The Company and the Banks are subject to the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the Banks are subject to Prompt
Corrective Action Rules as determined and enforced by the Federal Reserve. These
regulations establish minimum capital requirements which member banks must
maintain.
As of December 31, 1996, risk-based capital standards require 8% of
risk-weighted assets. At least half of that 8% must consist of Tier I core
capital (common stockholders' equity, noncumulative perpetual preferred stock,
and minority interest in the equity accounts of consolidated subsidiaries), and
the remainder may be Tier II supplementary capital (perpetual debt,
intermediate-term preferred stock, cumulative perpetual, long-term and
convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of
risk-weighted assets). Total risk-weighted assets are determined by weighing the
assets according to their risk characteristics. Certain off-balance sheet items
(such as standby letters of credit and firm loan commitments) are multiplied by
"credit conversion factors" to translate them into balance sheet equivalents
before assigning them risk weightings. Any bank having a capital ratio less than
the 8% minimum required level must, within 60 days, submit to the Federal
Reserve a plan describing the means and schedule by which the Bank shall achieve
the applicable minimum capital ratios.
A comparison of the Company's capital as of December 31, 1996 with minimum
requirements is presented below:
Minimum
Actual Requirements
-----------------------
Tier I Risk-Based Capital ........................ 14.01% 4%
Total Risk-Based Capital ......................... 15.27 8
Leverage Ratio ................................... 9.11 3
Each of the Banks is classified as "well capitalized" by FDIC capital
guidelines.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Commitments and Trends
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.
As of December 31, 1996, the Company is not aware of any known trends or
uncertainties which are expected that will have a material effect on the
financial condition of the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements are included on Pages 27 through 52. The Company does
not meet the requirements of Item 302 of Regulation S-K to include the
supplementary financial information required by that item.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Hills Bancorporation
Hills, Iowa
We have audited the accompanying consolidated balance sheets of Hills
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1996, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hills Bancorporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa
February 13, 1997
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In Thousands, Except Shares)
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks (Note 9) $ 15,036 $ 11,883
Investment securities (Note 2):
Available for sale (amortized cost 1996 $109,495; 1995 $99,621) 110,537 100,093
Held to maturity (fair value 1996 $22,232; 1995 $21,754) 22,098 21,443
Federal funds sold 1,107 16,080
Loans, net (Notes 3, 7 and 10) 368,264 318,546
Property and equipment, net (Note 4) 8,409 6,996
Accrued interest receivable 4,884 4,446
Deferred income taxes, net (Note 8) 1,359 1,474
Other assets 7,758 3,646
---------------------------------
$ 539,452 $ 484,607
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities
Noninterest-bearing deposits $ 46,154 $ 42,927
Interest-bearing deposits (Note 5) 403,907 349,330
---------------------------------
Total deposits 450,061 392,257
Securities sold under agreements to repurchase 6,071 10,019
Federal Home Loan Bank notes (Note 7) 25,795 30,727
Accrued interest payable 1,952 1,885
Other liabilities 1,822 1,171
---------------------------------
485,701 436,059
---------------------------------
Commitments and Contingencies (Notes 6 and 13)
Redeemable Common Stock Held By Employee Stock
Ownership Plan (ESOP) (Note 6) 6,416 5,271
---------------------------------
Stockholders' Equity (Note 9)
Capital stock, no par value; authorized 10,000,000 shares;
issued 1996 1,465,384 shares; 1995 1,463,604 shares 8,997 8,925
Retained earnings 44,078 39,325
Unrealized gains on investment securities, net 676 298
---------------------------------
53,751 48,548
Less maximum cash obligation related to ESOP shares (Note 6) 6,416 5,271
---------------------------------
47,335 43,277
---------------------------------
$ 539,452 $ 484,607
================================
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
(In Thousands, Except Per Share Amounts)
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 29,724 $ 27,236 $ 23,173
Interest on investment securities:
Taxable 6,190 5,189 5,158
Nontaxable 1,117 1,034 1,040
Interest on federal funds sold 485 519 212
--------------------------------------------
Total interest income 37,516 33,978 29,583
--------------------------------------------
Interest expense:
Interest on deposits 17,762 16,185 13,521
Interest on securities sold under agreements to repurchase 326 409 204
Interest on FHLB borrowings 1,863 1,874 1,109
--------------------------------------------
Total interest expense 19,951 18,468 14,834
--------------------------------------------
Net interest income 17,565 15,510 14,749
Provision for loan losses (Note 3) 754 722 641
--------------------------------------------
Net interest income after provision for loan losses 16,811 14,788 14,108
--------------------------------------------
Other income:
Loan origination fees 324 294 402
Trust fees 908 755 681
Deposit account charges and fees 1,645 1,606 1,500
Other fees and charges 1,048 894 943
Investment securities (losses) (Note 2) (57) (111) (215)
--------------------------------------------
3,868 3,438 3,311
--------------------------------------------
Other expenses:
Salaries and employee benefits 6,137 5,492 5,127
Occupancy 891 792 712
Furniture and equipment 1,117 1,099 989
F.D.I.C. insurance 8 424 793
Office supplies and postage 819 725 641
Other 3,085 2,443 2,378
--------------------------------------------
12,057 10,975 10,640
--------------------------------------------
Income before income taxes 8,622 7,251 6,779
Federal and state income taxes (Note 8) 2,478 1,994 1,845
--------------------------------------------
Net income $ 6,144 $ 5,257 $ 4,934
===========================================
