Item 1. Business
Hills Bancorporation (the "Company") is a multibank holding company principally engaged in the business of banking. Its two wholly-owned subsidiary banks are Hills Bank and Trust Company, Hills, Iowa ("Hills Bank and Trust") and Hills Bank Kalona, Kalona, Iowa ("Hills Bank Kalona") (hereinafter collectively referred to as the "Banks").
The Company was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Company became owner of 100% of the outstanding stock of Hills Bank and Trust as of January 23, 1984 when stockholders of Hills Bank and Trust exchanged their shares for shares of the Company. Effective July 1, 1996, the Company formed a new subsidiary, Hills Bank, which acquired for cash all the outstanding shares of a bank in Lisbon, Iowa. Subsequently an office of Hills Bank was opened in Mount Vernon, Iowa, a community that is contiguous in Lisbon. In 2000, the charter of Hills Bank was relocated in Cedar Rapids, Iowa, although Hills Bank continued to maintain offices in Lisbon and Mount Vernon, Iowa. Effective November 17, 2000, Hills Bank was merged into Hills Bank and Trust.
Hills Bank and Trust currently serves the communities of Iowa City, Coralville, Hills and North Liberty, located near Interstate 80 and Interstate 380 in Eastern Iowa. These communities have a combined population of approximately 80,000 and Johnson County, Iowa has a population of approximately 106,000. The University of Iowa in Iowa City has over 27,000 students and 23,000 full and part-time employees, including employees of the University of Iowa Hospitals and Clinics. Johnson County, Iowa has one of the strongest economies in Iowa and has had substantial economic growth in the past ten years. Johnson County is known for its educational institutions, health care facilities, cultural and sports events, and retail centers. As a result of the merger of Hills Bank into Hills Bank and Trust in 2000, Hills Bank and Trust also now operates offices in Linn County, Iowa located in Lisbon, Mount Vernon and Cedar Rapids, Iowa. Lisbon has a population of approximately 1,500 and Mount Vernon, located two miles away, has a population of 3,700. Both communities are strong economically and are easy commuting distances to Cedar Rapids and Iowa City, Iowa. In addition, Mount Vernon is the home of Cornell College, which has approximately 1,200 students. Cedar Rapids has a metropolitan population of approximately 180,000 and is located approximately 10 miles west of Lisbon, Iowa and approximately 25 miles north of Iowa City on Interstate 380. The larger employers in Cedar Rapids are Rockwell Collins with approximately 6,300 employees and Amana Appliances with approximately 2,950 employees. Other major employers include Cedar Rapids Community Schools (about 2,475 employees), St. Luke's Hospital (about 2,250 employees), and McLeodUSA (approximately 2,000 employees). There are several additional employers in Cedar Rapids having from 1,000 to 2,000 employees each.
On September 20, 1996, another subsidiary, Hills Bank, Kalona, acquired cash, certain assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. Hills Bank Kalona is located in Kalona, Iowa (Washington County), approximately 20 miles south of Iowa City. Kalona has a population of approximately 2,000 people. Kalona is primarily an agricultural community, but is located within easy driving distance for employment in Iowa City, which has a population of approximately 60,000 people and Washington, Iowa, which as a population of approximately 7,300 people.
The Banks are all full-service commercial banks extending their services to individuals, business, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Cedar Rapids, Coralville, North Liberty, Lisbon, Mount Vernon, and Kalona. This area includes all of Johnson County and parts of Linn and Washington counties. All of the Banks are actively engaged in all areas of commercial banking, including acceptance of demand; savings and time deposits; making commercial, real estate, agricultural and consumer loans; maintaining night and safe deposit facilities; and performing collection, exchange and other banking services tailored for individual customers. Hills Bank and Trust administers estates, personal trusts, and pension and profit-sharing funds and, in connection therewith, provides for farm management and investment advisory and custodial services for individuals, corporations and nonprofit organizations. At this time, trust services are available only at the Hills Bank and Trust locations. The loan activity of the Banks is diversified, with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans composing the majority of its loan portfolio. In addition, the Banks earn substantial fees from originating mortgages that are sold in the secondary residential real estate market without mortgage servicing rights being retained.
Item 1. Business (Continued)
Each Bank has established formal loan origination policies. In general, the loan origination policies require individual lenders to reduce the risk of credit loss to the Bank by requiring that, among other things, minimum loan to value ratios be maintained, evidence of appropriate levels of insurance be carried by borrowers and documenting appropriate types and amounts of collateral and sources of expected payment.
The Banks' business is not seasonal, except that loan origination fees are higher during the spring and summer months. The Banks have not undertaken significant new services during the current year that might exceed the limits of their human resources and data processing capabilities.
The commercial banking business is highly competitive and the Banks compete with other commercial banks, credit unions, brokerage firms, finance companies, insurance companies and other financial institutions. Recent developments have resulted in increasing competition for deposits and loans in the markets served by the Banks. Although Hills Bank and Trust is the largest locally-owned bank in Iowa City, as a result of relocations from smaller outlying cities and the establishment of de nov banks, there are now nine commercial banks which operate in Iowa City and Coralville.
In recent years, Wells Fargo Corporation, Firstar Corporation, Commercial Federal Bank of America Corporation (formerly NationsBank) have acquired a number of independent banks and smaller multibank holding companies in various metropolitan areas of Iowa. Each operates under a single charter in Iowa. In September 1998, the Company's largest competing bank in Iowa City, with assets of approximately $550 million, was acquired by Mercantile Bancorporation and effective January 2000 the Mercantile banks in Iowa were merged into Firstar Bank Iowa. In 2000, Firstar Corporation and U. S. Bancorporation announced a merger expected to be finalized in 2001 and Wells Fargo Corporation announced its acquisition of Brenton Bancorporation that is expected to be completed in 2001 After the completion of its acquisition of Brenton Bancorporation, Wells Fargo Corporation will have offices in Iowa City as well as in Cedar Rapids.
Hills Bank and Trust Company is in direct competition for deposits, loans and other financial related business with other financial institutions in Johnson County, Iowa. One of the largest competitors serving Johnson County is a branch of Firstar Bank, which does not disclose local assets. Other independent financial institutions are:
Assets As Of December 31, ------------------- (In Millions)
Largest competing bank $ 389 Next largest competing bank 166 Largest competing credit union 234
Hills Bank Kalona competes with other banks in its trade territory and holds less than 40% of the deposits in this community.
Item 1. Business (Continued)
Historically, Iowa's intrastate branching states have been rather restrictive when compared with those of other states. Iowa's intrastate branching statutes were relaxed in recent legislation that became effective on February 21, 2001(the "2001 Amendment"). The 2001 Amendment allows Iowa banks to move towards statewide branching by allowing every Iowa bank with the approval of its primary regulator, to establish three new bank offices anywhere in Iowa during the next three years. The three offices are in addition to those offices allowed within certain restricted geographic areas under prior Iowa law. Effective July 1, 2004, the 2001 Amendment repeals all limitations on bank office location and effectively allows statewide branching. After that date, banks will be allowed to establish an unlimited number of offices in any location in Iowa subject only to regulator's approval.
The Financial Services Modernization Act ("FSMA") was enacted into law on November 12, 1999. The most significant provision in this legislation is the repeal of the restriction on banks affiliating with securities firms. The FSMA would allow the creation of a "financial holding company" which can engage in a number of financial activities including insurance and securities underwriting and other agency activities, merchant banking and insurance company portfolio investment activities. Activities that are ancillary to financial activities are also allowed. Additionally, the FSMA amends the federal securities laws to incorporate functional regulation of bank securities activities and provides for the functional regulation of insurance activities by establishing which insurance products banks and bank subsidiaries may provide as principal. Furthermore, the FSMA provides reform in the Federal Home Loan Bank area by providing that banks with less than $500 million in assets may use long-term advances for loans to small business, small farms and small agri-businesses and replaces the current $300 million funding formula for the REFCORP obligations of the Federal Home Loan Banks to twenty percent (20%) of the Bank's annual net earnings.
