-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CFtYb6kKK7kQYKpxhHFeY8L0ieXw6sI/3kLnVXkEylrcoP7qQRw9HXVotHlHBT/9 KTtElJejWNCqnSkU0iwbuw== 0001169232-03-006459.txt : 20031110 0001169232-03-006459.hdr.sgml : 20031110 20031110155453 ACCESSION NUMBER: 0001169232-03-006459 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLS BANCORPORATION CENTRAL INDEX KEY: 0000732417 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421208067 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12668 FILM NUMBER: 03988414 BUSINESS ADDRESS: STREET 1: 131 MAIN ST CITY: HILLS STATE: IA ZIP: 52235 BUSINESS PHONE: 3196792291 MAIL ADDRESS: STREET 1: 131 MAIN ST CITY: HILLS STATE: IA ZIP: 52235 10-Q 1 d57379_10-q.txt QUARTERLY REPORT 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, 2003 Commission file number: 0-12668 Hills Bancorporation Incorporated in Iowa I.R.S. Employer Identification No. 42-1208067 131 MAIN STREET, HILLS, IOWA 52235 Telephone number: (319) 679-2291 Indicate by checkmark 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 Indicate by checkmark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). |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, 2003 ----- ------------------- Common Stock, no par value 1,515,778 1 HILLS BANCORPORATION Index to Form 10-Q Part I FINANCIAL INFORMATION Page Number ------ Item 1. Financial Statements Consolidated balance sheets, September 30, 2003 (unaudited) and December 31, 2002. 3 Consolidated statements of income, (unaudited) for three and nine months ended September 30, 2003 and 2002. 4 Consolidated statements of comprehensive income, (unaudited) for three and nine months ended September 30, 2003 and 2002. 5 Consolidated statements of stockholders' equity, (unaudited) for nine months ended September 30, 2003 and 2002. 6 Consolidated statements of cash flows (unaudited) for nine months ended September 30, 2003 and 2002. 7 Notes to consolidated financial statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Evaluation of Disclosures Controls 19 Part II OTHER INFORMATION Item 1. Legal proceedings 20 Item 2. Changes in securities and use of proceeds 20 Item 3. Defaults upon senior securities 20 Item 4. Submission of matters to vote of security holders 20 Item 5. Other information 20 Item 6. Exhibits and reports on Form 8-K 20 Signatures and Certifications 21-24 2 HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Shares)
September 30, 2003 Unaudited December 31, 2002* ---------- ------------------ ASSETS Cash and due from banks $ 32,274 $ 32,647 Investment securities: Available for sale (amortized cost September 30, 2003 $201,293 December 31, 2002 $190,313) 207,120 197,807 Held to maturity (fair value September 30, 2003 $8,374; December 31, 2002 $8,303) 8,224 8,022 Stock of Federal Home Loan Bank 8,774 8,382 Federal funds sold 40,492 32,514 Loans held for sale 4,890 6,884 Loans, net 846,310 773,973 Property and equipment, net 22,248 21,500 Accrued interest receivable 7,415 7,278 Deferred income taxes, net 2,067 1,971 Other assets 8,339 7,569 ---------- ---------- $1,188,153 $1,098,547 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest-bearing deposits $ 112,697 $ 107,833 Interest-bearing deposits 761,484 694,488 ---------- ---------- Total deposits $ 874,181 $ 802,321 Securities sold under agreements to repurchase 29,690 20,798 Federal Home Loan Bank ("FHLB") borrowings 167,574 167,606 Accrued interest payable 1,846 2,134 Other liabilities 5,193 4,653 Redeemable common stock held by employee stock ownership plan (ESOP) 14,570 12,951 ---------- ---------- $1,093,054 $1,010,463 ---------- ---------- STOCKHOLDERS' EQUITY Capital stock, common, no par value; authorized 10,000,000 shares; issued September 30, 2003 - 1,515,778 shares; December 31, 2002 - 1,501,054 shares $ 11,252 $ 10,541 Retained earnings 94,747 85,773 Accumulated other comprehensive income 3,670 4,721 ---------- ---------- $ 109,669 $ 101,035 Less unallocated shares of ESOP 14,570 12,951 ---------- ---------- $ 95,099 $ 88,084 ---------- ---------- $1,188,153 $1,098,547 ========== ==========
* Derived from audited financial statements. See Notes to Consolidated Financial Statements. 3 HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three and Nine Months Ended September 30, 2003 and 2002 (Amounts In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30 September 30 ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- Interest income: Loans, including fees $ 13,680 $13,940 $40,773 $40,206 Investment securities: Taxable 1,532 1,852 4,757 5,665 Nontaxable 575 584 1,780 1,681 Federal funds sold 68 134 285 407 -------- ------- ------- ------- Total interest income $ 15,855 $16,510 $47,595 $47,959 -------- ------- ------- ------- Interest expense: Deposits $ 4,123 $ 5,528 $13,015 $17,296 Securities sold under agreements to repurchase 87 77 297 289 FHLB borrowings 2,291 2,343 6,799 6,232 -------- ------- ------- ------- Total interest expense $ 6,501 $ 7,948 $20,111 $23,817 -------- ------- ------- ------- Net