HILLS BANCORPORATION
FORM 10-K
DECEMBER 31, 1999
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999. Commission File Number 0-12668.
HILLS BANCORPORATION
(Exact name of Registrant as specified in its charter)
Iowa 42-1208067
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
131 Main Street, Hills, Iowa 52235
- ----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 679-2291
Securities Registered pursuant to Section 12 (b) of the Act: None
Securities Registered pursuant to Section 12 (g) of the Act:
No par value common stock
-------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registrant S-K (229.405 of this chapter) is not contained herein, and will
not be contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
While it is difficult to determine the market value of shares owned by
nonaffiliates (within the meaning of such term under the applicable regulations
of the Securities and Exchange Commission), the Registrant estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 20, 2000 (based upon reports of beneficial ownership that approximately
80% of the shares are so owned by nonaffiliates and upon information
communicated informally to the Registrant by various purchasers and sellers that
the sale price for the common stock is generally $70 per share) was $83,773,000.
The number of shares outstanding of the Registrant's common stock as of March
20, 2000 is 1,495,941 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 20, 2000 for the Annual Meeting of
the Shareholders of the Registrant to be held April 17, 2000 (the Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.
EXHIBIT INDEX
The exhibits index is on Page 67.
<PAGE>
Part I
Item 1. Business
Hills Bancorporation (the "Company") is a multibank holding company principally
engaged in the business of banking. Its three wholly-owned subsidiary banks are
Hills Bank and Trust Company, Hills, Iowa ("Hills Bank and Trust"); Hills Bank,
Lisbon, Iowa ("Hills Bank Lisbon"); and Hills Bank Kalona, Kalona, Iowa ("Hills
Bank Kalona") (hereinafter collectively referred to as the "Banks").
The Company was incorporated December 12, 1982 and all operations are conducted
within the state of Iowa. The Company became owner of 100% of the outstanding
stock of Hills Bank and Trust as of January 23, 1984 when stockholders of Hills
Bank and Trust exchanged their shares for shares of the Company. Effective July
1, 1996, the Company acquired for cash all the outstanding shares of Hills Bank
Lisbon and on September 20, 1996, Hills Bank Kalona acquired cash, certain
assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank
Iowa, N.A.
The Banks are all full-service commercial banks extending their services to
individuals, business, governmental units and institutional customers primarily
in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount
Vernon and Kalona and the surrounding area and most recently in Cedar Rapids.
This area includes parts of Johnson, Linn and Washington counties. All of the
Banks are actively engaged in all areas of commercial banking, including
acceptance of demand; savings and time deposits; making commercial, real estate,
agricultural and consumer loans; maintaining night and safe deposit facilities;
and performing collection, exchange and other banking services tailored for
individual customers. Hills Bank and Trust administers estates, personal trusts,
and pension and profit-sharing funds and, in connection therewith, provides for
farm management and investment advisory and custodial services for individuals,
corporations and nonprofit organizations. At this time, trust services are
available only at the Hills Bank and Trust locations. The loan activity of the
Banks is diversified, with commercial and agricultural loans, real estate loans,
automobile, installment and other consumer loans composing the majority of its
loan portfolio. In addition, the Banks earn substantial fees from originating
mortgages that are sold in the secondary residential real estate market without
mortgage servicing rights being maintained.
Each Bank has established formal loan origination policies. In general, the loan
origination policies require individual lenders to reduce the risk of credit
loss to the Bank by requiring that, among other things, minimum loan to value
ratios be maintained, evidence of appropriate levels of insurance be carried by
borrowers and documenting appropriate types and amounts of collateral and
sources of expected payment.
The Banks' business is not seasonal, except that loan origination fees are
higher during the spring and summer months. The Banks have not undertaken
significant new services during the current year that might exceed the limits of
their human resources and data processing capabilities.
Hills Bank and Trust serves the communities of Iowa City, Coralville, Hills and
North Liberty, located near Interstate 80 and Interstate 380 in Eastern Iowa.
The communities have a population of approximately 80,000 and Johnson County,
Iowa has a population of approximately 106,000. The University of Iowa has over
27,000 students and 23,000 full and part-time employees, including employees of
The University of Iowa Hospitals and Clinics. Johnson County, Iowa has one of
the strongest economies in Iowa and has had substantial economic growth in the
past ten years. Johnson County is known for its educational institutions, health
care facilities, cultural and sports events, and retail centers.
<PAGE>
Hills Bank Lisbon has offices located in Lisbon, Iowa (Linn County) and Mount
Vernon, Iowa (Linn County), approximately 25 miles northeast of Iowa City and
does not conduct business in the same trade territories as Hills Bank and Trust.
Lisbon has a population of approximately 1,500 and Mount Vernon, located two
miles away, has a population of 3,700. Both communities are strong economically
and are easy commuting distances to Cedar Rapids and Iowa City, Iowa. In
addition, Mount Vernon is the home of Cornell College, which has approximately
1,200 students. In February 2000, Hills Bank Lisbon opened an office in downtown
Cedar Rapids, Iowa. Cedar Rapids has a metropolitan population of approximately
180,000 and is located approximately 10 miles west of Lisbon, Iowa.
Hills Bank Kalona is located in Kalona, Iowa (Washington County), approximately
20 miles south of Iowa City with a population of approximately 2,000 people.
Kalona is primarily an agricultural community, but is located within easy
driving distance for employment in Iowa City and Washington, Iowa.
The commercial banking business is highly competitive and the Banks compete with
other commercial banks, credit unions, brokerage firms, finance companies,
insurance companies and other financial institutions.
Iowa's banking laws regarding interstate banking and interstate branching are
currently more restrictive than many other states. As a result of the enactment
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 many
of the state-imposed geographic limitations on bank ownership have been
liberalized. The 1994 Act expanded opportunities for interstate banking,
interstate mergers and interstate branching in the United States. First, subject
to certain limitations, bank holding companies from anywhere in the United
States are able to acquire Iowa banks with the permission of the Federal Reserve
Board. Second, the 1994 Act authorizes a national or state bank which has its
main office in another state to merge with an Iowa bank and operate the Iowa
location as a branch office. However, out-of-state bank holding companies cannot
acquire Iowa commercial banks unless such banks have been in existence for at
least five years. Hills Bank Kalona has been in existence since September 20,
1996. Iowa also currently has a deposit concentration limit of 10% on the amount
of deposits that any one banking organization can control and continue to
acquire banks, which applies to both in-state and out-of-state banks. Iowa also
has a 35% limit on the aggregate amount of deposits all out-of-state banking
organizations can control within Iowa.
In recent years, Norwest Bank Iowa, N.A., Mercantile Bancorporation, Firstar
Corporation, Commercial Federal Bank and NationsBank have acquired a number of
independent banks and smaller multibank holding companies in various
metropolitan areas of Iowa. Each operates under a single charter in Iowa. In
September 1998, the Company's largest competing bank in Iowa City, with assets
of approximately $550 million, was acquired by Mercantile Bancorporation and
effective January 2000 the Mercantile banks in Iowa were merged into Firstar
Bank Iowa.
<PAGE>
Iowa's intrastate branching statutes are also rather restrictive when compared
with those of other states. Generally, bank branch offices may only be operated
or acquired in counties contiguous to or cornering upon the county in which the
Bank has its principal place of business. Also, a bank in Iowa may not establish
a new branch office in a city in which there exists an office of another bank,
other than by acquisition of an existing office or bank. Effective July 1, 1998,
the number of bank branch offices allowed within a municipal corporation or an
urban complex is unlimited. However, some of Iowa's intrastate branching
limitations regarding geographic location of branch offices and the number of
branch offices which may be established in an urban complex or any other
location in Iowa may be overcome by merging two or more affiliated banking
organizations that have been in continuous operation in Iowa for at least five
years into a "united community bank."
In 1999 and 1998, three smaller banks from outlying communities in Johnson
County opened branches or De Novo banks in Iowa City or Coralville, and Brenton
Bank opened an office in Coralville. Similarly, several smaller banks have
recently began competing in the Cedar Rapids trade area.
The Financial Services Modernization Act ("FSMA") was enacted into law on
November 12, 1999. The most significant provision in this legislation is the
repeal of the restriction on banks affiliating with securities firms. The FSMA
would allow the creation of a "financial holding company" which can engage in a
number of financial activities including insurance and securities underwriting
and other agency activities, merchant banking and insurance company portfolio
investment activities. Activities that are ancillary to financial activities are
also allowed. Additionally, the FSMA amends the federal securities laws to
incorporate functional regulation of bank securities activities and provides for
the functional regulation of insurance activities by establishing which
insurance products banks and bank subsidiaries may provide as principal.
Furthermore, the FSMA provides reform in the Federal Home Loan Bank area by
providing that banks with less than $500 million in assets may use long-term
advances for loans to small businesses, small farms and small agri-businesses
and replaces the current $300 million funding formula for the REFCORP
obligations of the Federal Home Loan Banks to twenty percent (20%) of the Bank's
annual net earnings.
In the area of privacy, the FSMA requires clear disclosure by all financial
institutions of their privacy policy regarding the sharing of nonpublic
information with both affiliates and third parties. Further, the FSMA requires a
notice to consumers and an opportunity to "opt-out" of sharing of nonpublic
personal information with nonaffiliated third parties subject to certain limited
exceptions. The FSMA also provides reform in the areas of ATM's, Community
Reinvestment, Community Banks and Deposit Production Offices. Specifically, the
FSMA requires ATM operators who impose a fee for use of an ATM by a noncustomer
to post a notice on the machine that a fee will be charged and on the screen
that a fee will be charged and the amount of the fee, and further requires a
notice when ATM cards are issued that surcharges may be imposed by other parties
when transactions are initiated from ATM's not operated by the car issuer. The
FSMA also clarifies that nothing in the act repeals any provision of the
Community Reinvestment Act ("CRA"); however, the FSMA requires full disclosure
of all CRA agreements and grants regulatory relief regarding the frequency of
CRA exams to small banks and savings and loans (those with no more than $250
million in assets). In the community bank area, the FSMA allows community banks
all the powers as a matter of right that large institutions have accumulated on
an ad hoc basis, including the ability to underwrite municipal bonds in several
years. Finally, the FSMA expands the prohibition of deposit production offices
contained in the Reigle-Neal Interstate bill to include all branches of an
out-of-state bank holding company.
<PAGE>
Hills Bank and Trust Company is in direct competition for deposits, loans and
other financial related business with other financial institutions in Johnson
County, Iowa. One of the largest competitors serving Johnson County is a branch
of Mercantile Bank, which does not disclose local assets. Other independent
financial institutions are:
Assets As Of
December 31,
1999
-------------
(In Millions)
Largest competing bank $ 382
Next largest competing bank 155
Largest competing credit union 185
Hills Bank Kalona and Hills Bank Lisbon compete with other banks in their trade
territories. Management estimates that these banks hold less than 40% of the
deposits in their respective communities.
No material portion of the Banks' deposits have been obtained from a single
person or a few persons. Accordingly, management of the Banks have no reason to
believe that the loss of the deposits of any person or few persons would have a
materially adverse effect on the Banks' operations or erode its deposit base.
Approximately 4.7% of the Banks' loans have been made for agricultural purposes.
The agricultural sector of the economy has been cyclical with a general trend
toward fewer and larger farms. The Banks have not experienced a material adverse
effect on their business as a result of defaults on agricultural loans and
expect none in the future.
The Company does not engage in any business activities apart from its ownership
of the Banks and, therefore, does not encounter any competition for its services
other than as described above for the Banks.
The Company and the Banks have undertaken no material research activities during
the last three years relating to research and development activities.
The Company is regulated by the Federal Reserve Bank.
All the Banks are regulated by the Federal Deposit Insurance Corporation and the
State of Iowa Division of Banking.
The Company had no employees as of December 31, 1999 and the Banks had 232
regular and 80 part-time employees.
<PAGE>
The following consolidated statistical information reflects selected balances
and operations of the Company and the Banks for the periods indicated.
The following tables show (1) average balances of assets and liabilities, (2)
interest income and expense on a tax equivalent basis, (3) interest rates and
differential and (4) changes in interest income and expense.
