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 September 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 OCTOBER 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, September 30, 1997 (unaudited)
and December 31, 1996
Consolidated statements of income, (unaudited) for three
and nine months ended September 30, 1997 and 1996
Consolidated statement of stockholders' equity, (unaudited)
for three and nine months ended September 30, 1997 and 1996
Consolidated statements of cash flows (unaudited) for three
and nine months ended September 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)
September 30,
1997 December 31,
Unaudited 1996*
------------- ------------
ASSETS
Cash and due from banks .................................. $ 16,236 $ 15,036
Investment securities:
Available for sale (amortized cost
September 30, 1997 $110,946;
December 31, 1996 $109,495) ......................... 111,441 110,537
Held to maturity (fair value
September 30, 1997 $25,770;
December 31, 1996 $22,232) .......................... 25,424 22,098
Federal funds sold ....................................... 207 1,107
Loans, net ............................................... 414,929 368,264
Property and equipment, net .............................. 8,802 8,409
Accrued interest receivable .............................. 5,660 4,884
Deferred income taxes, net ............................... 1,542 1,359
Other assets ............................................. 7,844 7,758
-------- --------
$592,085 $539,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ............................. $ 50,559 $ 46,154
Interest-bearing deposits ................................ 418,293 403,907
-------- --------
Total deposits ........................................ $468,852 $450,061
Federal funds purchased and securities
sold under agreements to repurchase ................... 16,104 6,071
Federal Home Loan Bank notes ............................. 45,764 25,795
Accrued interest payable ................................. 1,972 1,952
Other liabilities ........................................ 2,200 1,822
-------- --------
$534,892 $485,701
-------- --------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ................................................ $ 7,058 $ 6,416
-------- --------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued September 30, 1997- 1,467,259
shares; issued December 31, 1996 -
1,465,384 shares ...................................... $ 9,042 $ 8,997
Retained earnings ........................................ 47,839 44,078
Unrealized gains (losses) on investment securities, net .. 312 676
-------- --------
$ 57,193 $ 53,751
Less, maximum cash obligation related to
ESOP shares ........................................... 7,058 6,416
-------- --------
$ 50,135 $ 47,335
-------- --------
$592,085 $539,452
======== ========
<FN>
* Derived from audited financial statements.
</FN>
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 1997 and 1996
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Interest Income:
Interest and fees on loans ....................... $ 8,904 $ 7,618 $ 25,460 $ 21,740
Interest on investment securities
Taxable ................................. 1,680 1,628 5,046 4,524
Non-taxable ............................. 306 281 898 827
Other interest income ............................ 54 79 134 380
----------- ----------- ----------- -----------
Total interest income ............................ 10,944 9,606 31,538 27,471
----------- ----------- ----------- -----------
Interest Expense:
Interest on deposits ............................. 4,942 4,557 14,264 13,053
Interest on securities sold under
agreements to repurchase .................................. 90 62 288 229
Interest on FHLB notes ........................... 747 459 2,007 1,436
----------- ----------- ----------- -----------
Total interest expense ........................... 5,779 5,078 16,559 14,718
----------- ----------- ----------- -----------
Net interest income .............................. 5,165 4,528 14,979 12,753
Provision for loan losses ................................. 195 187 785 547
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses .................................. 4,970 4,341 14,194 12,206
----------- ----------- ----------- -----------
Other income:
Net gains (losses) on sale of investment
securities ................................................ (62) - - - 992 - - -
Real estate origination fees ..................... 117 76 237 281
Trust fees ....................................... 322 195 947 603
Deposit account charges and fees ................. 482 425 1,385 1,197
Other fees and charges ........................... 283 254 912 781
----------- ----------- ----------- -----------
1,142 950 4,473 2,862
----------- ----------- ----------- -----------
Other expenses:
Salaries and employee benefits ................... 1,858 1,608 5,445 4,671
Occupancy expenses ............................... 269 224 756 643
Furniture and equipment .......................... 335 278 1,005 798
Contributions .................................... 208 228 626 590
Office supplies and postage ...................... 17 23 1,109 41
Other operating .................................. 884 724 2,598 1,928
----------- ----------- ----------- -----------
3,571 3,085 11,539 8,671