Average common and common equivalent shares 1,479,352 1,472,784 1,469,345
===========================================
Earnings per common and common equivalent share $ 4.15 $ 3.57 $ 3.36
===========================================
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 6 AND 9)
Years Ended December 31, 1996, 1995 and 1994
(In Thousands, Except Share Amounts)
Less
Maximum
Unrealized Cash
Gains On Less Obligation
Investment ESOP Related
Capital Retained Securities, Debt To ESOP
Stock Earnings Net Guarantee Shares Total
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $ 8,898 $ 31,573 $ 283 $ (195) $ (4,616) $ 35,943
Issuance of 1,110 shares of
common stock 34 -- -- -- -- 34
Redemption of 657 shares
of common stock (17) -- -- -- -- (17)
Payment on debt of ESOP -- -- -- 195 -- 195
Change related to ESOP shares -- -- -- -- (594) (594)
Net income -- 4,934 -- -- -- 4,934
Cash dividends ($.80 per share) -- (1,171) -- -- -- (1,171)
Unrealized (losses) on investment
securities, net -- -- (2,877) -- -- (2,877)
------------------------------------------------------------------------
Balance, December 31, 1994 8,915 35,336 (2,594) -- (5,210) 36,447
Issuance of 609 shares of
common stock 20 -- -- -- -- 20
Redemption of 324 shares of
common stock (10) -- -- -- -- (10)
Change related to ESOP shares -- -- -- -- (61) (61)
Net income -- 5,257 -- -- -- 5,257
Cash dividends ($.87 per share) -- (1,268) -- -- -- (1,268)
Unrealized gains on investment
securities, net -- -- 2,892 -- -- 2,892
------------------------------------------------------------------------
Balance, December 31, 1995 8,925 39,325 298 -- (5,271) 43,277
Issuance of 1,936 shares of
common stock 77 -- -- -- -- 77
Redemption of 156 shares
of common stock (5) -- -- -- -- (5)
Change related to ESOP shares -- -- -- -- (1,145) (1,145)
Net income -- 6,144 -- -- -- 6,144
Cash dividends ($.95 per share) -- (1,391) -- -- -- (1,391)
Unrealized gains on investment
securities, net -- -- 378 -- -- 378
------------------------------------------------------------------------
Balance, December 31, 1996 $ 8,997 $ 44,078 $ 676 $ -- $ (6,416) $ 47,335
------------------------------------------------------------------------
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income .................................................................. $ 6,144 $ 5,257 $ 4,934
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................. 884 837 703
Amortization ............................................................. 133
Provision for loan losses ................................................ 754 722 641
Compensation paid by issuance of common stock ............................ 72 10 17
Deferred income taxes .................................................... (77) (238) (145)
(Increase) in accrued interest receivable ................................ (121) (670) (57)
Amortization of bond discount ............................................ 511 494 764
(Increase) in other assets ............................................... 1,589 (971) (14)
Increase in accrued interest and other liabilities ....................... 505 440 92
------------------------------
Net cash provided by operating activities ........................ 10,394 5,881 6,935
------------------------------
Cash Flows from Investing Activities Proceeds from maturities of investment
securities:
Available for sale ....................................................... 22,353 19,404 29,216
Held to maturity ......................................................... 4,069 2,653 2,674
Proceeds from sales of available-for-sale securities ........................ 10,988 11,013 8,961
Purchases of investment securities:
Available for sale ....................................................... (37,026) (35,563) (26,180)
Held to maturity ......................................................... (4,784) (4,896) (3,184)
Federal funds sold, net ..................................................... 26,421 (8,580) (3,732)
Loans made to customers, net of collections ................................. (29,807) (18,447) (38,485)
Purchases of property and equipment ......................................... (859) (1,483) (1,210)
Purchase of subsidiary banks, net of cash acquired (Note 14) ................ (7,163) -- --
------------------------------
Net cash (used in) investing activities .......................... (15,808) (35,899) (31,940)
------------------------------
Cash Flows from Financing Activities
Net increase in deposits .................................................... 18,938 19,419 19,352
Net increase (decrease) in securities sold under agreements
to repurchase ............................................................ (3,948) 2,976 2,554
Borrowings from FHLB ........................................................ 15,000 5,000
Payments on FHLB notes ...................................................... (5,032) (5,031) (32)
Dividends paid .............................................................. (1,391) (1,268) (1,171)
------------------------------
Net cash provided by financing activities ........................ 8,567 31,096 25,703
------------------------------
(Continued)
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (C ONTINUED)
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
1996 1995 1994
- -------------------------------------------------------------------------------------------
Increase in cash and due from banks .......... $ 3,153 $ 1,078 $ 698
Cash and due from banks:
Beginning ............................................... 11,883 10,805 10,107
----------------------------
Ending .................................................. $15,036 $11,883 $ 10,805
============================
Supplemental Disclosures
Cash payments for:
Interest paid to depositors and others ............... $17,848 $ 15,868 $13,417
Interest paid on other obligations ................... 2,189 2,263 1,313
Income taxes ......................................... 2,565 2,099 1,981
Noncash financing transactions:
Increase in stockholders' equity related to ESOP debt -- -- 195
Increase in maximum cash obligation related to
ESOP shares ........................................ 1,145 61 594
Net unrealized gains (losses) on investment securities 570 4,591 (4,593)
Purchase business acquisitions (Note 14)
See Notes to Financial Statements.