AVERAGE BALANCES
(Average Daily Basis)
December 31,
----------------------------------
1999 1998 1997
----------------------------------
(In Thousands)
ASSETS
Cash and due from banks ................... $ 16,863 $ 13,441 $ 12,689
Taxable securities ........................ 119,856 111,099 110,542
Nontaxable securities ..................... 34,699 30,122 25,184
Federal funds sold ........................ 9,796 23,279 3,032
Loans, net ................................ 508,293 438,072 397,787
Property and equipment, net ............... 11,633 10,410 8,603
Other assets .............................. 17,249 16,098 14,829
--------------------------------
$ 718,389 $ 642,521 $ 572,666
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits ....... $ 62,317 $ 52,538 $ 48,330
Interest-bearing demand deposits .......... 57,017 46,874 43,262
Savings deposits .......................... 152,507 131,988 119,282
Time deposits ............................. 274,507 262,111 250,241
Securities sold under agreements to
repurchase and federal funds
purchased .............................. 12,139 7,974 8,740
FHLB borrowings ........................... 86,880 75,262 43,026
Other liabilities ......................... 4,659 4,250 4,255
Redeemable common stock held by
Employee Stock Ownership Plan .......... 10,127 8,491 7,049
Stockholders' equity ...................... 58,236 53,033 48,481
--------------------------------
$ 718,389 $ 642,521 $ 572,666
================================
<PAGE>
INTEREST INCOME AND EXPENSE
Year Ended December 31,
------------------------------------
1999 1998 1997
----------------------------------
(In Thousands)
Income:
Loans (1) ................................. $ 42,107 $ 38,039 $ 34,814
Taxable securities ........................ 7,167 6,832 6,769
Nontaxable securities (1) ................. 2,373 2,112 1,845
Federal funds sold ........................ 455 1,209 158
---------------------------------
Total interest income .......... 52,102 48,192 43,586
---------------------------------
Expense:
Interest-bearing demand deposits .......... 1,175 997 949
Savings deposits .......................... 4,769 4,648 4,183
Time deposits ............................. 14,882 14,813 14,162
Securities sold under agreements to
repurchase ............................. 517 417 426
FHLB borrowings ........................... 4,970 4,379 2,782
---------------------------------
Total interest expense ......... 26,313 25,254 22,502
---------------------------------
Net interest income ............ $ 25,789 $ 22,938 $ 21,084
=================================
(1) Presented on a tax equivalent basis using a federal tax rate of 34%.
INTEREST RATES AND INTEREST DIFFERENTIAL
Year Ended December 31,
-----------------------------
1999 1998 1997
-----------------------------
Average yields:
Taxable securities ............................. 5.98% 6.15% 6.12%
Nontaxable securities .......................... 4.51 4.63 4.84
Nontaxable securities (tax equivalent basis) ... 6.84 7.01 7.33
Loans (1) ...................................... 8.25 8.64 8.70
Loans (tax equivalent basis) ................... 8.28 8.68 8.75
Federal funds sold ............................. 4.64 5.19 5.21
Interest-bearing demand deposits ............... 2.06 2.13 2.19
Savings deposits ............................... 3.13 3.52 3.51
Time deposits .................................. 5.42 5.65 5.66
Securities sold under agreements to repurchase . 4.26 5.23 4.87
Interest on FHLB borrowings .................... 5.72 5.82 6.47
Yield on average interest-earning assets ....... 7.75 8.00 8.12
Rate on average interest-bearing liabilities ... 4.51 4.82 4.84
Net interest spread (2) ........................ 3.24 3.18 3.28
Net interest margin (3) ........................ 3.83 3.81 3.93
(1) Nonaccruing loans are not significant and have been included in the average
loan balances for purposes of this computation.
(2) Net interest spread is the difference between the yield on average
interest-earning assets and the yield on average
(3) Net interest margin is net interest income, on a tax equivalent basis,
divided by average interest-earning assets.
<PAGE>
CHANGE IN INTEREST INCOME AND EXPENSE
Change Due Change Due Total
-------------------------------
To Volume To Rates Change
-------------------------------
(In Thousands)
Year ended December 31, 1999:
Change in interest income:
Loans ..................................... $ 5,882 $ (1,814) $ 4,068
Taxable securities ........................ 528 (193) 335
Nontaxable securities ..................... 337 (76) 261
Federal funds sold ........................ (637) (117) (754)
-------------------------------
6,110 (2,200) 3,910
-------------------------------
Change in interest expense:
Interest-bearing demand deposits .......... 212 (34) 178
Savings deposits .......................... 672 (551) 121
Time deposits ............................. 685 (616) 69
Securities sold under agreements to
repurchase ............................. 188 (88) 100
Interest on FHLB borrowings ............... 667 (76) 591
-------------------------------
2,424 (1,365) 1,059
-------------------------------
Change in net interest income ................ $ 3,686 $ (835) $ 2,851
===============================
Year ended December 31, 1998:
Change in interest income:
Loans ..................................... $ 3,505 $ (280) $ 3,225
Taxable securities ........................ 32 31 63
Nontaxable securities ..................... 330 (63) 267
Federal funds sold ........................ 1,052 (1) 1,051
-------------------------------
4,919 (313) 4,606
-------------------------------
Change in interest expense:
Interest-bearing demand deposits .......... 75 (27) 48
Savings deposits .......................... 453 12 465
Time deposits ............................. 676 (25) 651
Securities sold under agreements to
repurchase ............................. (39) 30 (9)
Interest on FHLB borrowings ............... 1,901 (304) 1,597
-------------------------------
3,066 (314) 2,752
-------------------------------
Change in net interest income ................ $ 1,853 $ 1 $ 1,854
===============================
Rate/volume variances are allocated on a consistent basis using the absolute
values of changes in volume compared to the absolute values of the changes in
rates. Loan fees included in interest income are not material. Interest on
nontaxable securities and loans is shown at tax equivalent amounts.
<PAGE>
LOANS
The following table shows the composition of loans (before deducting the reserve
for loan losses) as of December 31 for each of the last five years.
December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
(In Thousands)
Agricultural ................ $ 27,302 $ 32,318 $ 27,636 $ 23,133 $ 19,000
Commercial and financial .... 36,848 39,438 33,616 30,650 26,810
Real estate, construction ... 40,879 28,476 8,157 8,846 7,937
Real estate, mortgage ....... 439,072 338,871 332,655 279,134 239,899
Loans to individuals ........ 31,030 30,664 28,707 33,812 31,640
---------------------------------------------------
Total ......... $ 575,131 $ 469,767 $ 430,771 $ 375,575 $ 325,286
===================================================
There were no foreign loans outstanding for any of the years presented
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31,
1999:
<TABLE>
Amount One Year One To Over Five
Of Loans Or Less(1) Five Years Years
---------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural ......... $ 64,150 $ 35,134 $ 24,776 $ 4,240
Real estate, construction and mortgage ......... 479,951 73,126 192,431 214,394
Other .......................................... 31,030 10,492 19,732 806
--------------------------------------------
$ 575,131 $ 118,752 $ 236,939 $ 219,440
============================================
Interest rates on loans are as follows:
Fixed rate .................................. $ 355,167 $ 98,300 $ 229,552 $ 27,315
Variable rate ............................... 219,964 20,452 7,387 192,125
--------------------------------------------
$ 575,131 $ 118,752 $ 236,939 $ 219,440
============================================
</TABLE>
(1) A significant portion of the commercial loans are six-month notes.
However, a significant amount of these notes are renewed when due.
<PAGE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Company's nonaccrual, past due, restructured
and impaired loans as of December 31 for each of the years presented:
1999 1998 1997 1996 1995
---------------------------------------------
(In Thousands)
Nonaccrual loans .................. $ - - $ 12 $ - - $ 339 $ 489
Accruing loans past due
90 days or more ................ 1,320 945 954 1,092 417
Restructured loans
Impaired loans .................... 9,265 8,956 9,556 7,811 5,465
The Company does not have a significant amount of loans which are past due less
than 90 days on which there are serious doubts as to the ability of the
borrowers to comply with the loan repayment terms.
Loans are placed on nonaccrual status when management believes the collection of
future interest is not reasonably assured. Interest income was not materially
affected by this classification.
The Company has no individual borrower or borrowers engaged in the same or
similar industry exceeding 10% of total loans. The Company has no other
interest-bearing assets, other than loans, that meet the nonaccrual, past due,
restructured or potential problem loan criteria.
No allowance for losses has been recognized for impaired loans because partial
charge-offs have been taken to reduce the loan balances to the net present value
of the future cash flows or the fair value of the collateral if the loan is
collateral dependent.
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for each of
the last five years:
Year Ended December 31,
----------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------
(In Thousands)
Amount of loan loss allowance
at beginning of year .......... $ 8,856 $ 8,010 $ 7,311 $ 6,740 $ 6,210
----------------------------------------------
Charge-offs:
Agriculture ................... 60 4 197 300 101
Commercial and financial ...... 181 431 326 236 387
Real estate, mortgage ......... 104 132 215 127 180
Loans to individuals .......... 418 401 390 308 254
----------------------------------------------
763 968 1,128 971 922
----------------------------------------------
Recoveries:
Agriculture ................... 157 125 65 48 218
Commercial and financial ...... 260 256 195 95 226
Real estate, mortgage ......... 30 100 377 215 149
Loans to individuals .......... 310 417 142 80 137
----------------------------------------------
757 898 779 438 730
----------------------------------------------
Net charge-offs .................. 6 70 349 533 192
----------------------------------------------
Allowances of acquired banks ..... - - - - - - 350 - -
----------------------------------------------
Provision for loan losses (1) .... 900 916 1,048 754 722
----------------------------------------------
Balance of loan loss allowance
at end of year ................ $ 9,750 $ 8,856 $ 8,010 $ 7,311 $ 6,740
==============================================
Ratio of net charge-offs during
year to average loans
outstanding ................... 0.00% 0.02% 0.09% 0.16% 0.06%
==============================================
The balance of the loan loss allowance has not been allocated by type of loan.
Management regularly reviews the loan portfolio and does not expect any unusual
material amount to be charged off during 2000 that would be significantly
different than the years ended December 31, 1999, 1998, 1997, 1996 and 1995.
(1) For financial reporting purposes, management regularly reviews the loan
portfolio and determines a provision for loan losses based upon the
impact of economic conditions on the borrower's ability to repay, past
collection experience, the risk characteristics of the loan portfolio and
such other factors which deserve current recognition. For income tax
purposes, the allowance is maintained at the maximum allowable amount.
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Banks review and place in risk categories specific borrowings. Based upon
the risk category assigned, the Banks allocate a percentage, as determined by
management, for a required allowance needed. The risk categories are similar to
those used by federal and state regulatory agencies and consist of the
following:
(1) Potential watch and watch
(2) Problem
(3) Substandard
(4) Doubtful
In addition, each bank's management also reviews and, where determined
necessary, allows for specific allowances based upon reviews of specific
borrowers and provides general allowances for areas which management believes
are of higher credit risk (agricultural loans and constructed model real estate
homes as of December 31, 1999).
A summary of the components of the allowance for loan loss, by risk category, as
of December 31, 1999 and 1998 is as follows:
1999 1998
------------------------------
(In Thousands)
Potential watch and watch loans .................. $ 3,164 $ 2,905
Substandard ...................................... 2,416 2,169
Specific borrowers (agricultural loans) .......... 1,025 1,048
Constructed model real estate homes .............. 925 969
Anticipated charge-offs of the above categories are not determinable at December
31, 1999; however, it is possible that agricultural loan charge-offs could be
higher in 2000 than the historical average due to lower farm commodity prices in
recent months.
<PAGE>
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of
December 31, 1999, 1998 and 1997 and the maturities and weighted average yield
of the investment securities as of December 31, 1999:
December 31,
---------------------------------
1999 1998 1997
---------------------------------
(In Thousands)
Carrying value:
U. S. Treasury securities .................. $ 19,470 $ 33,340 $ 40,189
Obligations of other U. S. Government
agencies and corporations ............... 94,302 78,083 65,445
Obligations of states and political
subdivisions ............................ 36,496 33,580 27,692
---------------------------------
$ 150,268 $ 145,003 $ 133,326
=================================
December 31, 1999
------------------------
Weighted
Carrying Average
Value Yield
------------------------
(In Thousands)
Type and maturity grouping:
U. S. Treasury maturities:
Within 1 year .................................... $ 9,029 6.23%
From 1 to 5 years ................................ 10,441 5.96
------------
19,470
------------
Obligations of other U. S. Government agencies and
corporations, maturities:
Within 1 year .................................... 17,477 6.15%
From 1 to 5 years ................................ 76,353 6.02
From 5 to 10 years ............................... 472 6.05
------------
94,302
------------
Obligations of states and political subdivisions,
maturities:
Within 1 year .................................... 3,302 6.97%
From 1 to 5 years ................................ 19,080
From 5 to 10 years ............................... 13,851 6.71
Over 10 years .................................... 263 8.11
------------
36,496
------------
Total .................................... $ 150,268
============
<PAGE>
INVESTMENT SECURITIES
As of December 31, 1999, there were no investment securities of any issuer,
other than securities of the U. S. Government and U. S. Government agencies and
corporations, exceeding 10% of stockholders' equity.
The weighted average yield is based on the amortized cost of the investment
securities. The yields are computed on a tax-equivalent basis using a federal
tax rate of 34% and a state tax rate of 5%.