interest income $ 9,354 $ 8,562 $27,484 $24,142 Provision for loan losses (326) 244 123 731 -------- ------- ------- ------- Net interest income after provision for loan losses $ 9,680 $ 8,318 $27,361 $23,411 -------- ------- ------- ------- Other income: Gain on sale of loans $ 1,520 $ 407 $ 3,972 $ 1,026 Trust fees 605 605 1,783 1,764 Deposit account charges and fees 900 845 2,695 2,366 Other fees and charges 853 647 2,442 1,950 -------- ------- ------- ------- $ 3,878 $ 2,504 $10,892 $ 7,106 -------- ------- ------- ------- Other expenses: Salaries and employee benefits $ 3,933 $ 3,351 $11,445 $10,068 Occupancy 496 453 1,416 1,299 Furniture and equipment 762 684 2,246 2,146 Office supplies and postage 330 304 914 844 Other 1,525 1,287 4,517 3,782 -------- ------- ------- ------- $ 7,046 $ 6,079 $20,538 $18,139 -------- ------- ------- ------- Income before income taxes $ 6,512 $ 4,743 $17,715 $12,378 Federal and state income taxes 2,193 1,507 5,888 3,846 -------- ------- ------- ------- Net income $ 4,319 $ 3,236 $11,827 $ 8,532 ======== ======= ======= ======= Earning per share: Basic $ 2.85 $ 2.15 $ 7.83 $ 5.69 Diluted 2.84 2.14 7.81 5.64
See Notes to Consolidated Financial Statements. 4 HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and Nine Months Ended September 30, 2003 and 2002 (In Thousands)
Three Months Ended Nine Months Ended ------------------ ----------------- September 30 September 30 ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net Income $ 4,319 $3,236 $ 11,827 $ 8,532 ------- ------ -------- ------- Other comprehensive income: unrealized holding gains arising during the year, net of income taxes (1,472) 1,247 (1,051) 1,911 ------- ------ -------- ------- Comprehensive Income $ 2,847 $4,483 $ 10,776 $10,443 ======= ====== ======== =======
See Notes to Consolidated Financial Statements. 5 HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Nine Months Ended September 30, 2003 and 2002 (In Thousands)
Accumulated Other Unallocated Capital Retained Comprehensive Shares of Stock Earnings Income (Loss) ESOP Total ----- -------- ------------- ------ ------- Balance, December 31, 2002 $10,541 $ 85,773 $ 4,721 $(12,951) $ 88,084 Net income -- 11,827 -- -- 11,827 Stock options exercised for 14,724 shares of common stock 375 -- -- -- 375 Income tax benefit related to stock based compensation 336 -- -- -- 336 Change related to ESOP shares -- -- -- (1,619) (1,619) Cash dividends ($1.90 per share) -- (2,853) -- -- (2,853) Other comprehensive income -- -- (1,051) -- (1,051) ------- -------- ------- -------- -------- Balance, September 30, 2003 $11,252 $ 94,747 $ 3,670 $(14,570) $ 95,099 ======= ======== ======= ======== ======== Accumulated Other Unallocated Capital Retained Comprehensive Shares of Stock Earnings Income (Loss) ESOP Total ----- -------- ------------- ------ ------- Balance, December 31, 2001 $10,397 $ 76,931 $ 3,021 $(12,194) $ 78,155 Net income -- 8,532 -- -- 8,532 Issuance of 550 shares of common stock 45 -- -- -- 45 Change related to ESOP shares -- -- -- (462) (462) Cash dividends ($1.75 per share) -- (2,622) -- -- (2,622) Other comprehensive income -- -- 1,911 -- 1,911 ------- -------- ------- -------- -------- Balance, September 30, 2002 $10,442 $ 82,841 $ 4,932 $(12,656) $ 85,559 ======= ======== ======= ======== ========
See Notes to Consolidated Financial Statements. 6 HILLS BANCORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2003 and 2002 (In Thousands)
2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,827 $ 8,532 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,694 1,711 Amortization -- 127 Provision for loan losses 123 731 Compensation paid by issuance of common stock -- 45 Deferred income taxes 521 88 (Increase) in accrued interest receivable (137) (470) Amortization of bond premium 637 230 (Increase) in other assets (770) (850) Increase in accrued interest and other liabilities 252 1,009 Loans originated for sale (299,339) (104,146) Proceeds on sales of loans 305,305 99,228 Net gain on sales of loans (3,972) (1,026) Income tax benefits related to stock based compensation 336 -- --------- --------- Net cash provided by operating activities $ 16,477 $ 5,209 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale $ 53,365 $ 44,657 Held to maturity 3,368 3,106 Purchase of investment securities: Available for sale (65,375) (64,657) Held to maturity (3,570) -- Federal funds sold, net (7,978) 6,879 Loans made to customers, net of collections (72,460) (84,921) Purchases of property and equipment (2,442) (2,187) --------- --------- Net cash (used in) investing activities $ (95,092) $ (97,123) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 71,860 $ 68,406 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 8,892 (5,159) Borrowings from FHLB -- 30,000 Payments on FHLB borrowings (32) (31) Stock options exercised 375 -- Dividends paid (2,853) (2,622) --------- --------- Net cash provided by financing activities $ 78,242 $ 90,594 --------- --------- Decrease in cash and due from banks $ (373) $ (1,320) --------- --------- CASH AND DUE FROM BANKS Beginning 32,647 37,070 --------- --------- Ending $ 32,274 $ 35,750 ========= ========= SUPPLEMENTAL DISCLOSURES Cash payments for: Interest paid to depositors $ 13,303 $ 17,572 Interest paid on other obligations 7,096 6,518 Income taxes 6,226 3,926 Non-cash financing activity, increase in unallocated ESOP shares 1,619 462