HILLS BANCORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a multi-bank
holding company engaged in the business of banking. The Company's three
wholly-owned subsidiary commercial banks are Hills Bank and Trust Company,
Hills, Iowa; Lisbon Bank and Trust Company, Lisbon, Iowa; and Hills Bank Kalona,
Kalona, Iowa. The Banks are all full-service commercial banks extending their
services to individuals, businesses, governmental units, and institutional
customers primarily in the communities of Hills, Iowa City, Coralville, North
Liberty, Lisbon and Kalona, Iowa.
The Banks compete with other financial institutions and nonfinancial
institutions providing similar financial products. Although the loan activity of
the Banks is diversified with commercial and agricultural loans, real estate
loans, automobile, installment and other consumer loans, each Bank's credit is
concentrated in real estate loans.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investment securities: Held-to-maturity securities consist solely of debt
securities which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities and marketable equity
securities not classified as trading or held to maturity. Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses,
net of the related deferred tax effect, are reported as a separate component of
stockholders' equity. There were no trading securities as of December 31, 1996
and 1995.
Premiums and discounts on held-to-maturity debt securities are amortized over
the contractual lives of those securities. The method of amortization results in
a constant effective yield on those securities (the interest method). Interest
on debt securities is recognized in income as accrued. Realized gains and losses
are included in income, determined on the basis of the cost of the specific
securities sold.
Loans: Loans are stated at the amount of unpaid principal, reduced by the
allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance when management
believes the collectibility of principal is unlikely. The allowance for loan
losses is maintained at a level considered adequate to provide for losses that
can be reasonably anticipated. The allowance is increased by provisions charged
to expense and is reduced by net charge-offs. The Banks make continuous reviews
of the loan portfolio and considers current economic conditions, historical loss
experience, review of specific problem loans and other factors in determining
the adequacy of the allowance.
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by FASB Statement No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," loans are considered
impaired when, based on current information and events, it is probable the
Company will not be able to collect all amounts due. The portion of the
allowance for loan losses applicable to impaired loans has been computed based
on the present value of the estimated future cash flows of interest and
principal discounted at the loans effective interest rate or on the fair value
of the collateral for collateral dependent loans. The entire change in present
value of expected cash flows of impaired loans or of collateral value is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest income on impaired loans is recognized on
the cash basis.
The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due.
Loan fees and origination costs are reflected in the statement of income as
collected or incurred. Compared to the net deferral method, this practice had no
significant effect on income.
Property and equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using primarily
declining-balance methods over the estimated useful lives of 7-40 years for
buildings and improvements and 3-20 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the liability
method whereby deferred tax assets are recognized for deductible temporary
differences and net operating loss, and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some or all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Intangible assets: Intangible assets consist principally of goodwill which
represents the excess of cost over fair value of net assets acquired in business
combinations of two banks in 1996 accounted for under the purchase method.
Goodwill is amortized on a straight-line basis over the estimated period to be
benefited, 15 years. The carrying value of goodwill is reviewed periodically for
impairment. Goodwill totaled $3,804,000, net of accumulated amortization of
$93,000, as of December 31, 1996 and is included in other assets.
Stock options: Compensation expense for stock issued through stock options plans
is accounted for using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this
method, compensation is measured as the difference between the estimated market
value of the stock at the date of award less the amount required to be paid for
the stock. The difference, if any, is charged to expense over the periods of
service.
Common stock held by ESOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares are
not readily traded and could be put to the Company for cash.
Trust assets: Trust assets, other than cash deposits, held by the Banks in
fiduciary or agency capacities for its customers are not included in these
statements since they are not assets of the Company.
Earnings per common and common equivalent shares: Earnings per common and common
equivalent share are determined by dividing net income by the weighted average
number of common and common equivalent shares outstanding during the year.
Dilutive common stock equivalents related to the stock option plan were
determined using the treasury stock method. Earnings per share and common
equivalent shares assuming full dilution are the same as earnings per common and
common equivalent share.
Statement of cash flows: 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 loans originated by the Banks, deposits
and federal funds purchased and sold are reported net.
Recently issued accounting standards: The Company believes the adoption of
recently issued accounting standards will not have a material or significant
impact on its consolidated financial statements.