In the area of privacy, the FSMA requires clear disclosure by all financial institutions of their privacy policy regarding the sharing of nonpublic information with both affiliates and third parties. Further, the FSMA requires a notice to consumers and an opportunity to "opt-out" of sharing of nonpublic personal information with nonaffiliated third parties subject to certain limited exceptions. The FSMA also provides reform in the area of ATMs, Community Reinvestment, Community Banks and Deposit Production Offices. Specifically, the FSMA requires ATM operators who impose a fee for use of an ATM by a noncustomer to post a notice on the machine that a fee will be charged and on the screen that a fee will be charged and the amount of the fee, and further requires a notice when ATM cards are issued that surcharges may be imposed by other parties when transactions are initiated from ATMs not operated by the card issuer. The FSMA also clarifies that nothing in the act repeals any provision of the Continuity Reinvestment Act ("CRA"); however, the FSMA requires full disclosure of all CRA agreements and grants regulatory relief regarding the frequency of CRA exams to small banks and savings and loans (those with no more than $250 million in assets),in the community bank area, the FSMA allows community banks all the powers as a matter of right that large institutions have accumulated on an ad hoc basis, including the ability to underwrite municipal bonds in several years. Finally, the FSMA expands the prohibition of deposit production offices contained in the Riegle-Neal Interstate bill to include all branches of an out-of-state bank holding company.
Item 1. Business (Continued)
No material portion of the Banks' deposits have been obtained from a single person or a few persons. Accordingly, management of the Banks have no reason to believe that the loss of the deposits of any person or few persons would have a materially adverse effect on the Banks' operations or erode its deposit base. Approximately 4.5% of the Banks' loans have been made for agricultural purposes. The agricultural sector of the economy has been cyclical with a general trend toward fewer and larger farms. The Banks have not experienced a material adverse effect on their business as a result of defaults on agricultural loans and expect none in the future.
The Company does not engage in any business activities apart from its ownership of the Banks and, therefore, does not encounter any competition for its services other than as described above for the Banks.
The Company and the Banks have undertaken no material research activities during the last three years relating to research and development activities.
The Company is regulated by the Federal Reserve Bank.
All the Banks are regulated by the Federal Deposit Insurance Corporation and the State of Iowa Division of Banking.
The Company had no employees as of December 31, 2000 and the Banks had 250 regular and 82 part-time employees.
The following consolidated statistical information reflects selected balances and operations of the Company and the Banks for the periods indicated.
The following tables show (1) average balances of assets and liabilities, (2) interest income and expense on a tax equivalent basis, (3) interest rates and differential and (4) changes in interest income and expense.
AVERAGE BALANCES (Average Daily Basis)
December 31, --------------------------- 2000 1999 1998 --------------------------- ASSETS Cash and due from banks .................... $ 20,347 $ 16,863 $ 13,441 Taxable securities ......................... 121,499 119,856 111,099 Nontaxable securities ...................... 38,026 34,699 30,122 Federal funds sold ......................... 11,358 9,796 23,279 Loans, net ................................. 600,215 508,293 438,072 Property and equipment, net ................ 13,675 11,633 10,410 Other assets ............................... 16,129 17,249 16,098 ------------------------------- $821,249 $718,389 $642,521 ===============================
LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing demand deposits .......... 69,246 $ 62,317 $ 52,538 Interest-bearing demand deposits ............. 66,090 57,017 46,874 Savings deposits ............................. 154,121 152,507 131,988 Time deposits ................................ 309,565 274,507 262,111 Securities sold under agreements to repurchase and federal funds purchased ................ 14,665 12,139 7,974 FHLB borrowings .............................. 128,043 86,880 75,262 Other liabilities ............................ 5,569 4,659 4,250 Redeemable common stock held by Employee Stock Ownership Plan .............. 11,251 10,127 8,491 Stockholders' equity ......................... 62,699 58,236 53,033 ------------------------------- $821,249 $718,389 $642,521 ===============================
INTEREST INCOME AND EXPENSE Year Ended December 31, ------------------------------ 2000 1999 1998 ------------------------------ (In Thousands) Loans (1) ................................ $ 50,267 $ 42,107 $ 38,039 Taxable securities ....................... 7,481 7,167 6,832 Nontaxable securities (1) ................ 2,624 2,373 2,112 Federal funds sold ....................... 698 455 1,209 ----------------------------- Total interest income ................. 61,070 52,102 48,192 ----------------------------- Expense: Interest-bearing demand deposits ......... 1,566 1,175 997 Savings deposits ......................... 5,615 4,769 4,648 Time deposits ............................ 17,690 14,882 14,813 Securities sold under agreements to repurchase .......................... 699 517 417 FHLB borrowings .......................... 7,494 4,970 4,379 ----------------------------- Total interest expense ................ 33,064 26,313 25,254 ----------------------------- Net interest income ................... $28,006 $25,789 $22,938 =============================
(1) Presented on a tax equivalent basis using a federal tax rate of 34% and state tax rates of 3.7%
INTEREST RATES AND INTEREST DIFFERENTIAL
(1) Nonaccruing loans are not significant and have been included in the average loan balances for purposes of this computation.
(2) Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal and state tax rate of 34% and 5%, respectively, for the three years presented.
(3) Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets.
CHANGE IN INTEREST INCOME AND EXPENSE
Change Due Change Due Total To Volume To Rates Change -------------------------------- (In Thousands) Year ended December 31, 2000:
Change in interest income: Loans ..................................... $ 7,697 $ 463 $ 8,160 Taxable securities ........................ 102 212 314 Nontaxable securities ..................... 230 21 251 Federal funds sold ........................ 80 163 243 -------------------------------- 8,109 859 8,968 -------------------------------- Change in interest expense: Interest-bearing demand deposits .......... 201 190 391 Savings deposits .......................... 52 794 846 Time deposits ............................. 1,979 829 2,808 Securities sold under agreements to repurchase ........................... 116 66 182 Interest on FHLB borrowings ............... 2,408 116 2,524 -------------------------------- 4,756 1,995 6,751 -------------------------------- Change in net interest income ............... $ 3,353 $(1,136) $ 2,217 ================================ Year ended December 31, 1999: Change in interest income: Loans ...................................... $ 5,882 $(1,814) $ 4,068 Taxable securities ......................... 528 (193) 335 Nontaxable securities ...................... 337 (76) 261 Federal funds sold ......................... 6,110 (2,200) 3,910 ================================ Change in interest expense: Interest-bearing demand deposits ............ 212 (34) 178 Savings deposits ............................. 672 (551) 121 Time deposits ................................ 685 (616) 69 Securities sold under agreements to repurchase ............................... 188 (88) 100 Interest on FHLB borrowings ................... 667 (76) 591 -------------------------------- Change in net interest income .............. $ 3,686 $ (835) $ 2,851 ================================
Rate volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
LOANS
The following table shows the composition of loans (before deducting the allowance for loan losses) as of December 31 for each of the last five years.
December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------- (In Thousands) Agricultural ..............$ 28,560 $ 27,302 $ 32,318 $ 27,636 $ 23,133 Commercial and financial .. 37,832 36,848 39,438 33,616 30,650 Real estate, construction . 38,184 40,879 28,476 8,157 8,846 Real estate, mortgage ..... 499,010 439,072 338,871 332,655 279,134 Loans to individuals ...... 33,715 31,030 30,664 28,707 33,812 ----------------------------------------------------- Total .....................$637,301 $575,131 $469,767 $430,771 $375,575 =====================================================
There were no foreign loans outstanding for any of the years presented
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31, 2000:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Company's nonaccrual, past due, restructured and impaired loans as of December 31 for each of the years presented:
2000 1999 1998 1997 1996 ------------------------------------------------ Nonaccrual loans ........... $ 618 $ -- $ 12 $ -- $ 339 Accruing loans past due 90 days or more .......... 2,143 1,320 945 954 1,092 Restructured loans ......... -- -- -- -- -- Impaired loans ............. 11,068 9,265 8,956 9,556 7,811
The Company does not have a significant amount of loans that are past due less than 90 days on which there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
Loans are placed on nonaccrual status when management believes the collection of future interest is not reasonably assured. Interest income was not materially affected by this classification.