See Notes to Consolidated Financial Statements. 7 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 operations 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 audited Financial Statements for the year ended December 31, 2002, included in Hills Bancorporation (the "Company") Form 10-K filed with the Securities Exchange Commission on March 24, 2003. There were no changes in accounting policies, which had a significant effect on the interim consolidated financial statements for the periods presented except as disclosed in Note 3 to the financial statements. 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. Earnings Per Share Basic earnings per share amounts are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce the loss or increase the income per common share from continuing operations. The computation of earnings per common share for the periods presented are as follows:
Three months ended Six months ended ------------------ ---------------- September 30 September 30 ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- Weighted average number of shares outstanding (basic) 1,515,778 1,499,108 1,509,888 1,498,723 Weighted average of potential dilutive shares attributable to stock options granted computed under the treasury stock method 3,989 13,145 3,450 13,259 ---------- ---------- ---------- ---------- Weighted average number of shares (diluted) 1,519,767 1,512,253 1,513,338 1,511,982 ========== ========== ========== ========== Earnings Per Share: Net income (in thousands) $ 4.319 $ 3,236 $ 11,827 $ 8,532 ========== ========== ========== ========== Earnings per common share: Basic $ 2.85 $ 2.15 $ 7.83 $ 5.69 ========== ========== ========== ========== Diluted 2.84 2.14 7.81 5.64 ========== ========== ========== ==========
8 HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 3. Recent Accounting Pronouncements The FASB has issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The provisions of the Statement are effective for exit or disposal activities that are initiated after December 31, 2002. Implementation of the Statement is not expected to have a material impact on the Company's financial statements. The FASB has issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others"- an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company's consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of Interpretation No. 45's measurement and recognition provisions did not have a material impact to the Company's financial position or results of operations. In October 2002, the FASB issued Statement of Financial Accounting Standards No.147, "Acquisition of Certain Financial Institutions, an Amendment to FASB Statements No.72 and 144 and FASB Interpretation No.9. The statement removes acquisitions of financial institutions from the scope of the previous issued statements and interpretation and requires that those transactions be accounted for in accordance with Statement of Financial Accounting Standards No.141, "Business Combinations" and Statement of Financial Accounting Standards No.142, "Goodwill and Intangible Assets." Thus, the requirement to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this statement. The Company adopted FASB No. 147 on October 1, 2002 and the adoption resulted in no reclassification or revisions to prior period financial statements. In January 2003, the FASB issued Interpretation No.46,"Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities which have certain characteristics by requiring that if a business enterprise has a controlling interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity be included in the consolidated financial statements with those of the business enterprise. This statement applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interest acquired before February 1, 2003, it applies in the first fiscal year or interim period beginning after June 15, 2003. The Company has, and will continue to, adopt the various provisions of this statement but presently does not have any variable interest entities that would be required to be included in its consolidated financial statements. 9 HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 3. Recent Accounting Pronouncements (continued) In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, " Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the statement on July 1, 2003 and such adoption did not have a material effect on its financial position or results of operations. 