Fair value of financial instruments: FASB Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Off-balance sheet instruments: Fair values for outstanding letters of credit are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The fair value of the outstanding letters of credit is not believed to
be significant at December 31, 1996. Unfunded loan commitments are not valued
since the loans are generally priced at market at the time of funding.
Cash and cash equivalents and federal funds sold: The carrying amounts reported
in the balance sheet for cash and short-term instruments approximate their fair
values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans are determined using estimated future cash flows,
discounted at the interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying
amounts which represent the amount payable on demand. The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements approximate their fair values.
Long-term borrowings: The fair values of the Banks' long-term borrowings (other
than deposits) are estimated using discounted cash flow analyses, based on the
Banks' current incremental borrowing rates for similar types of borrowing
arrangements.
Note 2. Investment Securities
The amortized cost and fair value of investment securities available for sale
are as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------------------------------------------------------
(Amounts In Thousands)
December 31, 1996:
U. S. Treasury $ 45,100 $ 220 $ (107) $ 45,213
U. S. Government agencies and
corporations 57,405 295 (303) 57,397
State and political subdivisions 1,329 20 1,349
Other 5,661 920 (3) 6,578
-----------------------------------------------------------
Total $ 109,495 $ 1,455 $ (413) $ 110,537
===========================================================
December 31, 1995:
U. S. Treasury $ 41,094 $ 330 $ (149) $ 41,275
U. S. Government agencies and
corporations 55,246 511 (220) 55,537
Other 3,281 -- -- 3,281
-----------------------------------------------------------
Total $ 99,621 $ 841 $ (369) $ 100,093
===========================================================
The amortized cost and fair value of debt securities held to maturity are as
follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Gains Fair Value
-----------------------------------------
(Amounts In Thousands)
December 31, 1996:
States and political subdivisions . $ 22,098 $ 239 $ (105) $22,232
========================================
December 31, 1995:
States and political subdivisions . $ 21,443 $ 387 $ (76) $21,754
========================================
Gross losses realized on sales of investment securities totaled $57,000,
$111,000 and $215,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The contractual maturity distribution of investment securities as of December
31, 1996 is summarized as follows:
Available for Sale Held to Maturity
------------------------ ------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------------------------------------------------
(Amounts In Thousands)
Due in one year or less ................................. $ 20,715 $ 21,664 $ 2,231 $ 2,246
Due after one year through five years ................... 86,702 86,811 10,792 10,872
Due after five years through ten years .................. 917 928 9,010 9,044
Due over ten years ...................................... 1,161 1,134 65 70
-----------------------------------------------------
Total ..................................... $109,495 $110,537 $ 22,098 $ 22,232
=====================================================
As of December 31, 1996 investment securities with a carrying value of $27,616
were pledged to collateralize public and trust deposits, short-term borrowings,
and for other purposes, as required or permitted by law.
Note 3. Loans
The composition of loans is as follows:
December 31,
----------------------
1996 1995
----------------------
(Amounts In Thousands)
Agricultural ......................................... $ 23,133 $ 19,000
Commercial and financial ............................. 30,650 26,810
Real estate:
Construction ...................................... 8,846 7,937
Mortgage .......................................... 279,134 239,899
Loans to individuals ................................. 33,812 31,640
------------------
375,575 325,286
Less allowance for loan losses ....................... 7,311 6,740
------------------
$368,264 $ 318,546
==================
Changes in the allowance for loan losses are as follows:
Year Ended
December 31,
--------------------------
1996 1995 1994
--------------------------
(Amounts In Thousands)
Balance, beginning ...................... $6,740 $6,210 $5,775
Provision charged to expenses ........ 754 722 641
Recoveries ........................... 438 730 854
Allowances of acquired banks ......... 350 -- --
Loans charged off .................... (971) (922) (1,060)
--------------------------
Balance, ending ......................... $7,311 $6,740 $6,210
==========================
Information about impaired loans as of and for the years ended December 31, 1996
and 1995 is as follows:
1996 1995
----------------------
(Amounts In Thousands)
Loans receivable for which there is a
related allowance for credit losses............ $ -- $ --
Loans receivable for which there is no
related allowance for credit losses ........... 7,811 5,465
-------------------
Total impaired loans ................. $7,811 $5,465
-------------------
Related allowance for credit losses ................ $ -- $ --
Average balance .................................... 6,438 5,617
Interest income recognized ......................... 547 491
No allowance for credit losses has been recognized for impaired loans because
the loans have been charged off to the net present value of the future cash
flows or to the fair value of the collateral if the loan is collateral
dependent.