DEPOSITS
The following tables show the average deposits and rates paid on such deposits
for the years ended December 31, 1999, 1998 and 1997 and the composition of the
certificates issued in denominations in excess of $100,000 as of December 31,
1999:
<TABLE>
December 31,
----------------------------------------------------------------
1999 Rate 1998 Rate 1997 Rate
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average noninterest-bearing deposit ........ $ 62,317 0.00% $ 52,538 0.00% $ 48,330 0.00%
Average interest-bearing demand
deposits ................................ 57,017 2.06 46,874 2.13 43,262 2.19
Average savings deposits ................... 152,507 3.13 131,988 3.52 119,282 3.51
Average time deposits ...................... 274,507 5.42 262,111 5.65 250,241 5.66
---------- ---------- ----------
$ 546,348 $ 493,511 $ 461,115
========== ========== ==========
</TABLE>
Time certificates issued in amounts
of $100,000 or more as of
December 31, 1999 with Amount Rate
maturity in: -------------------------------
3 months or less ........................ $ 4,861 5.15
3 through 6 months ...................... 9,228 5.05
6 through 12 months ..................... 6,285 5.07
Over 12 months .......................... 10,068 5.60
-----------
$ 30,442
===========
There were no deposits in foreign banking offices.
<PAGE>
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and
average assets for the years ended December 31, 1999, 1998 and 1997:
December 31,
------------------------------
1999 1998 1997
------------------------------
Return on assets .............................. 1.18% 1.17% 1.24%
Return on stockholders' equity ................ 14.54 14.12 14.62
Dividend payout ratio ......................... 22.56 23.52 21.69
Stockholders' equity to assets ratio .......... 8.11 8.25 8.47
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates of federal funds purchased and securities sold under
agreements to repurchase during 1999, 1998 and 1997:
1999 1998 1997
-------------------------------
(Amounts In Thousands)
Outstanding as of December 31 ................... $ 26,714 $ 10,554 $ 9,008
Weighted average interest rate at year end ...... 4.28% 4.40% 4.30%
Maximum month-end balance ....................... 27,815 10,547 16,104
Average month-end balance ....................... 12,139 7,974 8,740
Weighted average interest rate for the year ..... 4.26% 5.23% 4.87%
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding balances, weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average interest rates during 1999, 1998 and 1997:
1999 1998 1997
--------------------------------
Outstanding as of December 31 .................. $ 108,700 $ 75,732 $ 50,764
Weighted average interest rate at year end ..... 5.66% 5.68% 6.42%
Maximum month-end balance ...................... 108,700 85,764 50,764
Average month-end balance ...................... 86,880 75,262 43,026
Weighted average interest rate for the year .... 5.72% 5.82% 6.47%
<PAGE>
PART I
Item 2. Properties
The Company's office and the main bank of Hills Bank and Trust are located at
131 Main Street, Hills, Iowa. This is a brick building containing approximately
14,200 square feet, a portion of which was built in 1977 and remodeled in 1986.
A two-story addition was completed in 1984.
The other offices of Hills Bank and Trust are as follows:
1. Iowa City office located at 1401 South Gilbert Street is a one-story
brick building containing approximately 15,400 square feet. The branch
has five drive-up teller lanes and a drive-up 24-hour automatic teller
machine. The Bank's trust department is located here. This building was
constructed in 1982 and has been expanded several times, most recently in
1998.
2. Coralville office is a two-story building built in 1972 that contains
approximately 16,700 square feet of space. This ofice is equipped with
four drive-up teller lanes and one 24-hour automatic teller machine.
3. A 2,800 square foot branch bank in North Liberty, Iowa was opened for
business in 1986. That office is a full-service location including three
drive-up teller lanes and a drive-up automatic teller machine.
4. The Bank leases an office at 132 East Washington Street in downtown Iowa
City with approximately 2,500 square feet. The office has two 24-hour
automatic teller machines and two private offices in addition to a
tellers and customer service area. The lease expires in 2001, but the
Bank has an option for an additional five years.
5. In June 1999, the Bank opened an office at 2400 Towncrest Drive on the
eastside of Iowa City. The office is approximately 1,100 square fet and
the lease expires in June 2002.
The Lisbon office of Hills Bank is a two-story brick building in Lisbon, Iowa
with approximately 3,000 square feet of banking retail space located on the
first floor. The building was extensively remodeled in 1996 and has one drive-up
lane and a walk-up 24-hour automatic teller machine. Hills Bank Lisbon
constructed and opened its Mount Vernon office location in February 1998 with
the completion of a full service, 4,200 square foot office, with four drive-up
lanes and a drive-up automatic teller machine. In February 2000, the Bank opened
a 2,900 square foot branch office in Cedar Rapids which is leased.
Hills Bank Kalona owns a 6,400 square foot building in Kalona that contains a
walk-up 24-hour automatic teller machine and one drive-up lane. This is an older
building that has been remodeled a number of times including a major renovation
in late 1998.
All of the properties owned by the Bank are free and clear of any mortgages or
other encumbrances of any type.
PART I
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Neither the Company nor the Banks hold any properties which are the subject of
hazardous waste clean up investigations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the three months
ended December 31, 1999.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
There is no established trading market for the Company's common stock. Its stock
is not listed with any exchange or quoted in an automated quotation system of a
registered securities association, nor is there any broker/dealer acting as a
market maker for its stock. A bid and ask price is quoted in an Iowa City local
paper and the quotes are provided by a local broker. The Company's stock is not
actively traded. As of December 31, 1999, the Company had 1,166 shareholders.
Based on the Company's stock transfer records and information informally
provided to the Company, its stock trading transactions have been as follows:
Number High Low
Of Shares Number Of Selling Selling
Year Traded Transactions Price Price
- --------------------------------------------------------------------------------
1999 6,415 22 $ 70 $ 58
1998 2,320 12 58 48
1997 7,314 12 48 40
The Company paid aggregate annual cash dividends in 1999 and 1998 of $1,910,000
and $1,761,000, respectively, or $1.30 per share in 1999 and $1.20 per share in
1998. In January 2000, the Company declared and paid a dividend of $1.45 per
share totaling $2,169,000. The decision to declare any such cash dividends in
the future and the amount thereof rests within the discretion of the Board of
Directors and will remain subject to, among other things, certain regulatory
restrictions imposed on the payment of dividends by the Banks, and the future
earnings, capital requirements and financial condition of the Company.
<PAGE>
PART II
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR-END TOTALS
Total assets ............................. $ 773,966 $ 689,787 $ 603,102 $ 539,452 $ 484,607
Investment securities .................... 156,198 149,350 138,064 132,635 121,536
Federal funds sold ....................... 206 36,811 2,447 1,107 16,080
Loans, net ............................... 565,381 460,911 422,761 368,264 318,546
Deposits ................................. 562,086 534,151 479,770 450,061 392,257
Federal Home Loan Bank notes ............. 108,700 75,732 50,764 25,795 30,727
Redeemable common stock .................. 10,953 9,301 7,682 6,416 5,271
Stockholders' equity ..................... 60,264 56,452 51,500 47,335 43,277
EARNINGS
Interest income .......................... $ 51,121 $ 47,289 $ 42,743 $ 37,516 $ 33,978
Interest expense ......................... 26,313 25,254 22,502 19,951 18,468
Provision for loan losses ................ 900 916 1,048 754 722
Other income ............................. 6,437 5,811 5,938 3,868 3,438
Other expenses ........................... 18,309 16,438 15,500 12,057 10,975
Applicable income taxes .................. 3,570 3,006 2,545 2,478 1,994
Net income ............................... 8,466 7,486 7,086 6,144 5,257
PER SHARE
Net income:
Basic ................................. $ 5.70 $ 5.10 $ 4.83 $ 4.19 $ 3.59
Diluted ............................... 5.66 5.02 4.78 4.15 3.57
Cash dividends ........................... 1.30 1.20 1.05 0.95 0.87
Book value as of December 31 ............. 40.29 38.42 35.08 32.30 29.57
Increase (decrease) in book value
due to:
ESOP obligation and debt .............. (7.32) (6.33) (5.23) (4.38) (3.60)
Unrealized gains (losses) on
debt securities ..................... (0.66) 0.81 0.33 0.46 0.20
SELECTED RATIOS
Return on average assets ................. 1.18% 1.17% 1.24% 1.22% 1.14%
Return on average equity ................. 14.54 14.12 14.62 13.97 13.32
Net interest margin ...................... 3.83 3.81 3.93 3.86 3.74
Average stockholders' equity to
average total assets .................. 8.11 8.25 8.47 8.72 8.58
Dividend payout ratio .................... 22.56 23.52 21.69 22.62 24.12
</TABLE>
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Special Note Regarding Forward Looking Statements
- -------------------------------------------------
The discussion following contains certain forward-looking statements with
respect to the financial condition, the results of operations and business of
the Company. These statements involve certain risks and uncertainties which are
often inherent in the ongoing operation of financial institutions such as the
Company's subsidiary banks.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate," "target," "goal," "objective," "intend," "estimate" and
similar expressions.
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 as well as events and trends affecting
specific assets, the effect of credit quality and market perceptions of value on
the fair values of financial instruments and regulatory factors. These risks,
which are not inclusive, cannot be accurately estimated.
For example, a financial institution may accept deposits at fixed interest
rates, at different times and for different terms, and lend funds at fixed
interest rates, at different times and for different terms. In doing so, it
accepts the risk that its cost of funds may rise while the use of those funds
may be at a fixed rate. Similarly, although market rates of interest may
decline, the financial institution may have committed, by virtue of the term of
a deposit, to pay what essentially becomes an above-market rate.
Loans, and the allowance for loan losses, carry the risk that borrowers will not
repay all funds in a timely manner, as well as the risk of total loss. The
collateral pledged as security for loans may or may not have the value which has
been attributed to it. The loan loss reserve, while believed to be adequate, may
prove inadequate if one or more large-balance borrowers, or numerous mid-balance
borrowers, or a combination of both, experience financial difficulty for a
variety of reasons. These reasons may relate to the financial circumstances of
an individual borrower, or may be caused by negative economic circumstances of
an individual borrower, or may be caused by negative economic circumstances at
the local, regional, national or international level which are beyond the
control of the borrowers or the lender.
Because the business of banking is of a highly regulated nature, the decisions
of governmental entities can have a major effect on operating results.
All of these uncertainties, as well as others, are present in the operations and
business of the Company, and stockholders are cautioned that the Company's
actual results may differ materially from those included in the forward-looking
statements.
<PAGE>
Financial Position
- ------------------
<TABLE>
Year End Amounts (In Thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, net of allowance for losses .... $ 565,381 $ 460,911 $ 422,761 $ 368,264 $ 318,546
Investment securities ................. 156,198 149,350 138,064 132,635 121,536
Deposits .............................. 562,086 534,151 479,770 450,061 392,257
Federal Home Loan Bank notes .......... 108,700 75,732 50,764 25,795 30,727
Stockholders' equity .................. 60,264 56,452 51,500 47,335 43,277
Total assets .......................... 773,966 689,787 603,102 539,452 484,607
</TABLE>
In 1999, net loans increased $104.5 million, primarily in real estate mortgage
loans, as demand remained high and rates continued to be attractive. The large
increase in loans was primarily driven by a strong local economy, the sale of a
local competing bank and favorable interest rates. The 1998 loan growth of $38.2
million was also concentrated in real estate mortgage loans.
Total assets increased 12.20% in 1999, compared to an increase of 14.37% in
1998. The growth in assets in 1999 and 1998 was primarily attributable to strong
loan demand real estate mortgage loans.
Deposits increased 5.23% in 1999 compared to an increase of 11.33% in 1998. The
banks continued to compete for deposits in a market area where the total deposit
growth was weak. Federal Home Loan Bank note borrowings increased by a net $33
million in 1999 and $25 million in 1998 with the advances used to fund the loan
growth.
Components of Diluted Earnings Per Share
- ----------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net interest income ............................. $ 16.59 $ 14.78 $ 13.64
Provision for loan losses ....................... (0.60) (0.61) (0.71)
Noninterest income .............................. 4.30 3.90 4.00
Noninterest expense ............................. (12.24) (11.03) (10.44)
-------------------------------
Income before income taxes ........ 8.05 7.04 6.49
Income tax expense .............................. (2.39) (2.02) (1.71)
-------------------------------
Net income ........................ $ 5.66 $ 5.02 $ 4.78
===============================
In 1999, the increase in net income was due primarily to increased net interest
income, primarily resulting from a large increase in earning assets. The 1999
increase in noninterest income totaling $941,000 included increases in trust
fees ($286,000), deposit charges and fees ($375,000) and other charges and fees
($487,000).
The 1998 increase in net income resulted from increases in net interest income
and noninterest income, but was partially offset by higher noninterest expense.
Both noninterest income and noninterest expense for 1997 included the
recognition of a $1,054,000 gain on the contribution of a marketable equity
security to Hills Bancorporation Foundation, a private charitable foundation. As
a result of the stock contribution, Hills Bancorporation received an income tax
benefit of approximately $340,000, which reduced income tax expense.
<PAGE>
The Company consistently benefited from low provisions for loan losses, a result
of a strong local economy and a loan portfolio that is concentrated in
well-secured real estate loans.
