-----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, BOAYVRQANJFtawWVs0r//m6SC7YQbJvcpZdUJhXh6RyH8+SC2CY6DqMOKT4XKRLV dzwTaM+BlME1DxSMJRtGBQ== 0001169232-04-002687.txt : 20040507 0001169232-04-002687.hdr.sgml : 20040507 20040507165900 ACCESSION NUMBER: 0001169232-04-002687 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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: 04789878 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 d59534_10-q.txt FORM 10-Q 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 March 31, 2004 Commission file number: 0-12668 Hills Bancorporation Incorporated in Iowa I.R.S. Employer Identification dNo. 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 April 30, 2004 ----- ----------------- Common Stock, no par value 4,550,256 Page 1 of 27 HILLS BANCORPORATION Index to Form 10-Q Part I FINANCIAL INFORMATION Page Number ------ Item 1. Financial Statements Consolidated balance sheets, March 31, 2004 (unaudited) and December 31, 2003. 3 Consolidated statements of income, (unaudited) for three months ended March 31, 2004 and 2003. 4 Consolidated statements of comprehensive income, (unaudited) for three ended March 31, 2004 and 2003. 5 Consolidated statements of stockholders' equity, (unaudited) for three months ended March 31, 2004 and 2003. 6 Consolidated statements of cash flows (unaudited) for three months ended March 31, 2004 and 2003. 7-8 Notes to consolidated financial statements 9-10 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. Controls and Procedures 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 20-21 Item 6. Exhibits and reports on Form 8-K 22 Signatures 23 Exhibits Index 24 Page 2 of 27 HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Shares)
March 31, 2004 ASSETS (Unaudited) December 31, 2003* - ------------------------------------------------------------------------------------------------------------------------ Cash and due from banks $ 21,508 $ 24,194 Investment securities: Available for sale (amortized cost March 31, 2004 $211,107 ; December 31, 2003 $214,530) 216,773 219,430 Held to maturity (fair value March 31, 2004 $7,744 ; December 31, 2003 $8,064) 7,654 7,953 Stock of Federal Home Loan Bank 8,774 8,774 Federal funds sold 100 13,233 Loans held for sale 8,476 1,960 Loans, net 898,031 868,194 Property and equipment, net 22,229 22,210 Tax credit real estate 8,178 2,282 Accrued interest receivable 7,246 7,303 Deferred income taxes 2,127 2,411 Goodwill 2,500 2,500 Other assets 2,747 3,077 ---------------------------------- $1,206,343 $1,183,521 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------ Liabilities Noninterest-bearing deposits $ 116,372 $ 116,206 Interest-bearing deposits 775,762 752,446 ---------------------------------- Total deposits $ 892,134 $ 868,652 Federal funds purchased and securities sold under agreements to repurchase 27,257 29,926 Federal Home Loan Bank borrowings ("FHLB") 167,574 167,574 Accrued interest payable 1,561 1,735 Other liabilities 5,521 4,005 ---------------------------------- $1,094,047 $1,071,892 ---------------------------------- REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) $ 15,306 $ 14,864 ---------------------------------- STOCKHOLDERS' EQUITY** Capital stock, no par value; authorized 10,000,000 shares; issued March 31, 2004 1,516,752 shares; December 31, 2003 1,516,678 shares $ 11,360 $ 11,353 Retained earnings 97,366 97,189 Accumulated other comprehensive income 3,570 3,087 ---------------------------------- $ 112,296 $ 111,629 Less maximum cash obligation related to ESOP shares 15,306 14,864 ---------------------------------- $ 96,990 $ 96,765 ---------------------------------- $1,206,343 $1,183,521 ==================================
* Derived from audited financial statements. ** See Part II - Item 5 (a) for details of a stock split effective April 19, 2004. See Notes to Consolidated Financial Statements. Page 3 of 27 HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts In Thousands, Except Per Share Amounts)
Three Months Ended March 31, 2004 2003 - --------------------------------------------------------------------------------------------------------------- Interest income: Loans, including fees $ 13,475 $ 13,431 Investment securities: Taxable 1,423 1,680 Nontaxable 602 602 Federal funds sold 15 101 ---------------------------- Total interest income $ 15,515 $ 15,814 ---------------------------- Interest expense: Deposits $ 3,530 $ 4,560 Federal funds purchased and securities sold under agreements to repurchase 74 93 FHLB borrowings 2,266 2,242 ---------------------------- Total interest expense $ 5,870 $ 6,895 ---------------------------- Net interest income $ 9,645 $ 8,919 Provision for loan losses 354 484 ---------------------------- Net interest income after provision for loan losses $ 9,291 $ 8,435 ---------------------------- Other income: Net gain on sale of loans $ 351 $ 865 Trust fees 710 619 Deposit account charges and fees 886 873 Other fees and charges 1,102 898 ---------------------------- $ 3,049 $ 3,255 ---------------------------- Other expenses: Salaries and employee benefits $ 4,064 $ 3,680 Occupancy 502 456 Furniture and equipment 806 734 Office supplies and postage 271 326 Advertising and business development 414 276 Other 1,421 1,179 ---------------------------- $ 7,478 $ 6,651 ---------------------------- Income before income taxes $ 4,862 $ 5,039 Federal and state income taxes 1,500 1,658 ---------------------------- Net income $ 3,362 $ 3,381 ============================ Earnings per share: Basic $ 2.22 $ 2.25 Diluted 2.21 2.23