Note 4. Property and Equipment
The major classes of property and equipment and the total accumulated
depreciation are as follows:
December 31,
----------------------
1996 1995
----------------------
(Amounts In Thousands)
Land .................................... $ 1,700 $ 1,362
Buildings and improvements .............. 6,475 5,358
Furniture and equipment ................. 8,007 6,900
--------------------
16,182 13,620
Less accumulated depreciation ........... 7,773 6,624
--------------------
Net ....................... $ 8,409 $ 6,996
====================
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows:
December 31,
----------------------
1996 1995
----------------------
(Amounts In Thousands)
NOW and other demand .................................. $ 43,017 $ 35,463
Savings ............................................... 115,037 85,502
Time, $100,000 and over ............................... 32,635 29,451
Other time ............................................ 213,218 198,914
------------------
$403,907 $349,330
==================
Note 6. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (the "Plan") established to
provide retirement benefits for its employees. The Plan borrowed $1,953,000 from
a bank in 1985 and acquired 172,200 shares of the Company's stock, which were
pledged as collateral on the bank note. The Company committed to annual ESOP
contributions sufficient to service the debt until the debt was retired in 1994
and has since made discretionary cash contributions.
The Company's contribution to the Plan totaled $42,000, $76,000 and $71,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
In the event a terminated plan participant desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at their fair market value. To the extent that shares of common
stock held by the ESOP are not readily traded, a sponsor must reflect the
maximum cash obligation related to those securities outside of stockholders'
equity. As of December 31, 1996, 160,401 shares held by the ESOP, at a fair
value of $40 per share, have been reclassified from stockholders' equity to
liabilities.
The Company has a profit-sharing plan with a 401(k) feature which provides for
discretionary annual contributions in amounts to be determined by the Board of
Directors. The profit-sharing contribution totaled $340,000, $419,000 and
$464,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company has a Stock Incentive Plan for certain key employees and directors
whereby 130,800 shares of common stock have been reserved for awards in the form
of stock options or stock awards. A Stock Option Committee grants options at
prices equal to the fair value of the stock at the date of the grant. Options
expire 10 years from the date of the grant. Directors may exercise options
immediately and officers' rights under the plan vest over a five-year period
from the date of the grant. Additional compensation is accrued equivalent to the
amount of dividends that would have been paid on the stock had the options been
exercised. Such compensation is payable upon exercise of the options.
A summary of the stock option transactions are as follows:
Weighted
Average
Number Exercise
Of Shares Price
------------------------
Balance, December 31, 1994 ................... 46,569 $ 25.76
Exercised ................................. -- --
Forfeited ................................. -- --
------
Balance, December 31, 1995 ................... 46,569 25.76
Exercised ................................. -- --
Forfeited ................................. -- --
-----------------------
Balance, December 31, 1996 ................... 46,569 $ 25.76
=======================
As of December 31, 1996, options for 22,605 shares of common stock were
exercisable at a weighted average price of $25.33. The range of exercise prices
is from $25.33 to $26.17 and the weighted average contractual life of all stock
options outstanding as of December 31, 1996 is 6.5 years.
The Committee is also authorized to grant awards of common stock and authorized
the issuance of 1,936, 609 and 1,110 shares of common stock to a group of
employees in 1996, 1995 and 1994, respectively.
Note 7. Federal Home Loan Bank Borrowings
As of December 31, 1996, the borrowings were as follows:
(In Thousands)
--------------
Due August 29, 1997, 6.60% ................................. $ 5,000
Due June 5, 1998, 5.74% .................................... 10,000
Due August 5, 1999, 6.57% .................................. 5,000
Due February 22, 2000, 7.73% ............................... 5,000
Due August 17, 2005, 7.12% ................................. 100
Due August 11, 2008, 6.00% ................................. 695
-------
$25,795
=======
The borrowings are collateralized by 1-4 family mortgage loans with a face
amount of $38,693,000. As of December 31, 1996, the Company held Federal Home
Loan Bank stock with a cost of $3,398,000 which is included in investment
securities.