Net Interest Income
- -------------------
Net interest income is the excess of the interest and fees received on
interest-earning assets over the interest expense of the interest-bearing
liabilities. The measure is shown on a tax-equivalent basis to make the interest
earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 1999 as follows:
<TABLE>
INTEREST INCOME
-----------------------------
Increase (Decrease)
Change In Change In -----------------------------
Average Average Volume Rate Net
Balance Rate Changes Changes Change
---------------------------------------------------
(Amounts In Thousands)
<S> <C> <C> <C> <C> <C>
Loans, net ............................................ $ 70,221 (0.39)% $ 5,882 $ (1,814) $ 4,068
Taxable securities .................................... 8,757 (0.17) 528 (193) 335
Nontaxable securities ................................. 4,577 (0.17) 337 (76) 261
Federal funds sold .................................... (13,483) (0.72) (637) (117) (754)
----------- ------------------------------
$ 70,072 $ 6,110 $ (2,200) $ 3,910
=========== ==============================
INTEREST EXPENSE
----------------------------
Interest-bearing demand deposits ...................... $ 10,143 (0.07)% $ 212 $ (34) $ 178
Savings deposits ...................................... 20,519 (0.39) 672 (551) 121
Time deposits ......................................... 12,396 (0.23) 685 (616) 69
Securities sold under agreements to repurchase ........ 4,165 (0.97) 188 (88) 100
FHLB borrowings ....................................... 11,618 (0.10) 667 (76) 591
----------- ------------------------------
$ 58,841 - - $ 2,424 $ (1,365) 1,059
=========== ==============================
Change in net interest income ......................... $ 3,686 $ (835) $ 2,851
==============================
</TABLE>
Net interest income changes for 1998 were as follows:
Change In Effect Of Effect Of
Average Volume Rate Net
Balance Changes Changes Change
--------------------------------------------
Interest-earning assets ............ $ 66,027 $ 4,919 $ (313) $ 4,606
Interest-bearing liabilities ....... 59,658 3,066 (314) 2,752
--------------------------------
Change in net interest income ...... $ 1,853 $ 1 $ 1,854
================================
<PAGE>
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) 1999 1998 1997
- --------------------------------------------------------------------------------
Yield on average interest-earning assets ............... 7.75% 8.00% 8.12%
Rate on average interest-bearing liabilities ........... 4.51 4.82 4.84
------------------------
Net interest spread .................................... 3.24 3.18 3.28
Effect of noninterest-bearing funds .................... 0.59 0.63 0.65
------------------------
Net interest margin (tax equivalent interest income
divided by average interest-earning assets) ......... 3.83% 3.81% 3.93%
========================
Loan Losses
- -----------
The provision for loan losses totaled $900,000, $916,000 and $1,048,000 for
1999, 1998 and 1997, respectively. Charge-offs, net of recoveries were $6,000
for 1999, $70,000 for 1998 and $349,000 for 1997.
The allowance for loan losses totaled $9,750,000 at December 31, 1999 compared
to $8,856,000 at December 31, 1998. The percentage of the allowance to
outstanding loans was 1.70% and 1.89% at December 31, 1999 and 1998,
respectively. The economy remains strong in the Banks' trade areas of Johnson,
Washington and Linn Counties, Iowa. Unemployment remains quite low in the Bank's
trade territory and, for the most part, area businesses have maintained stable
employment levels.
Agricultural loans totaled $27,302,000 at December 31, 1999. Management has
assessed the risks for agricultural loans higher than the other loans due to
unpredictable commodity prices, the effects of weather on crops and
uncertainties regarding government support programs. Therefore, the allowance
for loan losses includes general and specific reserves for these loans.
Loan concentrations, quality and loan terms had no other significant change in
1999 except that agricultural loans experienced a $5,000,000 decrease from 1999
and $100,000,000 of the 1999 loan growth was in real estate mortgages.
Therefore, the estimation methods and assumptions used in determining the 1999
allowance were consistent with 1998 and nearly all the additional allowance for
loan losses was allocated to new loans. Net loss experience for the past three
years has been consistently low, but the overall growth of the loan portfolio
results in a higher allowance for loan losses.
There are no known trends or uncertainties that are reasonably likely to have a
material effect on the allowance for loan losses in the near-term.
<PAGE>
Other Income
- ------------
Dollars Per Share, Based on Weighted Average
Diluted Shares Outstanding 1999 1998 1997
- --------------------------------------------------------------------------------
Real estate origination fees ...................... $ 0.39 $ 0.54 $ 0.26
Trust fees ........................................ 1.36 1.17 0.92
Deposit account charges and fees .................. 1.47 1.23 1.28
Other fees and charges ............................ 1.29 0.96 0.81
Other ............................................. - - - - 0.10
Investment securities gains (losses) .............. (0.21) - - 0.63
-----------------------------
$ 4.30 $ 3.90 $ 4.00
=============================
Other income for 1999 increased by $626,000 to $6,437,000. Loan origination fees
were $592,000 compared to $799,000 for 1998. The decrease is due primarily to
the fewer loan refinancing after interest rates increased in the second half of
1999. Trust fees increased $286,000 for the year to $2,029,000 due to more trust
assets under management. Deposit account charges and fees increased $375,000 for
1999 and other fees and charges increased $487,000. Other income was reduced for
1999 by $315,000, which represented investment securities losses taken to
replace lower yielding securities with higher yielding securities of similar
risk and maturity.
In 1998, total other income increased $967,000 on a comparable basis to 1997
after adjusting for investment securities gain in 1997 of $940,000 and $154,000
gain on the sale of the student loan portfolio. Due to the lower interest rate
environment in 1998, loan origination fees increased $412,000 over the 1997
amount of $387,000. In addition, trust fees increased $380,000 due to new
accounts and higher balances under management.
Other Expenses
- --------------
Dollars Per Share, Based on Weighted Average
Diluted Shares Outstanding 1999 1998 1997
- --------------------------------------------------------------------------------
Salaries and employees benefits ................... $ 6.56 $ 5.75 $ 4.79
Occupancy ......................................... 0.84 0.76 0.68
Furniture and equipment ........................... 1.26 1.13 0.96
Office supplies and postage ....................... 0.74 0.79 0.60
Contributions ..................................... 0.03 0.03 0.75
Other ............................................. 2.81 2.57 2.66
-----------------------------
$ 12.24 $ 11.03 $ 10.44
=============================
Other expenses for 1999 increased to $18,309,000 from $16,438,000 in 1998.
Salaries and benefits accounted for $1,200,000 of the increase for the year.
This is a result of new staff additions during 1999 including staff for the new
branch, salary adjustments in January 1999 and significant increases in medical
insurance claims in 1999 compared to 1998. All other expenses increased from
$7,863,000 in 1998 to $8,502,000 for the year ended December 31, 1999. The major
category that increased was furniture and equipment, which was $1,687,000 in
1998 and $1,893,000 in 1999 and was the result of depreciation and amortization
of major computer hardware and software additions in 1999 and late 1998.
<PAGE>
Salaries and benefits increased $1,457,000 in 1998 compared to 1997. The Banks
have added positions in the retail sector of the Banks, including the Trust
Department, as a result of increased business. At the end of 1998, full time
equivalent employees totaled 253, an increase of 30 since December 31, 1997.
Included in the 1998 increase are new personnel located at the Mount Vernon
office of Hills Bank Lisbon, which opened in February 1998. Occupancy and
furniture and equipment expenses increased $378,000 in 1998, or 15.45% over 1997
due to depreciation on the new office in Mount Vernon, a new computer hardware
and software system installed in the first quarter of 1998, and expenses related
to the Year 2000 computer changes which totaled approximately $88,000.
Income Taxes
- ------------
Income tax expense was $3,570,000, $3,006,000 and $2,545,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The corresponding percentage of
income taxes compared to income before income taxes is 29.66% in 1999, 28.65% in
1998 and 26.40% in 1997. Income tax expense for 1997 was 26.4% of pretax income,
compared to an average of 29.16% for other years, due to contributions.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
Recently issued accounting standards are summarized below.
Statement No. 133 on derivatives will, in 2000, require all derivatives to be
recorded at fair value in the balance sheet, with changes in fair value run
through income. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item.
This standard is not expected to have a material effect on future financial
statements.
<PAGE>
Interest Rate Sensitivity and Liquidity Analysis
- ------------------------------------------------
At December 31, 1999, the Company's interest rate sensitivity report is as
follows (in thousands):
<TABLE>
Repricing Days
Maturities -------------------------------------------- More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ............. $ 206 $ - - $ - - $ - - $ - - $ - - $ 206
Investment
securities .................. - - 390 6,700 7,855 14,862 126,391 156,198
Loans .......................... - - 52,440 26,001 32,869 51,183 412,638 575,131
Total earning ----------------------------------------------------------------------------
assets ................. 206 52,830 32,701 40,724 66,045 539,029 731,535
Sources of funds: ----------------------------------------------------------------------------
Interest-bearing
checking and
savings accounts ............ 79,431 - - - - - - - - 137,651 217,082
Certificates of
deposit ..................... - - 19,117 21,465 53,161 45,246 139,221 278,210
Other borrowings -
FHLB ........................ - - - - 10,000 3,000 5,000 90,700 108,700
Repurchase
agreements and
federal funds ............... 26,714 - - - - - - - - - - 26,714
----------------------------------------------------------------------------
106,145 19,117 31,465 56,161 50,246 367,572 630,706
Other sources,
primarily
noninterest-
bearing ..................... - - - - - - - - - - 100,829 100,829
----------------------------------------------------------------------------
Total sources ............. 106,145 19,117 31,465 56,161 50,246 468,401 731,535
----------------------------------------------------------------------------
Repricing
differences ................. $(105,939) $ 33,713 $ 1,236 $ (15,437) $ 15,799 $ 70,628 $ - -
============================================================================
</TABLE>
A portion of the interest-bearing checking, savings and money market accounts
has been included in the above table as maturing immediately based upon
management's estimate using a financial model and the rest of these deposits are
shown as more than one year. The classifications are used because the Banks'
historical data indicates that these have been very stable deposits without much
interest rate fluctuation. Historically, these accounts would not need to be
adjusted upward as quickly in a period of rate increases so the interest risk
exposure would be less than the repricing schedule indicates.
<PAGE>
Inflation
- ---------
Inflation has an impact on the growth of total assets and has resulted in the
need to increase equity capital to maintain an appropriate equity to asset
ratio. The results of operations have been affected by inflation, but the effect
has been minimal.
Liquidity and Capital Resources
- -------------------------------
On an unconsolidated basis, Hills Bancorporation (the holding company) had cash
balances of $1,419,000 as of December 31, 1999. In 1999, the holding company
received dividends of $1,911,000 from its subsidiary banks and used those funds
to pay dividends to its stockholders of $1,910,000.
As of December 31, 1999 and 1998, stockholders' equity before deducting for the
maximum cash obligation related to ESOP was $71,217,000 and $65,753,000,
respectively. This measure of equity as a percent of total assets was 9.20% at
December 31, 1999 and 9.53% at December 31, 1998. These ratios are comparable
with the Company's peers. As of December 31, 1999, total equity was 7.79% of
assets compared to 8.18% of assets at the prior year end. The ability of the
Company to pay dividends to its shareholders is dependent upon the earnings and
capital adequacy of the subsidiaries banks, which affects the Banks' dividends
to the Company. The Banks are subject to certain statutory and regulatory
restrictions on the amount they may pay in dividends. In order to maintain
acceptable capital ratios in the subsidiary banks, certain of their retained
earnings are not available for the payment of dividends. Retained earnings
available for the payment of dividends to the Company total approximately
$4,032,000 as of December 31, 1999.
The Company and the Banks are subject to the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the Banks are subject to Prompt
Corrective Action Rules as determined and enforced by the Federal Reserve. These
regulations establish minimum capital requirements which member banks must
maintain.
As of December 31, 1999, risk-based capital standards require 8% of
risk-weighted assets. At least half of that 8% must consist of Tier I core
capital (common stockholders' equity, noncumulative perpetual preferred stock
and minority interest in the equity accounts of consolidated subsidiaries), and
the remainder may be Tier II supplementary capital (perpetual debt,
intermediate-term preferred stock, cumulative perpetual, long-term and
convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of
risk-weighted assets). Total risk-weighted assets are determined by weighing the
assets according to their risk characteristics. Certain off-balance sheet items
(such as standby letters of credit and firm loan commitments) are multiplied by
"credit conversion factors" to translate them into balance sheet equivalents
before assigning them risk weightings. Any bank having a capital ratio less than
the 8% minimum required level must, within 60 days, submit to the Federal
Reserve a plan describing the means and schedule by which the Bank shall achieve
the applicable minimum capital ratios.
