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FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-26589, eff. 4/12/93.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number: 0-12668
Hills Bancorporation
Incorporated in Iowa I.R.S. Employer Identification
No. 42-1208067
131 MAIN STREET, HILLS, IOWA 52235
Telephone number: (319) 679-2291
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
SHARES OUTSTANDING
CLASS At October 31, 2002
- --------------------------------------------------------------------------------
Common Stock, no par value 1,499,108
1
HILLS BANCORPORATION
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated balance sheets, September 30, 2002 (unaudited)
and December 31, 2001 3
Consolidated statements of income, (unaudited) for three and nine
months ended September 30, 2002 and 2001 4
Consolidated statements of comprehensive income, (unaudited) for
three and nine months ended September 30, 2002 and 2001. 5
Consolidated statements of stockholders' equity, (unaudited)
for nine months ended September 30, 2002 and 2001 6
Consolidated statements of cash flows (unaudited) for nine
months ended September 30, 2002 and 2001 7
Notes to consolidated financial statements 8-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Evaluation of Disclosures Controls 14
Part II
OTHER INFORMATION
Item 1. Legal proceedings 15
Item 2. Changes in securities 15
Item 3. Defaults upon senior securities 15
Item 4. Submission of matters to vote of security holders 15
Item 5. Other information 15
Item 6. Exhibits and reports on Form 8-K 15
Signatures and Certifications 16-18
Exhibit 11 Computation of earnings per share
2
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30,
2002 December 31,
Unaudited 2001*
--------------------------
ASSETS
Cash and due from banks ............................. $ 35,750 $ 37,070
Investment securities:
Available for sale (amortized cost
September 30, 2002 $184,712;
December 31, 2001 $165,515) .................... 192,540 170,311
Held to maturity (fair value
September 30, 2002 $9,053;
December 31, 2001 $12,146) ..................... 8,734 11,840
Stock of Federal Home Loan Bank .................. 8,382 7,809
Federal funds sold .................................. 22,549 29,428
Loans, net .......................................... 772,826 682,692
Property and equipment, net ......................... 21,473 20,997
Accrued interest receivable ......................... 7,727 7,257
Deferred income taxes, net .......................... 664 1,873
Other assets ........................................ 7,551 6,828
-----------------------
$1,078,196 $ 976,105
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ........................ $ 99,304 $ 92,179
Interest-bearing deposits ........................... 689,120 627,839
-----------------------
Total deposits ................................... $ 788,424 $ 720,018
Federal funds purchased and securities
sold under agreements to repurchase .............. 17,250 22,409
Federal Home Loan Bank notes ........................ 167,606 137,637
Accrued interest payable ............................ 2,407 2,683
Other liabilities ................................... 4,294 3,009
-----------------------
$ 979,981 $ 885,756
-----------------------
REDEEMABLE COMMON STOCK HELD BY
EMPLOYEE STOCK OWNERSHIP PLAN
(ESOP) ........................................... $ 12,656 $ 12,194
-----------------------
STOCKHOLDERS' EQUITY
Capital stock, common, no par value;
authorized 10,000,000 shares;
issued September 30, 2002 - 1,499,108 shares;
December 31, 2001 - 1,498,558 shares ............. $ 10,442 $ 10,397
Retained earnings ................................... 82,841 76,931
Accumulated other comprehensive income,
unrealized gains on investment securities, net .. 4,932 3,021
-----------------------
$ 98,215 $ 90,349
Less maximum cash obligation related to
ESOP shares ...................................... 12,656 12,194
-----------------------
$ 85,559 $ 78,155
-----------------------
$1,078,196 $ 976,105
=======================
* Derived from audited financial statements.
See Notes to Financial Statements.