----------- ----------- ----------- -----------
Income before income taxes ....................... 2,541 2,206 7,128 6,397
Federal and state income taxes ............................ 788 626 1,829 1,836
----------- ----------- ----------- -----------
Net income ....................................... $ 1,753 $ 1,580 $ 5,299 $ 4,561
=========== =========== =========== ===========
Per common share: Net income .............................. $ 1.18 $ 1.07 $ 3.58 $ 3.09
Dividend, January ................................. - - - - - - 1.05 .95
Weighted average number of common shares
outstanding ................................... 1,482,862 1,476,374 1,481,029 1,476,847
See Notes to Financial Statements
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1997 and 1996
(In Thousands)
Capital Retained Unrealized ESOP
Stock Earnings Gains (Losses) Obligations Total
--------- -------- -------------- ----------- --------
Balance, January 1, 1997 ........ $ 8,996 $ 44,079 $ 676 $ (6,416) $ 47,335
Exercise stock options for 2,055
shares ........................ 53 - - - - - - - - - 53
Redemption of 180 shares stock .. (7) - - - - - - - - - (7)
Net income ...................... - - - 5,299 - - - - - - 5,299
Change related to ESOP shares ... - - - - - - - - - (642) (642)
Cash dividends ($1.05 per share) - - - (1,539) - - - - - - (1,539)
Unrealized gains (losses) on
debt securities, net .......... - - - - - - (364) - - - (364)
--------- -------- --------- --------- --------
Balance, September 30, 1997 ..... $ 9,042 $ 47,839 $ 312 $ (7,058) $ 50,135
========= ======== ========= ========= ========
Balance, January 1, 1996 ........ $ 8,925 $ 39,325 $ 298 $ (5,271) $ 43,277
Net income ...................... - - - 4,561 - - - - - - 4,561
Change related to ESOP shares ... - - - - - - - - - (769) (769)
Cash dividends ($.95 per share) . - - - (1,391) - - - - - - (1,391)
Unrealized gains (losses) on debt
securities, net ............... - - - - - - (609) - - - (609)
--------- -------- --------- --------- --------
Balance, September 30, 1996 ..... $ 8,925 $ 42,495 $ (311) $ (6,040) $ 45,069
========= ======== ========= ========= ========
See Notes to Financial Statements.
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(In Thousands)
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 5,299 $ 4,561
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 803 637
Provision for loan losses .................................................. 785 547
Net gains on disposition of investment securities .......................... (992) - - -
(Increase) decrease in accrued interest receivable ......................... (776) (448)
Amortization of bond discount .............................................. 260 398
(Increase) in other assets ................................................. (344) (44)
Amortization of intangibles ................................................ 258 45
Increase in accrued interest and other liabilities ......................... 398 549
-------- --------
Net cash provided by operating activities .................................. $ 5,691 $ 6,245
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 15,251 $ 13,000
Held to maturity ........................................................... 1,894 2,902
Proceeds from sales of available-for-sale securities ........................... 9,366 - - -
Purchase of investment securities:
Available for sale ......................................................... (25,283) (19,451)
Held to maturity ........................................................... (5,273) (3,418)
Federal funds sold, net ........................................................ 900 23,766
Loans made to customers, net of collections .................................... (47,450) (22,264)
Purchases of property and equipment ............................................ (1,196) (675)
Purchase of subsidiary banks,
net of cash acquired ....................................................... - - - (7,560)
-------- --------
Net cash (used in) investing activities ................................. $(51,791) $(13,700)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................................ $ 18,791 $ 17,010
Net increase (decrease) in fed funds purchased and
securities sold under agreements to repurchase .......................... 10,033 (2,047)
Borrowings from FHLB ....................................................... 20,000 - - -
Payments on FHLB notes ..................................................... (31) (5,032)
Stock options exercised .................................................... 53 - - -
Redemption of common stock ................................................. (7) - - -
Dividends paid ............................................................. (1,539) (1,391)
-------- --------
Net cash provided by financing activities ............................... $ 47,300 $ 8,540
-------- --------
Increase in cash and due from banks ..................................... $ 1,200 $ 1,085
CASH AND DUE FROM BANKS
Beginning .................................................................. 15,036 11,883
-------- --------
Ending ..................................................................... $ 16,236 $ 12,968
======== ========
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors and others .................................. $ 14,244 $ 13,127
