FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa I.R.S. Employer Identification
------------------------------
No. 42-1208067
131 MAIN STREET, HILLS, IOWA
Telephone number: (319) 679-2291
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
SHARES OUTSTANDING
CLASS AT October 31, 2000
-------------------------- -------------------
Common Stock, no par value 1,495,941
<PAGE>
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated balance sheets, September 30, 2000 (unaudited)
and December 31, 1999
Consolidated statements of income, (unaudited) for three and nine
months ended September 30, 2000 and 1999
Consolidated statements of comprehensive income, (unaudited) for
three and nine months ended September 30, 2000 and 1999
Consolidated statements of stockholders' equity, (unaudited)
for three and nine months ended September 30, 2000 and 1999
Consolidated statements of cash flows (unaudited) for nine
months ended September 30, 2000 and 1999
Notes to consolidated financial statements
Item 2. Management's discussion and analysis of financial condition
and results of operations
Part II
OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to vote of security holders
Item 5. Other information
Item 6. Exhibits and reports on Form 8-K
COMPUTATION OF EARNINGS PER SHARE
SIGNATURES
<PAGE>
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares)
<TABLE>
September 30,
2000 December 31,
Unaudited 1999*
---------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .................................. $ 21,381 $ 21,765
Investment securities:
Available for sale (amortized cost
September 30, 2000 $134,989;
December 31, 1999 $133,516) ......................... 134,337 131,961
Held to maturity (fair value
September 30, 2000 $16,675;
December 31, 1999 $18,362) .......................... 16,577 18,307
Stock of Federal Home Loan Bank ....................... 7,927 5,930
Federal funds sold ....................................... 5,510 206
Loans, net ............................................... 622,574 565,381
Property and equipment, net .............................. 14,338 11,646
Accrued interest receivable .............................. 7,647 6,376
Deferred income taxes, net ............................... 3,473 3,954
Other assets ............................................. 8,014 8,440
--------- ---------
$ 841,778 $ 773,966
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ............................. $ 73,872 $ 66,794
Interest-bearing deposits ................................ 547,532 495,292
--------- ---------
Total deposits ........................................ $ 621,404 $ 562,086
Federal funds purchased and securities
sold under agreements to repurchase ................... 12,377 26,714
Federal Home Loan Bank notes ............................. 125,669 108,700
Accrued interest payable ................................. 2,535 2,040
Other liabilities ........................................ 3,237 3,209
--------- ---------
$ 765,222 $ 702,749
--------- ---------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ................................................ $ 11,735 $ 10,953
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued September 30, 2000 - 1,495,941 shares;
December 31, 1999 - 1,495,941 shares .................. $ 10,214 $ 10,214
Retained earnings ........................................ 66,754 61,984
Accumulated other comprehensive income,
unrealized gains (losses) on investment securities, net (412) (981)
--------- ---------
$ 76,556 $ 71,217
Less, maximum cash obligation related to
ESOP shares ........................................... 11,735 10,953
--------- ---------
$ 64,821 $ 60,264
--------- ---------
$ 841,778 $ 773,966
========= =========
<FN>
* Derived from audited financial statements.
</FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2000 and 1999
(In Thousands, Except Per Share Data)
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30 September 30
----------------- -----------------
2000 1999 2000 1999
-------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans .......... $12,950 $10,746 $36,813 $30,624
Interest on investment securities:
Taxable ........................... 1,832 1,788 5,567 5,315
Non-taxable ....................... 439 394 1,284 1,157
Interest on federal funds sold ...... 79 78 346 435
------- ------- ------- -------
Total interest income ............... $15,300 $13,006 $44,010 $37,531
------- ------- ------- -------
Interest expense:
Interest on deposits ................ $ 6,536 $ 5,220 $17,870 $15,498
Interest on securities sold under
agreements to repurchase .......... 162 113 424 308
Interest on FHLB borrowings ......... 1,854 1,296 5,704 3,415
------- ------- ------- -------
Total interest expense .............. $ 8,552 $ 6,629 $23,998 $19,221
------- ------- ------- -------
Net interest income ................. $ 6,748 $ 6,377 $20,012 $18,310
Provision for loan losses .............. 237 204 711 612
------- ------- ------- -------
Net interest income after provision
for loan losses ................... $ 6,511 $ 6,173 $19,301 $17,698
------- ------- ------- -------
Other income:
Loan origination fees ............... $ 110 $ 121 $ 222 $ 525
Trust fees .......................... 590 457 1,757 1,483
Deposit account charges and fees .... 652 605 1,851 1,589
Net losses on sale of investment
securities ........................ - - (214) - - (214)
Other fees and charges .............. 534 464 1,710 1,382
------- ------- ------- -------
$ 1,886 $ 1,433 $ 5,540 $ 4,765
------- ------- ------- -------
Other expenses:
Salaries and employee benefits ...... $ 2,659 $ 2,429 $ 7,939 $ 7,244
Occupancy ........................... 414 330 1,085 920
Furniture and equipment ............. 517 453 1,512 1,363
Office supplies and postage ......... 254 290 754 814
Other operating ..................... 1,183 1,045 3,514 3,050
------- ------- ------- -------
$ 5,027 $ 4,547 $14,804 $13,391
------- ------- ------- -------
Income before income taxes .......... $ 3,370 $ 3,059 $10,037 $ 9,072
Federal and state income taxes ......... 1,034 941 3,098 2,794
------- ------- ------- -------
Net income .......................... $ 2,336 $ 2,118 $ 6,939 $ 6,278
======= ======= ======= =======
Earning per common share:
Basic ............................. $ 1.56 $ 1.41 $ 4.63 $ 4.20
Diluted ........................... 1.55 1.40 4.60 4.17
</TABLE>
<PAGE>
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2000 and 1999
(In Thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income ..................................... $ 2,336 $ 2,118 $ 6,939 $ 6,278
------- ------- ------- -------
Other comprehensive income:
Unrealized gains (losses) on debt securities 1,133 (371) 903 (2,527)
Income tax effect of unrealized gains losses) (419) 138 (334) 922
------- ------- ------- -------
$ 714 $ (233) $ 569 $(1,605)
------- ------- ------- -------
Comprehensive Income ........................ $ 3,050 $ 1,885 $ 7,508 $ 4,673
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2000 and 1999
(In Thousands)
<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, 1999 ................. $ 10,214 $ 61,984 $ (981) $(10,953) $ 60,264
Net income ............................... - - - 6,939 - - - - - - 6,939
Change related to ESOP shares ............ - - - - - - - - - (782) (782)
Cash dividends ($1.45 per share) ......... - - - (2,169) - - - - - - (2,169)
Other comprehensive income ............... - - - - - - 569 - - - 569
-------- -------- ------ -------- --------
Balance, September 30, 2000 ................ $ 10,214 $ 66,754 $ (412) $(11,735) $ 64,821
======== ======== ====== ======== ========
Less
Maximum
Accumulated Cash
Other Obligation
Capital Retained Comprehensive To ESOP
Stock Earnings Income Shares Total
-------- -------- ------------- -------- --------
Balance, December 31, 1998 ................. $ 9,140 $55,428 $ 1,185 $ (9,301) $ 56,452
Net income ............................... - - - 6,278 - - - - - - 6,278
Change related to ESOP shares ............ - - - - - - - - - (1,610) (1,610)
Cash dividends ($1.30 per share) ......... - - - (1,911) - - - - - - (1,911)
Other comprehensive income ............... - - - - - - (1,605) - - - (1,605)
Issuance of 24,424 shares of common stock 645 - - - - - - - - - 645
Income tax benefit related to
stock options exercised ................ - - - 308 - - - - - - 308
------- ------- -------- -------- -------
Balance, September 30, 1999 ................ $ 9,785 $60,103 $ (420) $(10,911) $ 58,557
======= ======= ======== ======== ========
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(In Thousands)
<TABLE>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 6,939 $ 6,278
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 1,020 1,071
Provision for loan losses .................................................. 711 612
Net losses on disposition of investment securities ......................... - - - 214
Deferred income taxes ...................................................... 147 (56)
Compensation paid by issuance of common stock .............................. - - - 20
(Increase) decrease in accrued interest receivable ......................... (1,271) (699)
Amortization of bond discount .............................................. 52 339
(Increase) in other assets ................................................. 168 (1,401)