<PAGE>
Each of the Banks is an insured state bank, incorporated under the laws of the
state of Iowa. As such, the Banks are subject to regulation, supervision and
periodic examination by the Superintendent of Banking of the State of Iowa (the
"Superintendent"). Among the requirements and restrictions imposed upon state
banks by the Superintendent are the requirements to maintain reserves against
deposits, restrictions on the nature and amount of loans which may be made by
state banks, and restrictions relating to investments, opening of bank offices
and other activities of state banks. Changes in the capital structure of state
banks must also be approved by the Superintendent. One of the most significant
standards of operation of state banks is the six and one-half percent (6 1/2%)
primary capital to total assets ratio generally required by the Superintendent.
This ratio was reduced in 1999 from the eight percent (8%) ratio formerly
required. In certain instances, the Superintendent may mandate higher capital,
but the Superintendent has not imposed such a requirement on the Bank. The
Superintendent defines the term "primary capital" to mean the sum of
stockholders' equity and the allowance for loan losses less any intangible
assets. In determining the primary capital ratio, the Superintendent uses the
total assets as of the date of computation. At December 31, 1999, the primary
capital to total assets ratio of each of the Banks exceeded the ratio required
by the Superintendent.
A comparison of the Company's capital as of December 31, 1999 with minimum
requirements is presented below:
Minimum
Actual Requirements
--------------------------------
Tier I Risk-Based Capital ....................... 13.2% 4%
Total Risk-Based Capital ........................ 14.47 8
Leverage Ratio .................................. 9.56 3
Each of the Banks is classified as "well capitalized" by FDIC capital
guidelines.
On a consolidated basis, 1999 cash flows from operations provided $10,844,000,
net increases in deposits provided $27,935,000 and Federal Home Loan Bank
borrowings provided $32,968,000. These cash flows were invested in net loans of
$105,370,000, net securities of $10,937,000 and net federal funds sold decrease
of $36,605,000. In addition, $1,937,000 was used to purchase property and
equipment.
At December 31, 1999, the Company had total outstanding loan commitments of
$83,894,000. Management believes that its liquidity levels are sufficient, but
the Company may slow down the growth of its assets by selling more loans in the
secondary market or by selling portions of loans to other banks through
participation agreements.
Commitments and Trends
- ----------------------
The Company has no material commitments or plans which will materially affect
its liquidity or capital resources. Property and equipment may be acquired in
cash purchases, or they may be financed if favorable terms are available.
Year 2000
- ---------
Like other financial service providers and business organizations, the Company
took appropriate measures in advance of the calendar change on January 1, 2000
to ensure its application software programs and operating systems would
accommodate this date value. Beginning in 1997, the Company began carrying out a
plan to address the "Y2K" issue. All systems were examined to determine the
extent and complexity of their vulnerability. Evaluations included hardware,
software, mechanical and other critical systems.
In each case where a potential problem was identified, action was taken to
address it by replacing or upgrading the system affected. All critical systems
were tested by simulating Year 2000 operating conditions and verifying the
results of those tests. Contingency plans were developed to ensure operations
would continue in the unlikely event a system failed. The Company employed
verification procedures during the century rollover period and encountered no
problems to any of its systems.
The Company's plans included communications to and evaluation of significant
borrowers to assess their readiness and determine if loan payments could be
delayed due to Year 2000 problems. To date, the Company has not experienced any
loan losses, nor does it anticipate future losses, related to this issue.
Total capitalized hardware and software costs of the Year 2000 project in 1999
and 1998 were approximately $136,000 and $1,180,000, respectively. Expenses
charged to earnings for the Year 2000 project in 1999 and 1998 were $88,000 and
$105,000, respectively. In addition, the Company estimates the opportunity cost
of maintaining additional cash reserves have been $66,000 in 1999.
<PAGE>
PART II
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures
- ---------------------
The Company's primary market risk exposure is to changes in interest rates. The
Company's asset/liability management, or its management of interest rate risk,
is focused primarily on evaluating and managing net interest income given
various risk criteria. Factors beyond the Company's control, such as market
interest rates and competition, may also have an impact on the Company's
interest income and interest expense. In the absence of other factors, the
Company's overall yield on interest-earning assets will increase as will its
cost of funds on its interest-bearing liabilities when market rates increase
over an extended period of time. Inversely, the Company's yields and cost of
funds will decrease when market rates decline. The Company is able to manage
these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time.
The Banks maintain an asset/liability committee which meets at least quarterly
to review the interest rate sensitivity position and to review various
strategies as to interest rate risk management. In addition, the Banks use a
simulation model to review various assumptions relating to interest rate
movement. The model attempts to limit rate risk even if it appears the Banks'
asset and liability maturities are perfectly matched and a favorable interest
margin is present.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Company's operations,
management has implemented an asset/liability program designed to mitigate the
Company's interest rate sensitivity. The program emphasizes the origination of
adjustable rate loans, which are held in the portfolio, the investment of excess
cash in short or intermediate term interest-earning assets, and the solicitation
of passbook or transaction deposit accounts which are less sensitive to changes
in interest rates and can be repriced rapidly.
Based on the data following, net interest income should decline with
instantaneous increases in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Company's interest rate spread and margin. This would result
from an increase in the Company's cost of funds that would not be immediately
offset by an increase in its yield on earning assets which would tend to reduce
net interest income. In times of decreasing interest rates, fixed rate assets
could increase in value and the lag in repricing of interest rate sensitive
assets could be expected to have a positive effect on the Company's net interest
income.
The following table provides quantitative information with respect to interest
sensitive assets and liabilities.
<PAGE>
PART II
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
The following table provides information about the Company's loans, investment
securities and deposits that are sensitive to changes in interest rates. The
table presents principal cash flows and related weighted average interest rates
by expected maturity dates.
<TABLE>
2000 2001 2002 2003 2004 Thereafter Total Fair Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans, fixed:
Balance ......................... $ 98,300 $ 41,605 $ 46,523 $ 63,964 $ 77,460 $ 27,315 $ 355,167 $ 348,367
Average interest rate ........... 8.25% 8.20% 8.26% 7.90% 7.69% 7.88% 8.03%
Loans, variable:
Balance ......................... $ 20,452 $ 1,344 $ 2,349 $ 1,629 $ 2,065 $ 192,125 $ 219,964 $ 219,964
Average interest rate ........... 8.89% 9.09% 8.96% 8.73% 8.68% 7.69% 7.84%
Investments (1):
Balance ......................... $ 30,308 $ 42,268 $ 26,527 $ 28,249 $ 8,537 $ 20,515 $ 156,404 $ 156,253
Average interest rate ........... 6.27% 5.96% 6.01% 6.34% 6.71% 6.78% 6.25%
Liabilities:
Liquid
deposits (2):
Balance ......................... $ 217,082 $ - - $ - - $ - - $ - - $ - - $ 217,082 $ 217,082
Average interest rate ........... 2.95% 0.00% 0.00% 0.00% 0.00% 0.00% 2.95%
Deposits,
certificates:
Balance ......................... $ 138,989 $ 99,994 $ 15,294 $ 18,741 $ 5,192 $ - - $ 278,210 $ 281,164
Average interest rate ........... 5.20% 5.58% 5.22% 5.79% 5.51% 0.00% 5.38%
</TABLE>
(1) Includes all available-for-sale investments, held-to-maturity investments
and federal funds.
(2) Includes passbook accounts, NOW accounts, Super NOW accounts and
money market funds.
Item 8. Financial Statements and Supplementary Data
The financial statements are included on Pages 33 through 61. The Company does
not meet the requirements of Item 302 of Regulation S-K to include the
supplementary financial information required by that item.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Hills Bancorporation
Hills, Iowa
We have audited the accompanying consolidated balance sheets of Hills
Bancorporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the years ended December 31, 1999, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hills Bancorporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997 in conformity with generally accepted accounting principles.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa
February 14, 2000
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In Thousands, Except Shares)
<TABLE>
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (Note 9) .............................................................. $ 21,765 $ 16,427
Investment securities (Note 2):
Available for sale (amortized cost 1999 $133,516; 1998 $121,954) ........................... 131,961 123,835
Held to maturity (fair value 1999 $18,362; 1998 $21,740) ................................... 18,307 21,168
Stock of Federal Home Loan Bank ............................................................ 5,930 4,347
Federal funds sold ............................................................................ 206 36,811
Loans, net of allowance for loan losses 1999 $9,750; 1998 $8,856 (Notes 3 and 10) ............. 565,381 460,911
Property and equipment, net (Note 4) .......................................................... 11,646 11,193
Accrued interest receivable ................................................................... 6,376 5,885
Deferred income taxes, net (Note 8) ........................................................... 3,954 1,838
Other assets .................................................................................. 8,440 7,372
-------------------------
$ 773,966 $ 689,787
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ............................................................... $ 66,794 $ 68,100
Interest-bearing deposits (Note 5) ......................................................... 495,292 466,051
-------------------------
Total deposits .................................................................. 562,086 534,151
Federal funds purchased and securities sold under agreements to repurchase ................. 26,714 10,554
Federal Home Loan Bank notes (Note 6) ...................................................... 108,700 75,732
Accrued interest payable ................................................................... 2,040 2,048
Other liabilities .......................................................................... 3,209 1,549
-------------------------
702,749 624,034
-------------------------
Commitments and Contingencies (Notes 7 and 13)
Redeemable Common Stock Held By Employee Stock
Ownership Plan (ESOP) (Note 7) ............................................................. 10,953 9,301
-------------------------
Stockholders' Equity (Note 9)
Capital stock, no par value; authorized 10,000,000 shares;
issued 1999 1,495,941 shares; 1998 1,469,443 shares ..................................... 10,214 9,140
Retained earnings .......................................................................... 61,984 55,428
Accumulated other comprehensive income, unrealized gains (losses)
on debt securities, net ................................................................ (981) 1,185
-------------------------
71,217 65,753
Less maximum cash obligation related to ESOP shares (Note 7) ............................... 10,953 9,301
-------------------------
60,264 56,452
-------------------------
$ 773,966 $ 689,787
=========================
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Per Share Amounts)
<TABLE>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees ........................................... $ 41,933 $ 37,854 $ 34,598
Investment securities:
Taxable ...................................................... 7,167 6,832 6,769
Nontaxable ................................................... 1,566 1,394 1,218
Federal funds sold .............................................. 455 1,209 158
-----------------------------------
Total interest income ................................ 51,121 47,289 42,743
-----------------------------------
Interest expense:
Deposits ........................................................ 20,826 20,458 19,294
Securities sold under agreements to repurchase .................. 517 417 426
FHLB borrowings ................................................. 4,970 4,379 2,782
-----------------------------------
Total interest expense ............................... 26,313 25,254 22,502
-----------------------------------
Net interest income .................................. 24,808 22,035 20,241
Provision for loan losses (Note 3) ................................. 900 916 1,048
-----------------------------------
Net interest income after provision for loan losses .. 23,908 21,119 19,193
-----------------------------------
Other income:
Loan origination fees ........................................... 592 799 387
Trust fees ...................................................... 2,029 1,743 1,363
Deposit account charges and fees ................................ 2,203 1,828 1,893
Other fees and charges .......................................... 1,928 1,441 1,355
Net gains (losses) on sale of investment securities (Note 2) ... (315) - - 940
-----------------------------------
6,437 5,811 5,938
-----------------------------------
Other expenses:
Salaries and employee benefits .................................. 9,807 8,575 7,118
Occupancy ....................................................... 1,249 1,137 1,017
Furniture and equipment ......................................... 1,893 1,687 1,429
Office supplies and postage ..................................... 1,111 1,178 889
Contributions ................................................... 45 39 1,118
Other ........................................................... 4,204 3,822 3,929
-----------------------------------
18,309 16,438 15,500
-----------------------------------
Income before income taxes ........................... 12,036 10,492 9,631
Federal and state income taxes (Note 8) ............................ 3,570 3,006 2,545
-----------------------------------
Net income ........................................... $ 8,466 $ 7,486 $ 7,086
===================================
Earnings per share:
Basic ........................................................... $ 5.70 $ 5.10 $ 4.83
Diluted ......................................................... 5.66 5.02 4.78
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................................... $ 8,466 $ 7,486 $ 7,086
---------------------------------
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during the year,
net of income taxes 1999 $(1,385); 1998 $413; 1997 $202 ............ (2,364) 700 464
Reclassification adjustments for net (gains) losses realized in
net income, net of income taxes 1999 $116; 1998 none;
1997 $(285) ........................................................ 198 - - (655)
---------------------------------
Other comprehensive income (loss) .......................... (2,166) 700 (191)
---------------------------------
Comprehensive income ....................................... $ 6,300 $ 8,186 $ 6,895
=================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Notes 7 and 9)
Years Ended December 31, 1999, 1998 and 1997
(In Thousands, Except Share Amounts)
<TABLE>
Less
Maximum
Accumulated Cash
Other Obligation
Capital Retained Comprehensive To ESOP
Stock Earnings Income Shares Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .................. $ 8,997 $ 44,078 $ 676 $ (6,416) $ 47,335
Issuance of 2,993 shares of
common stock .......................... 97 - - - - - - 97
Redemption of 623 shares
of common stock ....................... (24) - - - - - - (24)
Change related to ESOP shares ............ - - - - - - (1,266) (1,266)
Net income ............................... - - 7,086 - - - - 7,086
Cash dividends ($1.05 per share) ......... - - (1,537) - - - - (1,537)
Other comprehensive income ............... - - - - (191) - - (191)
--------------------------------------------------------
Balance, December 31, 1997 .................. 9,070 49,627 485 (7,682) 51,500
Issuance of 1,931 shares of
common stock .......................... 78 - - - - - - 78
Redemption of 242 shares