See Notes to Consolidated Financial Statements. Page 4 of 27 HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts In Thousands)
Three Months Ended March 31, 2004 2003 - ----------------------------------------------------------------------------------------------- Net income $ 3,362 $ 3,381 Other comprehensive income, Unrealized holding gains (losses) arising during the period, net of income taxes, 2004 $283; 2003 $(204) 483 (347) -------------------------- Comprehensive income $ 3,845 $ 3,034 ==========================
See Notes to Consolidated Financial Statements. Page 5 of 27 HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts In Thousands, Except Share Amounts)
Maximum Cash Accumulated Obligation Other Related Capital Retained Comprehensive To ESOP Stock Earnings Income (Loss) Shares Total - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $ 10,541 $ 85,773 $ 4,721 $ (12,951) $ 88,084 Change related to ESOP shares -- -- -- (658) (658) Net income -- 3,381 -- -- 3,381 Cash dividends ($1.90 per share) -- (2,853) -- -- (2,853) Other comprehensive income -- -- (347) -- (347) ---------------------------------------------------------------------------- Balance, March 31, 2003 $ 10,541 $ 86,301 $ 4,374 $ (13,609) $ 87,607 ============================================================================ Balance, December 31, 2003 $ 11,353 $ 97,189 $ 3,087 $ (14,864) $ 96,765 Issuance of 74 shares of common stock 7 -- -- -- 7 Change related to ESOP shares -- -- -- (442) (442) Net income -- 3,362 -- -- 3,362 Cash dividends ($2.10 per share) -- (3,185) -- -- (3,185) Other comprehensive income -- -- 483 -- 483 ---------------------------------------------------------------------------- Balance, March 31, 2004 $ 11,360 $ 97,366 $ 3,570 $ (15,306) $ 96,990 ============================================================================
See Notes to Consolidated Financial Statements. Page 6 of 27 HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands)
Three Months Ended March 31, 2004 2003 - ------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 3,362 $ 3,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 619 565 Provision for loan losses 354 484 Compensation paid by issuance of common stock 7 -- Deferred income taxes -- 124 Decrease in accrued interest receivable 57 202 Amortization of bond discount 334 166 Decrease in other assets 330 377 Increase in accrued interest and other liabilities 1,342 1,427 Loans originated for sale (39,613) (73,028) Proceeds on sales of loans 33,448 63,383 Net gain on sales of loans (351) (865) -------------------------- Net cash using in operating activities $ (111) $ (3,784) -------------------------- Cash Flows from Investing Activities Proceeds from maturities of investment securities: Available for sale $ 23,394 $ 16,500 Held to maturity 299 675 Purchases of investment securities available for sale (20,305) (12,569) Federal funds sold, net 13,133 (21,730) Loans made to customers, net of collections (30,191) (25,250) Purchases of property and equipment (638) (1,128) Investment in tax credit real estate (5,896) -- -------------------------- Net cash used in investing activities $(20,204) $(43,502) -------------------------- Cash Flows from Financing Activities Net increase in deposits $ 23,483 $ 41,566 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase (2,669) 7,029 Dividends paid (3,185) (2,853) -------------------------- Net cash provided by financing activities $ 17,629 $ 45,742 --------------------------
(Continued) Page 7 of 27 HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Continued (Amounts In Thousands)
Three Months Ended March 31, 2004 2003 - ------------------------------------------------------------------------------------- Increase (decrease) in cash and due from banks $ (2,686) $ (1,544) Cash and due from banks: Beginning 24,194 32,647 -------------------------- Ending $ 21,508 $ 31,103 ========================== Supplemental Disclosures Cash payments for: Interest paid to depositors $ 3,704 $ 4,712 Interest paid on other obligations 2,340 2,335 Income taxes 14 725 Noncash financing activities: Increase in maximum cash obligation related to ESOP shares $ 442 $ 658
See Notes to Consolidated Financial Statements. Page 8 of 27 HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X. These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown. Certain prior year amounts may be reclassified to conform to the current year presentation. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the "Company") for the year ended December 31, 2003 filed with the Securities Exchange Commission on March 11, 2004. 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 basic and diluted earnings per share for the periods presented is as follows:
Three months ended 2004 2003 ------------ ------------ Common shares outstanding at the beginning of the year 1,516,678 1,501,054 Weighted average number of net shares issued (redemption) 37 0 ------------ ------------ Weighted average shares outstanding (basic) 1,516,715 1,501,054 Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method 4,641 13,408 ------------ ------------ Weighted average number of shares (diluted) 1,521,356 1,514,462 ============ ============ Net income (In Thousands) $ 3,362 $ 3,381 ============ ============ Earnings per share: Basic $ 2.22 $ 2.25 ============ ============ Diluted $ 2.21 $ 2.23 ============ ============