Note 8. Income Taxes
Income taxes for the years ended December 31, 1996, 1995 and 1994 are summarized
as follows:
1996 1995 1994
---------------------------
(Amounts In Thousands)
Current:
Federal ............................... $ 2,098 $ 1,828 $ 1,630
State ................................. 457 404 360
Deferred ................................. (77) (238) (145)
---------------------------
$ 2,478 $ 1,994 $ 1,845
===========================
Deferred income tax liabilities and assets arose from the following temporary
differences:
December 31,
------------------------
1996 1995 1994
------------------------
(Amounts In Thousands)
Deferred income tax assets:
Unrealized losses on debt securities .... $ -- $ -- $1,525
Allowance for loan losses ............... 2,264 2,135 1,938
Certain accrued expenses ................ 205 166 107
Other ................................... 7 43 24
------------------------
Gross tax assets ............. 2,476 2,344 3,594
------------------------
Deferred income tax liabilities:
Property and equipment .................. 621 591 570
FHLB dividends .......................... 130 105 80
Unrealized gains on debt securities ..... 366 174 --
Other ................................... 9 -- --
------------------------
Gross tax liabilities ........ 1,117 870 659
------------------------
Net deferred income tax asset $1,359 $1,474 $2,935
========================
The net change in the deferred income taxes for the years ended December 31,
1996, 1995 and 1994 is reflected in the financial statements as follows:
Year Ended December 31,
-----------------------------
1996 1995 1994
-----------------------------
(Amounts In Thousands)
Statement of income ............................ $ (77) $ (238) $ (145)
Statement of stockholders' equity .............. 192 1,699 (1,715)
-----------------------------
$ 115 $ 1,461 $ (1,860)
=============================
The income tax provisions for the years ended December 31, 1996, 1995 and 1994
are less than the amounts computed by applying the maximum effective federal
income tax rate to the income before income taxes because of the following
items:
1996 1995 1994
------------------------- ------------------------- ------------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------------------- ------------------------- ------------------------
(Amounts In Thousands)
Expected provision .............. $ 2,931 34.0% $ 2,465 34.0% $ 2,305 34.0%
Tax-exempt interest ............. (539) (6.3) (530) (7.3) (551) (8.1)
Interest expense limitation ..... 95 1.1 87 1.2 75 1.1
State income taxes, net of
federal income tax benefit ... 315 3.7 245 3.4 225 3.3
Income tax credits .............. (344) (4.0) (250) (3.5) (195) (2.9)
Other ........................... 20 0.2 (23) (0.3) (14) (0.2)
------------------------------------------------------------------------------------------
$ 2,478 28.7% $ 1,994 27.5% $ 1,845 27.2%
==========================================================================================
Note 9. Regulatory Capital Requirements, Restrictions on Subsidiary
Dividends and Cash Restrictions
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk-based capital standards include requirements for a minimum Tier 1 capital
to assets ratio (leverage ratio). In addition, regulatory agencies consider the
published capital levels as minimum levels and may require a financial
institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 1996 with the minimum
requirements is presented below.
Minimum
Actual Requirements
-------------------------
Tier 1 Risk-Based Capital ..................... 14.01% 4.00%
Total Risk-Based Capital ...................... 15.27 8.00
Leverage Ratio ................................ 9.11 3.00
According to FDIC capital guidelines, the Banks are considered to be "Well
Capitalized."
The ability of the Company to pay dividends to its stockholders is dependent
upon dividends paid by the Banks. The Banks are subject to certain statutory and
regulatory restrictions on the amount it may pay in dividends. To maintain
acceptable capital ratios in the Banks, certain of their retained earnings are
not available for the payment of dividends. To maintain a ratio of capital to
assets of 8%, retained earnings which could be available for the payment of
dividends to the Company total approximately $4,900,000 as of December 31, 1996.
The Bank is required to maintain reserve balances in cash or with the Federal
Reserve Bank. Reserve balances totaled $3,974,000 and $3,389,000 as of December
31, 1996 and 1995, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and companies with which they are affiliated
and certain principal officers are customers of, and have banking transactions
with, the Banks in the ordinary course of business. Such indebtedness has been
incurred on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons.
The following is an analysis of the changes in the loans to related parties
during the years ended December 31, 1996 and 1995:
Year Ended December 31,
-----------------------
1996 1995
----------------------
(Amounts In Thousands)
Balance, beginning .............. $ 9,548 $ 9,011
Advances ..................... 1,502 1,327
Collections .................. (1,818) (790)
-----------------
Balance, ending ................. $ 9,232 $ 9,548
=================
Deposits from related parties are accepted subject to the same interest rates
and terms as those from nonrelated parties.
Note 11. Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 are as follows:
1996 1995
------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------------------------------------------------
(Amounts In Thousands)
Cash and due from banks ............................ $ 15,036 $ 15,036 $ 11,883 $ 11,883
Federal funds sold ................................. 1,107 1,107 16,080 16,080
Investment securities .............................. 132,635 132,769 121,536 121,847
Loans .............................................. 368,264 374,804 318,546 321,553
Accrued interest receivable ........................ 4,884 4,884 4,446 4,446
Deposits ........................................... 450,061 451,114 392,257 394,390
Securities sold under agreements
to repurchase ................................... 6,071 6,071 10,019 10,019
Borrowings from Federal Home Loan
Bank ............................................ 25,795 26,629 30,727 30,973
Accrued interest payable ........................... 1,952 1,952 1,885 1,885
Face Face
Amount Amount
-------- --------
Off-balance sheet instruments:
Loan commitments $ 72,322 $ 50,456
Letters of credit 9,583 5,822
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company
only):
BALANCE SHEETS
December 31, 1996 and 1995
(Amounts In Thousands)
ASSETS 1996 1995
- --------------------------------------------------------------------------