of common stock ....................... (8) - - - - - - (8)
Change related to ESOP shares ............ (1,619) (1,619)
Net income ............................... - - 7,486 - - - - 7,486
Income tax benefit related to
stock based compensation .............. - - 76 - - - - 76
Cash dividends ($1.20 per share) ......... - - (1,761) - - - - (1,761)
Other comprehensive income ............... - - - - 700 - - 700
--------------------------------------------------------
Balance, December 31, 1998 .................. 9,140 55,428 1,185 (9,301) 56,452
Issuance of 26,665 shares of
common stock .......................... 752 - - - - - - 752
Redemption of 167 shares
of common stock ....................... (8) - - - - - - (8)
Change related to ESOP shares ............ - - - - - - (1,652) (1,652)
Net income ............................... - - 8,466 - - - - 8,466
Income tax benefit related to
stock based compensation .............. 330 - - - - - - 330
Cash dividends ($1.30 per share) ......... - - (1,910) - - - - (1,910)
Other comprehensive income ............... - - - - (2,166) - - (2,166)
--------------------------------------------------------
Balance, December 31, 1999 .................. $ 10,214 $ 61,984 $ (981) $ (10,953) $ 60,264
========================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ..................................................................... $ 8,466 $ 7,486 $ 7,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................................ 1,484 1,325 1,143
Amortization ................................................................ 261 261 261
Provision for loan losses ................................................... 900 916 1,048
Net (gains) losses on disposition of investment securities .................. 315 - - (940)
Compensation paid by issuance of common stock ............................... 94 70 73
Contribution of investment securities ....................................... - - - - 1,054
Deferred income taxes ....................................................... (847) (15) (417)
(Increase) in accrued interest receivable ................................... (491) (444) (557)
Amortization of bond discount ............................................... 339 300 378
(Increase) in other assets .................................................. (1,329) (425) (88)
Increase (decrease) in accrued interest and other liabilities ............... 1,652 (781) 603
-------------------------------------
Net cash provided by operating activities ........................... 10,844 8,693 9,644
-------------------------------------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities:
Available for sale .......................................................... 29,278 27,300 21,292
Held to maturity ............................................................ 2,862 2,607 2,590
Proceeds from sales of available-for-sale securities ........................... 17,013 - - 16,411
Purchases of investment securities:
Available for sale .......................................................... (60,090) (40,380) (42,083)
Held to maturity ............................................................ - - - - (4,404)
Federal funds sold, net ........................................................ 36,605 (34,364) (1,340)
Loans made to customers, net of collections .................................... (105,370) (39,066) (55,545)
Purchases of property and equipment ............................................ (1,937) (3,081) (2,171)
-------------------------------------
Net cash (used in) investing activities ............................. (81,639) (86,984) (65,250)
-------------------------------------
Cash Flows from Financing Activities
Net increase in deposits ....................................................... 27,935 54,381 29,709
Net increase in federal funds purchased and
securities sold under agreements to repurchase .............................. 16,160 1,546 2,937
Borrowings from FHLB ........................................................... 50,000 40,000 30,000
Payments on FHLB notes ......................................................... (17,032) (15,032) (5,031)
Stock options exercised ........................................................ 650 - - - -
Income tax benefits related to stock based compensation ........................ 330 76 - -
Dividends paid ................................................................. (1,910) (1,761) (1,537)
-------------------------------------
Net cash provided by financing activities ........................... 76,133 79,210 56,078
-------------------------------------
</TABLE>
(Continued)
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in cash and due from banks ................. $ 5,338 $ 919 $ 472
Cash and due from banks:
Beginning ...................................................... 16,427 15,508 15,036
--------------------------------
Ending ......................................................... $ 21,765 $ 16,427 $ 15,508
================================
Supplemental Disclosures
Cash payments for:
Interest paid to depositors and others ...................... $ 20,824 $ 20,470 $ 19,186
Interest paid on other obligations .......................... 5,487 4,796 3,208
Income taxes ................................................ 3,755 3,544 2,942
Noncash financing transactions:
Increase in maximum cash obligation related to
ESOP shares ............................................... $ 1,652 $ 1,619 $ 1,266
Available-for-sale investment securities transferred
as a charitable contribution .............................. - - - - 1,054
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a multibank
holding company engaged in the business of banking. The Company's three
wholly-owned subsidiary commercial banks are Hills Bank and Trust Company,
Hills, Iowa, Hills Bank, Lisbon, Iowa, and Hills Bank Kalona, Kalona, Iowa. The
Banks are all full-service commercial banks extending their services to
individuals, businesses, governmental units and institutional customers
primarily in the communities of Hills, Iowa City, Coralville, North Liberty,
Lisbon, Mount Vernon, Kalona and Cedar Rapids, Iowa.
The Banks compete with other financial institutions and nonfinancial
institutions providing similar financial products. Although the loan activity of
the Banks is diversified with commercial and agricultural loans, real estate
loans, automobile, installment and other consumer loans, each Bank's credit is
concentrated in real estate loans.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for loan losses, fair values of
securities and other financial instruments, and stock-based compensation expense
involve certain significant estimates made by management. These estimates are
reviewed by management routinely and it is reasonably possible that
circumstances that exist at December 31, 1999 may change in the near-term future
and that the effect could be material to the consolidated financial statements.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Investment securities: Held-to-maturity securities consist solely of debt
securities which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities not classified as
trading or held to maturity. Available-for-sale securities are stated at fair
value, and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders' equity. There were
no trading securities as of December 31, 1999 and 1998.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual
lives of those securities. The method of amortization results in a constant
effective yield on those securities (the interest method). Realized gains and
losses on investment securities are included in income, determined on the basis
of the cost of the specific securities sold.
Loans: Loans are stated at the amount of unpaid principal, reduced by the
- ----- allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance when management
believes the collectability of principal is unlikely. The allowance for loan
losses is maintained at a level considered adequate to provide for losses that
can be reasonably anticipated. The allowance is increased by provisions charged
to expense and is reduced by net charge-offs. The Banks make continuous reviews
of the loan portfolio and considers current economic conditions, historical loss
experience, review of specific problem loans and other factors in determining
the adequacy of the allowance.
Loans are considered impaired when, based on current information and events, it
is probable the Banks will not be able to collect all amounts due. The portion
of the allowance for loan losses applicable to impaired loans has been computed
based on the present value of the estimated future cash flows of interest and
principal discounted at the loans effective interest rate or on the fair value
of the collateral for collateral dependent loans. The entire change in present
value of expected cash flows of impaired loans or of collateral value is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest income on impaired loans is recognized on
the cash basis.
<PAGE>
The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due.
Loan fees and origination costs are reflected in the statement of income as
collected or incurred. Compared to the net deferral method, this practice had no
significant effect on income.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Credit related financial instruments: In the ordinary course of business, the
Company has entered into commitments to extend credit, including commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded when they are funded.
Property and equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using primarily
declining-balance methods over the estimated useful lives of 7-40 years for
buildings and improvements and 3-20 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the liability
method whereby deferred tax assets are recognized for deductible temporary
differences and net operating loss, and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some or all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Intangible assets: Intangible assets consist principally of goodwill which
represents the excess of cost over fair value of net assets acquired in business
combinations of two banks in 1996 accounted for under the purchase method.
Goodwill is amortized on a straight-line basis over the estimated period to be
benefited, 15 years. The carrying value of goodwill is reviewed periodically for
impairment. Goodwill totaled $3,021,000 and $3,282,000, net of accumulated
amortization of $876,000 and $615,000 as of December 31, 1999 and 1998 and is
included in other assets.
Stock options: Compensation expense for stock issued through stock option and
award plans is accounted for using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under this method, compensation is measured as the difference
between the estimated fair value of the stock at the date of award less the
amount required to be paid for the stock. The difference, if any, is charged to
expense over the periods of service.
Common stock held by ESOP: The Company's maximum cash obligation related to
these shares is classified outside stockholders' equity because the shares are
not readily traded and could be put to the Company for cash.
Trust assets: Trust assets, other than cash deposits, held by the Banks in
fiduciary or agency capacities for its customers are not included in these
statements since they are not assets of the Company.
Earnings per share: Basic per-share amounts are computed by dividing net income
(the numerator) by the weighted-average number of common shares outstanding (the
denominator). Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock unless the effect is to reduce the loss
or increase the income per common share from continuing operations.
Following is a reconciliation of the denominator:
<TABLE>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares ........................... 1,483,540 1,467,772 1,465,914
Potential number of dilutive shares ......................... 11,784 22,702 18,040
---------------------------------------------
Total shares to compute diluted earnings per share .......... 1,495,324 1,490,474 1,483,954
=============================================
</TABLE>
There are no potentially dilutive securities that have not been included in the
determination of diluted shares.
<PAGE>
Statement of cash flows: For purposes of reporting cash flows, cash and due from
banks includes cash on hand and amounts due from banks (including cash items in
process of clearing). Cash flows from loans originated by the Banks, deposits
and federal funds purchased and sold are reported net.
Recently issued accounting standards:
Recently issued accounting standards are not expected to materially affect the
Company's financial statements.
Fair value of financial instruments: In cases where quoted market prices are not
available, fair values of financial instruments are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from fair value
disclosure. Accordingly, the aggregate fair value amounts presented in Note 11
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Off-balance sheet instruments: Fair values for outstanding letters of credit
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing. The fair value of the outstanding letters of credit is not
believed to be significant. Unfunded loan commitments are not valued since
the loans are generally priced at market at the time of funding.
Cash and cash equivalents and federal funds sold: The carrying amounts
reported in the balance sheet for cash and short-term instruments approximate
their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are determined using estimated future cash
flows, discounted at the interest rates currently being offered for loans
with similar terms to borrowers with similar credit quality. The carrying
amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying
amounts which represent the amount payable on demand. The carrying amounts
for variable-rate, fixed-term money market accounts and certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements approximate their fair values.
Long-term borrowings: The fair values of the Banks' long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses,
based on the Banks' current incremental borrowing rates for similar types of
borrowing arrangements.
<PAGE>
Note 2. Investment Securities
The amortized cost and fair value of investment securities available for sale
are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(Amounts In Thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
U. S. Treasury ........................... $ 19,525 $ 24 $ (79) $ 19,470
U. S. Government agencies and
corporations .......................... 95,389 8 (1,095) 94,302
State and political subdivisions ......... 18,602 8 (421) 18,189
-----------------------------------------------
Total ......................... $ 133,516 $ 40 $(1,595) $ 131,961
===============================================
December 31, 1998:
U. S. Treasury ........................... $ 32,804 $ 536 $ - - $ 33,340
U. S. Government agencies and
corporations .......................... 76,882 1,206 (5) 78,083
State and political subdivisions ......... 12,268 168 (24) 12,412
-----------------------------------------------
Total ......................... $ 121,954 $ 1,910 $ (29) $ 123,835
===============================================
</TABLE>
The amortized cost and fair value of debt securities held to maturity are as
follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
(Amounts In Thousands)
<S> <C> <C> <C> <C>
December 31, 1999:
States and political subdivisions ........ $ 18,307 $ 93 $ (38) $ 18,362
=============================================
December 31, 1998:
States and political subdivisions ........ $ 21,168 $ 574 $ (2) $ 21,740
=============================================
</TABLE>
The contractual maturity distribution of investment securities as of December
31, 1999 is summarized as follows:
<TABLE>
Available For Sale Held To Maturity
-------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------------------
(Amounts In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less ........................ $ 27,085 $ 27,082 $ 2,726 $ 2,729
Due after one year through five years .......... 92,901 91,739 14,135 14,181
Due after five years through ten years ......... 13,330 12,952 1,371 1,377
Due over ten years ............................. 200 188 75 75
-------------------------------------------------
Total ............................ $ 133,516 $ 131,961 $ 18,307 $ 18,362
=================================================
</TABLE>
As of December 31, 1999, investment securities with a carrying value of
$58,981,000 were pledged to collateralize public and trust deposits, short-term
borrowings and for other purposes, as required or permitted by law.
Net gains or losses from the sale of investment securities were as follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
(Amounts In Thousands)
Gross gains ........................ $ 4 $ - - $ 1,059
Gross (losses) ..................... (319) - - (119)
-----------------------------------
Net gains (losses) ... $ (315) $ - - $ 940
===================================
Included in 1997 gains was the contribution of a marketable equity security to a
private charitable foundation organized by the Company, upon which a gain of
$1,054,000 was recognized. The marketable equity security was an investment in a
development stage company that later became a public entity.