10 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the financial condition of Hills Bancorporation and subsidiary ("Company") at September 30, 2003, (unaudited) when compared with December 31, 2002 and the results of operations for the three and nine months ended September 30, 2003 and 2002 (unaudited). 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 bank. Forward-looking statements discuss matters that are not facts and are typically identified by the words "believe," "expect," "anticipate," " target," " goal," "objective," " intend," "estimate," " will," "can," "would," "should," "could," "may" and similar expressions. They discuss expectations about the future and are not guarantees. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them to reflect changes that occur after the date they are made. There are several factors - many of which are beyond the control of the Company or its subsidiary Bank - that could cause results to differ significantly from expectations. Some of these factors are described below. There are factors other than those described below that could cause results to differ from expectations. Any factor described below could by itself, or together with one or more other factors, adversely affect the business, earnings and/ or financial condition of the Company and its subsidiary Bank. 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. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and in particular, the state of certain industries. 11 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) CRITICAL ACCOUNTING POLICIES (continued) Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presents elsewhere herein, as well as the portion of this Management's Discussion and Analysis section entitled "Financial Condition - Allowance for Loan Losses". Although management believes the levels of the allowance as of both September 30, 2003 and December 31, 2002 were adequate to absorb losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. 12 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL CONDITION AT SEPTEMBER 30, 2003 COMPARED TO DECEMBER 31, 2002. Assets and Liabilities Review Total assets grew to $1.188 billion at September 30, 2003, compared to total assets of $1.099 billion at December 31, 2002. The asset growth of $89.6 million included a net increase in the investment securities of $9.9 million and net loan growth of $70.3 million. The net loan growth includes loans held for sale of $4.9 million as of September 30, 2003, which were secondary market loans that are waiting funding. The loans held for sale at December 31,2002 were $6.9 million. The following tables set forth the composition of loans and the allowance for loan losses and information on non-performing loans: September 30 ------------ 2003 2002 ---- ---- (Amounts in thousands) Agricultural $ 41,887 $ 37,323 Commercial and financial 46,326 39,436 Real estate: Construction 60,018 46,352 Mortgage 676,966 612,611 Loans to individuals 33,538 36,235 -------- -------- $858,735 $771,957 Less allowance for loan losses 12,425 10,650 -------- -------- $846,310 $761,307 ======== ======== Changes in the allowance for loan losses are as follows:
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- (Amounts in thousands) (Amounts in thousands) Balance, beginning $ 12,740 $ 10,350 $ 12,125 $ 9,950 Provision charged to expense (326) 244 123 731 Recoveries 488 271 1,298 1,066 Loans charged off (477) (215) (1,121) (1,097) -------- -------- -------- -------- Balance, ending $ 12,425 $ 10,650 $ 12,425 $ 10,650 ======== ======== ======== ========
Non-performing loan information at September 30, was as follows:
2003 2002 ---- ---- (Amounts in thousands) Impaired loans, non-accrual $3,897 $1,998 Loans past due ninety days or more and still accruing 2,078 2,613 Restructured loans -- --
13 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Assets and Liabilities Review (continued) Interest rates at historically low levels have helped drive both new loan growth and secondary market loans, including refinances. Effective June 25, 2003, the Federal Reserve Open Market Committee lowered the federal funds target rate to 1.00%. This 1.00% federal funds target rate is the lowest since July of 1958. The June 25, 2003 action was the only such interest rate reduction since the prior 25 basis point decrease on November 6, 2002. The June 25, 2003 decrease in the federal funds rate marked the thirteenth decrease since May 16, 2000, when the rate was 6.50%. The University of Iowa continues to have a dominant effect on the economy of the Bank's primary trade area, Johnson County, Iowa, and has helped the local economy remain strong even when the national economy has experienced weaknesses. However, in the last two years the economy of the state of Iowa has weakened and the University continues to deal with budget cuts. The possible effects on the local economy cannot be predicted. Overall, the local economy remains in good condition but weaknesses have been seen in some industries with some layoffs in employment. Budget restraints continue to adversely