3
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
-------------------------------------
Interest Income:
Interest and fees on loans .......... $13,940 $13,398 $40,206 $39,567
Interest on investment securities:
Taxable ........................... 1,852 1,957 5,665 5,727
Non-taxable ....................... 584 493 1,681 1,425
Interest on federal funds sold ...... 134 184 407 996
-------------------------------------
Total interest income ............... $16,510 $16,032 $47,959 $47,715
-------------------------------------
Interest Expense:
Interest on deposits ................ $ 5,528 $ 6,577 $17,296 $20,504
Interest on securities sold under
Interest on FHLB borrowings ......... 2,343 1,785 6,232 5,298
-------------------------------------
Total interest expense .............. $ 7,948 $ 8,509 $23,817 $26,292
-------------------------------------
Net interest income ................. $ 8,562 $ 7,523 $24,142 $21,423
Provision for loan losses .............. 244 225 731 675
-------------------------------------
Net interest income after provision
Other income:
Loan origination fees ............... $ 407 $ 219 $ 1,026 $ 702
Trust fees .......................... 605 567 1,764 1,777
Deposit account charges and fees .... 845 793 2,366 2,295
Other expenses:
Salaries and employee benefits ...... $ 3,351 $ 2,938 $10,068 $ 8,627
Occupancy ........................... 453 490 1,299 1,348
Furniture and equipment ............. 684 681 2,146 1,929
Office supplies and postage ......... 304 322 844 905
Other operating ..................... 1,287 1,265 3,782 3,705
-------------------------------------
$ 6,079 $ 5,696 $18,139 $16,514
-------------------------------------
Income before income taxes .......... $ 4,743 $ 3,910 $12,378 $10,929
Federal and state income taxes ......... 1,507 1,230 3,846 3,408
-------------------------------------
Net income .......................... $ 3,236 $ 2,680 $ 8,532 $ 7,521
=====================================
Earning per common share:
Basic ............................. $ 2.15 $ 1.79 $ 5.69 $ 5.02
Diluted ........................... 2.14 1.77 5.64 4.98
See Notes to Financial Statements
4
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------
2002 2001 2002 2001
-------------------------------------
Net Income ............................. $ 3,236 $ 2,680 $ 8,532 $ 7,521
-------------------------------------
Other comprehensive income:
Unrealized gains (losses) on debt
Income tax effect of unrealized gains
Comprehensive Income ................ $ 4,483 $ 4,250 $10,443 $10,666
=====================================
See Notes to Financial Statements.
5
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)
Less
Maximum
Accumulated Cash
Other Obligation
Capital Retained Comprehensive To ESOP
Stock Earnings Income Shares Total
----------------------------------------------------
Balance, December 31, 2001 ............... $10,397 $76,931 $ 3,021 $(12,194) $78,155
Net income ........................... - - 8,532 - - - - 8,532
Change related to ESOP shares ........ - - - - - - (462) (462)
Cash dividends ($1.75 per share) ..... - - (2,622) - - - - (2,622)
Issuance of 550 shares of common stock 45 - - - - - - 45
Other comprehensive income ........... - - - - 1,911 - - 1,911
----------------------------------------------------
Balance, September 30, 2002 .............. $10,442 $82,841 $ 4,932 $(12,656) $85,559
====================================================
Balance, December 31, 2000 ............... $10,197 $69,179 $ 698 $(11,550) $68,524
Net income ............................. - - 7,521 - - - - 7,521
Cash dividends ($1.60 per share) ....... - - (2,393) - - - - (2,393)
Change related to ESOP shares .......... - - - - - - (310) (310)
Issuance of 2,865 shares of common
stock ................................ 135 - - - - - - 135
Income tax benefit related to stock
based compensation ................... - - 29 - - - - 29
Other comprehensive income ............. - - - - 3,145 - - 3,145
----------------------------------------------------
Balance, September 30, 2001 .............. $10,332 $ 74,336 $ 3,843 $(11,860) $76,651
====================================================
See Notes to Financial Statements.