<PAGE>
Note 3. Loans
The composition of loans is as follows:
December 31,
--------------------------
1999 1998
--------------------------
(Amounts In Thousands)
Agricultural ......................................... $ 27,302 $ 32,318
Commercial and financial ............................. 36,848 39,438
Real estate:
Construction ...................................... 40,879 28,476
Mortgage .......................................... 439,072 338,871
Loans to individuals ................................. 31,030 30,664
--------------------------
575,131 469,767
Less allowance for loan losses ....................... 9,750 8,856
--------------------------
$ 565,381 $ 460,911
==========================
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
(Amounts In Thousands)
Balance, beginning ....................... $ 8,856 $ 8,010 $ 7,311
Provision charged to expenses ......... 900 916 1,048
Recoveries ............................ 757 898 779
Loans charged off ..................... (763) (968) (1,128)
--------------------------------------
Balance, ending .......................... $ 9,750 $ 8,856 $ 8,010
======================================
Information about impaired loans as of and for the years ended December 31, 1999
and 1998 is as follows:
1999 1998
--------------------------
(Amounts In Thousands)
Loans receivable for which there is a
related allowance for credit losses ........... $ - - $ - -
Loans receivable for which there is no
related allowance for credit losses ........... 9,750 8,956
--------------------------
Total impaired loans ............... $ 9,750 $ 8,956
==========================
Related allowance for credit losses .............. $ - - $ - -
Average balance .................................. 9,110 9,216
Interest income recognized ....................... 814 869
No allowance for credit losses has been recognized for impaired loans because
partial charge-offs have been taken to reduce the loan balances to the net
present value of the future cash flows or to the fair value of the collateral if
the loan is collateral dependent.
<PAGE>
Note 4. Property and Equipment
The major classes of property and equipment and the total accumulated
depreciation are as follows:
December 31,
----------------------
1999 1998
----------------------
(Amounts In Thousands)
Land ............................................. $ 2,195 $ 1,950
Buildings and improvements ....................... 8,858 8,363
Furniture and equipment .......................... 12,129 10,932
----------------------
23,182 21,245
Less accumulated depreciation .................... 11,536 10,052
----------------------
Net ................................ $ 11,646 $ 11,193
======================
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows:
December 31,
-----------------------
1999 1998
-----------------------
(Amounts In Thousands)
NOW and other demand ............................. $ 62,081 $ 53,296
Savings .......................................... 155,001 144,177
Time, $100,000 and over .......................... 30,442 33,657
Other time ....................................... 247,768 234,921
-----------------------
$ 495,292 $ 466,051
=======================
Note 6. Federal Home Loan Bank Borrowings
As of December 31, 1999, the borrowings were as follows:
(In Thousands)
--------------
Due January 24, 2000, 6.21% ................................. $ 10,000
Due April 9, 2000, 6.71% .................................... 3,000
Due November 18, 2002, 5.33% ................................ 5,000
Due August 17, 2005, 7.12% .................................. 100
Due January 14, 2008, 5.22% ................................. 10,000
Due February 4, 2008, 5.38% ................................. 10,000
Due February 4, 2008, 5.25% ................................. 10,000
Due April 30, 2008, 5.40% ................................... 10,000
Due August 11, 2008, 6.00% .................................. 600
Due June 15, 2009, 5.66% .................................... 10,000
Due June 15, 2009, 6.04% .................................... 10,000
Due June 17, 2009, 5.11% .................................... 5,000
Due October 6, 2009, 5.37% .................................. 5,000
Due October 6, 2009, 5.85% .................................. 10,000
Due October 6, 2009, 6.22% .................................. 10,000
-----------
$ 108,700
===========
The borrowings are collateralized by 1-4 family mortgage loans with a face
amount of $135,875,000. As of December 31, 1999, the Company held Federal Home
Loan Bank stock with a cost of $5,930,000.
Note 7. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes
discretionary cash contributions. The Company's contribution to the ESOP totaled
$64,000, $58,000 and $49,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
In the event a terminated plan participant desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at their fair value. To the extent that shares of common stock held
by the ESOP are not readily traded, a sponsor must reflect the maximum cash
obligation related to those securities outside of stockholders' equity. As of
December 31, 1999, 156,474 shares held by the ESOP, at a fair value of $70 per
share, have been reclassified from stockholders' equity to liabilities.
<PAGE>
The Company has a profit-sharing plan with a 401(k) feature which provides for
discretionary annual contributions in amounts to be determined by the Board of
Directors. The profit-sharing contribution totaled $509,000, $461,000 and
$394,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has a Stock Incentive Plan for certain key employees and directors
whereby shares of common stock have been reserved for awards in the form of
stock options or stock awards. A Stock Option Committee may grant options at
prices equal to the fair value of the stock at the date of the grant. Options
expire 10 years from the date of the grant. Directors may exercise options
immediately and officers' rights under the plan vest over a five-year period
from the date of the grant. Additional compensation is accrued equivalent to the
amount of dividends that would have been paid on the stock had the options been
exercised. Such compensation is payable upon exercise of the options. No
compensation expense has been charged to expense using the intrinsic value based
method as prescribed by APB No. 25. Had compensation expense been determined
based on the grant date fair values of the awards, as prescribed by SFAS No.
123, reported net income and earnings per share would have been as follows:
Years Ended December 31,
--------------------------
1999 1998 1997
--------------------------
Pro forma net income (in thousands) ........... $ 8,461 $ 7,481 $ 7,084
Pro forma earnings per share:
Basic ...................................... 5.70 5.10 4.83
Diluted .................................... 5.66 5.02 4.77
The pro forma effects of applying SFAS are not indicative of future amounts
since, among other reasons, the pro forma requirements of SFAS No. 123 have been
applied only to options granted after December 31, 1994.
The fair value of each grant is established at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1997: Dividend rate 2.19%; price volatility of 4.64%;
risk-free interest rate of 6.63% and an expected life of 5 years.
A summary of the stock options is as follows:
Weighted
Average
Number Exercise
Of Shares Price
--------------------------
Balance, December 31, 1997 ...................... 46,569 $ 26.45
Exercised .................................... (1,029) 25.33
--------------------------
Balance, December 31, 1998 ...................... 45,540 26.48
Exercised .................................... (25,078) 25.93
--------------------------
Balance, December 31, 1999 ...................... 20,462 $ 27.15
==========================
1999 1998 1997
--------------------------------
Number of options exercisable, end of year ... 20,462 45,540 22,605
Weighted-average fair value of options granted
during the year ........................... $ - - $ - - $ 13.22
Other pertinent information related to the options outstanding at December 31,
1999 is as follows:
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- --------------------------------------------------------------------------------
$ 25.33 12,330 27 Months 12,330
26.17 6,077 30 Months 6,077
41.00 2,055 75 Months 2,055
---------- ----------
20,462 20,462
========== ==========
As of December 31, 1999, no options were available for future grants.
The committee is also authorized to grant awards of common stock and authorized
the issuance of 1,587, 902 and 938 shares of common stock to a group of
employees in 1999, 1998 and 1997, respectively.
<PAGE>
Note 8. Income Taxes
Income taxes for the years ended December 31, 1999, 1998 and 1997 are summarized
as follows:
1999 1998 1997
-------------------------------
(Amounts In Thousands)
Current:
Federal ................................... $ 3,707 $ 2,435 $ 2,399
State ..................................... 710 586 563
Deferred ..................................... (847) (15) (417)
-------------------------------
$ 3,570 $ 3,006 $ 2,545
===============================
Deferred income tax liabilities and assets arose from the following temporary
differences:
December 31,
------------------------------
1999 1998 1997
------------------------------
(Amounts In Thousands)
Deferred income tax assets:
Allowance for loan losses .............. $ 3,597 $ 3,079 $ 2,622
Unrealized losses on debt securities ... 574 - - - -
Deferred compensation .................. 311 156 77
Certain accrued expenses ............... 190 211 302
Other .................................. 112 - - - -
------------------------------
Gross tax assets .................... 4,784 3,446 3,001
------------------------------
Deferred income tax liabilities:
Property and equipment ................. 700 677 644
FHLB dividends ......................... 130 130 130
Unrealized gains on debt securities .... - - 696 283
Other .................................. - - 105 85
------------------------------
Gross tax liabilities ............... 830 1,608 1,142
------------------------------
Net deferred income tax asset ....... $ 3,954 $ 1,838 $ 1,859
==============================
The net change in the deferred income taxes for the years ended December 31,
1999, 1998 and 1997 is reflected in the financial statements as follows:
Year Ended December 31,
----------------------------------
1999 1998 1997
----------------------------------
(Amounts In Thousands)
Statement of income ....................... $ (847) $ (15) $ (417)
Statement of stockholders' equity ......... (1,269) 413 (83)
----------------------------------
$ (2,116) $ 398 $ (500)
==================================
The income tax provisions for the years ended December 31, 1999, 1998 and 1997
are less than the amounts computed by applying the maximum effective federal
income tax rate to the income before income taxes because of the following
items:
1999 1998 1997
--------------------------------------------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------------------------------------------------------
(Amounts In Thousands)
Expected provision ..... $ 4,213 35.0% $ 3,672 35.0% $ 3,371 35.0%
Tax-exempt interest .... (647) (5.3) (596) (5.7) (557) (5.8)
Interest expense
limitation .......... 120 1.0 102 1.0 97 1.0
Investment securi-
ties contributed .... - - - - - - - - (358) (3.7)
State income taxes,
net of federal
income tax
benefit ............. 468 3.9 398 3.8 372 3.9
Income tax credits ..... (345) (2.9) (345) (3.3) (345) (3.6)
Other .................. (239) (2.0) (225) (2.2) (35) (0.4)
--------------------------------------------------------
$ 3,570 29.7% $ 3,006 28.6% $ 2,545 26.4%
========================================================
<PAGE>
Note 9. Regulatory Capital Requirements, Restrictions on Subsidiary
Dividends and Cash Restrictions
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk-based capital standards include requirements for a minimum Tier 1 capital
to assets ratio (leverage ratio). In addition, regulatory agencies consider the
published capital levels as minimum levels and may require a financial
institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 1999 with the minimum
requirements is presented below.
Minimum
Actual Requirements
--------------------------------
Tier 1 Risk-Based Capital ....................... 13.21% 4.00%
Total Risk-Based Capital ........................ 14.47% 8.00%
Leverage Ratio .................................. 9.56% 3.00%
According to FDIC capital guidelines, each of the Banks is classified as "Well
Capitalized." The ability of the Company to pay dividends to its stockholders is
dependent upon dividends paid by the Banks. The Banks are subject to certain
statutory and regulatory restrictions on the amount they may pay in dividends.
To maintain acceptable capital ratios in the Banks, certain of their retained
earnings are not available for the payment of dividends. To maintain a ratio of
capital to assets of 8%, retained earnings of $4,032,000 as of December 31, 1999
are available for the payment of dividends to the Company.
Each of the Banks is required to maintain reserve balances in cash or with the
Federal Reserve Bank. Reserve balances totaled $7,938,000 and $5,783,000 as of
December 31, 1999 and 1998, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and the Banks and companies with which the
directors are affiliated and certain principal officers are customers of, and
have banking transactions with, the Banks in the ordinary course of business.
Such indebtedness has been incurred on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons.
The following is an analysis of the changes in the loans to related parties
during the years ended December 31, 1999 and 1998:
Year Ended December 31,
----------------------------
1999 1998
----------------------------
(Amounts In Thousands)
Balance, beginning ..................... $ 10,981 $ 10,511
Advances ............................ 5,732 7,077
Collections ......................... (5,980) (6,607)
----------------------------
Balance, ending ........................ $ 10,733 $ 10,981
============================
Deposits from related parties are accepted subject to the same interest rates
and terms as those from nonrelated parties.