Amortization of intangibles ................................................ 258 258
Increase in accrued interest and other liabilities ......................... 523 1,291
-------- --------
Net cash provided by operating activities .................................. $ 8,547 $ 7,927
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 21,531 $ 26,837
Held to maturity ........................................................... 1,651 2,055
Proceeds from sales of available for sale securities ....................... - - - 9,003
Purchase of available for sale investment securities ....................... (24,974) (46,726)
Federal funds sold, net .................................................... (5,304) 36,605
Loans made to customers, net of collections ................................ (57,904) (76,098)
Purchases of property and equipment ........................................ (3,712) (1,483)
-------- --------
Net cash (used in) investing activities .................................... $(68,712) $(49,807)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................................... $ 59,318 $ 14,672
Net increase (decrease) in fed funds purchased and
securities sold under agreements to repurchase .......................... (14,337) 16,135
Borrowings from FHLB ....................................................... 40,000 25,000
Payments on FHLB notes ..................................................... (23,031) (12,032)
Stock options exercised .................................................... - - - 625
Income tax benefits on stock options exercised ............................. - - - 308
Dividends paid ............................................................. (2,169) (1,911)
-------- --------
Net cash provided by financing activities ............................... $ 59,781 $ 42,797
-------- --------
Increase (decrease) in cash and due from banks .......................... $ (384) $ 917
CASH AND DUE FROM BANKS
Beginning .................................................................. 21,765 16,427
-------- --------
Ending ..................................................................... $ 21,381 $ 17,344
======== ========
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest paid to depositors and others .................................. $ 17,375 $ 15,568
Interest paid on other obligations ...................................... 6,128 3,723
Non-cash financing transaction, increase in maximum cash
obligation related to ESOP shares ..................................... 782 1,610
</TABLE>
See Notes to Financial Statements.
<PAGE>
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Interim Financial Statements
Interim consolidated financial statements have not been examined by independent
public accountants, but include all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary for a
fair presentation of the results for these periods. The results of operation for
the interim periods are not necessarily indicative of the results for a full
year.
In reviewing these financial statements, reference should be made to the Notes
to Financial Statements contained in the Financial Statements for the year ended
December 31, 1999.
There were no changes in accounting policies which had a significant effect on
the interim consolidated financial statements for the periods presented.
For purposes of reporting cash flows, cash and due from banks includes cash on
hand and amounts due from banks (including cash items in process of clearing).
Cash flows from demand deposits, NOW accounts, savings accounts, and federal
funds purchased and sold are reported net since their original maturities are
less than three months. Cash flows from loans and time deposits are presented as
net increases or decreases.
Note 2. Loans
The following tables set forth the composition of loans and the allowance for
loan losses:
(In thousands)
September 30
--------------------------
2000 1999
--------- ---------
Agricultural ................................ $ 29,090 $ 29,394
Commercial and financial .................... 37,292 40,046
Real estate, construction ................... 44,340 39,706
Real estate, mortgage ....................... 489,453 406,420
Loans to individuals ........................ 32,447 30,058
--------- ---------
$ 632,622 $ 545,624
Less allowance for loan losses .............. 10,048 9,227
--------- ---------
$ 622,574 $ 536,397
========= =========
Transactions in the allowance for loan losses are as follows:
(In thousands)
Nine Months
Ended September 30
-------------------------
2000 1999
-------- --------
Balance, beginning ........................... $ 9,750 $ 8,856
Provision charged to expense ............... 711 612
Net charge-offs ............................ (413) (241)
-------- --------
Balance, ending .............................. $ 10,048 $ 9,227
======== ========
The following summarizes the Company's nonaccrual, past due, restructured and
impaired loans:
(In thousands)
September 30
-----------------
2000 1999
------ ------
Nonaccrual ..................................... $ 98 $- - -
Accruing loans, past due 90 days or more ....... 2,215 1,083
Restructured loan .............................. - - - - - -
Impaired loans ................................. $8,908 9,343
<PAGE>
Note 3. Earnings Per Share
Basic net income per share amounts are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the period plus the number of
potential dilutive common shares attributable to the Company's stock option
plan.
