FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa I.R.S. Employer Identification
------------------------------
No. 42-1208067
131 MAIN STREET, HILLS, IOWA
Telephone number: (319) 679-2291
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
SHARES OUTSTANDING
CLASS AT JULY 31, 1997
- -------------------------- ------------------
Common Stock, no par value 1,467,259
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Consolidated balance sheets, June 30, 1997
(unaudited) and December 31, 1996
Consolidated statements of income, (unaudited) for
three and six months ended June 30, 1997 and 1996
Consolidated statement of stockholders' equity,
(unaudited) for three and six months ended June 30,
1997 and 1996
Consolidated statements of cash flows (unaudited) for
three and six months ended June 30, 1997 and 1996
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of financial
condition and results of operations
Part II
OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to vote of security holders
Item 5. Other information
Item 6. Exhibits and reports on Form 8-K
COMPUTATION OF EARNINGS PER SHARE
SIGNATURES
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30,
1997 December 31,
Unaudited 1996*
--------- ------------
ASSETS
Cash and due from banks .................................. $ 17,807 $ 15,036
Investment securities:
Available for sale (amortized cost
June 30, 1997 $109,865;
December 31, 1996 $109,495) ......................... 109,995 110,537
Held to maturity (fair value
June 30, 1997 $24,271;
December 31, 1996 $22,232) .......................... 24,063 22,098
Federal funds sold ....................................... 1,712 1,107
Loans, net ............................................... 399,856 368,264
Property and equipment, net .............................. 8,349 8,409
Accrued interest receivable .............................. 5,396 4,884
Deferred income taxes, net ............................... 1,668 1,359
Other assets ............................................. 7,924 7,758
-------- --------
$576,770 $539,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ............................. $ 51,947 $ 46,154
Interest-bearing deposits ................................ 413,697 403,907
-------- --------
Total deposits ........................................ $465,644 $450,061
Federal funds purchased and securities
sold under agreements to repurchase ................... 6,084 6,071
Federal Home Loan Bank notes ............................. 45,795 25,795
Accrued interest payable ................................. 1,917 1,952
Other liabilities ........................................ 2,120 1,822
-------- --------
$521,560 $485,701
-------- --------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ................................................ $ 6,897 $ 6,416
-------- --------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued June 30, 1997- 1,467,259
shares; issued December 31, 1996 -
1,465,384 shares ...................................... $ 9,042 $ 8,997
Retained earnings ........................................ 46,086 44,078
Unrealized gains (losses) on investment securities, net .. 82 676
-------- --------
$ 55,210 $ 53,751
Less, maximum cash obligation related to
ESOP shares ........................................... 6,897 6,416
-------- --------
$ 48,313 $ 47,335
-------- --------
$576,770 $539,452
======== ========
* Derived from audited financial statements.
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 1997 and 1996
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------------------- --------------------
Interest Income:
Interest and fees on loans .................... $ 8,515 $ 7,123 $ 16,556 $ 14,122
Interest on investment securities
Taxable .............................. 1,693 1,478 3,366 2,896
Non-taxable ......................... 298 269 592 546
Other interest income ......................... 39 133 80 301
--------------------------------------------
Total interest income ......................... 10,545 9,003 20,594 17,865
--------------------------------------------
Interest Expense:
Interest on deposits .......................... 4,719 4,253 9,322 8,496
Interest on securities sold under
agreements to repurchase ................... 109 67 198 167
Interest on FHLB notes......................... 730 488 1,260 977
--------------------------------------------
Total interest expense ........................ 5,558 4,808 10,780 9,640
--------------------------------------------
Net interest income ........................... 4,987 4,195 9,814 8,225
Provision for loan losses .............................. 395 180 590 360
--------------------------------------------
Net interest income after provision
for loan losses ............................. 4,592 4,015 9,224 7,865
--------------------------------------------
Other income:
Gain on disposition of marketable equity
security ................................... 1,054 -- 1,054 --
Real estate origination fees .................. 61 94 120 205
Trust fees .................................... 321 223 625 408
Deposit account charges and fees .............. 470 397 903 772
Other fees and charges ........................ 300 246 629 527
--------------------------------------------
Other expenses:
Salaries and employee benefits ................ 1,797 1,513 3,587 3,063
Occupancy expenses ............................ 241 207 487 419
Furniture and equipment ....................... 343 254 670 520
Contributions ................................. 1,073 1 1,092 18
Office supplies and postage ................... 187 186 418 362
Other operating ............................... 867 618 1,714 1,204
--------------------------------------------
4,508 2,779 7,968 5,586
--------------------------------------------