Page 9 of 27 HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Note 3. Recent Accounting Pronouncement In December, 2003, the FASB issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. It requires a business enterprise that has a controlling interest in a variable interest entity (as defined by FIN 46) to include the assets, liabilities, and results of the activities of the variable interest entity in the consolidated financial statements of the business enterprise. FIN 46 applies to a public entity that is not a small business issuer no later than the end of the first reporting period that ends after March 15, 2004. The impact of adopting FIN 46 on the Company's financial condition and results of operations was not material. Page 10 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations The following is management's discussion and analysis of the financial condition of Hills Bancorporation and subsidiary ("Hills Bancorporation" or the "Company") at March 31, 2004, (unaudited) when compared with December 31, 2003 and the results of operations for the three months ended March 31, 2004 compared to the same period in 2003. 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 and its subsidiary Bank 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 raise 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 that 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 at the local, regional, national or international level that are beyond the control of the borrowers or the lender. Page 11 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) Because the business of banking is of a highly regulated nature, the decisions of governmental entities can have a major effect on operating results. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could have substantial and unpredictable effects including increasing the ability of non-banks to offer competing financial services and products. The Bank's success depends, in part, on its ability to attract and retain key people. Competition for the best people - in particular individuals with technology experience - is intense. The Bank may not be able to hire well-qualified people or pay them enough to keep them. 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. 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 contained 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 policies 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 non-performing 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. 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 presented 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 March 31, 2004 and December 31, 2003 were adequate to absorb probable 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. Page 12 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) Financial condition at March 31, 2004 compared to December 31, 2003. Assets and Liabilities Review Total assets grew to $1.206 billion at March 31, 2004, compared to total assets of $1.184 billion at December 31, 2003. The asset growth of $22.8 million includes an increase in net loans of $29.8 million. Loans held for sale to the secondary market increased $6.5 million to $8.5 million at March 31, 2004. The change is due to the volume of secondary market loans increasing in the last six weeks of the quarter compared to the quarter ended December 31, 2003. The volume change is due to a drop in rates in the first quarter of 2004 compared to the quarter ended December 31, 2003. Other significant changes in assets on the balance sheet for the two periods presented include a reduction in federal funds sold of $13.1 million, an increase in the investment in tax credit real estate of $5.9 million and a reduction of cash and investment securities of $5.6 million. The liabilities of the Company increased a net $22.2 million as of March 31, 2004. This increase in net liabilities was primarily the result of a net increase in deposits and short-term borrowings of $20.8 million. The table below sets forth the composition of the loan portfolio as of March 31, 2004 and December 31, 2003 (in thousands):
March 31, 2004 December 31, 2003 Amount Percent Amount Percent --------------------- ------------------------ Agricultural $ 38,881 4.27% $ 38,153 4.33% Commercial and financial 50,820 5.58 47,938 5.44 Real estate: Construction 63,240 6.94 66,644 7.57 Mortgage 724,705 79.55 696,453 79.07 Loans to indivuals 33,365 3.66 31,591 3.59 --------- ------ ---------- ------ $ 911,011 100.00% $ 880,779 100.00% ========= ====== ========== ====== Less allowance for loan losses (12,980) (12,585) --------- ---------- Loans, net $ 898,031 $ 868,194 ========= ==========
Changes in the allowance for loan losses were as follows:
Three months ended March 31, 2004 2003 -------- -------- (Amounts in thousands) Balance, beginning $ 12,585 $ 12,125 Provision charged to expense 354 484 Recoveries 269 342 Loans charged off (228) (421) -------- -------- Balance, ending $ 12,980 $ 12,530 ======== ========