affect the University of Iowa and state government spending. Although weaknesses in the national economy has not directly affected the Company, continuing uncertainty about the situation in Iraq and other national economic news will continue to affect the financial markets. The new tax relief act signed into law in May, 2003, contains major tax cuts for individuals and business taxpayers. One of the most talked about provisions is lower tax on corporate dividends and this has aided recent stock market gains. As of September 30, 2003, the major stock indices all show a positive growth for the first nine months of 2003. The growth of deposits in the first nine months of the year has been $71.9 million and a total of $80.8 million when repurchase agreements are included. Borrowings from the FHLB remained static at $167.6 million for the two periods presented. Dividends and Equity In January 2003, Hills Bancorporation paid a dividend of $2,853,000 or $1.90 per share, an 8.57% increase from the $1.75 paid in January 2002. After payment of the dividend and the adjustment for accumulated other comprehensive income, stockholders' equity as of September 30, 2003 totaled $95,099,000. Under risk-based capital rules, the total risk based capital is 14.34% of risk-adjusted assets, and is substantially in excess of required minimums. 14 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002. Net income, net interest income and other income Net income for the nine months ended September 30, 2003 is $11,827,000, which represents a $3,295,000 increase over the reported income for the same period in 2002. The increase in net income is related to three significant factors. The factors are the continued growth in average earning assets, the decrease in the provision for loan losses and the increase in the gain on sale of loans. Net interest income, including fees increased $3.3 million for the nine months ended September 30, 2003 compared to 2002. The improvement is due to an increase in average earning assets of $120.3 million. The provision for loan losses and its effect on net income is discussed in a later section of this report. Mortgage refinancing growth continued in the third quarter of the year as the number of loans sold on the secondary market increased and the resulting gain on sale was $3,972,000 which is $1,991,000 more than for all of 2002 and $2,946,000 higher than the gain on sale of loans for the period ended September 30, 2002. The interest rates on secondary market loans that are sold increased in late summer as long-term investment rates rose. As a result of this increase in interest rates, coupled with the fact that many consumers had taken advantage of the opportunity to borrow or refinance at lower rates, the volume of loans sold and the related level of income from this mortgage activity is not expected to continue in the fourth quarter of 2003. The net income for the quarter ended September 30, 2003 was $1,083,000 ahead of the same quarter in 2002. This change is due in large part to the gain on sale of loans, to the secondary market, which was $1,113,000 higher in 2003 than 2002 for the three months. Another factor in such increased net income is that net interest income is $792,000 higher due to average earning assets increasing by $112.7 million. In addition to these two items, the provision for loan losses was $570,000 less in 2003 than 2002. The provision for loan losses is discussed in a separate section. Deposit account charges and fees increased $329,000 for the nine months ended September 30, 2003 compared to the same period in 2002. The increase is primarily due to increased service charges on selected deposit accounts and the volume of accounts. Other fees and charges increased $492,000 from the first nine months of 2003 compared to the same period in 2002. The increase included $391,000 in credit card processing fees, but this income was offset by additional processing expense fees of $431,000, included in the other expense category. In comparing the three months ended September 30, 2003 and 2002, other income increased by $1,374,000 to $3,878,000. The increase was the result of the gain on sale of loans increasing by $1,113,000 and this was primarily due to the continued low rate environment. Deposit account charges increased $55,000 from $845,000 to $900,000. As was true for the nine months results previously discussed, the change was due to increased service charges and the increased volume of accounts. The $206,000 increase for the nine months ended September 30, 2003 in other fees is primarily attributable to an increase in credit card processing fees, offset by similar increases in processing fees included in the expenses. 