Cash ................................................... $ 294 $ 316
Investment securities available for sale ............... 1,181 300
Investment in subsidiary banks ......................... 52,355 47,727
Other assets ........................................... 693 205
----------------
Total assets ............................. $54,523 $48,548
================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------
Liabilities ............................................ $ 772 $ --
----------------
Redeemable common stock held by ESOP ................... 6,416 5,271
----------------
Stockholders' equity:
Capital stock ....................................... 8,997 8,925
Retained earnings ................................... 44,078 39,325
Unrealized gains on investment securities, net ...... 676 298
----------------
53,751 48,548
Less maximum cash obligation related to ESOP shares . 6,416 5,271
----------------
Total stockholders' equity ............... 47,335 43,277
----------------
Total liabilities and stockholders' equity $54,523 $48,548
================
Note 12. Parent Company Only Financial Information (Continued)
STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
(Amounts In Thousands)
1996 1995 1994
- ------------------------------------------------------------------------------------
Interest on investment securities ..................... $ 15 $ 20 $ 11
Dividends received from subsidiaries .................. 9,422 1,272 1,212
Operating expenses .................................... (67) (20) (20)
--------------------------
Income before income taxes and equity
in subsidiaries' undistributed income . 9,370 1,272 1,203
Income tax benefit .................................... 22 2 5
--------------------------
9,392 1,274 1,208
Equity in subsidiaries' undistributed income .......... (3,248) 3,983 3,726
--------------------------
Net income .............................. $6,144 $5,257 $4,934
==========================
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(Amounts In Thousands)
1996 1995 1994
--------------------------
Cash flows from operating activities:
Net income ......................................... $6,144 $5,257 $4,934
Noncash items included in net income:
Undistributed earnings of subsidiaries .......... 3,248 (3,983) (3,726)
(Increase) decrease in other assets ............. (414) 39 123
Increase in liabilities ......................... 464 -- --
--------------------------
Net cash provided by operating activities 9,442 1,313 1,331
--------------------------
Cash flows from investing activities:
Investment in subsidiary banks ..................... (8,073) -- --
Proceeds from maturities of investment securities .. 300 300 300
Purchase of investment securities .................. (300) (300) (300)
--------------------------
Net cash (used in) investing activities . (8,073) -- --
--------------------------
Cash flows (used in) financing activities,
cash dividends paid ................................ (1,391) (1,268) (1,171)
--------------------------
Increase (decrease) in cash ............. (22) 45 160
Cash balance:
Beginning .......................................... 316 271 111
--------------------------
Ending ............................................. $ 294 $ 316 $ 271
==========================
Note 13. Commitments and Contingencies
Concentrations of credit risk: All of the Banks' loans, commitments to extend
credit, unused lines of credit and outstanding letters of credit have been
granted to customers within each Bank's market area. Investments in securities
issued by state and political subdivisions within the state of Iowa totaled
approximately $11,006,000. The concentrations of credit by type of loan are set
forth in Note 3. Outstanding letters of credit were granted primarily to
commercial borrowers. Although the Banks have a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economic conditions in Johnson County, Iowa.
Contingencies: In the normal course of business, the Banks are involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the
accompanying financial statements.
Financial instruments with off-balance sheet risk: The Banks are party to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, credit card participations and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, credit card
participations and standby letters of credit is represented by the contractual
amount of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. A summary of the Banks' commitments at December 31, 1996 and 1995
is as follows:
1996 1995
---------------
(Amounts In
Thousands)
Firm loan commitments and unused portion of lines of credit:
Home equity loans ....................................... $ 3,979 $ 2,333
Credit card participants ................................ 6,336 5,123
Commercial, real estate and home construction ........... 23,862 18,103
Commercial lines ........................................ 38,145 24,897
Outstanding letters of credit .............................. 9,583 5,822
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties. Credit card participations are the unused portion of the holders'
credit limits. Such amounts represent the maximum amount of additional unsecured
borrowings.
Outstanding letters of credit are the conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party and
collateralize the customer's borrowing arrangement with other creditors. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Banks deem necessary.
Note 14. Business Acquisitions
Effective July 1, 1996, the Company acquired for cash all of the outstanding
shares of LBC, Inc., which owned 100% of the outstanding shares of Alliance
Bancorporation, which held 100% of the outstanding shares of the Lisbon Bank and
Trust Company, Lisbon, Iowa. The total acquisition cost was $3,042,000. The
excess of the total acquisition cost over the fair value of the net assets
acquired of $1,373,000 is being amortized over 15 years by the straight-line
method.
The Company chartered a new subsidiary bank, Hills Bank Kalona, and on September
20, 1996, the subsidiary bank acquired cash, certain assets and assumed the
deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. The total
acquisition cost was $5,031,000. The excess of the cost over the fair value of
the net assets acquired was $2,523,000 and is being amortized over 15 years by
the straight-line method.
The acquisitions were accounted for as purchases and the results of operations
since the acquisition dates are included in the consolidated financial
statements.
Unaudited proforma net income for 1996, 1995 and 1994, as though the Banks had
been acquired as of January 1, 1994, is not significantly different than
reported net income of the Company after consideration of goodwill amortization
and imputed interest on borrowed funds.