Page 13 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) Non-performing loan information at March 31, 2004 and December 31, 2003, was as follows:
March 31, 2004 December 31, 2003 2004 2003 -------------- ----------------- (Amounts in thousands) Impaired loans, non-accrual $ 3,670 $ 3,944 Loans past due ninety days or more and still accruing 2,087 2,296 Restructured loans -- --
Interest rates remained relatively stable during the first quarter of 2004. As a result of stable interest rates, the growth of the loan portfolio continued as the overall economy in the Company's primary trade area in Johnson and Linn County remained positive. The increase in deposits for the first three months of 2004 reflects the continued marketing of deposits in this local economy and steady deposit increase at the twelve banking locations. Dividends and Equity In January 2004, Hills Bancorporation paid a dividend of $3,185,000 or $2.10 per share, a 10.53% increase from the $1.90 paid in January 2003. After payment of the dividend and the adjustment for accumulated other comprehensive income, stockholders' equity as of March 31, 2004 totaled $96,990,000. Under risk-based capital rules, the total risk based capital is 14.13% of risk-adjusted assets, and is substantially in excess of required minimums. Page 14 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) Results of operations for the three months ended March 31, 2004 and 2003. Net income decreased for the quarter ended March 31, 2004 compared to March 31, 2003 by $19,000. Net interest income increased $726,000 in 2004 compared to 2003. 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 factors that have the greatest impact on net interest income are the volume of average earning assets and the net interest margin. The volume of average earning assets continues to have significant increases. In comparing the earning assets as of March 31, 2004 to March 31, 2003, the increase is $76 million. Net loan growth accounts for a $90 million increase while federal funds and investments have decreased $14 million. The net interest margin continues to remain steady at 3.53% for the first quarter of 2004 compared to 3.51% for the same quarter in 2003. The measure is shown on a tax-equivalent basis using a rate of 34% to make the interest earned on taxable and non-taxable assets more comparable. The provision for loan losses was $354,000 and $484,000 for the three months ended March 31, 2004 and 2003, respectively. The Company experienced net recoveries in the first quarter of 2004 of $41,000 compared to net charge-offs of $79,000 in the first quarter of 2003. The provision adjustment computed on a quarterly basis is a result of management's determination of the quality of the loan portfolio and the adequacy of the allowance for loan losses. 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 of the loan portfolio based on review of problem and watch loans, including loans with historically higher credit risks (primarily agricultural loans). The allowance for loan losses totaled $12,980,000 at March 31, 2004 compared to $12,530,000 at March 31, 2003. The percentage of the allowance to outstanding loans was 1.42% and 1.54% at March 31, 2004 and 2003, respectively. The allowance was based on management's consideration of a number of factors, including loan concentrations, loans with higher credit risks (primarily agriculture loans and spec real estate construction) and overall increases in net loans outstanding. The methodology used in 2004 is consistent with the prior year. Net gain on sale of loans for the quarter ended March 31, 2004 were $351,000 compared to $865,000 for the same period ended March 31, 2003. The decrease was expected as net gain on sale of secondary market loans dropped significantly from the levels experienced in the first three quarters of 2003. The decrease in the volume of loans is due to the fact that many consumers had taken advantage of lower rates in 2003 to refinance loans and rates remain similar to rates that existed during the summer of 2003, resulting in additional refinancing activity. Trust fees increased $91,000 or 14.71% in the first quarter of 2004 compared to 2003 and is due to the increase in total assets under management. Since approximately 51% of the trust assets are held in common stocks the asset growth has been fueled by the increase in the stock market the last twelve months. For example, the Dow Jones Industrial Average is up just over 25% in the twelve months ended March 31, 2004. Other fees and charges increased for the two quarters shown from $898,000 in 2003 to $1,102,000 in 2004 or $204,000. Approximately $60,000 of the increased revenue is in ATM service fees and credit card merchant fees. In addition, rental revenue from a new tax credit real estate property added in January, 2004 was $81,000 higher in 2004 than in 2003. Page 15 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) Total other expenses were $7,478,000 and $6,651,000 for the three months ended March 31, 2004 and 2003, respectively. The increase of $827,000 included salaries and employee benefits which were $384,000 higher. The increase in direct salaries was $291,000 or 10.47%. The increase is due to salary adjustments for 2004 and full-time equivalents increasing. Increased employment resulted in part from the need to staff the Marion office that opened in February of 2003. Medical expenses on the Company's self-funding plan increased by $69,000 for the quarter from one year ago and are a result of higher medical costs and more employees in the plan. Other expenses were $1,421,000 for the quarter ended March 31, 2004 compared to $1,179,000 for the three months ended March 31, 2003. The increase of $242,000 included a $138,000 increase in the advertising and business development expenses primarily costs associated with the 2004, 100th Anniversary celebration of the registrant's. Merchant card processing charges were $37,000 higher in 2004 than 2003 and were related to the increased volume of activity. Also, expenses for the rental of the tax credit real estate increased from $66,000 in the three months ended March 31, 2003 to $163,000 for the same period in 2004. The increase is due to a new property added in January of 2004. Income tax expense was $1,500,000 and $1,658,000 for the three months ended March 31, 2004 and 2003, respectively. The corresponding percentage of income taxes compared to income before income taxes is 30.85% in 2004 and 32.90% in 2003. The percentage in 2004 is lower due to higher income tax credits available from the tax credit real estate investments. The credits were $132,000 and $59,000 for the quarters ended March 31, 2004 and 2003, respectively. 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 17.98% of the Company's total assets at March 31, 2004, compared to 19.66% at December 31, 2003. 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 March 31, 2004, the Company had borrowed $167.6 million from the FHLB of Des Moines. The amount of advances from the FHLB of Des Moines is unchanged from March 31, 2003. 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 $141 million at March 31, 2004. Page 16 of 27 HILLS BANCORPORATION Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations (continued) 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 $102 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 March 31, 2004. Page 17 of 27 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 2004, changed significantly when compared to 2003. Asset/Liability Management 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. 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 Bank maintains 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 Bank uses a simulation model to review various assumptions relating to interest rate movement. The model attempts to limit rate risk even if it appears the Bank's 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 re-priced rapidly. 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 re-price faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would tend to reduce net interest income because the resulting increase in the Company's cost of funds would not be immediately offset by an increase in its yield on earning assets. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in re-pricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income. Page 18 of 27 HILLS BANCORPORATION Item 4. Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures, and as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in enabling the Company's periodic SEC filings within the required time period. There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 19 of 27 HILLS BANCORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings There is 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 March 31, 2004. Item 5. Other Information (a) Effective with a record date of April 19, 2004, Hills Bancorporation approved a three for one stock split on April 13, 2004. On April 26, 2004, each shareholder of Hills Bancorporation was mailed two additional shares of stock for each share owned on the record date. This transaction increased the shares outstanding from 1,516,752 at March 31, 2004 to 4,550,256 shares. (b) The Company does not have a standing nominating committee of the Board of Directors or a committee performing similar functions. Historically, changes in the membership of the Company's Board of Directors have been relatively infrequent. In the view of the Board of Directors the amount of nominating activity does not justify the establishment of such a committee. The Board of Directors has directly performed and expects that it will continue to be capable of directly performing all nominating functions. Therefore, the Board of Directors has concluded that such a committee is not needed. In connection with its performance of such nominating functions, the Board of Directors does not have a charter. All directors would participate in the consideration of director nominees. Each of the directors, with the exception of Mr. Seegmiller, is independent as defined under the rules of the NASDAQ Stock Market. If one or more positions on the Board of Directors were to become vacant for any reason, the vacancy would be filled by the Board of Directors and all directors would participate in the selection of a person to fill each such vacancy. The Board will utilize a variety of methods for identifying and evaluating candidates for director. The size of the Board is established by the Company's bylaws. The Board will regularly assess whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Board will consider various potential candidates