The Company has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. The Company has no other interest-bearing assets, other than loans, that meet the nonaccrual, past due, restructured or potential problem loan criteria.
No allowance for losses has been recognized for impaired loans because partial charge-offs have been taken to reduce the loan balances to the net present value of the future cash flows or the fair value of the collateral if the loan is collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for each of the last five years:
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------ (In Thousands) Amount of loan loss allowance at beginning of year ....... $ 9,750 $ 8,856 $ 8,010 $ 7,311 $ 6,740
Charge-offs: Agriculture ................. 26 60 4 197 300 Commercial and financial .... 522 181 431 326 236 Real estate, mortgage ....... 254 104 132 215 127 Loans to individuals ........ 372 418 401 390 308 ------------------------------------------------ 1,174 763 968 1,128 971 ------------------------------------------------ Recoveries: Agriculture ................. 153 157 125 65 48 Commercial and financial .... 276 260 256 195 95 Real estate, mortgage ....... 118 30 100 377 215 Loans to individuals ........ 357 310 417 142 80 ------------------------------------------------ 904 757 898 779 438 ------------------------------------------------ Net charge-offs ............... 270 6 70 349 533 ------------------------------------------------ Allowances of acquired banks .. -- -- -- -- 350 ------------------------------------------------ Provision for loan losses (1) . 948 900 916 1,048 754 ------------------------------------------------ Balance of loan loss allowance at end of year .............. $10,428 $ 9,750 $ 8,856 $ 8,010 $ 7,311 ================================================
Ratio of net charge-offs during year to average loans outstanding............ 0.04% 0.00% 0.02% 0.09% 0.16% ================================================
The balance of the loan loss allowance has not been allocated by type of loan. Management regularly reviews the loan portfolio and does not expect any unusual material amount to be charged off during 2000 that would be significantly different than the years ended December 31, 2000, 1999, 1998, 1997 and 1996.
(1) For financial reporting purposes, management regularly reviews the loan portfolio and determines a provision for loan losses based upon the impact of economic conditions on the borrower's ability to repay, past collection experience, the risk characteristics of loan portfolio and such other factors which deserve current recognition. The growth of the loan portfolio is a significant element in the determination of the provision for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Banks review a substantial part of the loans in the portfolio and classify the loans into one or more categories. Based upon the risk category assigned, the Banks allocate a percentage, as determined by management, for a required allowance needed. The risk categories are similar to those used by federal and state regulatory agencies and consist of the following:
(1) Pass (2) Potential watch and watch (3) Problem (4) Substandard (5) Doubtful
In addition, each bank's management also reviews and, where determined necessary, provides allowances based upon reviews of specific borrowers and provides general allowances for areas which management believes are of higher credit risk (agricultural loans and constructed model real estate homes as of December 31, 2000).
A summary of the components of the allowance for loan loss, by risk category, as of December 31, 2000 and 1999 is as follows:
2000 1999 ---------------- (In Thousands)
Pass ........................................ $ 1,316 $ 2,220 Potential watch and watch loans ............. 3,471 3,164 Substandard ................................. 2,521 2,416 Specific borrowers (agricultural loans) ..... 1,576 1,025 Constructed model real estate homes ......... 1,544 925 ----------------- $10,428 $ 9,750 =================
Anticipated charge-offs of the above categories are not determinable at December 31, 2000; however, management does not believe there are any categories of loans where future charge-offs are likely to be higher than the allowances provided.
PART I
Item 1. Business (Continued)
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of December 31, 2000, 1999 and 1998 and the maturities and weighted average yield of the investment securities as of December 31, 2000:
December 31, ---------------------------- 2000 1999 1998 ---------------------------- (In Thousands) Carrying value: U. S. Treasury securities ..................... $ 18,318 $ 19,470 $ 33,340 Obligations of other U. S. Government agencies and corporations ................... 95,036 94,302 78,083 Obligations of state and political subdivisions 39,923 36,496 33,580 ----------------------------- $153,277 $150,268 $145,003 ==============================
December 31, 2000 ---------------------------- Weighted Carrying Average Value Yield ---------------------------- (In Thousands) Type and maturity grouping: U. S. Treasury maturities: Within 1 year ................................ $ 6,509 6.14% From 1 to 5 years ............................ 11,809 6.22 --------- 18,318 --------- Obligations of other U. S. Government agencies and corporations, maturities: Within 1 year .................................. 31,283 5.86% From 1 to 5 years .............................. 63,260 6.30 From 5 to 10 years ............................. 493 6.05 -------- 95,036 -------- Obligations of state and politicalsubdivisions, maturities: Within 1 year ................................. 4,349 6.79% From 1 to 5 years ............................. 20,247 6.87 From 5 to 10 years ............................ 14,921 7.04 Over 10 years ................................. 406 7.86 -------- 39,923 --------- Total ....................................... $153,277 =========
INVESTMENT SECURITIES
As of December 31, 2000, there were no investment securities of any issuer, other than securities of the U. S. Government and U. S. Government agencies and corporations, exceeding 10% of stockholders' equity.
The weighted average yield is based on the amortized cost of the investment securities. The yields are computed on a tax-equivalent basis using a federal tax rate of 34% and a state tax rate of 5%.
DEPOSITS
The following tables show the average deposits and rates paid on such deposits for the years ended December 31, 2000, 1999 and 1998 and the composition of the certificates issued in denominations in excess of $100,000 as of December 31, 2000:
Time certificates issued in amounts of $100,000 or more as of December 31, 2000 with ............. Amount Rate maturity in: ---------------- 3 months or less ................... $ 6,527 5.75% 3 through 6 months ................. 10,069 6.21 6 through 12 months ................ 4,966 5.93 Over 12 months ..................... 25,091 6.57 -------- $ 46,653 ========
There were no deposits in foreign banking offices.
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and average assets for the years ended December 31, 2000, 1999 and 1998:
December 31, ---------------------------------------- 2000 1999 1998 ---------------------------------------- Return on assets 1.14% 1.18% 1.17% Return on stockholders' equity 14.94 14.54 14.12 Dividend payout ratio 23.18 22.56 23.52 Stockholders' equity to assets ratio 7.63 8.11 8.25
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of federal funds purchased and securities sold under agreements to repurchase during 2000, 1999 and 1998:
2000 1999 1998 ----------------------------------- (Amounts In Thousands)
Outstanding as of December 31 $ 16,561 $ 26,714 $ 10,554 Weighted average interest rate at year end 4.80% 4.28% 4.40% Maximum month-end balance 16,678 27,815 10,547 Average month-end balance 14,665 12,139 7,974 Weighted average interest rate for 4.77% 4.26% 5.23%
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates during 2000, 1999 and 1998:
2000 1999 1998 --------------------------------------
Outstanding as of December 31 $ 120,668 $ 108,700 $ 75,732 Weighted average interest rate a 5.79% 5.66% 5.68% Maximum month-end balance 148,700 108,700 85,764 Average month-end balance 128,043 86,880 75,262 Weighted average interest rate for the year 5.85% 5.72% 5.82%
Item 2.