15 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Provision for loan losses and allowance for loan losses The provision for loan losses resulted in a reduction in expense of $326,000 in the third quarter of 2003 compared to an increase in expense of $244,000 for the same period in 2002. The provision for loan losses for the nine months ended September 30, 2003 is $123,000 compared to $731,000 for the nine months ended September 30, 2002. The net adjustment required on a quarterly basis for loan losses is a result of management's determination of the quality of the loan portfolio. The provision reflects a number of factors, including the size of the loan portfolio, loan concentrations, the level of impaired loans which are all non-accrual and loans past due ninety days or more. In addition, management considers the credit quality based on their review of problem and watch loans, including loans with historical higher credit risks (primarily agricultural loans). During the quarter ended September 30, 2003, agricultural loans which have a higher credit risk, were reduced by payments of $2.2 million. The result of this was that the allowance for loan losses required at September 30, 2003 was lowered by approximately $450,000. The allowance for loan losses balance is also affected by the net charge-offs for the periods presented. For the nine months ended September 30, 2003 and 2002, net recoveries were $177,000 in 2003, compared to net charge-offs of $31,000 in 2002. In the three months ended September 2003 and 2002, net recoveries were $56,000 and $11,000 respectively. Primarily as a result of the factors discussed in the preceding paragraph, the allowance for loan losses totaled $12,425,000 at September 30, 2003 compared to $10,650,000 at September 30, 2002. The percentage of the allowance to outstanding loans was 1.44% and 1.36% at September 30, 2003 and 2002, respectively. The methodology used in 2003 is consistent with the prior years. Other expenses and income taxes expense Total other expenses were $20,538,000 and $18,139,000 for the nine months ended September 30, 2003 and 2002, respectively. The increase since September 30, 2002 includes $1,376,000 in salaries and benefits, which is the direct result of an increase of fifteen full-time equivalent employees to 361 employees at September 30, 2003. The new employees added included nine in the secondary market department and eleven in the Marion office, which opened in February 2003. All other expenses other than salaries and benefits increased a total of $1,023,000 or 12.68%. Credit card processing fees, which composed part of the other expenses, increased $431,000 and was offset by $391,000 of increased fee income of credit card processing included in the other income section. The three months ended September 30, 2003 compared to the same period ending September 30, 2002, saw an increase in other expenses of $967,000. Salaries and employee benefits accounted for $582,000 of the increase and reflect salary increases over the prior year and the increase discussed above in the full-time equivalents added in 2003. The only other large increase in expenses was the credit card processing expense of approximately $146,000 discussed in the other income review. Income tax expense was $5,888,000 and $3,846,000 for the nine months ended September 30, 2003 and 2002, respectively. The corresponding percentage of income taxes compared to income before income taxes is 33.24% in 2003 and 31.07% in 2002. For the three months ended September 30, 2003 and 2002, the percentage of income taxes to income before income taxes, increased to 33.68% in 2003 from 31.77% in 2002. The percentage is up slightly due to substantially more income from the gain on sale of loans and not a corresponding increase in the percentage of non-taxable interest income. 16 HILLS BANCORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Liquidity The Company actively monitors and manages its liquidity position with the objective of maintaining sufficient cash flows to fund operations, meet client commitments, take advantage of market opportunities and provide a margin against unforeseeable liquidity needs. Federal funds sold and investment securities available for sale are readily marketable assets. Maturities of all investment securities are managed to meet the Company's normal liquidity needs, to respond to market changes or to adjust the Company's interest rate risk position. Federal funds sold and investment securities available for sale comprised 20.8% of the Company's total assets at September 30, 2003, compared to 19.9% at September 30, 2002. Net cash provided from operations is another primary source of liquidity. For the nine months ended September 30, 2003 and 2002, net cash provided by operating activities was $16,477,000 and $5,209,000 respectively. The Company has historically maintained a stable deposit base and a relatively low level of large deposits, which has mitigated the volatility in liquidity. As of September 30, 2003, the Company had borrowed $167,574,000 from the FHLB of Des Moines compared to $167,606,000 at September 30, 2002. These advances were used as a means of providing both long and short-term, fixed-rated funding for certain assets and managing interest rate risk. The Company had additional borrowing capacity available from the FHLB of approximately $136 million at September 30, 2003. As additional sources of liquidity, the Company has the ability to borrow up to $10 million from the Federal Reserve Bank of Chicago, and two lines of credit with two banks totaling $98 million. Those two lines of credit require the pledging of investment securities when drawn upon. The combination of high levels of potentially liquid assets, low dependence on volatile liabilities and additional borrowing capacity provided sources of liquidity for the Company which management considered sufficient at September 30, 2003. 