for director. Candidates may come to the attention of the committee through current Board members, shareholders, or other persons. The Board has never paid fees to any third party to identify, evaluate, or to assist in identifying or evaluating, potential nominees, and it does not now anticipate that it will be necessary to do so in the future. Page 20 of 27 HILLS BANCORPORATION PART II - OTHER INFORMATION (continued) (b) (continued) The Board is not obligated to nominate any candidate for election. Candidates will be evaluated at meetings of the Board. In evaluating possible candidates for membership on the Board of Directors, the Board will seek to achieve a balance of knowledge, experience, and capability on the Board and to address the following qualifications. Members of the Board should have the highest professional and personal ethics and values and excellent personal and professional reputations and must satisfy all regulatory requirements to serve as directors. They should have broad experience at the policy-making level in business, government, education, technology, or public interest. They should be committed to furthering the long-term as well as short-term interest of the Company and its shareholders, and in doing so they should be willing to consider the effect of any action on the Company's shareholders, employees, suppliers, creditors, and customers and on the communities in which the Company and its subsidiary operate. They should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all directors' duties. The Board of Directors reserves the right to modify these qualifications from time to time. In general, advance notice of the shareholder's intention to nominate such candidate for election to the Board must be given to the Company's Treasurer. In order to be considered for nomination by the Board of Directors in connection with the Annual Meeting of Shareholders to be held in 2005, such advance notice of nominations must be received by the Company no later than November 20, 2004. A shareholder's advance notice of nomination should set forth (i) as to each person whom the shareholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director, if elected); and (ii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made, (A) the name and address of such shareholder, as they appear on the Company's books, and of such beneficial owner, (B) the number of shares of Common Stock that are owned (beneficially or of record) by such shareholder and such beneficial owner, (C) a description of all arrangements or understandings between such shareholder and such beneficial owner and any other person or persons (including their names) in connection with the nomination, and (D) a representation that such shareholder or its agent or designee intends to appear in person or by proxy at the annual meeting to place such candidate in nomination for election as a director. Page 21 of 27 HILLS BANCORPORATION PART II - OTHER INFORMATION (continued) Item 6. Exhibits and Reports on Form 8-K Exhibits 31 Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 Reports on Form 8-K No reports on Form 8-K have been filed during the quarter ended March 30, 2004. Page 22 of 27 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 May 7, 2004 By /s/ Dwight O. Seegmiller ------------ ----------------------------------- Dwight O. Seegmiller, President and Chief Executive Officer Date May 7, 2004 By /s/ James G. Pratt ------------ ----------------------------------- James G. Pratt, Treasurer and Chief Financial Officer Page 23 of 27 HILLS BANCORPORATION QUARTERLY REPORT OF FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004
Page Number In The Sequential Exhibit Numbering System Number Description March 31, 2004 Form 10-Q - ------------------------------------------------------------------------------------------------------------ 31 Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 25-26 of 27 32 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 27 of 27
Page 24 of 27 EX-31.1 2 d59534_ex31-1.txt CERTIFICATIONS UNDER SECTION 302 OF CEO Exhibit 31 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date May 7, 2004 By /s/ Dwight O. Seegmiller ------------- ----------------------------------- Dwight O. Seegmiller, President and Chief Executive Officer Page 25 of 27 EX-31.2 3 d59534_ex31-2.txt CERTIFICATIONS UNDER SECTION 302 OF CFO Exhibit 31 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date May 7, 2004 By /s/ James G. Pratt ----------- ----------------------------- James G. Pratt, Treasurer and Chief Financial Officer Page 26 of 27 EX-32 4 d59534_ex-32.txt CERTIFICATIONS UNDER SECTION 906 OF CEO AND CFO Exhibit 32 SECTION 906 CERTIFICATION BY DWIGHT O. SEEGMILLER Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2003, 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 May 7, 2004 By /s/ Dwight O. Seegmiller ------------- ----------------------------------- Dwight O. Seegmiller, President and Chief Executive Officer SECTION 906 CERTIFICATION BY JAMES G. PRATT Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2003, 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 May 7, 2004 By /s/ James G. Pratt ------------- ----------------------------------- James G. Pratt, Treasurer and Chief Financial Officer Page 27 of 27 -----END PRIVACY-ENHANCED MESSAGE-----