Income before income taxes .................... 2,290 2,196 4,587 4,191
Federal and state income taxes ......................... 355 641 1,041 1,210
--------------------------------------------
Net income .................................... $ 1,935 $ 1,555 $ 3,546 $ 2,981
============================================
Per common share: Net income ........................... 1.31 1.05 2.40 2.02
Dividend, January ........... -- -- 1.05 .95
Weighted average
of common
outstanding stock ......... 1,480,933 1,474,199 1,480,199 1,476,216
See Notes to Financial Statements
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1997 and 1996
(In Thousands)
Capital Retained Unrealized ESOP
Total Stock Earnings Losses Obligations
----------------------------------------------------
Balance, January 1, 1997 ........ $ 47,335 $ 8,996 $ 44,079 $ 676 $ (6,416)
Exercise stock options for 2,055
shares ........................ 53 53 - - - - - - - - -
Redemption of stock ............. (7) (7) - - - - - - - - -
Net income ...................... 3,546 - - - 3,546 - - - - - -
Change related to ESOP shares ... (481) - - - - - - - - - (481)
Cash dividends ($1.05 per share) (1,539) - - - (1,539) - - - - - -
Unrealized gains (losses) on
debt securities, net .......... (594) - - - - - - (594) - - -
--------------------------------------------------
Balance, June 30, 1997 .......... $ 48,313 $ 9,042 $ 46,086 $ 82 $ (6,897)
==================================================
Balance, January 1, 1996 ........ $ 43,277 $ 8,925 $ 39,325 $ 298 $ (5,271)
Net income ...................... 2,981 - - - 2,981 - - - - - -
Change related to ESOP shares ... (531) - - - - - - - - - (531)
Cash dividends ($.95 per share) . (1,391) - - - (1,391) - - - - - -
Unrealized gains (losses) on debt
securities, net ............... (816) - - - - - - (816) - - -
--------------------------------------------------
Balance, June 30, 1996 .......... $ 43,520 $ 8,925 $ 40,915 $ (518) $ (5,802)
==================================================
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996
(In Thousands)
1997 1996
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 3,546 $ 2,981
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 535 412
Provision for loan losses ...................................................... 590 360
Gain on disposition of marketable equity security ......................... (1,054) - - -
(Increase) decrease in accrued interest receivable.......................... (512) (22)
Amortization of bond discount .............................................. 189 266
(Increase) in other assets ................................................. (337) (37)
Amortization of intangibles ................................................ 171 - - -
Increase in accrued interest and other liabilities ......................... 263 150
--------------------
Net cash provided by operating activities .................................. $ 3,391 $ 4,110
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment
securities:
Available for sale ......................................................... $ 9,855 $ 6,000
Held to maturity ........................................................... 1,393 2,852
Purchase of investment securities
Available for sale ......................................................... (9,315) (12,321)
Held to maturity ........................................................... (3,393) (2,474)
Federal funds sold, net ........................................................ (605) 6,118
Loans made to customers, net of collections .................................... (32,182) (9,495)
Purchases of property and equipment ............................................ (475) (361)
--------------------
Net cash (used in) investing activities .................................... $(34,722) $ (9,681)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................................ $ 15,583 $ 10,301
Net increase (decrease) in fed funds purchased and
securities sold under agreements to repurchase .......................... 13 (4,953)
Borrowings from FHLB ....................................................... 20,000 - - -
Stock options exercised .................................................... 52
Redemption of common stock ................................................. (7) - - -
Dividends paid ............................................................. (1,539) (1,391)
--------------------
Net cash provided by financing activities ............................... $ 34,102 $ 3,957
--------------------
Increase in cash and due from banks ..................................... $ 2,771 $ (1,614)
CASH AND DUE FROM BANKS
Beginning .................................................................. $ 15,036 11,883
--------------------
Ending ..................................................................... $ 17,807 $ 10,269
====================
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors and others .................................. $ 9,325 $ 8,555
Interest paid on other obligations ...................................... 1,458 1,144
Non-cash financing transactions:
Increase in maximum cash obligation related
to ESOP shares ......................................................... 481 531
Net unrealized gains (losses) on debt securities ........................ (913) (816)
See Notes to Financial Statements.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Interim Financial Statements
Interim consolidated financial statements have not been examined by
independent public accountants, but include all adjustments
(consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the results
for these periods. The results of operation for the interim periods
are not necessarily indicative of the results for a full year.
