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, 1998 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, 1998 - -------------------------- ------------------ Common Stock, no par value 1,467,754 HILLS BANCORPORATION Index to Form 10-Q Part I FINANCIAL INFORMATION Page Number Item 1. Financial Statements Consolidated balance sheets, June 30, 1998 (unaudited) and December 31, 1997 Consolidated statements of income, (unaudited) for three and six months ended June 30, 1998 and 1997 Consolidated statements of comprehensive income, (unaudited) for three and six months ended June 30, 1998 and 1997. Consolidated statements of stockholders' equity, (unaudited) for six months ended June 30, 1998 and 1997 Consolidated statements of cash flows (unaudited) for six months ended June 30, 1998 and 1997 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, 1998 Unaudited December 31, 1997* -------------------------------- ASSETS Cash and due from banks .............................. $ 18,591 $ 15,508 Investment securities: Available for sale (amortized cost June 30, 1998 $109,492; December 31, 1997 $108,718) ..................... 110,322 109,486 Held to maturity (fair value June 30, 1998 $22,539; December 31, 1997 $24,230) ...................... 22,191 23,840 Stock of Federal Home Bank ........................ 4,347 4,738 Federal funds sold ................................... 17,131 2,447 Loans, net ........................................... 438,129 422,761 Property and equipment, net .......................... 10,547 9,437 Accrued interest receivable .......................... 6,938 5,441 Deferred income taxes, net ........................... 1,832 1,859 Other assets ......................................... 7,070 7,585 -------- -------- $637,098 $603,102 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest-bearing deposits ......................... $ 54,617 $ 52,174 Interest-bearing deposits ............................ 436,145 427,596 -------- -------- Total deposits .................................... $490,762 $479,770 Federal funds purchased and securities sold under agreements to repurchase ............... 5,339 9,008 Federal Home Loan Bank notes ......................... 75,764 50,764 Accrued interest payable ............................. 1,964 2,060 Other liabilities .................................... 2,235 2,318 -------- -------- $576,064 $543,920 -------- -------- REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) ............................................ $ 8,482 $ 7,682 -------- -------- STOCKHOLDERS' EQUITY Capital stock, common, no par value; authorized 10,000,000 shares; issued June 30, 1998 and December 31, 1997 - 1,467,754 shares ........................... $ 9,070 $ 9,070 Retained earnings .................................... 51,441 49,627 Accumulated other comprehensive income, unrealized gains on investment securities, net .... 523 485 -------- -------- $ 61,034 $ 59,182 Less, maximum cash obligation related to ESOP shares ....................................... 8,482 7,682 -------- -------- $ 52,552 $ 51,500 -------- -------- $637,098 $603,102 ======== ======== <FN> * Derived from audited financial statements. </FN> See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended June 30, 1998 and 1997 (In Thousands, Except Per Share Data) Three Months Ended Six Months Ended June 30 June 30 ------------------------------------- 1998 1997 1998 1997 ------------------ ----------------- Interest Income: Interest and fees on loans ........................ $ 9,367 $ 8,515 $18,542 $16,556 Interest on investment securities: Taxable ......................................... 1,686 1,693 3,366 3,366 Non-taxable ..................................... 330 298 665 592 Interest on federal funds sold .................... 296 39 543 80 ------- ------- ------- ------- Total interest income ............................. $11,679 $10,545 $23,116 $20,594 ------- ------- ------- ------- Interest Expense: Interest on deposits .............................. $ 5,042 $ 4,719 $10,068 $ 9,322 Interest on securities sold under agreements to repurchase ............................. 81 109 169 198 Interest on FHLB borrowings ....................... 1,146 730 2,171 1,260 ------- ------- ------- ------- Total interest expense ............................ $ 6,269 $ 5,558 $12,408 $10,780 ------- ------- ------- ------- Net interest income ............................... $ 5,410 $ 4,987 $10,708 $ 9,814 Provision for loan losses ............................ 204 395 408 590 ------- ------- ------- ------- Net interest income after provision for loan losses ...................................... $ 5,206 $ 4,592 $10,300 $ 9,224 ------- ------- ------- ------- Other income: Net gains (losses) on sale of investment securities $ -- $ 1,054 $ -- $ 1,054 Loan origination fees ............................. 182 61 334 120 Trust fees ........................................ 406 321 863 625 Deposit account charges and fees .................. 459 470 893 903 Other fees and charges ............................ 358 300 731 629 ------- ------- ------- ------- $ 1,405 $ 2,206 $ 2,821 $ 3,331 ------- ------- ------- ------- Other expenses: Salaries and employee benefits .................... $ 2,168 $ 1,797 $ 4,233 $ 3,587 Occupancy ......................................... 305 241 575 487 Furniture and equipment ........................... 418 343 828 670 Office supplies and postage ....................... 307 187 589 1,092 Contributions ..................................... 8 1,073 8 418 Other operating ................................... 957 867 1,830 1,714 ------- ------- ------- ------- $ 4,163 $ 4,508 $ 8,063 $ 7,968 ------- ------- ------- ------- Income before income taxes ........................ $ 2,448 $ 2,290 $ 5,058 $ 4,587 Federal and state income taxes ....................... 715 355 1,481 1,041 ------- ------- ------- ------- Net income ........................................ $ 1,733 $ 1,935 $ 3,577 $ 3,546 ======= ======= ======= ======= Earning per common share: Basic ........................................... $ 1.18 $ 1.32 $ 2.44 $ 2.42 Diluted ......................................... 1.16 1.31 2.40 2.40 See Notes to Financial Statements HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and Six Months Ended June 30, 1998 and 1997 (In Thousands, Except Per Share Data) Three Months Ended Six Months Ended June 30 June 30 ------------------ ----------------- 1998 1997 1998 1997 ---------------------------------------- Net Income ...................................... $ 1,733 $ 1,935 $ 3,577 $ 3,546 Other comprehensive income: Unrealized gains (losses) on debt securities . (122) (692) 62 (912) Income tax effect of unrealized gains (losses) 44 236 (24) 318 ------- ------- ------- ------- Comprehensive Income ......................... $ 1,655 $ 1,479 $ 3,615 $ 2,952 ======= ======= ======= ======= HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended June 30, 1998 and 1997 (In Thousands) Capital Retained Unrealized ESOP Stock Earnings Gains (Losses) Obligations Total ------------------------------------------------------- Balance, January 1, 1998 ........ $ 9,070 $49,627 $ 485 $(7,682) $51,500 Net income ...................... - - 3,577 - - - - 3,577 Change related to ESOP shares ... - - - - - - (800) (800) Cash dividends ($1.20 per share). - - (1,763) - - - - (1,763) Unrealized gains (losses) on debt securities, net ............... - - - - 38 - - 38 ------------------------------------------------------- Balance, June 30, 1998 .......... $ 9,070 $51,441 $ 523 $(8,482) $52,552 ======================================================= Balance, January 1, 1997 ........ $ 8,996 $44,079 $ 676 $(6,416) $47,335 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 .......... $ 9,042 $46,086 $ 82 $(6,897) $48,313 ======================================================= See Notes to Financial Statements. HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 1998 and 1997 (In Thousands) 1998 1997 -------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................................... $ 3,577 $ 3,546 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................... 658 535 Provision for loan losses .................................................. 408 590 (Increase) decrease in accrued interest receivable ......................... (1,497) (512) Amortization of bond discount .............................................. 139 189 (Increase) in other assets ................................................. 346 (337) Amortization of intangibles ................................................ 172 171 Increase in accrued interest and other liabilities ......................... (179) 263 -------- -------- Net cash provided by operating activities .................................. $ 3,624 $ 4,445 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale ......................................................... $ 13,499 $ 8,801 Held to maturity ........................................................... 2,086 1,393 Purchase of investment securities: Available for sale ......................................................... (14,459) (9,315) Held to maturity ........................................................... - - - (3,393) Federal funds sold, net ........................................................ (14,684) (605) Loans made to customers, net of collections .................................... (15,776) (32,182) Purchases of property and equipment ............................................ (1,768) (475) -------- -------- Net cash (used in) investing activities .................................... $(31,102) $(35,776) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits ........................................ $ 10,992 $ 15,583 Net increase (decrease) in fed funds purchased and Securities sold under agreements to repurchase .......................... (3,669) 13 Borrowings from FHLB ....................................................... 40,000 20,000 Payments on FHLB notes ..................................................... (15,000) - - - Stock options exercised .................................................... - - - 52 Redemption of common stock ................................................. - - - (7) Dividends paid ............................................................. (1,762) (1,539) -------- -------- Net cash provided by financing activities ............................... $ 30,561 $ 34,102 -------- -------- Increase in cash and due from banks ..................................... $ 3,083 $ 2,771 CASH AND DUE FROM BANKS Beginning .................................................................. 15,508 15,036 -------- -------- Ending ..................................................................... $ 18,591 $ 17,807 ======== ======== SUPPLEMENTAL DISCLOSURES Cash payments for: Interest paid to depositors and others .................................. $ 10,164 $ 9,325 Interest paid on other obligations ...................................... 2,340 1,458 Non-cash financing transactions: Increase in maximum cash obligation related to ESOP shares ......................................................... 800 481 Net unrealized gains (losses) on debt securities ........................ 62 (913) 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 ------------------------- 1998 1997 ------------------------- Agricultural ................................. $ 28,881 $ 24,630 Commercial and financial ..................... 34,376 31,101 Real estate, construction .................... 18,618 11,530 Real estate, mortgage ........................ 328,229 306,149 Loans to individual .......................... 36,134 34,232 -------- -------- $446,238 $407,642 Less allowance for loan losses ............... 8,109 7,786 -------- -------- $438,129 $399,856 ======== ======== Transactions in the allowance for loan losses are as follows: (In thousands) Six Months ended June 30 ------------------------ 1998 1997 ------------------------ Balance, beginning ........................... $ 8,010 $ 7,311 Provision charged to expense ............... 408 590 Net charge-offs ............................ (309) (115) ------- ------- Balance, ending .............................. $ 8,109 $ 7,786 ======= ======= The following summarizes the Company's nonaccrual, past due, restructured and impaired loans: (In thousands) March 31 ----------------- 1998 1997 ------- ------- Nonaccrual .................................... $ - - $ - - Accruing loans, past due 90 days or more ...... 