6
HILLS BANCORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(In Thousands)
2002 2001
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 8,532 $ 7,521
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................................... 1,711 1,486
Provision for loan losses .................................................. 731 675
Deferred income taxes ...................................................... 88 91
Compensation paid by issuance of common stock .............................. 45 149
(Increase) decrease in accrued interest receivable ......................... (470) (180)
Amortization of bond discount .............................................. 230 102
(Increase) in other assets ................................................. (850) (1,329)
Amortization of intangibles ................................................ 127 236
Increase in accrued interest and other liabilities ......................... 1,009 578
----------------------
Net cash provided by operating activities ............................... $ 11,153 $ 9,329
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ......................................................... $ 44,657 $ 42,587
Held to maturity ........................................................... 3,106 2,463
Purchase of investment securities available for sale ........................... (64,657) (64,909)
Federal funds sold, net ........................................................ 6,879 18,481
Loans made to customers, net of collections .................................... (90,865) (39,207)
Purchases of property and equipment ............................................ (2,187) (4,316)
----------------------
Net cash (used in) investing activities .................................... $(103,067) $ (44,901)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ........................................... $ 68,406 $ 38,954
Net increase (decrease) in fed funds purchased and
securities sold under agreements to repurchase ............................. (5,159) 1,175
Borrowings from FHLB ........................................................... 30,000 --
Payments on FHLB notes ......................................................... (31) (31)
Stock options exercised ........................................................ -- 44
Income tax benefits on stock options exercised ................................. -- 29
Dividends paid ................................................................. (2,622) (2,393)
----------------------
Net cash provided by financing activities .................................. $ 90,594 $ 37,778
----------------------
Increase (decrease) in cash and due from banks ............................. $ (1,320) $ 2,206
----------------------
CASH AND DUE FROM BANKS
Beginning .................................................................. 37,070 25,669
----------------------
Ending ..................................................................... $ 35,750 $ 27,875
======================
SUPPLEMENTAL DISCLOSURES Cash payments for:
Interest paid to depositors and others ....................................... $ 17,572 $ 20,555
Interest paid on other obligations ........................................... 6,518 5,788
Non-cash financing transaction,
decrease in maximum cash obligation related
to ESOP shares ............................................................. 462 310
See Notes to Financial Statements.
7
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Interim Financial Statements
Interim consolidated financial statements have not been examined by independent
public accountants, but include all adjustments (consisting only of normal
recurring accruals), which, in the opinion of management, are necessary for a
fair presentation of the results for these periods. The results of operation for
the interim periods are not necessarily indicative of the results for a full
year.
In reviewing these financial statements, reference should be made to the Notes
to Financial Statements contained in the Financial Statements for the year ended
December 31, 2001.
There were no changes in accounting policies which had a significant effect on
the interim consolidated financial statements for the periods presented except
as disclosed in Note 4 to the financial statements.
For purposes of reporting cash flows, cash and due from banks includes cash on
hand and amounts due from banks (including cash items in process of clearing).
Cash flows from demand deposits, NOW accounts, savings accounts, and federal
funds purchased and sold are reported net since their original maturities are
less than three months. Cash flows from loans and time deposits are presented as
net increases or decreases.
Note 2. Loans
The following tables set forth the composition of loans and the allowance for
loan losses:
(In thousands)
September 30
2002 2001
-------------------------
Agricultural ................................. $ 37,323 $ 35,077
Commercial and financial ..................... 39,436 39,349
Real estate, construction .................... 46,352 39,113
Real estate, mortgage ........................ 624,130 529,272
Loans to individuals ......................... 36,235 33,123
-------------------------
$783,476 $675,934
Less allowance for loan losses ............... 10,650 10,529
-------------------------
$772,826 $665,405
=========================
Transactions in the allowance for loan losses are as follows:
(In thousands)
Nine Months
Ended September 30
2002 2001
--------------------------
Balance, beginning ........................... $ 9,950 $ 10,428
Provision charged to expense ............... 731 675
Net recoveries (charge-offs) ............... (31) (574)
-------------------------
Balance, ending .............................. $ 10,650 $ 10,529
==========================
8
The following summarizes the Company's nonaccrual, past due, restructured and
impaired loans:
(In thousands)
September 30
---------------------
2002 2001
---------------------
Non-accrual ........................................ $ 1,998 $ 1,896
Accruing loans, past due 90 days or more ........... 2,417 1,812
Restructured loan .................................. -- - - -
Impaired loans ..................................... 12,353 9,901
Note 3. Earnings Per Share
Basic net income per share amounts are computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the period plus the number of
potential dilutive common shares attributable to the Company's stock option
plan.