For purposes of reporting cash flows, cash and due from banks includes
cash on hand and amounts due from banks (including cash items in
process of clearing). Cash flows from demand deposits, NOW accounts,
savings accounts, and federal funds purchased and sold are reported
net since their original maturities are less than three months. Cash
flows from loans and time deposits are presented as net increases or
decreases.
Note 2. Loans
The following tables set forth the composition of loans and the
allowance for loan losses:
(In thousands)
June 30
-------------------------
1997 1996
-------------------------
Agricultural ................................. $ 24,630 $ 18,983
Commercial and financial ..................... 31,101 26,501
Real estate, construction .................... 11,530 8,707
Real estate, mortgage ........................ 306,149 248,745
Loans to individual .......................... 34,232 31,641
-------------------------
$407,642 $334,577
Less allowance for loan losses ............... 7,786 6,896
-------------------------
$399,856 $327,681
=========================
Transactions in the allowance for loan losses are as follows:
(In thousands)
Six months
ended June 30
-------------------------
1997 1996
-------------------------
Balance, beginning ........................... $ 7,311 $ 6,740
Provision charged to expense ............... 590 360
Net charge-offs ............................ (115) (204)
------------------------
Balance, ending .............................. $ 7,786 $ 6,896
========================
The following summarizes the Company's nonaccrual, past due,
restructured and impaired loans:
(In thousands)
June 30
1997 1996
------------------
Nonaccrual .................................... $- - - $ 339
Accruing loans, past due 90 days or more ...... 870 777
Restructured loan ............................. - - - - - -
Impaired loans ................................ 6,807 5,820
Note 3. Changes in Accounting Policies
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", was issued in February 1997 and will be
effective for the Company for periods ending after December 15, 1997
and may not be adopted prior to such date. This statement establishes
standards for computing and presenting earnings per share. The Company
expects to adopt SFAS No. 128 when required and management anticipates
adoption of this statement will not have a material effect on earnings
per share disclosures.
In June 1997, the FASB issued Statement #130, "Reporting Comprehensive
Income," and Statement #131, "Disclosures About Segments of an
Enterprise and Related Information." Statement #130 establishes
standards for reporting comprehensive income in financial statements.
Statement #131 expands certain reporting and disclosure requirements
for segments from current standards. The Statements are effective for
fiscal years beginning after December 15, 1997 and the Company does
not expect the adoption of these new standards to result in material
changes to previously reported amounts or disclosures
PART I, ITEM 2.
HILLS BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATION
The Hills Bancorporation consolidated balance sheet as of June 30, 1997 reflects
total assets of $576.8 million, which is an increase of $37.3 million from
December 31, 1996. Net loans are $399.9 million which represents an increase of
$31.6 million from December 31, 1996. These loan increases continue to be
primarily in the area of single family residential loans and some multi-family
housing units. Deposits (when federal funds purchased and securities sold under
agreements to repurchase are included) as of June 30, 1997 totaled $471.7
million, an increase of $15.6 million in six months. Borrowings from the FHLB
have increased from $25.8 million to $45.8 million during the last six months
and these funds were used to fund the new loans.
Other significant balance sheet changes from June 30, 1996 to June 30, 1997 were
as follows:
Investment securities increase $8.1 million to $134.1 million.
Net loans at $399.9 million, an increase of $72.2 million.
Total deposits, including securities sold under agreements to repurchase,
increased from $407.6 million to $471.7 million for a total change of $64.1
million.
Borrowings from the Federal Home Loan Bank increased $15 million and these funds
were used primarily to fund residential home loans.
The addition of a location in Lisbon, Iowa in July of 1996 and Kalona, Iowa in
September, 1996 accounted for approximately $40 million of this asset growth;
$22 million in loans; $18 million in investment securities and other assets; and
approximately $40 million in deposit growth.
Significant changes in the balance sheet are subject to asset-liability
management, which encompasses both the management of interest rate sensitivity
and the maintenance of adequate liquidity. Interest rate sensitivity management
attempts to provide the optimal level of net interest income while managing
exposure to risks associated with interest rate movements. Liquidity management
involves planning to meet anticipated funding needs. Management monitors the
rate sensitivity and liquidity positions on an on-going basis and, when
necessary, appropriate action is taken to minimize any adverse effects of rapid
interest rate movements or any unexpected liquidity concerns.