A summary of the net assets acquired of these two institutions is as follows:
(Amounts
In
Thousands)
----------
Cash purchase price .......................................... $ 8,073
--------
Assets acquired:
Cash and due from banks ................................... $ 910
Investment securities available for sale .................. 6,640
Federal funds sold ........................................ 11,448
Loans ..................................................... 20,665
Property and equipment .................................... 1,438
Accrued interest receivable ............................... 317
Intangible assets ......................................... 3,896
Other assets .............................................. 1,938
Liabilities assumed:
Deposits and accrued interest ............................. (39,019)
Borrowings from FHLB ...................................... (100)
Other liabilities ......................................... (60)
--------
$ 8,073
========
Note 15. Common Stock Dividend
On April 17, 1996, the Company effected 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 II
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is contained in the Registrant's Proxy
Statement under the heading "Information Concerning Nominees for Election as
Directors" and "Information Concerning Directors Other Than Nominees," which
sections are incorporated herein by this reference.
The following table sets forth the name, age and principal occupation of the
Executive Officers of the Registrant and Executive Officers of the Bank. All
officers of the Registrant and the Bank are elected annually for one-year terms
of office.
Year First
Elected
Position With Registrant Or Bank And Officer Of
Principal Occupation And Employment Registrant
Name Age During The Past Five Years (Bank)
- -------------------------------------------------------------------------------------------------------------------------------
Dwight O. Seegmiller 44 Director of Registrant and Bank; President, Registrant and Bank 1986 (1975)
William H. Olin, D.D.S. 73 Director of Registrant and Bank; Chairman of the Board, Bank; 1984
Vice President of the Registrant; Dentist, University of Iowa Hospitals
and Clinics
Earlis Rohret 72 Director of Registrant and Bank; Vice President of the Registrant; Farmer 1984
James G. Pratt 48 Treasurer of Registrant; Senior Vice President and Controller of Bank 1985 (1982)
from January 1986 to present
Thomas J. Cilek 50 Secretary of Registrant; Senior Vice President of Bank from August 1986 1988 (1986)
to present
PART III
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Executive Compensation and Benefits," which section
is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management" and "Report on Executive Compensation," which sections are
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Loans To and Certain Other Transactions With
Executive Officers and Directors," which section is incorporated herein by this
reference.
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
Form 10-K
Reference
-----------
(a) 1. Financial Statements
Independent auditor's report on the financial statements
Consolidated balance sheets as of December 31, 1996 and 1995
Consolidated statements of income for the years ended December 31,
1996, 1995 and 1994
Consolidated statements of stockholders' equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995 and 1994
Notes to financial statements
(a) 2. Financial Statements Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits
Exhibit 3 - Articles of Incorporation and Bylaws filed as Exhibit 3 of
Form 10-K for the year ended December 31, 1993 are incorporated by
reference.
Exhibit 10(a) - Material Contract (Employee Stock Ownership Plan) filed
as Exhibit 10(a) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(b) - Material Contract (1993 Stock Incentive Plan) filed as
Exhibit 10(b) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(c) - Material contract (1995 Deferred Compensation Plans)
filed as Exhibit 10(c) in Form 10-K for the year ended December 31,
1995 is incorporated by reference.
Exhibit 11 - Statement Re Computation of Earnings Per Common and Common
Equivalent Share is attached on Page 59.
Exhibit 21 - Subsidiaries of the Registrant is attached on Page 60.
Exhibit 23 - Consent of Accountants is attached on Page 61.
Exhibit 27 - Financial Data Schedule is attached on Pages 62 and 63.
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December
31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 27, 1997 By /s/ Dwight O. Seegmiller
---------------------- --------------------------------------------
Dwight O. Seegmiller, Director and President
Date March 27, 1997 By /s/ James G. Pratt
---------------------- --------------------------------------------
James G. Pratt, Treasurer and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date March 27, 1997 By /s/ Willis M. Bywater
---------------------- --------------------------------------------
Willis M. Bywater, Director
Date March 27, 1997 By /s/ Thomas J. Gill
---------------------- --------------------------------------------
Thomas J. Gill, Director
Date March 27, 1997 By /s/ Donald H. Gringer
---------------------- --------------------------------------------
Donald H. Gringer, Director
Date March 27, 1997 By /s/ Richard W. Oberman
---------------------- --------------------------------------------
Richard W. Oberman, Director
Date March 27, 1997 By /s/ William H. Olin
---------------------- --------------------------------------------
William H. Olin, Director
Date March 27, 1997 By /s/ Theodore H. Pacha
---------------------- --------------------------------------------
Theodore H. Pacha, Director
Date March 27, 1997 By /s/ Ann M. Rhodes
---------------------- --------------------------------------------
Ann M. Rhodes, Director
Date March 27, 1997 By /s/ Earlis Rohet
---------------------- --------------------------------------------
Earlis Rohet, Director
Date March 27, 1997 By /s/ Ronald E. Stutsman
---------------------- --------------------------------------------
Ronald E. Stutsman, Director
Date March 27, 1997 By /s/ Earl M. Yoder
---------------------- --------------------------------------------
Earl M. Yoder, Director
HILLS BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX
Page Number
In The Sequential
Exhibit Numbering System
Number Description For 1996 Form 10-K
- --------------------------------------------------------------------------------
11 Statement Re Computation of Earnings Per
Common and Common Equivalent Share
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule