HILLS BANCORPORATION
131 Main Street
Hills, Iowa 52235
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
To Be Held on April 20, 1998
This Proxy Statement is furnished to shareholders of Hills
Bancorporation (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company for the Annual Meeting of Shareholders to
be held April 20, 1998, and any adjournments thereof. This Proxy Statement and
form of Proxy enclosed herewith are first sent to the shareholders of the
Company entitled thereto on or about March 23, 1998.
If the accompanying Proxy is properly signed and returned and is not
withdrawn or revoked, the shares represented thereby will be voted in accordance
with the specifications thereon. If the manner of voting such shares is not
indicated on the Proxy, the shares will be voted FOR the election of the
nominees for directors named herein. Election of any nominee as a director
requires a majority of the votes cast by the shares entitled to vote at a
meeting at which a quorum is present.
Only shareholders of record at the close of business on March 16, 1998,
are entitled to notice of and to vote at the meeting. There were 1,467,754
shares of Common Stock of the Company outstanding at the close of business on
that date, all of which will be entitled to vote. The presence, in person or by
proxy, of the holders of a majority of such outstanding shares is necessary to
constitute a quorum for the transaction of business at the meeting. Holders of
the shares of Common Stock are entitled to one vote per share standing in their
names on the record date on all matters. Shareholders do not have cumulative
voting rights. If the holder of shares abstains from voting on any matter, or if
shares are held by a broker which has indicated that it does not have
discretionary authority to vote on a particular matter, those shares will be
counted for quorum purposes, but will not be counted as votes cast with respect
to any matter to come before the meeting and will not affect the outcome of any
matter.
The Company will bear the cost of solicitation of proxies. In addition
to the use of the mails, proxies may be solicited by officers, directors and
regular employees of the Company, without extra compensation, by telephone,
facsimile or personal contact. It will greatly assist the Company in limiting
expense in connection with the meeting if shareholders who do not expect to
attend in person will return signed proxies promptly whether they own a few or
many shares.
A shareholder may revoke his or her Proxy at any time prior to the
voting thereof by filing with the Secretary of the Company at the Company's
principal office at 131 Main Street, Hills, Iowa 52235, a written revocation or
a duly executed Proxy bearing a later date. A shareholder may also withdraw the
Proxy at the meeting at any time before it is exercised.
INFORMATION CONCERNING NOMINEES FOR ELECTION AS DIRECTORS
The Company has ten directors with staggered terms of office. Three
directors are to be elected at the 1998 Annual Meeting of shareholders to serve
for a three-year term. The Board of Directors has no reason to believe that any
nominee will be unable to serve as a director, if elected. However, in case any
nominee should become unavailable for election, the proxy will be voted for such
substitute, if any, as the Board of Directors may designate.
Each director of the Company also serves as a director of each of the
Company's wholly-owned subsidiaries which are three commercial banks. The
commercial banks are Hills Bank and Trust Company ("Hills"), Hills Bank, which
has offices in Lisbon and Mount Vernon ("Hills Bank"), and Hills Bank Kalona
("Kalona"). The Company anticipates that, following the election of the nominees
set forth below, all directors of the Company will continue to serve as
directors of the Banks, being elected to such positions by the vote of the
Company as the sole shareholder of the Banks.
<PAGE>
Set forth below are the names of the three persons nominated by the
Board of Directors for election as directors at the 1998 Annual Meeting along
with certain other information concerning such persons.
Name and Year Positions & Principal Occupation or
First Became Offices Held Employment During
a Director Age With Company the Past Five Years
- --------------------------------------------------------------------------------
Nominees for Director to serve until the 2001 Annual Meeting
Richard W. Oberman 62 Director President,
1984-Company Oberman Farms, Inc.
1980-Bank
Earl M. Yoder 70 Director & Executive officer and
1984-Company Vice President shareholder of Iowa City
1984-Bank Ready Mix Inc.
Sheldon E. Yoder, D.V.M. 45 Director President
1997-Company and shareholder of
1997-Bank Kalona Veterinary Clinic
INFORMATION CONCERNING DIRECTORS OTHER THAN NOMINEES
The following table sets forth certain information with respect to
directors of the Company who will continue to serve subsequent to the 1998
Annual Meeting and who are not nominees for election at the 1998 Annual Meeting.
Name and Year Positions & Principal Occupation or
First Became Offices Held Employment During
a Director Age With Company the Past Five Years
- --------------------------------------------------------------------------------
Directors Serving Until the 1999 Annual Meeting
Theodore H. Pacha 49 Director Executive officer and owner
1990-Company of Hawkeye Medical Supply,
1990-Bank Inc. (medical supplies)
Ann Marie Rhodes 44 Director Vice President for University
1993-Company Relations - The University of
1993-Bank Iowa
Ronald E. Stutsman 58 Director Executive officer and
1984-Company shareholder of Eldon C.
1981-Bank Stutsman, Inc. (fertilizer
plant)
Directors Serving Until the 2000 Annual Meeting
Willis M. Bywater 59 Director & Executive officer and
1984-Company Vice President shareholder of Economy
1979-Bank Advertising Company
(commercial printing
and sales of advertising
specialties)
Thomas J. Gill, D.D.S. 51 Director Dentist - Private Practice
1993-Company
1993-Bank
Donald H. Gringer 63 Director Executive officer and
1988-Company shareholder of Gringer Feed
1988-Bank and Grain (grain elevator)
Dwight O. Seegmiller 45 Director & President of the Company
1986-Company President and the Bank
1986-Bank
None of the nominees or directors serves as a director of another company whose
securities are registered under the Securities Exchange Act of 1934 or a company
registered under the Investment Company Act of 1940.
<PAGE>
INFORMATION CONCERNING THE BOARDS OF DIRECTORS
Board of Directors of Company
The Board of Directors of the Company meets on a regularly scheduled
basis. During 1997, the Board of Directors of the Company held an annual meeting
and fourteen regular meetings. The Board of Directors of the Company has
established a committee consisting of the nine non-employee directors (all
directors but Mr. Seegmiller) to administer and grant awards under the Hills
Bancorporation 1993 Incentive Stock Plan (the "Incentive Stock Plan"). During
1997, the Incentive Stock Committee held one meeting. The Board of Directors of
the Company has not established any standing executive, audit, nominating or
compensation committees or committees performing similar functions. During 1997,
all directors of the Company attended at least seventy-five percent of the total
number of meetings of the Board and the Incentive Stock Committee. Directors are
compensated for attending meetings of the Board of Directors of the Company at
the rate of $100 per meeting. The Directors are not compensated for meetings of
the Incentive Stock Committee.
Upon approval of the Incentive Stock Plan by the Company's shareholders
at the 1993 Annual Meeting, options to purchase up to 2,055 shares of Company
Common Stock were granted in accordance with the terms of the plan to each
non-employee director of the Company (all directors but Mr. Seegmiller). The
options were immediately exerciseable upon grant at an exercise price of $25.34
per share. The options were granted in tandem with dividend equivalents,
entitling the holder of the option to receive, upon exercise of the option, a
cash payment equal to the dividends paid with respect to the shares purchased
from the date the option was granted through the date the option is exercised.
The options will expire on the earlier of April 19, 2003 or two years after the
director's term of service on the Board of Directors of the Company ends.
Boards of Directors of Banks
The business and affairs of the Banks are managed directly by the Board
of Directors of the Banks, the membership of which is identical to that of the
Board of Directors of the Company. The Board of Directors of each of the Banks
holds regular monthly meetings. In 1997, the Board of Directors of Hills had
twelve regular meetings and two special meetings. The Board of Directors of
Hills has established the Trust Committee, Audit Committee, Loan Committee and
Employee Stock Ownership Plan ("ESOP") Committee as standing committees of the
Board of Directors. Directors Gringer and Pacha serve on the Trust Committee;
Directors Bywater, Gill and Rhodes on the Audit Committee; Directors Bywater,
Oberman, Pacha, Stutsman, Sheldon Yoder and Earl Yoder on the Loan Committee;
and Director Rhodes serves on the ESOP Committee. The three directors not
appointed to the Loan Committee are invited to attend meetings of that committee
and are compensated at the normal rate for each meeting attended. Hills has
established no standing executive, nominating or compensation committees of the
Board of Directors or committees performing similar functions.
The Trust Committee is responsible for overseeing and annually
reviewing the status of all trusts for which the Hills' Trust Department acts in
a fiduciary capacity. The Trust Committee met twelve times during 1997. The
Audit Committee held six meetings during 1997 and is responsible for
coordinating the audit service with McGladrey & Pullen, LLP and addressing
internal audit functions. The Loan Committee held twelve meetings during 1997
and is responsible for review and oversight of the loan activities of Hills. The
ESOP Committee, which is responsible for overseeing the ESOP in connection with
which Hills' Trust Department serves as trustee, had two meetings during 1997.
During 1997, all of the directors of Hills attended at least 75% of the total
number of meetings of the Board of Directors and the committees to which each
director was appointed.
Directors of Hills who are not employees of Hills (all directors but
Mr. Seegmiller) receive a retainer of $4,000 per year and $250 for each meeting
of the Board of Directors attended. Willis M. Bywater, the Chairman of the Board
of Hills, receives an additional $1,500 per year as a retainer fee. Directors of
Hills who are not employees of Hills are compensated for serving on the various
Hills committees at the rate of $150 per meeting attended.
The membership of the Board of Directors of Hills Bank, formerly Lisbon
Bank and Trust Company and Kalona is identical to the membership of the Boards
of Directors of the Company and Hills. The directors of Hills Bank and Kalona
are compensated at the rate of $25.00 for each meeting attended. During 1997,
there were no committees of the Board of Directors of Hills Bank or the Board of
Directors of Kalona. The Board of Directors of Hills Bank held twelve regular
meetings during 1997. The Board of Directors of Kalona held twelve regular
meetings during 1997. All directors of the Hills Bank and Kalona attended at
least 75% of the meetings held.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is certain information on each person
who is known to the Board of Directors to be the beneficial owner as of March
16, 1998 of more than 5% of the Company's Common Stock, which is the only class
of equity securities which the Company has outstanding.
Amount and Nature of Beneficial Ownership
<TABLE>
Total Shares Sole Voting Shared Voting
Name and Address of Beneficially and Investment and Investment Percent of
Beneficial Owner Owned Power Power Class
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hills Bank and Trust 160,049 0 160,049 (1) 10.78%
Company, as trustee
of the Hills Bank
and Trust Company
Employee Stock
Ownership Plan
131 Main Street
Hills, Iowa 52235
<FN>
NOTE:
(1) Consists of shares of Company Common Stock allocated to the accounts of
employees of the Banks eligible to participate in the Hills Bank and Trust
Company Employee Stock Ownership Plan. Employees are entitled to direct the
trustee how to vote shares allocated to their accounts.
</FN>
</TABLE>
The following table sets forth certain information as of March 16, 1998
as to the number of shares of the Company's Common Stock beneficially owned by
each director, nominee for director, executive officer and by the executive
officers and directors as a group.
Amount and Nature of Beneficial Ownership
<TABLE>
Total Shares Sole Voting Shared Voting
Beneficially and Investment and Investment Percent of
Name Owned Power Power Class
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Directors
Willis M. Bywater 26,615 (1) 15,255 11,360 1.79%
Thomas J. Gill, D.D.S. 2,055 (1) 2,055 0 .14%
Donald H. Gringer 2,679 (1) 2,679 0 .18%
Richard W. Oberman 15,255 (1) 4,275 10,980 1.03%
Theodore H. Pacha 2,655 (1) 2,655 0 .18%
Ann Marie Rhodes 2,055 (1) 2,055 0 .14%
Dwight O. Seegmiller 31,797 (2) 30,597 1,200 2.14%
Ronald E. Stutsman 15,358 (1) 15,169 189 1.03%
Earl M. Yoder 16,164 (1) 16,164 0 1.09%
Sheldon E. Yoder 2,364 (1) 2,364 0 .16%
Non-Director Executive Officers
Thomas J. Cilek 13,426 (2) 8,806 4,620 .90%
James G. Pratt 15,800 (2) 10,880 4,920 1.06%
All Directors and 146,223 (3) 112,954 33,269 9.84%
Executive Officers
as a group
(12 persons)
<FN>
NOTES:
(1) This figure includes 2,055 shares subject to currently exerciseable stock
options granted in 1993 for eight of the directors of the Company and 2,055
shares granted in 1997 to one director pursuant to the Hills Bancorporation
1993 Incentive Stock Plan.
(2) This figure includes shares held by the Hills Bank and Trust Company
Employee Stock Ownership Plan which have been allocated to the executive
officer for voting purposes. The following number of shares have been
allocated under the ESOP to the executive officers for voting purposes: Mr.
Seegmiller - 13,557; Mr. Cilek - 8,806; Mr. Pratt - 10,880; all executive
officers as a group - 33,243.
(3) Includes shares subject to currently exercisable options and shares held by
the Hills Bank and Trust Company Employee Stock Ownership Plan as noted in
Notes 1 and 2.
</FN>
</TABLE>
<PAGE>
EXECUTIVE COMPENSATION AND BENEFITS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Company and the Bank for the last three
fiscal years with respect to Mr. Seegmiller, as President of the Company, and to
the other two executive officers of the Company:
<TABLE>
Annual Compensation Long Term Compensation
--------------------------------- ----------------------
Awards
Name and ------------------
Principal Securities All Other
Position Year Salary ($) Bonus ($)(1) Underlying Options Compensation ($) (2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dwight O. Seegmiller 1997 206,428 28,043 0 13,500
President of 1996 201,428 17,643 0 13,500
Company and 1995 180,500 13,986 0 19,500
Bank
Thomas J. Cilek 1997 159,512 10,150 0 13,500
Secretary of 1996 159,512 7,951 0 13,500
Company; Senior 1995 151,500 6,390 0 19,500
Vice President
of Bank
James G. Pratt 1997 159,512 10,150 0 13,500
Treasurer of 1996 159,512 7,951 0 13,500
Company; 1995 151,500 5,726 0 19,500
Senior Vice
President of Bank
<FN>
Note:
(1) Consists of a $19,000 cash bonus for Mr. Seegmiller and a $7,000 cash bonus
to both Mr. Cilek and Mr. Pratt and additional compensation that represents
the contributions, which were limited due to statutory and administrative
rules, for the Hills Bank and Trust Company Employee Stock Ownership Plan
and Profit Sharing Plan.
(2) Consists solely of contributions made by the Bank to the Hills Bank and
Trust Company Employee Stock Ownership Plan and Profit Sharing Plan for the
named executive officer for the specified year.
</FN>
</TABLE>
Unexercised Stock Options
The following table contains information concerning unexercised stock
options which were granted in fiscal 1993 to the named executive officers under
the Company's 1993 Incentive Stock Plan:
<TABLE>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the Money Options at
FY-End(#) FY-End ($)
Exercisable/Unexercisable(1)(2) Exercisable/Unexercisable (3)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Dwight O. Seegmiller -0-/8,886 $-0-/$193,981
Thomas J. Cilek -0-/7,683 $-0-/$167,720
James G. Pratt -0-/7,395 $-0-/$161,433
<FN>
Notes:
(1) Options were granted in tandem with dividend equivalents. Dividend
equivalents entitle the holder of the option to receive, upon exercise of
the option, a cash payment equal to the dividends paid with respect to the
shares purchased from the date the option was granted through the date the
option was exercised.
<PAGE>
(2) All options granted are subject to a five-year vesting requirement and no
options may be exercised before July 13, 1998. All options will be
forfeited if the holder ceases to be employed by the Bank prior to
satisfying the five-year vesting requirement. The options may, in the
discretion of the Board of Directors, vest immediately upon a change in the
control of the Company.
(3) These dollar values were calculated by determining the difference between
the fair market value of the securities underlying the options and the
exercise or base price of the options at fiscal year-end. Options were
granted at an exercise price equal to the then fair market value of the
underlying stock which was determined by the Incentive Stock Committee of
the Board of Directors to be equal to the then book value per share
($26.17) of the stock. The fair market value of stock as of December 31,
1997 is $48.00 per share. Since no established trading market exists for
the Company's common stock the price of $48.00 is based on the last known
selling price in December, 1997. The book value per share of the stock as
of December 31, 1997 is $40.32 computed on the same method as the $26.17
book value used at the date the options were granted.
</FN>
</TABLE>
Employee Stock Ownership Plan
Hills sponsors a tax-qualified income plan for the employees of Hills
Bank and Trust Company, Hills Bank and Hills Bank Kalona known as the Hills Bank
and Trust Company Employee Stock Ownership Plan (the "ESOP"). The ESOP is
described in and operated in accordance with the provisions of the written plan
document. Hills is the trustee of the ESOP assets. The ESOP is a defined
contribution plan designed primarily to reward eligible employees for long and
loyal service by providing them with retirement benefits. The ESOP is designed
and intended to invest primarily in Common Stock issued by the Company and, in
so doing, to provide for employee participation in the equity ownership of the
Company. The ESOP may also provide benefits in the event of death, disability or
other termination of employment prior to retirement. Any benefits payable under
the ESOP will be based solely upon the amounts contributed for the benefit of a
participant and any changes in the value of those contributions while they are
held in the ESOP. The total number of participants in the ESOP as of January 1,
1998, was 217.
Participating employees are entitled to direct the trustee of the ESOP
how to vote the Common Stock of the Company held for their benefit and allocated
to their accounts under the ESOP. The trustee of the ESOP will have voting
discretion with regard to all other Common Stock of the Company owned by the
ESOP, if any. All common stock owned by the ESOP has been allocated to
participating employees.
Each calendar year Hills, as plan sponsor, contributes to the ESOP such
amount as may be determined by the Board of Directors of Hills or as may be
required to make any payments of principal and interest due on any loan made to
the trustee of the ESOP. The ESOP does not require or allow contributions by
participating employees. Distributions of benefits from the ESOP to plan
participants or their beneficiaries can be made either in cash or in Common
Stock of the Company. In recent years, distributions have been made partly in
cash and partly in Common Stock of the Company. Subject to certain exceptions,
contributions to the ESOP are fully vested after seven (7) years of service with
Hills, Hills Bank or Kalona.
The following table indicates the amount accrued pursuant to the ESOP
for each named executive officer or group during 1997:
Name of Individual Capacities in Amounts
or Number in Group Which Served Accrued
- --------------------------------------------------------------------------------
Dwight O. Seegmiller Director and President of the $1,500
Company; Director and President
of the Bank
Thomas J. Cilek Secretary of the Company; $1,500
Senior Vice President of the Bank
James G. Pratt Treasurer of the Company; $1,500
Senior Vice President of the Bank
All Executive Officers
as a group (3 persons) $4,500
All Other Participating
Employees (214 persons) $44,738
<PAGE>
Profit Sharing Plan
Hills began sponsoring a new profit sharing plan in December, 1994.
Hills is the trustee of the Hills Bank and Trust Company Profit Sharing Plan
(the "Profit Sharing Plan"). The Profit Sharing Plan is operated in accordance
with the provisions of the written plan document. Employees of Hills Bank and
Trust Company, Hills Bank and Hills Bank Kalona are eligible to participate in
the Profit Sharing Plan. The Profit Sharing Plan, like the ESOP, is designed
primarily to reward eligible employees for long and loyal service by providing
them with retirement benefits. The Profit Sharing Plan is a defined contribution
plan and is invested in assets other than equity securities of the Company. Any
benefits payable under the Profit Sharing Plan will be based solely upon the
amounts contributed for the benefit of a participant and any changes in the
value of those contributions while they are held in the Profit Sharing Plan. The
Profit Sharing Plan does not require or allow contributions by participating
employees. Subject to certain exceptions, contributions to the Profit Sharing
Plan are fully vested after seven (7) years of service with the Banks.
The following table indicates the amount accrued pursuant to the Profit
Sharing Plan for each named executive officer or group during 1997:
Name of Individual Capacities in Amounts
or Number in Group Which Served Accrued
- --------------------------------------------------------------------------------
Dwight O. Seegmiller Director and President of the
Company; Director and President
of the Bank $12,000
Thomas J. Cilek Secretary of the Company;
Senior Vice President of the Bank $12,000
James G. Pratt Treasurer of the Company;
Senior Vice President of the Bank $12,000
All Executive Officers
as a Group (3 persons) $36,000
All Other Participating
Employees (214 persons) $357,903
Performance Graph
The graphical presentation omitted herein provided information
regarding cumulative, five year shareholder returns on an indexed basis of the
Company's Common Stock as compared with NASDAQ Market Index and the West North
Central Bank Index prepared by Media General Financial Services of Richmond,
Virginia. The latter index reflects the performance of twenty-one bank holding
companies operating principally in the upper Midwest as selected by Media
General Financial Services. The indexes assume the investment of $100 on
December 31, 1992 in Company Common Stock, the NASDAQ Index and the West North
Central Bank Index, with all dividends reinvested. The data points used in the
omitted graph were as follows:
1992 1993 1994 1995 1996 1997
------------------------------------------------------
Hills Bancorporation $100.00 $113.32 $131.61 $143.63 $177.50 $223.43
West North Central Banks $100.00 $111.47 $113.79 $168.59 $233.65 $408.81
Nasdaq Market Index $100.00 $119.95 $125.94 $163.35 $202.99 $248.30
Compensation Committee Interlocks and Insider Participation
Except as otherwise noted below, all compensation decisions affecting
the executive officers of the Company and the Banks are made by the Board of
Directors of the Banks, as the executive officers are employees of the Banks.
The Board of Directors of the Banks has not established a compensation
committee. Mr. Seegmiller, President of the Banks, serves on the Board of
Directors of the Banks, but does not participate in deliberations or voting on
decisions concerning compensation of executive officers. Although Mr. Seegmiller
does make a recommendation to the Board of Directors regarding the compensation
of Mr. Cilek and Mr. Pratt, no recommendation is made by Mr. Seegmiller
regarding his own compensation. After making such recommendations, Mr.
Seegmiller is excused from the meeting and the Board of Directors deliberates
and votes upon the compensation to be paid to each of the three executive
officers. Decisions regarding the award of stock options to the three executive
officers pursuant to the Company's Incentive Stock Plan are made by an Incentive
Stock Committee of the Board of Directors of the Company consisting of the nine
non-employee directors (all directors but Mr. Seegmiller).
<PAGE>
Willis M. Bywater and Theodore H. Pacha, both members of the Board of
Directors of the Banks and the Incentive Stock Committee, participated in
deliberations concerning executive compensation matters during 1997. Under rules
of the Securities and Exchange Commission, the Banks are required to disclose
that it has had certain business relationships during 1997 with Economy
Advertising Company, a commercial printing and specialty advertising firm and
Hawkeye Medical Supply, a medical and office supply store. Mr. Bywater is an
executive officer and principal shareholder of Economy Advertising Company and
Mr. Pacha is an executive officer and owner of Hawkeye Medical Supply. During
1997, the Banks paid the sum of $205,330 to Economy Advertising Company for
commercial printing services and for the purchase of calendars and other
specialty advertising items and $21,062 to Hawkeye Medical Supply for office
equipment and supplies. The Banks contemplates that it will purchase a similar
amount of goods and services from Economy Advertising Company and Hawkeye
Medical Supply during 1998. Such business relationships have been entered into
in the ordinary course of business of the Banks and, in the opinion of
management, the prices charged for the goods and services provided by Economy
Advertising Company and Hawkeye Medical Supply Company are at least as favorable
to the Banks as prices generally charged by similar businesses in the area for
such goods and services. The Board of Directors of the Banks does not believe
that the participation by Mr. Bywater and Mr. Pacha in the deliberations
concerning executive compensation has provided the executive officers of the
Banks with more favorable compensation arrangements than would have been the
case absent their participation.
REPORT ON EXECUTIVE COMPENSATION
Under rules established by the Securities and Exchange Commission, the
Company is required to provide certain data and information in regard to the
compensation and benefits provided to Dwight Seegmiller, as President of the
Company and the Banks, and the other two executive officers of the Company and
the Banks. The disclosure requirements for these three individuals (the
"executive officers") include information set forth in various compensation
tables contained in this Proxy Statement and a report explaining the rationale
and matters considered in making fundamental executive compensation decisions
affecting those individuals. Decisions regarding executive officer salaries,
bonuses and contributions to the ESOP and, beginning in 1994, the Profit Sharing
Plan are made by the Board of Directors of the Banks, with Mr. Seegmiller
abstaining from deliberations and voting on such matters. Decisions regarding
the grant of awards to executive officers pursuant to the Incentive Stock Plan
are made by the Incentive Stock Committee of the Board of Directors of the
Company, consisting of the ten non-employee directors (all directors but Mr.
Seegmiller). In fulfillment of the disclosure requirements, the Board of
Directors of the Banks and the Incentive Stock Committee of the Company have
prepared the following report.
Compensation Policy
This report describes the current compensation policy as endorsed by
the Board of Directors of the Banks and the Incentive Stock Committee and the
resulting actions taken in arriving at 1997 compensation as reported in the
various compensation tables. The executive compensation program of the Banks has
been designed to:
- - provide a pay for performance policy that differentiates compensation
amounts based upon corporate and individual performance;
- - provide compensation opportunities which are comparable to those offered by
other Iowa-based financial institutions, thus allowing the Banks to compete
for and retain talented executives who are essential to the long-term
success of the Company and the Banks; and
- - align the interest of the executive officers with the long-term interest of
the Company's shareholders through the ownership of Company Common Stock.
<PAGE>
The executive compensation program is comprised of salary,
opportunities for annual cash bonuses, participation in the ESOP and
opportunities for long-term incentives pursuant to awards granted under the
Incentive Stock Plan and, beginning in 1994, participation in the Profit Sharing
Plan. An executive officer's salary is based on a number of factors, including
the Banks' performance as compared to internally established goals for the most
recently ended fiscal year and to the performance of other Iowa-based financial
institutions, the individual officer's level of responsibility within the Banks
and comparisons to salaries paid to officers holding similar positions in other
Iowa-based financial institutions. The award of an annual cash bonus is made in
the discretion of the Board of Directors and not pursuant to any formal plan or
formula. A bonus, if granted, is based on the individual performance of the
executive officer and the achievement of financial performance goals of the
Banks, as established in the Banks' annual budget and business plan. The Banks,
as plan sponsor of the ESOP, makes an annual ESOP contribution which is
allocated among all participating employees of the Banks, including the
executive officers, based on their annual salaries. In 1997, the Banks, as
sponsor of the Profit Sharing Plan, made a Profit Sharing Plan contribution
which was allocated among all participating employees of the Banks, including
the executive officers, based on their annual salaries. The amount of the ESOP
contribution and the amount of the Profit Sharing Plan contribution are
determined in the discretion of the Board of Directors and are based on the
achievement of financial performance goals of the Banks as established in the
Banks' annual budget and business plan. The Incentive Stock Committee uses the
award of stock options to executive officers (as well as the award of restricted
stock to other Banks employees) to align their interests with those of the
shareholders; however, significant vesting periods are also used to encourage
retention as employees. The amount of options granted is determined by reviewing
the practices of other financial institutions based on information provided by
an outside consultant to the Board of Directors.
In 1993, Section 162(m) of the Internal Revenue Code was amended to
place limits on the deductibility of compensation in excess of $1 million paid
to executive officers of publicly held companies. The Board of Directors of the
Banks does not believe, however, that the amendment has had or will have any
impact on the compensation policies followed by the Board.
President's Compensation
Mr. Seegmiller's base salary was increased from $201,428 to $206,428
effective January 1, 1997. This increase reflected consideration of (i) an
assessment of the Banks' performance during 1996 as compared to goals set in the
Banks' annual budget and business plan for 1996, (ii) a comparison of the Banks'
performance as compared with that of other Iowa-based financial institutions,
and (iii) compensation data provided by comparative industry surveys. Each year,
management of the Banks prepares, and the Board of Directors approves, an annual
budget and business plan containing financial performance goals measured
primarily in terms of earnings per share, asset quality, return on assets and
return on stockholders' equity. In setting Mr. Seegmiller's salary for 1997, the
Board reviewed the goals established for 1996 and determined that such goals had
been achieved by the Banks. The Board also reviewed the Banks' performance as
compared to that of other Iowa-based financial institutions of similar asset
size. Compensation data for other Iowa-based financial institutions of similar
asset size is also provided through surveys independently prepared by the Iowa
Bankers Association. The survey reviewed by the Board in setting 1997 salary
contained information on salaries paid during 1996 to the chief executive
officers of all of the 21 Iowa-based banks with deposits in excess of $225
million. While the foregoing factors are not specifically weighted in the
decision-making process, primary emphasis is placed on the Banks' performance
during the previous year as compared to the internally-established goals. Review
of comparable compensation data is used primarily as a check to ensure that the
salary established is within the range of salaries paid to other chief executive
officers of Iowa-based financial institutions. Although the Board reviewed a
number of objective factors as described above in setting Mr. Seegmiller's
salary for 1997, the amount of the increase was based on a subjective
determination by the Board.
Mr. Seegmiller was awarded a cash bonus in 1997 in the amount of
$19,000 based on a determination by the Board of Directors that the Banks had
accomplished certain goals as established in the budget and business plan for
1996. Those goals were measured primarily in terms of earnings per share, asset
quality, return on assets and return on stockholders' equity. The amount of the
bonus was based on a subjective determination by the Board. In addition to the
cash bonus, Mr. Seegmiller received additional compensation that represents the
contributions, which were limited due to statutory and administrative rules, for
the Hills Bank and Trust Company Employee Stock Ownership Plan and Profit
Sharing Plan.
<PAGE>
A contribution of $13,500 was made to Mr. Seegmiller's ESOP and profit
sharing accounts during 1997. The size of the contribution was determined as a
function of Mr. Seegmiller's 1997 salary (not including bonus) and the size of
the contribution made by the Banks, as plan sponsors, to the ESOP and profit
sharing plan for the benefit of all employees of the Banks eligible to
participate in the ESOP and profit sharing plans limited to a maximum of 15% of
$150,000 or $22,500 established by the Internal Revenue Service. For 1997, the
ESOP and profit sharing plan contributions made by the Banks amounted to 9% of
the aggregate salaries paid to all Banks employees eligible to participate in
the plans. The size of the ESOP and profit sharing contributions are determined
by the Board of Directors in its discretion based on its assessment of whether
the Banks achieved the goals established in the annual budget and business plan
for 1997. Once the size of the ESOP and profit sharing contributions were
determined, such contributions were allocated among the ESOP and profit sharing
accounts of all eligible employees of the Banks, including Mr. Seegmiller, based
on their annual salaries for 1997.
Compensation for Other Executive Officers
Effective January 1, 1997, the Board of Directors increased the
salaries paid to the two other executive officers of Hills as reflected in the
compensation table appearing herein. The Board of Directors also awarded a cash
bonus of $7,000 to each of the other two executive officers in 1997, and bonuses
as discussed for Mr. Seegmiller and appearing on the compensation table. The
salary increases and bonus awards were based on the same considerations as the
compensation decisions for the President of the Banks. Additionally,
contributions were made to the ESOP accounts and the Profit Sharing Plan
accounts of the other two executive officers, the size of which were determined
in accordance with the same procedure as used for all employees of the Banks.
BOARD OF DIRECTORS
HILLS BANK AND TRUST COMPANY
Incentive Stock Committee
Hills Bancorporation
Willis M. Bywater Ann Marie Rhodes
Thomas J. Gill, D.D.S. Ronald E. Stutsman
Donald H. Gringer Earl M. Yoder
Richard W. Oberman Sheldon E. Yoder
Theodore H. Pacha
LOANS TO AND CERTAIN OTHER TRANSACTIONS WITH
EXECUTIVE OFFICERS AND DIRECTORS
Certain of the officers and directors of the Company, their associates
or members of their families, were customers of, and have had transactions with,
the Banks from time to time in the ordinary course of business, and additional
transactions may be expected to take place in the ordinary course of business in
the future. All loans and commitments included in such transactions have been
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons.
In the opinion of management of the Banks, such loan transactions do not involve
more than the normal risk of collectibility or present other unfavorable
features.
During the past year, the Banks and the Company have maintained
business relationships with certain companies partially owned or operated by
members of the Board of Directors of the Company through the purchase of varying
amounts of goods and services from such companies. All such business
relationships have been entered into in the ordinary course of business of the
Banks and the Company and, in the opinion of management, the prices charged for
such goods and services have been at least as favorable to the Banks and the
Company as prices generally charged by similar businesses in the area for such
goods and services. Management of the Company anticipates that the Banks and the
Company will continue to maintain such business relationships on a similar basis
to the extent that such goods and services are required by the Banks and the
Company in the future.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
McGladrey & Pullen, LLP, Certified Public Accountants, provided
accounting services to the Company during the Company's fiscal year ended
December 31, 1997. The Board of Directors of the Company has selected McGladrey
& Pullen, LLP to provide accounting services to the Company for the fiscal year
ending December 31, 1998. A representative of McGladrey & Pullen, LLP is
expected to be present at the Annual Meeting with the opportunity to make a
statement if he desires to do so and he is also expected to be available to
respond to appropriate questions.
<PAGE>
PROPOSALS BY SHAREHOLDERS
Shareholder proposals intended to be presented at the Annual Meeting of
Shareholders to be held in 1998 must be received by the Company no later than
December 4, 1998 for inclusion in the Company's proxy statement and form of
proxy relating to that meeting. Proposals should be submitted to the Company at
its principal executive offices at 131 Main Street, Hills, Iowa 52235.
AVAILABILITY OF FORM 10-K REPORT
Copies of the Company's Annual Report to the Securities and Exchange
Commission (Form 10-K) including the financial statements and schedules thereto
for the fiscal year of the Company ended December 31, 1997, will be mailed when
available without charge (except for exhibits) to a holder of shares of the
Common Stock of the Company upon written request to James G. Pratt, Treasurer,
Hills Bancorporation, 131 Main Street, Hills, Iowa 52235.
OTHER MATTERS
Management of the Company knows of no other matters which will be
presented for consideration at the Annual Meeting of Shareholders other than
those stated in the Notice of Annual Meeting which is part of this Proxy
Statement, and management does not intend itself to present any such other
business. If any other matters do properly come before the meeting, it is
intended that the persons named in the accompanying proxy will vote thereon in
accordance with their judgment. The proxy will also have the power to vote for
the adjournment of the meeting from time to time.
A copy of the Annual Report of the Company for the year ended December
31, 1997, is mailed to shareholders together with this Proxy Statement. Such
report is not incorporated in this Proxy Statement and is not to be considered a
part of the proxy soliciting material.
By Order of the Board of Directors
/s/ Dwight O. Seegmiller
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Dwight O. Seegmiller
President
March 23, 1998
Hills, Iowa