In January 1997, Hills Bancorporation paid a dividend of $1.05 per share, a
10.52% increase from the $.95 paid in January 1996. Stockholders' equity at June
30, 1997 and December 31, 1996 reflects an adjustment for unrealized gains
(losses) on investment securities, net of income taxes. As of December 31, 1996,
the unrealized net gains on securities were $676,000 compared to $82,000 at June
30, 1997. The major reduction in stockholders' equity was the result of the
disposition of an appreciated equity security to the Hills Bancorporation
Foundation. Other details of this transaction is discussed in the income
statement comment section.
The total stockholders' equity of Hills Bancorporation as of June 30, 1997
(before the reduction for the ESOP shares) as a percent of total assets was
9.57%. Under risk-based capital rules, total capital is 15.10% of risk-adjusted
assets, compared to the current 8% requirement.
Net income for the quarter ended June 30, 1997 increased $380,000 from the
previous year's quarter. Net interest income increased $792,000 and $1,589,000
for the quarter and the six months ended June 30, 1997 compared to the same time
period in 1996. These increases are due to significant volume increases in
average earnings assets which, as of June 30, 1997 compared to one year ago, had
grown approximately $62.9 million. These increases are the results of increased
loan volume and the two acquisitions discussed above. Due to the large increase
in net loans, an additional $200,000 was provided for the reserve for loan
losses for the second quarter of 1997.
A significant other transaction in the second quarter of 1997 was the
recognition of $1,054,000 on the disposition of a marketable equity security
held by Hills Bancorporation. The equity security was contributed to the Hills
Bancorporation Foundation, a private charitable foundation, organized
exclusively for charitable and educational purposes to benefit the communities
with bank offices. As a result of the stock contribution, Hills Bancorporation
recognized a gain of $1,054,000; a contribution expense of the same amount, and
an income tax savings of approximately $340,000 which is reflected as tax
savings in the federal and state income taxes expense for the second quarter.
The marketable equity security was purchased several years ago as an investment
in a non-marketable start-up software developer. The stock became marketable
upon an initial public offering in late 1996.
Excluding the gain on disposition of the marketable equity securite, all other
income items increased $365,000 for the six months, primarily due to trust fee
increases of $217,000, which was the direct result of additional assets under
management and deposit amount charges and fees which increased $131,000.
Excluding the contribution of the marketable equity security, all other expenses
for the six months increased $1,328,000 and the major portion of this increase
was a $524,000 increase in salaries and employee benefits as twenty seven full
time full-time equivalent positions were added due to the new banks acquired in
1996 and new positions added at Hills Bank in various areas. Other operating
expenses were up $510,000 as a result of increases in marketing, other
professional fees, and other data processing charges.
The Bank's principal sources of funds continues to be prepayment of loan
principal and current amortized loan payments. In addition, funds are provided
from current operations. All of the funds are used to fulfill loan commitments,
make short-term investments, and fund any deposit withdrawals needed. 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.
Forward-looking information relating to the financial results or strategies of
the Company are referenced throughout Management's Discussion and Analysis. The
following paragraphs identify forward-looking statements and the risks that need
to be considered when reading those statements.
Forward-looking statements include such words as believe, expect, anticipate,
target, goal, objective or other words with similar meaning. The Company is
under no obligation to update such forward-looking information statements.
The risks involved in the operations and strategies of the Company include
competition from other financial institutions, changes in interest rates,
changes in economic or market conditions and changes in regulations from the
federal and state regulators. These risks, whch are not all inclusive, cannot be
estimated.
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings.
Item 2. Changes in Securities
There were no changes in securities.
Item 3. Defaults Upon Senior Securities
Hills Bancorporation has not senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting held on April 21, 1997, the security holders
approved the following:
(a) Elected Sheldon E. Yoder, D.V.M., to a one-year term to the Board
of Directors expiring at the 1998 Annual Meeting.
(b) Elected Willis M. Bywater; Thomas J. Gill, D.D.S.; Donald H.
Gringer; and Dwight O. Seegmiller to three-year terms to the
Board of Directors expiring at the 2000 Annual Meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
See exhibit 11 - Statement Re Computation of Earnings Per Common
Share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
HILLS BANCORPORATION
(Registrant)
August 13, 1997 /s/ Dwight O. Seegmiller
- --------------------------- -------------------------------
Date Dwight O. Seegmiller, President
(Duly authorized officer of the
registrant)
/s/ James G. Pratt
-------------------------------
James G. Pratt, Treasurer
(Principal Financial Officer)