17 HILLS BANCORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Management Market risk is the risk of loss arising from adverse changes in market prices and rates. The Company's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on current fair market values of the Company's assets, liabilities and off-balance sheet contracts. The Company's objective is to measure this risk and manage the balance sheet to avoid unacceptable potential for economic loss. Management continually develops and applies strategies to mitigate market risk, some of which are described below. Exposure to market risk is reviewed on a regular basis by the asset/liability committee at the bank. Management does not believe that the Company's primary market risk exposures and how those exposures have been managed to date in 2003, changed significantly when compared to 2002. 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 risk, the net interest margin and levels of net interest income. The goal 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 5 percent if interest rates increased 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 re-pricing 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, and active management of the available for sale investment securities portfolio to provide for cash flows that will facilitate rate risk management. The highly competitive banking environment in Iowa also greatly impacts the Company's net interest margin. The future effect of competition on net interest income is difficult to predict. 18 HILLS BANCORPORATION ITEM 4. EVALUATION OF DISCLOSURE CONTROLS Based on their evaluation of the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report, the undersigned officers of the registrant have concluded that such disclosure controls and procedures are adequate. There were no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, subsequent to the date of the most recent evaluation by the undersigned officers of the registrant of the design and operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data. 19 HILLS BANCORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no materials 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, 2003. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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, 2003. 20 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 thereunto duly authorized. HILLS BANCORPORATION Date 11/10/03 By /s/ Dwight O. Seegmiller Dwight O. Seegmiller, President Date 11/10/03 By /s/ James G. Pratt James G. Pratt, Treasurer and Chief Accounting Officer 21 EX-31.1 3 d57379_ex31-1.txt CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Dwight O. Seegmiller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/10/03 By /s/ Dwight O. Seegmiller Dwight O. Seegmiller, President 21 EX-31.2 4 d57379_ex31-2.txt CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, James G. Pratt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/10/03 By /s/ James G. Pratt James G. Pratt, Treasurer and Chief Accounting Officer 22 EX-32.1 5 d57379_ex32-1.txt CERTIFICATION Exhibit 32.1 SECTION 906 CERTIFICATION BY DWIGHT O. SEEGMILLER Pursuant to the requirements of Section 906 of the Sarbannes-Oxley Act of 2002, Dwight O. Seegmiller hereby certifies that: 1. This report fully complies with the requirements of Section 13(a) or 15(d) of the 1934 Act, and 2. The information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of operations of the registrant. Date 11/10/03 By /s/ Dwight O. Seegmiller Dwight O. Seegmiller, President 24 EX-32.2 6 d57379_ex32-2.txt CERTIFICATION Exhibit 32.2 SECTION 906 CERTIFICATION BY JAMES G. PRATT Pursuant to the requirements of Section 906 of the Sarbannes-Oxley Act of 2002, James G. Pratt hereby certifies that: 1. This report fully complies with the requirements of Section 13(a) or 15(d) of the 1934 Act, and 2. The information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of operations of the registrant. Date 11/10/03 By /s/ James G. Pratt James G. Pratt, Treasurer and Chief Accounting Officer A signed original of this written statement required by Section 906 has been provided to Hills Bancorporation and will be retained by Hills Bancorporation and furnished to the Securities and Exchange Commission or its staff upon request. 24 -----END PRIVACY-ENHANCED MESSAGE-----