<PAGE>
Note 11. Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company's financial
instruments as of December 31, 1999 and 1998 are as follows:
<TABLE>
1999 1998
------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------------
(Amounts In Thousands)
<S> <C> <C> <C> <C>
Cash and due from banks ..................... $ 21,765 $ 21,765 $ 16,427 $ 16,427
Federal funds sold .......................... 206 206 36,811 36,811
Investment securities ....................... 156,198 156,253 149,350 149,922
Loans ....................................... 565,381 568,331 460,911 468,581
Accrued interest receivable ................. 6,376 6,376 5,885 5,885
Deposits .................................... 562,086 565,040 534,151 536,824
Securities sold under agreements
to repurchase ............................ 26,714 26,714 10,554 10,554
Borrowings from Federal Home Loan
Bank ..................................... 108,700 109,112 75,732 78,609
Accrued interest payable .................... 2,040 2,040 2,048 2,048
Face Amount Face Amount
----------- -----------
Off-balance sheet instruments:
Loan commitments ......................... $ 83,894 $ - - $ 93,920 $ - -
Letters of credit ........................ 10,711 - - 10,571 - -
</TABLE>
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company
only):
BALANCE SHEETS
December 31, 1999 and 1998
(Amounts In Thousands)
ASSETS 1999 1998
- --------------------------------------------------------------------------------
Cash ..................................................... $ 1,419 $ 698
Investment securities available for sale ................. 499 303
Investment in subsidiary banks ........................... 68,790 64,332
Other assets ............................................. 833 653
----------------------
Total assets ............................... $ 71,541 $ 65,986
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities .............................................. $ 324 $ 233
----------------------
Redeemable common stock held by ESOP ..................... 10,953 9,301
----------------------
Stockholders' equity:
Capital stock ......................................... 10,214 9,140
Retained earnings ..................................... 61,984 55,428
Unrealized gains (losses) on investment
securities, net .................................... (981) 1,185
----------------------
71,217 65,753
Less maximum cash obligation related to ESOP shares ... 10,953 9,301
----------------------
Total stockholders' equity ................. 60,264 56,452
----------------------
Total liabilities and stockholders' equity . $ 71,541 $ 65,986
======================
STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
(Amounts In Thousands)
1999 1998 1997
- --------------------------------------------------------------------------------
Interest on investment securities ................. $ 16 $ 17 $ 17
Gain on sale of investment security ............... - - - - 1,054
Dividends received from subsidiaries .............. 1,911 2,762 2,515
Contributions ..................................... - - - - (1,054)
Other expenses .................................... (121) (113) (102)
Income before income taxes and equity -----------------------------
in subsidiaries' undistributed income .... 1,806 2,666 2,430
Income tax benefit ................................ 37 39 370
-----------------------------
1,843 2,705 2,800
Equity in subsidiaries' undistributed income ...... 6,623 4,781 4,286
-----------------------------
Net income .......................... $ 8,466 $ 7,486 $ 7,086
=============================
<PAGE>
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Amounts In Thousands)
<TABLE>
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 8,466 $ 7,486 $ 7,086
Noncash items included in net income:
Undistributed earnings of subsidiaries ................ (6,623) (4,781) (4,286)
(Increase) decrease in other assets ................... (180) 357 (174)
Increase (decrease) in liabilities .................... 90 (84) (225)
---------------------------------
Net cash provided by operating activities ..... 1,753 2,978 2,401
---------------------------------
Cash flows from investing activities:
Investment in subsidiary banks ........................... - - (1,000) (750)
Proceeds from maturities of investment securities ........ 303 300 - -
Purchase of investment securities ........................ (499) (303) - -
---------------------------------
Net cash (used in) investing activities ....... (196) (1,003) (750)
---------------------------------
Cash flows (used in) financing activities:
Stock issued ............................................. 744 - - - -
Income tax benefits related to stock based
compensation .......................................... 330 76 - -
Dividends paid ........................................... (1,910) (1,761) (1,537)
---------------------------------
Net cash (used in) financing activities ....... (836) (1,685) (1,537)
---------------------------------
Increase (decrease) in cash ................... 721 290 114
Cash balance:
Beginning ................................................ 698 408 294
---------------------------------
Ending ................................................... $ 1,419 $ 698 $ 408
=================================
</TABLE>
Concentrations of credit risk: All of the Banks' loans, commitments to extend
credit, unused lines of credit and outstanding letters of credit have been
granted to customers within each Bank's market area. Investments in securities
issued by state and political subdivisions within the state of Iowa totaled
approximately $15,898,000. The concentrations of credit by type of loan are set
forth in Note 3. Outstanding letters of credit were granted primarily to
commercial borrowers. Although the Banks have a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economic conditions in Johnson County, Iowa.
Contingencies: In the normal course of business, the Banks are involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the
accompanying financial statements.
Financial instruments with off-balance sheet risk: The Banks are parties to
financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit, credit card participations and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheets.
<PAGE>
Note 13. Commitments and Contingencies (Continued)
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, credit card
participations and standby letters of credit is represented by the contractual
amount of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance sheet
instruments. A summary of the Banks' commitments at December 31, 1999 and 1998
is as follows:
1999 1998
------------------------
(Amounts In Thousands)
Firm loan commitments and unused portion of
lines of credit:
Home equity loans .................................... $ 3,628 $ 3,509
Credit card participations ........................... 10,695 8,689
Commercial, real estate and home construction ........ 35,882 27,549
Commercial lines ..................................... 33,689 54,173
Outstanding letters of credit ........................... 10,711 10,571
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, crops, livestock, inventory,
property and equipment, residential real estate and income-producing commercial
properties. Credit card participations are the unused portion of the holders'
credit limits. Such amounts represent the maximum amount of additional unsecured
borrowings.
Outstanding letters of credit are the conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party and
collateralize the customer's borrowing arrangement with other creditors. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Banks deem necessary.
<PAGE>
Part II
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is contained in the Registrant's Proxy
Statement under the heading "Information Concerning Nominees for Election as
Directors" and "Information Concerning Directors Other Than Nominees," which
sections are incorporated herein by this reference.
The following table sets forth the name, age and principal occupation of the
Executive Officers of the Registrant and Executive Officers of the Bank. All
officers of the Registrant and the Bank are elected annually for one-year terms
of office.
<TABLE>
Year First
Elected
Position With Registrant Or Bank And Officer Of
Principal Occupation And Employment Registrant
Name Age During The Past Five Years (Bank)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dwight O. Seegmiller 47 Director of Registrant and Bank; President, Registrant and Bank 1986 (1975)
Willis M. Bywater 61 Director of Registrant and Bank; Chairman of the Board, Bank; 1997
Vice President of the Registrant; Executive Officer and Shareholder
of Economy Advertising Company
Earl M. Yoder 72 Director of Registrant and Bank; Vice President of the Registrant; 1997
Executive Officer and Shareholder of Iowa City Ready Mix, Inc.
James G. Pratt 51 Treasurer of Registrant; Senior Vice President from January 1986 1985 (1982)
to present
Thomas J. Cilek 53 Secretary of Registrant; Senior Vice President of Bank from 1988 (1986)
August 1986 to present
</TABLE>
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Executive Compensation and Benefits," which section
is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management" and "Report on Executive Compensation," which sections are
incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's Proxy
Statement under the heading "Loans To and Certain Other Transactions With
Executive Officers and Directors," which section is incorporated herein by this
reference.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Form 10-K
Reference
---------
(a) 1. Financial Statements
Independent auditor's report on the financial statements
Consolidated balance sheets as of December 31, 1999 and 1998
Consolidated statements of income for the years ended
December 31, 1999, 1998 and 1997
Consolidated statements of comprehensive income for the years
ended December 31, 1999, 1998 and 1997
Consolidated statements of stockholders' equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998 and 1997
Notes to financial statements
(a) 2. Financial Statements Schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
(a) 3. Exhibits
Exhibit 3 - Articles of Incorporation and Bylaws filed as Exhibit 3 of
Form 10-K for the year ended December 31, 1993 are incorporated by
reference.
Exhibit 10(a) - Material Contract (Employee Stock Ownership Plan) filed
as Exhibit 10(a) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(b) - Material Contract (1993 Stock Incentive Plan) filed as
Exhibit 10(b) in Form 10-K for the year ended December 31, 1993 is
incorporated by reference.
Exhibit 10(c) - Material contract (1995 Deferred Compensation Plans)
filed as Exhibit 10(c) in Form 10-K for the year ended December 31,
1995 is incorporated by reference.
Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per
Share is attached on Page 68.
Exhibit 21 - Subsidiaries of the Registrant is attached on Page 69.
Exhibit 23 - Consent of Accountants is attached on Page 70.
Exhibit 27 - Financial Data Schedule is attached on Pages 71 and 72.
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December
31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HILLS BANCORPORATION
Date March 30, 1999 By /s/ Dwight O. Seegmiller
-------------------------- --------------------------------------------
Dwight O. Seegmiller, Director and President
Date March 30, 1999 By /s/ James G. Pratt
-------------------------- --------------------------------------------
James G. Pratt, Treasurer and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date March 30, 1999 By /s/ Willis M. Bywater
-------------------------- --------------------------------------------
Willis M. Bywater, Director
Date March 30, 1999 By /s/ Thomas J. Gill
-------------------------- --------------------------------------------
Thomas J. Gill, Director
Date March 30, 1999 By /s/ Donald H. Gringer
-------------------------- --------------------------------------------
Donald H. Gringer, Director
Date March 30, 1999 By /s/ Richard W. Oberman
-------------------------- --------------------------------------------
Richard W. Oberman, Director
Date March 30, 1999 By /s/ Theodore H. Pacha
-------------------------- --------------------------------------------
Theodore H. Pacha, Director
Date March 30, 1999 By /s/ Ann M. Rhodes
-------------------------- --------------------------------------------
Ann M. Rhodes, Director
Date March 30, 1999 By /s/ Ronald E. Stutsman
-------------------------- --------------------------------------------
Ronald E. Stutsman, Director
Date March 30, 1999 By /s/ Earl M. Yoder
-------------------------- --------------------------------------------
Earl M. Yoder, Director
Date March 30, 1999 By /s/ Sheldon E. Yoder
-------------------------- --------------------------------------------
Sheldon E. Yoder, Director
<PAGE>
HILLS BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
11 Statement Re Computation of Basic and Diluted Earnings Per Share
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
HILLS BANCORPORATION EXHIBIT 11
STATEMENT RE COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
Year Ended December 31,
----------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of common stock, beginning ........................................ 1,469,443 1,467,754 1,465,385
========================================
Shares of common stock, ending ........................................... 1,495,941 1,469,443 1,467,754
========================================
Computation of weighted average number of basic and diluted shares:
Common shares outstanding at the beginning of the year ................ 1,469,443 1,467,754 1,465,385
Weighted average number of net shares issued .......................... 14,097 18 529
----------------------------------------
Weighted average shares outstanding (basic) ................ 1,483,540 1,467,772 1,465,914
Weighted average of potential dilutive shares
attributable to stock options granted, computed under
the treasury stock method .......................................... 11,784 22,702 18,040
----------------------------------------
Weighted average number of shares (diluted) ................ 1,495,324 1,490,474 1,483,954
========================================
Net income (In Thousands) ................................................ $ 8,466 $ 7,486 $ 7,086
========================================
Earnings per share:
Basic ................................................................. $ 5.70 $ 5.10 $ 4.83
========================================
Diluted ............................................................... $ 5.66 $ 5.02 $ 4.78
========================================
Dividends per common share ............................................... $ 1.30 $ 1.20 $ 1.05
========================================
</TABLE>
EXHIBIT 21
HILLS BANCORPORATION
SUBSIDIARIES OF THE REGISTRANT
Name Of Subsidiary State Of Incorporation
- --------------------------------------------------------------------------------
Hills Bank and Trust Company Iowa
LBC, Inc. Iowa
Hills Bank Kalona Iowa
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Hills Bancorporation
We hereby consent to the incorporation by reference of our report dated February
14, 2000 with respect to the financial statements of Hills Bancorporation and
subsidiaries included in the Annual Report on Form 10-K of Hills Bancorporation
for the year ended December 31, 1999 in Registrant Statement No. 33-73606 on
Form S-8 filed December 30, 1993 and Registrant Statement No. 33-2657 on Form
S-8 filed January 10, 1986.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FORM 10-K OF HILLS BANCORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,765
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 206
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,961
<INVESTMENTS-CARRYING> 18,307
<INVESTMENTS-MARKET> 18,362
<LOANS> 575,131
<ALLOWANCE> 9,750
<TOTAL-ASSETS> 773,966
<DEPOSITS> 562,086
<SHORT-TERM> 26,714
<LIABILITIES-OTHER> 18,249
<LONG-TERM> 95,700
10,953
0
<COMMON> 10,214
<OTHER-SE> 50,050
<TOTAL-LIABILITIES-AND-EQUITY> 773,966
<INTEREST-LOAN> 41,933
<INTEREST-INVEST> 8,733
<INTEREST-OTHER> 455
<INTEREST-TOTAL> 51,121
<INTEREST-DEPOSIT> 20,826
<INTEREST-EXPENSE> 26,313
<INTEREST-INCOME-NET> 24,808
<LOAN-LOSSES> 900
<SECURITIES-GAINS> (315)
<EXPENSE-OTHER> 18,309
<INCOME-PRETAX> 12,036
<INCOME-PRE-EXTRAORDINARY> 8,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,466
<EPS-BASIC> 5.70
<EPS-DILUTED> 5.66
<YIELD-ACTUAL> 3.83
<LOANS-NON> 0
<LOANS-PAST> 1,320
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,265
<ALLOWANCE-OPEN> 8,856
<CHARGE-OFFS> 763
<RECOVERIES> 757
<ALLOWANCE-CLOSE> 9,750
<ALLOWANCE-DOMESTIC> 9,750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