Note 4. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement 141,
"Business Combinations" and Statement 142, "Goodwill and Other Intangible
Assets." Statement 141 eliminated the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain. Statement 142
eliminated the amortization of goodwill and other intangibles that are
determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life. The provisions of the Statements were implemented
effective January 1, 2002. The amortization of goodwill with an indefinite life
was suspended on January 1, 2002.
In October 2002 the Financial Accounting Standards Board issued Statement No.
147, "Acquisitions of Certain Financial Institutions" which amended several
previously issued accounting standards. The Company has adopted FASB Statement
No. 147 in the third quarter of 2002. This adoption of this statement had no
material effect on current or prior financial statements.
9
HILLS BANCORPORATION
PART I, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Information
Forward-looking information relating to the financial results or strategies of
the Company are made in the Management's Discussion and Analysis. The following
paragraphs identify forward-looking statements and the risks that need to be
considered when reading those statements.
Forward-looking statements include such words as believe, expect, anticipate,
target, goal, objective and other words with similar meaning. The Company is
under no obligation to update such statements.
The risks involved in the operations and strategies of the Company include
competition from other financial institutions, changes in interest rates,
changes in economic or market conditions and changes in regulatory factors.
These risks, which are not all inclusive, cannot be estimated.
Recent Activities
During the period ended September 30, 2002 the highlights included the
following:
o Hills Bancorporation achieved a new milestone in the first quarter as total
assets exceeded one billion dollars. This growth continued in the second
and third quarters with total assets at September 30, 2002 at $1.078
billion and this represents a $153 million increase in assets from
September 30, 2001. Also since December 31, 2001 assets have increased
$102.1 million.
o Hills Bank and Trust Company opened its eleventh office on April 1, 2002.
The full service banking office in Cedar Rapids is located at 3610 Williams
Blvd. SW and is the second location in Cedar Rapids. The new 7,200 square
foot one story building has three drive-up lanes and a drive-up ATM. The
office has been well received during its first six months of operations.
o In August of 2002, Hills Bank and Trust Company began an extensive
remodeling on a property located at 800 11th Street in Marion, Iowa. The
building will be a two-story building with approximately 8,400 square feet
with three drive-up lanes and a drive-up ATM. The full service bank office
is scheduled to open in January, 2003. This office will be Hills Bank's
third office in the Cedar Rapids area and the twelfth office of Hills Bank.
Financial Position
Total assets at September 30, 2002 are $1.078 billion compared to $976.1 million
in assets at December 31, 2001. The asset changes include a $90.1 million
addition in net loans and a $19.7 million increase in investment securities.
Consistent with the history of the Bank the primary growth in loans were real
estate mortgage loans, including growth in the 1 to 4 family home loans and
multifamily and commercial real estate loans. The growth in the investment
securities is in U.S. Government Agency securities and municipal bonds. The
asset growth was funded by deposit growth of $68.4 million and a net increase of
Federal Home Loan Bank advances of $30 million. The local economy continues to
be strong in terms of loan and deposit growth. Interest rates continue to be at
forty year lows so that results in high loan demand and current customers that
wish to obtain lower rates on existing borrowings. These low rates have also
resulted in a high volume of loans sold on the secondary market and significant
fee income. The national economy and the stock market continues to have signs
that are not favorable and will at sometime effect the state and local economy.
Due to the continued loan demand and challenges for funding sources,
asset-liability management continues to be very important. The asset-liability
process encompasses both the management of interest rate sensitivity and the
maintenance of adequate liquidity. Interest rate sensitivity management attempts
to provide the optimal level of net interest income while managing exposure to
risks associated with interest rate movements. Liquidity management involves
planning to meet anticipated funding needs. Management monitors the rate
sensitivity and liquidity positions on an on-going basis and, when necessary,
appropriate action is taken to minimize any adverse effects of rapid interest
rate movements or any unexpected liquidity concerns. The Company believes it
will be able to maintain sufficient liquidity.