Item 2. Properties
The Company's office and the main bank of Hills Bank and Trust are located at 131 Main Street, Hills, Iowa. This is a brick building containing approximately 45,000 square feet. A portion of the building was built in 1977, a two-story addition was completed in 1984, and in February 2001, the Company completed a two-story brick addition. With the completion of the 31,000 square foot addition, all bank processing and administrative systems, including trust, were consolidated in Hills, Iowa. A majority of these operations were located previously in the Coralville office and sixty- five full-part and part-time employees relocated.
The other offices of Hills Bank and Trust are as follows:
1. Iowa City office located at 1401 South Gilbert Street is a one-story brick building containing approximately 15,400 square feet. The branch has five drive-up teller lanes and a drive-up, 24-hour automatic teller machine. The Bank's trust department customer service representatives are located here. This building was constructed in 1982 and has been expanded several times, most recently in 1998.
2. Coralville office is a two story building built in 1972 that contained approximately 16,700 square feet of space. This
3. A 2,800 square foot branch bank in North Liberty, Iowa was opened for business in 1986. That office is a full-service
4. The Bank leases an office at 132 East Washington Street in downtown Iowa City with approximately 2,500 square feet. The office has two 24-hour automatic teller machines and two private offices in addition to a tellers and customer service area. The lease expires in 2001, but the Bank has an option for an additional five years.
5. In June 1999, the Bank opened an office at 2400 Towncrest Drive on the eastside of Iowa City. The office is approximately 1,100 square feet and the lease expire in June 2002.
6. The Lisbon office is a two-story brick building in Lisbon, Iowa with approximately 3,000 square feet of banking retail space located on the first floor. The building was extensively remodeled in 1996 and has one drive-up lane and a walk-up, 24-hour automatic teller machine.
7. Hills Bank and Trust constructed and opened its Mount Vernon office location in February 1998 with the completion of a full-service, 4,200 square foot office, with four drive-up and a drive-up, automatic teller machine.
8. In February 2000, the Bank opened a 2,900 square foot branch office in downtown Cedar Rapids which is leased.
Hills Bank Kalona owns a 6,400 square foot building in Kalona that contains a walk-up 24-hour automatic teller machine and one drive-up lane. This is an older building that has been remodeled a number of times including a major renovation in late 1998.
All of the properties owned by the Bank are free and clear of any mortgages or other encumbrances of any type.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Neither the Company nor the Banks hold any properties that are the subject of hazardous waste clean-up investigations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the three months ended December 31, 2000.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
There is no established trading market for the Company's common stock. Its stock is not listed with any exchange or quoted in an automated quotation system of a registered securities association, nor is there any broker/dealer acting as a market maker for its stock. A bid and ask price is quoted in an Iowa City local paper and the quotes are provided by a local broker. The Company's stock is not actively traded. As of December 31, 2000, the Company had 1,270 shareholders.
Based on the Company's stock transfer records and information informally provided to the Company, its stock trading transactions have been as follows:
Number High Low Of Shares Number Of Selling Selling Year Traded Transactions Price Price - ------------------------------------------------------------------------------- 2000 14,187 16 $ 77.00 $ 70.00 1999 6,415 22 70.00 58.00 1998 2,320 12 58.00 48.00
The Company paid aggregate annual cash dividends in 2000 and 1999 of $2,171,000 and $1,910,000, respectively, or $1.45 per share in 2000 and $1.30 per share in 1999. In January 2001, the Company declared and paid a dividend of $1.60 per share totaling $2,393,000. The decision to declare any such cash dividends in the future and the amount thereof rests within the discretion of the Board of Directors and will remain subject to, among other things, certain regulatory restrictions imposed on the payment of dividends by the Banks, and the future earnings, capital requirements and financial condition of the Company.
Item 6.
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward Looking Statements
The discussion following contains certain forward-looking statements with respect to the financial condition, the results of operations and business of the Company. These statements involve certain risks and uncertainties, which are often inherent in the ongoing operation of financial institutions such as the Company's subsidiary banks.
Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "target," "goal," "objective," "intend," "estimate" and similar expressions.
The risks involved in the operations and strategies of the Company include competition from other financial institutions, changes in interest rates, changes in economic or market conditions as well as events and trends affecting specific assets, the effect of credit quality and market perceptions of value on the fair values of financial instruments and regulatory factors. These risks, which are not inclusive, cannot be accurately estimated.
For example, a financial institution may accept deposits at fixed interest rates, at different times and for different terms, and lend funds at fixed interest rates, at different times and for different terms. In doing so, it accepts the risk that its cost of funds may rise while the use of those funds may be at a fixed rate. Similarly, although market rates of interest may decline, the financial institution may have committed, by virtue of the term of a deposit, to pay what essentially becomes an above-market rate.
Loans, and the allowance for loan losses, carry the risk that borrowers will not repay all funds in a timely manner, as well as the risk of total loss. The collateral pledged as security for loans may or may not have the value which has been attributed to it. The loan loss reserve, while believed to be adequate, may prove inadequate if one or more large-balance borrowers, or numerous mid-balance borrowers, or a combination of both, experience financial difficulty for a variety of reasons. These reasons may relate to the financial circumstances of an individual borrower, or may be caused by negative economic circumstances of an individual borrower, or may be caused by negative economic circumstances at the local, regional, national or international level which are beyond the control of the borrowers or the lender.
Because the business of banking is of a highly regulated nature, the decisions of governmental entities can have a major effect on operating results.
All of these uncertainties, as well as others, are present in the operations and business of the Company, and stockholders are cautioned that the Company's actual results may differ materially from those included in the forward-looking statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Position
For the year 2000, net loans increased $61.5 million, and $60 million of the increase was in real estate mortgage loans. Stable interest rates and new real estate development projects contributed to loan growth.
In 1999, net loans increased $104.5 million, primarily in real estate mortgage loans, as demand remained high and rates continued to be attractive. The large increase in loans was primarily driven by a strong local economy, the sale of a local competing bank and favorable interest rates.
Total assets increased 13.15% in 2000, compared to an increase of 12.20% in 1999. The growth in assets in 2000 and 1999 was primarily attributable to strong loan demand for real estate mortgage loans.
In 2000, the rates paid on deposits were higher than in 1999, and Bank deposits became more attractive to investors as stock market returns were down significantly from recent years. In addition, in February 2000, the Company extended to new market areas in Cedar Rapids, Iowa, with a downtown location and the results of deposit growth has exceeded expectations during the first year of operations.
Deposits increased 16.12% in 2000 compared to an increase of 5.23% in 1999. The banks continued to compete for deposits in market areas where the total deposit growth continues to be weak. Federal Home Loan Bank borrowings increased by a net $12.0 million in 2000 and $33 million in 1999 with the advances used to fund the loan growth.
Components of Diluted Earnings Per Share
2000 1999 1998 ---------------------------------------- Net interest income ............... $ 17.85 $ 16.59 $ 14.78 Provision for loan losses ......... (0.63) (0.60) (0.61) Noninterest income ................ 4.98 4.30 3.90 Noninterest expense ............... (13.30) (12.24) (11.03) ---------------------------------------- Income before income taxes 8.90 8.05 7.04 Income tax expense ................ (2.69) (2.39) (2.02) ---------------------------------------- Net income ................ $ 6.21 $ 5.66 $ 5.02 ========================================
For the year ended December 31, 2000, net income increased by $900,000 from the 1999 results. Net interest income for 2000 was $2.1 million higher than 1999 and was primarily the result of a significant increase in the volume of average earning assets during the year of approximately $100 million. Other income for 2000 increased over the prior year by $1,077,000 and other expenses increased in 2000 by $1,760,000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In 1999, the increase in net income was due primarily to increased net interest income, primarily resulting from a large increase in earning assets. The 1999 increase in noninterest income totaling $941,000 included increases in trust fees ($286,000), deposit charges and fees ($375,000) and other charges and fees ($487,000).
The Company consistently benefited from low provisions for loan losses, a result of a strong local economy and a loan portfolio that is concentrated in well-secured real estate loans.