<PAGE>
PART I, ITEM 2.
HILLS BANCORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
Forward looking information relating to the financial results or strategies of
the Company are made in the Management's Discussion and Analysis. The following
paragraphs identify forward looking statements and the risks that need to be
considered when reading those statements.
Forward looking statements include such words as believe, expect, anticipate,
target, goal, objective and other words with similar meaning. The Company is
under no obligation to update such statements.
The risks involved in the operations and strategies of the Company include
competition from other financial institutions, changes in interest rates,
changes in economic or market conditions and changes in regulatory factors.
These risks, which are not all inclusive, cannot be estimated.
Recent Activities
During the first nine months of 2000 the Company expanded to a new market and
two significant construction projects were started in Hills and Coralville,
respectively. In February the Company opened a new office in downtown Cedar
Rapids, Iowa, our tenth location. The construction of the new operations center
in Hills, began in March 2000, and continues to be on schedule with a completion
expected by December of 2000. The total cost of the project is expected to be
approximately $3.1 million, plus capitalized interest cost during construction.
Also construction began in June, 2000 of a 6,000 square foot addition to the
Coralville office, which will be primarily for retail banking services in the
growing Coralville market. The Coralville project also includes a substantial
remodeling of the existing two story Coralville office. Total project costs are
estimated to be approximately $2.1 million.
Financial Position
Total assets at September 30, 2000 are $841.8 million and represent a $103.2
million increase in assets from one year ago. This increase in assets included
an increase in net loans from September 30, 1999 to September 30, 2000 of $86.2
million, with primarily all the loan growth attributable to real estate loans,
consistent with loan growth over the last few years. The local and national
economy continues to be strong despite recent increases in interest rates. Our
asset growth was funded primarily by deposit growth of $72.6 million, while
federal funds purchased and securities sold under agreements to repurchase
decreased by $14.3 million and a net increase in Federal Home Loan Bank note
advances of $37.0 million. Due to the continued loan demand and challenges for
funding sources, asset-liability management continues to be very important. The
asset-liability management encompasses both the management of interest rate
sensitivity and the maintenance of adequate liquidity. Interest rate sensitivity
management attempts to provide the optimal level of net interest income while
managing exposure to risks associated with interest rate movements. Liquidity
management involves planning to meet anticipated funding needs. Management
monitors the rate sensitivity and liquidity positions on an on-going basis and,
when necessary, appropriate action is taken to minimize any adverse effects of
rapid interest rate movements or any unexpected liquidity concerns. The Company
believes it will be able to maintain sufficient liquidity.
In January 2000, Hills Bancorporation paid a dividend of $2,169,000 or $1.45 per
share, an 11.54% increase from the $1.30 paid in January 1999. After payment of
the dividend and adjustment for accumulated other comprehensive income,
stockholders' equity as of September 30, 2000 totaled $64,821,000. The total
stockholders' equity of Hills Bancorporation as of September 30, 2000 before the
reduction for the ESOP shares, totaled 9.09% of total assets. Under risk-based
capital rules, our total risk based capital is 13.70% of risk adjusted assets,
and substantially in excess of required minimums.
Results of Operations
Net income for the quarter and nine months ended September 30, 2000 compared to
the same periods in 1999 had increases of $218,000 and $661,000, respectively.