10
Dividends and Equity
In January 2002, Hills Bancorporation paid a dividend of $2,622,000 or $1.75 per
share, a 9.38% increase from the $1.60 paid in January 2001. After payment of
the dividend and the adjustment for accumulated other comprehensive income,
stockholders' equity as of September 30, 2002 totaled $85,559,000. The total
stockholders' equity of Hills Bancorporation as of September 30, 2002, before
the reduction for the ESOP shares, totaled 9.11% of total assets. Under
risk-based capital rules, the total risk based capital is 12.77% of
risk-adjusted assets, and substantially in excess of required minimums.
Liquidity
The Company actively monitors and manages its liquidity position with the
objective of maintaining sufficient cash flows to fund operations, meet client
commitments, take advantage of market opportunities and provide a margin against
unforeseeable liquidity needs. Federal funds sold and investment securities
available for sale are readily marketable assets. Maturities of all investment
securities are managed to meet the Company's normal liquidity needs. Investment
securities available for sale may be sold prior to maturity to meet liquidity
needs, to respond to market changes or to adjust the Company's interest rate
risk position. Federal funds sold and investment securities available for sale
comprised 19.9% of the Company's total assets at September 30, 2002.
Net cash provided from operations is another primary source of liquidity. For
the nine months ended September 30, 2002 and 2001, net cash provided by
operating activities was $11,153,000 and $9,329,000, respectively.
The Company has historically maintained a stable deposit base and a relatively
low level of large deposits, which has mitigated the volatility in liquidity. As
of September 30, 2002, the Company had advances of $167,606,000 from the FHLB of
Des Moines. These advances were used as a means of providing both long and
short-term, fixed-rated funding for certain assets and managing interest rate
risk. The Company had additional borrowing capacity available from the FHLB of
approximately $83 million at September 30, 2002.
The combination of high levels of potentially liquid assets, low dependence on
volatile liabilities and additional borrowing capacity provided sufficient
liquidity for the Company through September 30, 2002.
Results of Operations
Net income for the quarter and nine months ended September 30, 2002 compared to
the same periods in 2001 had increases of $556,000 and $1,011,000, respectively.
For the three and nine month periods, the changes were the result of significant
increases in net interest income which was the result of increases in average
earning assets from the prior year. Average earning assets were approximately
$114 million higher for the nine months ended September 30, 2002 compared to the
same period in 2001. Loan origination fees increased over the prior year by
$188,000 for the three months ended September 30th but increased $324,000 for
the nine month period. Trust fees increased for the quarter ended September 30,
2002 by $38,000 but decreased for the nine months by $13,000 compared to the
same periods in the previous year. Even though trust accounts under management
have increased, the downturn in stock values that existed in 2001 and continued
in 2002 had the effect of reducing trust fees that are based on the asset values
of the accounts. Deposit account charges and fees were $2,366,000 and $2,295,000
for the nine months ended September 30, 2002 and 2001, respectively. Other fees
and charges as of September 30, 2002 increased $29,000 to $1,950,000. This
increase was due to volume changes in various accounts.
The Bank's primary trade territory is Johnson County, Iowa. Due to the large
employment in the county by the University of Iowa and the University of Iowa
Hospitals and Clinics and the dependency on funding by the State of Iowa, which
is experiencing decreasing tax revenue, the Bank continues to monitor loan
delinquencies and other indicators of loan problems. The quality of the Bank's
loans has continued to be high because the portfolio is concentrated in well
collateralized real estate loans.
Other expenses for the quarter ended September 30, 2002 were $6,079,000 compared
to $5,696,000 for the same time frame in 2001. For the nine months ended
September 30, 2002 other expenses were $18,139,000, an increase of $1,625,000
from the first nine months in 2001. The changes for the nine months included
salaries and benefits which accounted for $1,441,000 and were the direct result
of salary adjustments in 2002 and staff additions at various locations. The
occupancy and furniture and equipment expenses increased $168,000 and these
increases were the result of new locations that have been added and new
equipment purchases both in 2001 and 2002.
11
Earnings per share, both basic and diluted, increased for the quarter ended
September 30, 2002 compared to 2001. For the quarter ended September 30, 2002
basic and diluted earnings per share were $2.15 and $2.14 in comparison to $1.79
and $1.77 for the quarter ended September 30, 2001. The earnings per share for
the nine months ended September 30, 2002 and September 30, 2001 were $5.69 and
$5.02 for basic earnings per share and $5.64 and $4.98 for diluted earnings per
share.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is comprised
primarily of interest rate risk arising from its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that the Company's primary market risk exposures and
how those exposures have been managed to-date in 2002 changed significantly when
compared to 2001.
Asset/Liability Management
The Company has a fully integrated asset/liability management system to assist
in managing the balance sheet. The process, which is used to project the results
of alternative investment decisions, includes the development of simulations
that reflect the effects of various interest rate scenarios on net interest
income. Management analyzes the simulations to manage interest rate risk, the
net interest margin and levels of net interest income.
The goal is to structure the balance sheet so that net interest margin
fluctuates in a narrow range during periods of changing interest rates. The
Company currently believes that net interest income would fall by less than 5
percent if interest rates increased or decreased by 300 basis points over a
one-year time horizon. This is within the Company's policy limits.
To improve net interest income and lessen interest rate risk, management
continues its strategy of de-emphasizing fixed-rate portfolio residential real
estate loans with long repricing periods. The Company continues to focus on
reducing interest rate risk by emphasizing growth in variable-rate consumer and
commercial loans. Other actions include the use of fixed-rate Federal Home Loan
Bank (FHLB) advances as alternatives to certificates of deposit, and active
management of the available for sale investment securities portfolio to provide
for cash flows that will facilitate interest rate risk management.
The highly competitive banking environment in Iowa also greatly impacts the
Company's net interest margin. The effect of competition on net interest income
is difficult to predict.
12
HILLS BANCORPORATION
PART I, ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Company's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit
gathering. Interest rate risk measures the impact on earnings from changes in
interest rates and the effect on current fair market values of the Company's
assets, liabilities and off-balance sheet contracts. The objective is to measure
this risk and manage the balance sheet to avoid unacceptable potential for
economic loss. Management continually develops and applies strategies to
mitigate market risk. Exposure to market risk is reviewed on a regular basis by
the asset/liability committee at the bank. Management does not believe that the
Company's primary market risk exposures and how those exposures have been
managed to date in 2002 changed significantly when compared to 2001.
13
HILLS BANCORPORATION
PART I, ITEM 4
EVALUATION OF DISCLOSURE CONTROLS
Based on their evaluation of the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report, the undersigned officers of the registrant have concluded
that such disclosure controls and procedures are adequate. There were no
significant changes in internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, subsequent to the
date of the most recent evaluation by the undersigned officers of the registrant
of the design and operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial
data.
14
HILLS BANCORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings.
Item 2. Changes in Securities
There were no changes in securities.
Item 3. Defaults upon Senior Securities
Hills Bancorporation has no senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended September 30, 2002
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re Computation of Earnings Per
Common Share
Exhibit 99.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended September 30, 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLS BANCORPORATION
Date November 14, 2002 By /s/ Dwight O. Seegmiller
-------------------- -------------------------------
Dwight O. Seegmiller, President
Date November 14, 2002 By /s/ James G. Pratt
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James G. Pratt, Treasurer and
Chief Accounting Officer
16
CERTIFICATIONS
I, Dwight O. Seegmiller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By /s/ Dwight O. Seegmiller
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Dwight O. Seegmiller, President
17
CERTIFICATIONS
I, James G. Pratt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hills Bancorporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By /s/ James G. Pratt
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James G. Pratt, Treasurer and Chief
Accounting Officer
18