Interest paid on other obligations ...................................... 2,295 1,665
Non-cash financing transactions:
Increase in maximum cash obligation related
to ESOP shares ......................................................... 642 769
Net unrealized gains (losses) on debt securities ........................ (547) (609)
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)
September 30
---------------------------
1997 1996
--------- ---------
Agricultural ............................... $ 27,135 $ 23,811
Commercial and financial ................... 33,742 30,800
Real estate, construction .................. 9,887 8,507
Real estate, mortgage ...................... 322,278 272,161
Loans to individual ........................ 29,741 32,935
--------- ---------
$ 422,783 $ 368,214
Less allowance for loan losses ............. (7,854) (7,286)
--------- ---------
$ 414,929 $ 360,928
========= =========
Transactions in the allowance for loan losses are as follows:
(In thousands)
Nine Months
Ended September 30
------------------------
1997 1996
------- -------
Balance, beginning ........................... $ 7,311 $ 6,740
Provision charged to expense ............... 785 547
Net charge-offs ............................ (242) (350)
Allowances of acquired banks ................ - - - 349
------- -------
Balance, ending .............................. $ 7,854 $ 7,286
======= =======
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 ...... 963 1,079
Restructured loan ............................. - - - - - -
Impaired loans ................................ 7,173 5,970
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 OPERATIONS
The Hills Bancorporation consolidated balance sheet as of September 30, 1997
reflects total assets of $592.1 million, which is an increase of $52.7 million
from December 31, 1996. Net loans are $414.9 million which represents an
increase of $46.7 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 September 30,
1997 totaled $485.0 million, an increase of $28.8 million in nine months.
Borrowings from the FHLB have increased from $25.8 million to $45.8 million
during the last nine months and these funds were used primarily to fund the new
loans.
Other significant balance sheet changes from September 30, 1996 to September 30,
1997 were as follows:
Investment securities increased $3.1 million to $136.9 million.
Net loans at $414.9 million, an increase of $54.0 million.
Total deposits, including securities sold under agreements to repurchase,
increased from $456.1 million to $485.0 million for a total change of $28.9
million.
The addition of a location in Lisbon, Iowa in July 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
September 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 $312,000
at September 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 are discussed in
the income statement comment section.
The total stockholders' equity of Hills Bancorporation as of September 30, 1997
(before the reduction for the ESOP shares) as a percent of total assets was
9.66%. Under risk-based capital rules, total capital is 15.05% of risk-adjusted
assets, compared to the current 8% requirement.
Net income for the quarter ended September 30, 1997 increased $173,000 from the
previous year's quarter. Net income for the nine months ended September 30, 1997
increased $738,000 from the prior year's first three quarters. Net interest
income increased $637,000 and $2,226,000 for the quarter and the nine months
ended September 30, 1997 compared to the same time period in 1996. These
increases are due to significant volume increases in average earning assets
which, as of September 30, 1997 compared to one year ago, had grown
approximately $61.1 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
during the second quarter of 1997.
Another significant other transaction in the second quarter of 1997 was the
recognition of $1,054,000 gain 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. The net gain of $1,054,000 is
included in the line item of net gains (losses) on sale of investments
securities.
Excluding the net gain on sale of investment securities, all other income items
increased $619,000 for the nine months, primarily due to trust fee increases of
$347,000; which was the direct result of additional assets under management and
deposit amount charges and fees which increased $188,000. Excluding the
contribution of the marketable equity security, all other expenses for the nine
months increased $1,814,000 and the major portion of this increase was a
$774,000 increase in salaries and employee benefits as twenty-nine full-time
equivalent positions were added due to the new banks added in 1996 and new
positions added at Hills Bank in various areas. Other operating expenses were up
$670,000 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, which 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 no senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ending September 30, 1997.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
See exhibit II - Statement Re Computation of Earnings Per
Common Share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended September 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)
November 14, 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)