1,065 870 Restructured loan ............................. - - - - Impaired loans ................................ 7,309 6,807 Note 3. Changes in Accounting Policies 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 the quarter ended March 31, 1998. The company has presented a Statement of Comprehensive Income. Statement #131 has no effect on the interim period financial statements. PART I, ITEM 2. HILLS BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated balance sheet of Hills Bancorporation as of June 30, 1998 reflects total assets of $637.1 million which is an increase of $34.0 million from December 31, 1997. Net loans increased from $422.8 million to $438.1 million, which represents an increase of $15.3. Compared to one year ago, total assets have increased from $576.8 million to $637.1 million for an increase of $60.3 million. Also during this year, net loans increased $38.3 million to $438.1 million as of June 30, 1998. The loan increases were primarily single family residential loans in the Iowa City and Coralville area as lower rates continued and a strong economy remains active. Federal funds sold increased during the first half of 1998 by $14.7 million and have increased from June 30, 1997 to June 30, 1998 by $15.4 million. This increase is primarily excess funds that will be used for loan commitments and other investments during the balance of 1998. Also during the first six months of 1998 Hills Bank and Trust Company took advantage of lower interest rates on four and five year advances available from the Federal Home Loan Bank and borrowed a net $25 million since December 31, 1997 and a net $30 million since June 30, 1997. These advances are secured by 1-4 family mortgage loans. Total deposits, including federal funds purchased and securities sold under agreements to repurchase, total $496.1 million at June 30, 1998 and this is an increase of $7.3 million from the December 31, 1997 balances. Deposits and securities sold under agreements to repurchase increased from $471.7 million at June 30,1997 to $496.1 million at June 30, 1998, an increase of $24.4 million. The largest increase on the liability side of the balance sheet is the net increase discussed above in Federal Home Loan Bank notes. Asset-liability management 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 1998, Hills Bancorporation paid a dividend of $1.20 per share, a 14.29% increase from the $1.05 paid in January 1997. The total dividend of $1,762,000 is deducted form stockholders' equity and is reflected in the resulting stockholders' equity as of June 30, 1998 of $52,552,000. Stockholders' equity at June 30, 1998 and December 31, 1997 reflects an adjustment for unrealized gain (losses) on debt securities, net of income taxes. The total stockholders' equity of Hills Bancorporation before the reduction for the ESOP shares as a percent of total assets is 9.58%. Under risk-based capital rules, total capital is 15.04% of risk adjusted assets, compared to the current 8% requirement. Net income for the quarter ending June 30, 1998 was $1,733,000 and was down $202,000 from the previous year's quarter. A significant other income item in the second quarter of 1997 was the recognition of $1,054,000 on the sale of a marketable equity security held by Hills Bancorporation. The equity security was transferred to the Hills Bancorporation Foundation, a private charitable foundation, organized exclusively for charitable and educational purposes. As a result of the stock contribution, Hills Bancorporation received an income tax savings of approximately $340,000 which was reflected as tax savings in the federal and state income taxes expense for the second quarter of 1997. Other income changes occurred in loan origination fees which increased $121,000 for the three months ended June 30, 1998 from one year ago and $214,000 for the six months ending June 30, 1998, compared to the same period in 1997. Trust fees showed growth over last year with an $85,000 increase for the quarter and $238,000 for the six months. Other expenses, excluding the contribution discussed above increased $728,000 and $1,187,000 for the second quarter and the six months ended June 30, 1998 compared to the same periods in 1997. The major portion of this increase was $371,000 increase in salaries and employee benefits as full-time equivalent employees increased by twenty-seven due to the new banks added in 1996 and new positions added at Hills Bank and Trust Company in various areas. All other operating expenses are up $533,000 as a result of increases in marketing, other professional fees, expenses relating to the new bank in Mount Vernon and other data processing charges. Basic and diluted earnings per share for the three months ending June 30, 1998 were $1.18 and $1.16 in comparison to $1.32 and $1.31 for the quarter ending June 30, 1997. The earnings per share for the six months ended June 30, 1998 and June 30, 1997 were $2.44 and $2.42 for basic earnings per share and $2.40 for diluted earnings per share for both periods present. 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 HILLS BANCORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no material pending legal proceedings. Item 2. Changes in Securities There were no changes in securities. Item 3. Defaults upon Senior Securities Hills Bancorporation has no senior securities. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting held on April 20, 1998, the security holders approved the election of Richard W. Oberman, Earl M. Yoder, and Sheldon E. Yoder, D.V.M. to three-year terms to the Board of Directors expiring at the 2001 Annual Meeting. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit See exhibit II - Statement Re Computation of Earnings Per Common Share (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 1998. 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) Date AUGUST 13, 1998 --------------------------- /s/ Dwight O. Seegmiller ------------------------------------------- Dwight O. Seegmiller, President (Duly authorized officer of the registrant) /s/ James G. Pratt ------------------------------------------- James G. Pratt, Treasurer (Principal Financial Officer)