Net Interest Income
Net interest income is the excess of the interest and fees received on interest-earning assets over the interest expense of the interest-bearing liabilities. The measure is shown on a tax-equivalent basis to make the interest earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 2000 as follows:
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Net interest income changes for 1999 were as follows:
Loan Losses
The provision for loan losses totaled $948,000, $900,000 and $916,000 for 2000, 1999 and 1998, respectively. Charge-offs, net of recoveries were $270,000 for 2000, $6,000 for 1999 and $70,000 for 1998.
The allowance for loan losses totaled $10,428,000 at December 31, 2000 compared to $9,750,000 at December 31, 1999. The percentage of the allowance to outstanding loans was 1.64% and 1.70% at December 31, 2000 and 1999, respectively.
Agricultural loans totaled $28,560,000 and $27,302,000 at December 31, 2000 and 1999, respectively. Management has assessed the risks for agricultural loans higher than the other loans due to unpredictable commodity prices, the effects of weather on crops and uncertainties regarding government support programs. Therefore, the allowance for loan losses includes general and specific reserves for these loans.
Loan concentrations, quality and loan terms had no significant changes in 2000 except that agricultural loans experienced a $1,300,000 increase from 1999 and $60,000,000 of the 2000 loan growth was in real estate mortgages. Therefore, the estimation methods and assumptions used in determining the 2000 allowance were consistent with 1999 and nearly all the additional allowance for loan losses was allocated to new loans. Net loss experience for the past three years has been consistently low, but the overall growth of the loan portfolio results in an increased allowance for loan losses. There were no significant changes in the elements of the allowance in the past two years or the methodology in determining the allowance. The estimated loss rates were consistently used in 2000 and 1999 because asset quality was comparable.
There are no known trends or uncertainties that are reasonably likely to have a material effect on the allowance for loan losses in the near-term.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Other Income
Total other income increased $1,077,000 for the year ended December 31, 2000 compared to the same period one year ago. Loan origination fees for the year 2000 are $276,000 less than 1999 as a result of higher interest rates in 2000 for these types of loans. Trust fees, deposit account charges and other fees increased $1,038,000 for 2000 and resulted from volume increases in trust assets and deposit accounts. During 1999, the Company had a reduction of other income by $315,000, which represented investment securities losses taken to replace lower yielding securities with higher yielding securities of similar risk and maturity. For the year 2000, no gains and losses on sale of investment securities occurred.
Other income for 1999 increased by $626,000 to $6,437,000. Loan origination fees were $592,000 compared to $799,000 for 1998. The decrease was due primarily to fewer loan refinancings after interest rates increased in the second half of 1999. Trust fees increased $286,000 for the year to $2,029,000 due to more trust assets under management. Deposit account charges and fees increased $375,000 for 1999 and other fees and charges increased $487,000.
Other Expenses
Other expenses increased $1,760,000. Of the increase, salaries and benefits accounted for $844,000, occupancy and furniture and equipment expense $431,000 and all other expenses $485,000. The salaries and employee benefits increase were the direct result of salary adjustments in the first quarter of 2000 and the two new offices added during the last sixteen months. The Iowa City eastside location of Hills Bank and Trust Company opened in June 1999 and the Cedar Rapids office opened in February 2000. The two new locations also accounted for a portion of the increase in occupancy expense and other expense increases were in marketing and business promotion. Also during 2000, the bank introduced an on-line banking product and incurred increased product promotion expense.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Other expenses for 1999 increased to $18,309,000 from $16,438,000 in 1998. Salaries and benefits accounted for $1,232,000 of the increase for the year. This is a result of new staff additions during 1999 including staff for the new branch, salary adjustments in January 1999 and significant increases in medical insurance claims in 1999 compared to 1998. All other expenses increased from $7,863,000 in 1999 to $8,502,000 for the year ended December 31, 1999. The major category that increased was furniture and equipment, which was $1,687,000 in 1998 and $1,893,000 in 2000 and was the result of depreciation and amortization of major computer hardware and software additions in 1999.
Income Taxes
Income tax expense was $4,059,000, $3,570,000 and $3,006,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The corresponding percentage of income taxes compared to income before income taxes is 30.23% in 2000, 29.66% in 1999 and 28.65% in 1998.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after January 1, 2001. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Management believes that adoption of this Statement will not have an effect on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaces FASB Statement No. 125 in its entirety. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of Statement 125's provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management believes that adoption of this Statement will not have an effect on the Company's financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Interest Rate Sensitivity and Liquidity Analysis
At December 31, 2000, the Company's interest rate sensitivity report is as follows (in thousands):
A portion of the interest-bearing checking, savings and money market accounts has been included in the above table as maturing immediately based upon management's estimate using a financial model and the rest of these deposits are shown as more than one year. The classifications are used because the Banks' historical data indicates that these have been very stable deposits without much interest rate fluctuation. Historically, these accounts would not need to be adjusted upward as quickly in a period of rate increases so the interest risk exposure would be less than the repricing schedule indicates.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Inflation
Inflation has an impact on the growth of total assets and has resulted in the need to increase equity capital to maintain an appropriate equity to asset ratio. The results of operations have been affected by inflation, but the effect has been minimal.
Liquidity and Capital Resources
On an unconsolidated basis, Hills Bancorporation (the holding company) had cash balances of $1,583,000 as of December 31, 2000. In 2000, the holding company received dividends of $2,170,000 from its subsidiary banks and used those funds to pay dividends to its stockholders of $2,171,000.
As of December 31, 2000 and 1999, stockholders' equity, before deducting for the maximum cash obligation related to ESOP, was $80,074,000 and $71,217,000, respectively. This measure of equity as a percent of total assets was 9.14% at December 31, 2000 and 9.20% at December 31, 1999. As of December 31, 2000, total equity was 7.82% of assets compared to 7.79% of assets at the prior year end. The ability of the Company to pay dividends to its shareholders is dependent upon the earnings and capital adequacy of the subsidiary banks, which affects the Banks' dividends to the Company. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. In order to maintain acceptable capital ratios in the subsidiary banks, certain of their retained earnings are not available for the payment of dividends. Retained earnings available for the payment of dividends to the Company total approximately $3,070,000 as of December 31, 2000.
The Company and the Banks are subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Banks are subject to Prompt Corrective Action Rules as determined and enforced by the Federal Reserve. These regulations establish minimum capital requirements which member banks must maintain.
As of December 31, 2000, risk-based capital standards require 8% of risk-weighted assets. At least half of that 8% must consist of Tier I core capital (common stockholders' equity, noncumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries), and the remainder may be Tier II supplementary capital (perpetual debt, intermediate-term preferred stock, cumulative perpetual, long-term and convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of risk-weighted assets). Total risk-weighted assets are determined by weighing the assets according to their risk characteristics. Certain off-balance sheet items (such as standby letters of credit and firm loan commitments) are multiplied by "credit conversion factors" to translate them into balance sheet equivalents before assigning them risk weightings. Any bank having a capital ratio less than the 8% minimum required level must, within 60 days, submit to the Federal Reserve a plan describing the means and schedule by which the Bank shall achieve the applicable minimum capital ratios.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Each of the Banks is an insured state bank, incorporated under the laws of the state of Iowa. As such, the Banks are subject to regulation, supervision and periodic examination by the Superintendent of Banking of the State of Iowa (the "Superintendent"). Among the requirements and restrictions imposed upon state banks by the Superintendent are the requirements to maintain reserves against deposits, restrictions on the nature and amount of loans, which may be made by state banks, and restrictions relating to investments, opening of bank offices and other activities of state banks. Changes in the capital structure of state banks must also be approved by the Superintendent. One of the most significant standards of operation of state banks is the six and one-half percent (6 1/2%) primary capital to total assets ratio generally required by the Superintendent. This ratio was reduced in 1999 from the eight percent (8%) ratio formerly required. In certain instances, the Superintendent may mandate higher capital, but the Superintendent has not imposed such a requirement on the Bank. The Superintendent defines the term "primary capital" to mean the sum of stockholders' equity and the allowance for loan losses less any intangible assets. In determining the primary capital ratio, the Superintendent uses the total assets as of the date of computation. At December 31, 2000, the primary capital to total assets ratio of each of the Banks exceeded the ratio required by the Superintendent.