For both periods the changes were primarily the result of significant increases
in net interest income which was the result of increases in average earning
assets from the prior year. Average earning assets were approximately $100
million higher for the nine months ended September 30, 2000 compared to the same
period in 1999. Total other income increased over the prior year by $453,000 for
the three months ended September 30, 2000 and $775,000 for the nine month period
then ended.
<PAGE>
Loan origination fees for the nine months in 2000 are $303,000 less than 1999 as
a result of fewer real estate loan refinancings in 2000. Trust fees, deposit
account charges and other fees increased $250,000 for the three months and
$864,000 for the nine months and were the direct results of volume increased in
trust assets and deposit accounts opened. During the third quarter of 1999 the
Company had a reduction of other income by $214,000, which represented
investment securities losses taken to replace lower yielding securities with
higher yielding securities of similar risk and maturity. For the year 2000 no
gains and losses on sale of investment securities have occurred.
Other expenses increased $480,000 and $1,413,000 for the two periods
represented. Of the increase, salaries and benefits accounted for $695,000,
occupancy and furniture and equipment expense $314,000 and all other expenses
$404,000. The salaries and employee benefits increase were the direct result of
salary adjustments in the first quarter of 2000 and the two new offices added
during the last sixteen months. The Eastside location of Hills Bank and Trust
Company opened in June of 1999 and the Cedar Rapids office of Hills Bank opened
in February of 2000. The two new locations also accounted for a portion of the
increase in occupancy expense and other expense increases in marketing and
business promotion. Also during the year 2000 the banks have introduced an
on-line banking product and incurred increased promotion expense for this
product.
Earnings per share, both basic and diluted, increased for the quarter ended
September 30, 2000 compared to 1999. For the quarter ended September 30, 2000
basic and diluted earnings per share were $1.56 and $1.55 in comparison to $1.41
and $1.40 for the quarter ended September 30, 1999. The earnings per share for
the nine months ended September 30, 2000 and 1999 were $4.63 and $4.20 for basic
earnings per share and $4.60 and $4.17 for diluted earnings per share.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is comprised
primarily of interest rate risk arising form its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that the Company's primary market risk exposures and
how those exposures have been managed to-date in 2000 changed significantly when
compared to 1999.
Asset/Liability Management
The Company has a fully integrated asset/liability management system to assist
in managing the balance sheet. The process, which is used to project the results
of alternative investment decisions, includes the development of simulations
that reflect the effects of various interest rate scenarios on net interest
income. Management analyzes the simulations to manage interest rate risk, the
net interest margin and levels of net interest income.
Our objective is to structure the balance sheet so that net interest margin
fluctuates in a narrow range during periods of changing interest rates. The
Company currently believes that net interest income would fall by less than 4
percent if interest rates increased or decreased by 300 basis points over a
one-year time horizon. This is within the Company's policy limits.
To improve net interest income and lessen interest rate risk, management
continues its strategy of de-emphasizing fixed-rate portfolio residential real
estate loans with long repricing periods. The Company continues to focus on
reducing interest rate risk by emphasizing growth in variable-rate consumer and
commercial loans. Other actions include the use of fixed-rate Federal Home Loan
Bank (FHLB) advances as alternatives to certificates of deposit, active
management of the available for sale investment securities portfolio to provide
for cash flows that will facilitate interest rate risk management.
The highly competitive banking environment in Iowa also greatly impacts the
Company's net interest margin. The effect of competition on net interest income
is difficult to predict.
<PAGE>
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings.
Item 2. Changes in Securities
There were no changes in securities.
Item 3. Defaults upon Senior Securities
Hills Bancorporation has no senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended September 30, 2000.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
See exhibit II - Statement Re Computation of Earnings Per
Common Share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended September 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
HILLS BANCORPORATION
(Registrant)
November 14, 2000 /s/ Dwight O. Seegmiller
------------------ -------------------------------------------
Date Dwight O. Seegmiller, President
(Duly authorized officer of the registrant)
November 14, 2000 /s/ James G. Pratt
----------------- -------------------------------------------
Date James G. Pratt, Treasurer
(Principal Financial Officer)