A comparison of the Company's capital as of December 31, 2000 with minimum requirements is presented below:
Actual Requirements ---------------------------
Tier I Risk-Based Capital ..............13.09 4% Total Risk-Based Capital .............. 14.35 8 Leverage Ratio ......................... 8.91 3
Each of the Banks is classified as "well capitalized" by FDIC capital guidelines.
On a consolidated basis, 2000 cash flows from operations provided $12,702,000, net increases in deposits provided $90,620,000 and Federal Home Loan Bank borrowings provided $29,847,000. These cash flows were invested in net loans of $62,440,000, net securities of $2,245,000 and net federal funds sold increase of $27,859,000. In addition, $6,501,000 was used to purchase property and equipment.
At December 31, 2000, the Company had total outstanding loan commitments and unused portions of lines of credit totaling $91,060,000. Management believes that its liquidity levels are sufficient, but the Company may slow down the growth of its assets by selling more loans in the secondary market or by selling portions of loans to other banks through participation agreements.
As of December 31, 2000, the Company estimates that additional construction expenditures for two construction projects to be completed in 2001 will total $1,648,000 and will not require outside financing.
Commitments and Trends
The Company has no material commitments or plans that will materially affect its liquidity or capital resources. Property and equipment may be acquired in cash purchases, or they may be financed if favorable terms are available.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures
The Company's primary market risk exposure is to changes in interest rates. The Company's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond the Company's control, such as market interest rates and competition, may also have an impact on the Company's interest income and interest expense. In the absence of other factors, the Company's overall yield on interest-earning assets will increase as will its cost of funds on its interest-bearing liabilities when market rates increase over an extended period of time. Inversely, the Company's yields and cost of funds will decrease when market rates decline. The Company is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time.
The Banks maintain an asset/liability committee, which meets at least quarterly to review the interest rate sensitivity position and to review various strategies as to interest rate risk management. In addition, the Banks use a simulation model to review various assumptions relating to interest rate movement. The model attempts to limit rate risk even if it appears the Banks' asset and liability maturities are perfectly matched and a favorable interest margin is present.
In order to minimize the potential effects of adverse material and prolonged increases or decreases in market interest rates on the Company's operations, management has implemented an asset/liability program designed to mitigate the Company's interest rate sensitivity. The program emphasizes the origination of adjustable rate loans, which are held in the portfolio, the investment of excess cash in short or intermediate term interest-earning assets, and the solicitation of passbook or transaction deposit accounts which are less sensitive to changes in interest rates and can be repriced rapidly.
Based on the data following, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would result from an increase in the Company's cost of funds that would not be immediately offset by an increase in its yield on earning assets that would tend to reduce net interest income. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income.
The following table provides quantitative information with respect to interest sensitive assets and liabilities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (Continued)
The following table provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.
(1) Includes all available-for-sale investments, held-to-maturity investments, federal funds and Federal Home Loan Bank stock.
(2) Includes passbook accounts, NOW accounts, Super NOW accounts and money market funds.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included on Pages 32 through 60.
Independent Auditor's Report
To the Board of Directors and Stockholders Hills Bancorporation Hills, Iowa
We have audited the accompanying consolidated balance sheets of Hills Bancorporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years ended December 31, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hills Bancorporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity with generally accepted accounting principles.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa February 16, 2001
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999 (In Thousands, Except Shares)
See Notes to Financial Statements
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998 (In Thousands, Except Per Share Amounts)
See Notes to Financial Statements
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2000, 1999 and 1998 (In Thousands)
See Notes to Financial Statements.
- -------------------------------------------------------------------------------- HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Notes 7 and 9) Years Ended December 31, 2000, 1999 and 1998 (In Thousands, Except Share Amounts)
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998 (In Thousands)
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000, 1999 and 1998 (In Thousands)
See Notes to Financial Statements.
Hills Bancorporation
Notes to Financial Statements
- -------------------------------------------------------------------------------- Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a multibank holding company engaged in the business of banking. The Company's wholly-owned subsidiary commercial banks are Hills Bank and Trust Company, Hills, Iowa and Hills Bank Kalona, Kalona, Iowa. The Banks are all full-service commercial banks extending their services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona and Cedar Rapids, Iowa.
The Banks compete with other financial institutions and nonfinancial institutions providing similar financial products. Although the loan activity of the Banks is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, each Bank's credit is concentrated in real estate loans.
Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for loan losses, fair values of securities and other financial instruments, and stock-based compensation expense involve certain significant estimates made by management. These estimates are reviewed by management routinely and it is reasonably possible that circumstances that exist at December 31, 2000 may change in the near-term future and that the effect could be material to the consolidated financial statements.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation.
Investment securities: Held-to-maturity securities consist solely of debt securities, which the Company has the positive intent and ability to hold to maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading securities as of December 31, 2000 and 1999.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual lives of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Realized gains and losses on investment securities are included in income, determined on the basis of the cost of the specific securities sold.
Loans: Loans are stated at the amount of unpaid principal, reduced by the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes the collectability of principal is unlikely. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The Banks make continuous reviews of the loan portfolio and considers current economic conditions, historical loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance.
Loans are considered impaired when, based on current information and events, it is probable the Banks will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to impaired loans has been computed based on the present value of the estimated future cash flows of interest and principal discounted at the loans effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans or of collateral value is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Interest income on impaired loans is recognized on the cash basis.
The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due.
Loan fees and origination costs are reflected in the statement of income as collected or incurred. Compared to the net deferral method, this practice had no significant effect on income.
Transfers of financial assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Property and equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using primarily declining-balance methods over the estimated useful lives of 7-40 years for buildings and improvements and 3-20 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Intangible assets: Intangible assets consist principally of goodwill, which represents the excess of cost over fair value of net assets acquired in business combinations of two banks in 1996 accounted for under the purchase method. Goodwill is amortized on a straight-line basis over the estimated period to be benefited, 15 years. The carrying value of goodwill is reviewed periodically for impairment. Goodwill totaled $2,760,000 and $3,021,000, net of accumulated amortization of $1,137,000 and $876,000 as of December 31, 2000 and 1999, respectively, and is included in other assets.
Stock options: Compensation expense for stock issued through stock option and award plans is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation is measured as the difference between the estimated fair value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service.
Common stock held by ESOP: The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash.
Trust assets: Trust assets, other than cash deposits, held by the Banks in fiduciary or agency capacities for its customers are not included in these statements since they are not assets of the Company.
Earnings per share: Basic per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock unless the effect is to reduce the loss or increase the income per common share from continuing operations.
Following is a reconciliation of the denominator:
There are no potentially dilutive securities that have not been included in the determination of diluted shares.
Statement of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans originated by the Banks, deposits and federal funds purchased and securities sold under agreements to repurchase are reported net.
Recently issued accounting standards:
Recently issued accounting standards are not expected to materially affect the Company's financial statements.
Fair value of financial instruments: In cases where quoted market prices are not available, fair values of financial instruments are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure. Accordingly, the aggregate fair value amounts presented in Note 11 do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Off-balance sheet instruments: Fair values for outstanding letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the outstanding letters of credit is not believed to be significant. Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding.
Cash and cash equivalents and federal funds sold: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds sold and securities sold under agreements to repurchase approximate their fair values.
Long-term borrowings: The fair values of the Banks' long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Banks' current incremental borrowing rates for similar types of borrowing arrangements.
Note 2.
Investment Securities
The amortized cost and fair value of investment securities available for sale are as follows:
The amortized cost and fair value of debt securities held to maturity are as follows:
The contractual maturity distribution of investment securities as of December 31, 2000 is summarized as follows:
As of December 31, 2000, investment securities with a carrying value of $54,522,000 were pledged to collateralize public and trust deposits, short-term borrowings and for other purposes, as required or permitted by law.
Net gains or losses from the sale of investment securities were as follows:
Note 3. Loans
The composition of loans is as follows:
December 31, ---------------------- 2000 1999 ---------------------- (Amounts In Thousands) Agricultural .............................. $ 28,560 $ 27,302 Commercial and financial ................. 37,832 36,848 Real estate: Construction ............................ 38,184 40,879 Mortgage ............................... 499,010 439,072 Loans to individuals ..................... 33,715 31,030 --------------------- 637,301 575,131 --------------------- Less allowance for loan losses ............ 10,428 9,750 --------------------- $626,873 $565,381 ===================== Changes in the allowance for loan losses are as follows:
Changes in the allowance for loan losses are as follows: Year Ended December 31, --------------------------------- 2000 1999 1998 --------------------------------- (Amounts In Thousands) Balance, beginning .................... $ 9,750 $ 8,856 $ 8,010 Provision charged to expenses ......... 948 900 916 Recoveries ............................ 904 757 898 Loans charged off ..................... (1,174) (763) (968) --------------------------------- Balance, ending ....................... $ 10,428 $ 9,750 $ 8,856 =================================
Information about impaired loans as of and for the years ended December 31, 2000 and 1999 is as follows:
No allowance for credit losses has been recognized for impaired loans because partial charge-offs have been taken to reduce the loan balances to the net present value of the future cash flows or to the fair value of the collateral if the loan is collateral dependent.
Note 4. Property and Equipment
The major classes of property and equipment and the total accumulated depreciation are as follows:
December 31, -------------------- 2000 1999 -------------------- (Amounts In Thousands)
Furniture and equipment .................... 13,939 12,129 -------------------- $29,683 $23,182 Less accumulated depreciation .............. 13,184 11,536 -------------------- Net ................................ $16,499 $11,646 ====================
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows
December 31, ---------------------- 2000 1999 ---------------------- (Amounts In Thousands) ---------------------- NOW and other demand ................. $ 70,980 $ 62,081 Savings .............................. 161,603 155,001 Time, $100,000 and over ............. 46,653 30,442 Other time .......................... 297,383 247,768 --------------------- $576,619 $495,292 =====================
Note 6. Federal Home Loan Bank Borrowings
As of December 31, 2000, the borrowings were as follows:
(In Thousands) ------------ Due August 17, 2005, 7.12% ..................... $10,000 Due January 14, 2008, 5.22% .................... 10,000 Due February 4, 2008, 5.38% .................... 10,000 Due February 4, 2008, 5.25% .................... 100 Due April 30, 2008, 5.40% ...................... 10,000 Due August 11, 2008, 6.00% ..................... 10,000 Due June 15, 2009, 5.66% ....................... 10,000 Due June 15, 2009, 6.04% ....................... 10,000 Due October 6, 2009, 5.85% ..................... 568 Due October 6, 2009, 6.22% ..................... 10,000 Due January 8, 2010, 6.28% ..................... 10,000 Due January 8, 2010, 6.61% ..................... 10,000 Due January 19, 2010, 5.77% .................... 20,000 --------- $ 120,668 =========
The borrowings are collateralized by 1-4 family mortgage loans with a face amount of $150,835,000. As of December 31, 2000, the Company held Federal Home Loan Bank stock with a cost of $7,789,000.
Note 7. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes discretionary cash contributions. The Company's contribution to the ESOP totaled $70,000, $64,000 and $58,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value. To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. As of December 31, 2000, 150,005 shares held by the ESOP, at a fair value of $77 per share, have been reclassified from stockholders' equity to liabilities.
The Company has a profit-sharing plan with a 401(k) feature, which provides for discretionary annual contributions in amounts to be determined by the Board of Directors. The profit-sharing contribution totaled $562,000, $509,000 and $461,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has a Stock Option and Incentive Plan for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or stock awards. The Plan approved by the shareholders in April 2000 replaces the 1993 Stock Incentive Plan that expired in 1999. Under the new Stock Option and Incentive Plan, the aggregate number of options cannot exceed 66,000 shares. A Stock Option Committee may grant options at prices equal to the fair value of the stock at the date of the grant. Options expire 10 years from the date of the grant. Directors may exercise options immediately and officers' rights under the plan vest over a five-year period from the date of the grant. No compensation expense has been charged to expense using the intrinsic value based method as prescribed by APB No. 25. Had compensation expense been determined based on the grant date fair values of the awards, as prescribed by SFAS No. 123, reported net income and earnings per share would have been as follows:
Years Ended December 31, ----------------------------- 2000 1999 1998 ----------------------------- Pro forma net income (in thousands) ....... $ 9,361 $ 8,461 $ 7,481 Pro forma earnings per share: Basic ................................... 6.26 5.70 5.10 Diluted ................................. 6.21 5.66 5.02
The fair value of each grant is established at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for the last grants in 1997: Dividend rate 2.19%; price volatility of 4.64%; risk-free interest rate of 6.63% and an expected life of 5 years.
A summary of the stock options is as follows: Weighted Average Number Exercise Of Shares Price ---------------------- Balance, December 31, 1998 .......... 45,540 $ 26.48 Exercised ........................... (25,078) 25.93
Balance, December 31, 1999 .......... 20,462 27.15 Exercised ........................... -- -- ---------------------- Balance, December 31, 2000 .......... 20,462 $ 27.15 ======================
Other pertinent information related to the options outstanding at December 31, 2000 is as follows:
Remaining Exercise Number Contractual Number Price Outstanding Life Exercisable - ------------------------------------------------------------------- $ 25.33 12,330 15 Months 12,330 26.17 6,077 18 Months 6,077 41.00 2,055 63 Months 2,055 ------ ----- 20,462 20,462 ====== ====== As of December 31, 2000, 66,000 options were available for future grants.
The committee is also authorized to grant awards of common stock and authorized the issuance of none, 1,587 and 902 shares of common stock to a group of employees in 2000, 1999 and 1998, respectively.
Note 8.
Income Taxes
Income taxes for the years ended December 31, 2000, 1999 and 1998 are summarized as follows: 2000 1999 1998 -------------------------------- (Amounts In Thousands) Current: Federal .................. $ 3,648 $ 3,707 $ 2,435 State .................... 726 710 586 Deferred ................. (315) (847) (15) -------------------------------- $ 4,059 $ 3,570 $ 3,006 ================================
Deferred income tax liabilities and assets arose from the following temporary differences: December 31, ---------------------------- 2000 1999 1998 ---------------------------- (Amounts In Thousands) Deferred income tax assets: Allowance for loan losses .................... $3,860 $3,597 $3,079 Unrealized losses on investment securities ... -- 574 -- Deferred compensation ........................ 433 311 156 Certain accrued expenses ..................... 198 190 211 Other ........................................ 90 112 -- ------------------------ Gross deferred tax assets ................. 4,581 4,784 3,446 ------------------------ Deferred income tax liabilities: Property and equipment ....................... 750 700 677 FHLB dividends ............................... 130 130 130 Unrealized gains on investment securities .... 409 -- 696 Other ........................................ 6 -- 105 ------------------------ Gross deferred tax liabilities ............ 1,295 830 1,608 ------------------------ Net deferred income tax asset ............. $3,286 $3,954 $1,838 ========================
The net change in the deferred income taxes for the years ended December 31, 2000, 1999 and 1998 is reflected in the financial statements as follows: Year Ended December 31, -------------------------- 2000 1999 1998 -------------------------- (Amounts In Thousands) Statement of income ..................... $ (315) $ (847) $ (15) Statement of stockholders' equity ....... 983 (1,269) 413 -------------------------- $ 668 $ (2,116) $ 398 ==========================
The income tax provisions for the years ended December 31, 2000, 1999 and 1998 are less than the amounts computed by applying the maximum effective federal income tax rate to the income before income taxes because of the following items: 2000 1999 1998 ------------------------------------------------ % Of % Of % Of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------------------------------------------------ (Amounts In Thousands) Expected provision ...... $ 4,699 35.0% $ 4,213 35.0% $ 3,672 35.0% Tax-exempt interest ..... (712) (5.3) (647) (5.3) (596) (5.7) Interest expense limitation ............ 111 1.0 120 1.0 102 1.0 State income taxes, net of federal income tax benefit ............... 479 3.6 468 3.9 398 3.8 Income tax credits ...... (345) (2.6) (345) (2.9) (345) (3.3) Other ................... (173) (1.3) (239) (2.0) (225) (2.2) ------------------------------------------------ $ 4,059 30.4% $ 3,570 29.7% $ 3,006 28.6% ================================================
Note 9. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash Restrictions
Federal regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance sheet items.
Risk-based capital standards include requirements for a minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 2000 with the minimum requirements is presented below.
Minimum Actual Requirements --------------------------- Tier 1 Risk-Based Capital .................... 13.09% 4.00% Total Risk-Based Capital ..................... 14.35 8.00 Leverage Ratio .............................. 8.91 3.00
According to FDIC capital guidelines, each of the Banks is classified as "Well Capitalized." The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Banks. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the Banks, certain of their retained earnings are not available for the payment of dividends. To maintain a ratio of capital to assets of 8%, retained earnings of $3,070,000 as of December 31, 2000 are available for the payment of dividends to the Company.
Each of the Banks is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $9,662,000 and $7,938,000 as of December 31, 2000 and 1999, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and the Banks and companies with which the directors are affiliated and certain principal officers are customers of, and have banking transactions with, the Banks in the ordinary course of business. Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.
The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2000 and 1999:
Year Ended December 31, ------------------------ 2000 1999 ------------------------ (Amounts In Thousands) Balance, beginning ................. $ 10,733 $ 10,981 Advances ......................... 8,725 5,732 Collections ...................... (6,161) (5,980) ------------------------ Balance, ending .................... $ 13,297 $ 10,733 ========================
Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.
Note 11.
Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company's financial instruments as of December 31, 2000 and 1999 are as follows:
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company only):
BALANCE SHEETS December 31, 2000 and 1999 (Amounts In Thousands)
STATEMENTS OF INCOME Years Ended December 31, 2000, 1999 and 1998 (Amounts In Thousands)
2000 1999 1998 - --------------------------------------------------------------------------------
Interest on investment securities .............. $ 30 $ 16 $ 17 Dividends received from subsidiaries ........... 2,170 1,911 2,762 Other expenses ................................. (119) (121) (113) ----------------------------- Income before income taxes and equity in subsidiaries' undistributed income ..... 2,081 1,806 2,666 Income tax benefit ............................. 43 37 39 ----------------------------- 2,124 1,843 2,705 Equity in subsidiaries' undistributed income ... 7,242 6,623 4,781 ----------------------------- Net income ................................ $ 9,366 $ 8,466 $ 7,486 =============================
Note 13. Commitments and Contingencies
Concentrations of credit risk: All of the Banks' loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within each Bank's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $15,877,000. The concentrations of credit by type of loan are set forth in Note 3. Outstanding letters of credit were granted primarily to commercial borrowers. Although the Banks have a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in Johnson County, Iowa.
Contingencies: In the normal course of business, the Company and Banks are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the accompanying financial statements.
Financial instruments with off-balance sheet risk: The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, credit card participations and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card participations and standby letters of credit is represented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. A summary of the Banks' commitments at December 31, 2000 and 1999 is as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties. Credit card participations are the unused portion of the holders' credit limits. Such amounts represent the maximum amount of additional unsecured borrowings.
Outstanding letters of credit are the conditional commitments issued by the Banks to guarantee the performance of a customer to a third party and collateralize the customer's borrowing arrangement with other creditors. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Banks deem necessary.
Note 14. Quarterly Results of Operations (unaudited, in thousands, except per share amounts)
Part II
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is contained in the Registrant's Proxy Statement under the heading "Information Concerning Nominees for Election as Directors" and "Information Concerning Directors Other Than Nominees," which sections are incorporated herein by this reference.
The following table sets forth the name, age and principal occupation of the Executive Officers of the Registrant and Executive Officers of the Bank. All officers of the Registrant and the Bank are elected annually for one-year terms of office.
Item 11.
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Executive Compensation and Benefits," which section is incorporated herein by this reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and "Report on Executive Compensation," which sections are incorporated herein by this reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Loans To and Certain Other Transactions With Executive Officers and Directors," which section is incorporated herein by this reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 2. Financial Statements Schedules
All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
Exhibit 3 - Articles of Incorporation and Bylaws filed as Exhibit 3 of Form 10-K for the year ended December31, 1993 are incorporated by reference.
Exhibit 10(a) - Material Contract (Employee Stock Ownership Plan) filed as Exhibit 10(a) in Form 10-K for the year ended December 31, 1993 is incorporated by reference.
Exhibit 10(b) - Material Contract (1993 Stock Incentive Plan) filed as Exhibit 10(b) in Form 10-K for the year ended December 31, 1993 is incorporated by reference.
Exhibit 10(c) - Material contract (1995 Deferred Compensation Plans) filed as Exhibit 10(c) in Form 10-K for the year ended December 31, 1995 is incorporated by reference.
Exhibit 10(d) - Material contract (2000 Stock Option and Incentive Plan)filed as Exhibit 10(d) in Form 10-K for the year ended December 31, 2000 is incorporated by reference.
Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per Share is attached on Page 66
Exhibit 21 - Subsidiaries of the Registrant is attached on Page 67
Exhibit 23 - Consent of Accountants is attached on Page 68
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HILLS BANCORPORATION
3/27/01 By /s/ Dwight O. Seegmiller - ---------------------------- -------------------------------------- Date Dwight O. Seegmiller, Director and President
3/27/01 By /s/ James G. Pratt - ---------------------------- -------------------------------------- James G. Pratt, Treasurer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
3/27/01 /s/Willis M. Bywater - ---------------------------- ----------------------------------------- Date Willis M. Bywater, Director
3/27/01 /s/ Thomas J. Gill - --------------------------- ---------------------------------------- Date Thomas J. Gill, Director
3/27/01 /s/Donald H. Gringer - --------------------------- ---------------------------------------- Date Donald H. Gringer, Director
3/27/01 /s/ Michael E. Hodge - --------------------------- ---------------------------------------- Date Michael E. Hodge, Director
3/27/01 /s/ Richard W. Oberman - --------------------------- ---------------------------------------- Date Richard W. Oberman, Director
3/27/01 /s/ Theodore H. Pacha - --------------------------- ---------------------------------------- Date Theodore H. Pacha
3/27/01 /s/ Ann M. Rhodes - --------------------------- ---------------------------------------- Date Ann M. Rhodes, Director
3/27/01 /s/ Ronald E. Stutsman - --------------------------- ---------------------------------------- Date Ronald E. Stutsman, Director
3/27/01 /s/ Sheldon E. Yoder - --------------------------- ---------------------------------------- Date Sheldon E. Yoder, Director
HILLS BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBIT INDEX
Page Number In The Sequential Exhibit Numbering System Number Description For 2000 Form 10-K - ------------------------------------------------------------------------------- 11 Statement Re Computation of Basic and Diluted Earnings Per Share
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants