Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1995. Commission File Number 0-12668.
HILLS BANCORPORATION
(Exact name of Registrant as specified in its charter)
IOWA 42-1208067
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
131 Main Street, Hills, Iowa 52235
- ----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 679-2291
Securities Registered pursuant to Section 12 (b) of the Act: None
Securities Registered pursuant to Section 12 (g) of the Act:
No par value common stock
-------------------------
Title of Class
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registrant S-K (229.405 of this chapter) is not contained herein, and will
not be contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
While it is difficult to determine the market value of shares owned by
nonaffiliates (within the meaning of such term under the applicable regulations
of the Securities and Exchange Commission), the Registrant estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 15, 1996 (based upon reports of beneficial ownership that approximately
80% of the shares are so owned by nonaffiliates and upon information
communicated informally to the Registrant by various purchasers and sellers that
the sale price for the common stock is generally $100 per share) was
$39,029,000.
The number of shares outstanding of the Registrant's common stock as of March
15, 1996 is 487,868 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 29, 1996, for the Annual Meeting of
the Shareholders of the Registrant to be held April 15, 1996 (the Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.
EXHIBIT INDEX
The exhibits index is on page 51.
PART I
Item 1. Business
Hills Bancorporation (the "Registrant") is a one-bank holding company
principally engaged in the business of banking through its only wholly-owned
subsidiary, Hills Bank and Trust Company, Hills, Iowa (the "Bank"). The
Registrant was incorporated December 12, 1982 and all operations are conducted
within the state of Iowa. The Registrant became owner of 100% of the outstanding
stock of the Bank as of January 23, 1984 when stockholders of the Bank exchanged
their shares for shares of the Registrant.
The Bank is a full-service commercial bank extending its services to
individuals, businesses, governmental units and institutional customers in the
State of Iowa, the communities of Hills, Iowa City, Coralville and North
Liberty, Iowa, and the surrounding area. It currently operates the main bank in
Hills and has office locations in Iowa City on South Gilbert Street and East
Washington Street, and additional offices in Coralville and North Liberty. The
Bank is 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. The trust department administers estates, personal trusts
and pension and profit-sharing funds and, in connection therewith, provides farm
management and investment advisory and custodial services for individuals,
corporations and nonprofit organizations. The loan activity of the Bank 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 Bank earns substantial fees from originating
mortgages which are sold in the secondary residential real estate market.
The Bank's Board of Directors has established a formal loan origination policy.
In general, the loan origination policy requires 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 repayment.
The Bank's business is not seasonal, except that loan origination fees are
higher during the spring and summer months. The Bank has not undertaken
significant new services during the current year or services which might exceed
the limits of its human and data processing capabilities.
Iowa City and Coralville are located on Interstate 80 in Eastern Iowa. The
communities have a population of approximately 80,000. The University of Iowa in
Iowa City has over 27,000 students and 15,000 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 growth in the past ten
years. The area is known for its educational institutions, health care
facilities, cultural and sports events and retail centers.
The commercial banking business in Iowa is highly competitive and the Company's
bank competes with other commercial banks, credit unions, brokerage firms,
finance companies, insurance companies, and other financial institutions.
Part 1.
Item 1. Business (continued)
Iowa's banking laws regarding interstate banking and interstate branching are
currently more restrictive than many other states. Prior to 1991, Iowa banking
law prohibited interstate banking altogether, except for certain grandfathered
rights extended to the largest bank holding company conducting business in Iowa,
Norwest Corporation, which is headquartered in Minnesota. Since January 1, 1991,
Iowa banking law has been less restrictive by allowing limited interstate
banking by permitting financial institutions whose operations are principally
conducted in Illinois, Missouri, Nebraska, South Dakota, Minnesota, or Wisconsin
to conduct business in Iowa by acquiring an existing Iowa banking organization.
Conversely, Iowa financial institutions may expand operations into Iowa's six
neighboring states, provided such expansion is accomplished by acquisition
rather than by branching. Interstate branching by out-of-state banks into Iowa
is still expressly prohibited by Iowa statutes. Iowa also currently has a
deposit concentration limit of 10% on the amount of deposits that any one
banking organization can control and continue to acquire banks, which applies to
both in-state and out-of-state banks. Iowa also has a 35% limit on the aggregate
amount of deposits all out-of-state banking organizations can control within
Iowa.
In recent years, Norwest Corporation, Firstar Corporation and Boatmen's
Bancshares, Inc. have acquired a number of independent banks and smaller
multi-bank holding companies in various metropolitan areas of Iowa. Each
operates under a single charter in Iowa. To date none of the Bank's local
competitors have been purchased by the larger regional or national bank holding
companies.
As with its law regarding interstate banking and branching, Iowa's intrastate
branching statutes are also rather restrictive when compared with those of other
states. Generally, bank branch offices may only be operated or acquired in
counties contiguous to or cornering upon the county in which the bank has its
principal place of business. Also, a bank in Iowa may not establish a new branch
office in a city in which there exists an office of another bank, other than by
acquisition of an existing office or bank. Furthermore, the number of bank
branch offices allowed within a municipal corporation or an urban complex is
limited to four offices in populations of 100,000 or less, five offices in
populations of over 100,000 to 200,000, and six offices in areas with
populations over 200,000. However, some of Iowa's intrastate branching
limitations regarding geographic location of branch offices and the number of
branch offices which may be established in an urban complex may be overcome by
merging two or more affiliated banking organizations that have been in
continuous operation in Iowa for at least five years into a "united community
bank."
In September 1994, Congress passed interstate banking and branching legislation,
which would (1) permitted nationwide interstate banking effective September 29,
1995, (2) would permit interstate bank branching effective June 1, 1997, and (3)
increased each state's deposit concentration limit to 30%, subject to
ratification by each particular state. If Iowa elects to do so, it can continue
to (1) limit the means by which an out-of-state bank may acquire a bank within
the state, (2) prohibit out-of-state banks from branching into the state, and
(3) set its own deposit concentration limit.
At this time it is uncertain what competitive impact any future interstate
banking developments or Iowa banking legislation might have upon the Company and
the Bank.
The Bank is in direct competition for deposits, loans and other financial
related business with other financial institutions in Johnson County, Iowa as
follows:
Approximate
Assets As Of
December 31,
1995
-------------
(In Millions)
Largest competing bank $ 391
Next largest competing bank 305
Next largest competing bank 70
Largest competing credit union 117
Part I
Item 1. Business (continued)
No material portion of the Bank's deposits has been obtained from a single
person or a few persons. Accordingly, management of the Bank has no reason to
believe that the loss of the deposits of any person or few persons would have a
materially adverse effect on the Bank's operations or erode its deposit base.
Approximately 5.8% of the Bank's loans have been made to farmers for
agricultural purposes. The agricultural sector of the economy has been cyclical
with a general trend toward fewer and larger farms. The Bank has not experienced
a material adverse effect on its business as a result of defaults on
agricultural loans and expects none in the future.
The Registrant does not engage in any business activities apart from its
ownership of the Bank and therefore does not encounter any competition for its
services other than as described above for the Bank.
The Registrant and the Bank have undertaken no material research activities
during the last three years relating to research and development activities.
The Registrant is regulated by the Federal Reserve Bank.
The Bank is regulated by the Federal Deposit Insurance Corporation and the State
of Iowa Division of Banking.
The Registrant had no full-time employees as of December 31, 1995, while the
Bank had 147 regular and 53 part-time employees.
The following consolidated statistical information reflects selected balances
and operations of the Registrant and the Bank for the periods indicated. Average
refers to an average monthly basis for the periods stated.
The following tables shown (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
(Daily Average Basis)
Year Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
ASSETS
Cash and due from banks ...................... $ 9,795 $ 9,951 $ 8,608
Taxable securities ........................... 95,747 102,608 91,253
Nontaxable securities ........................ 19,528 18,775 17,772
Federal funds sold ........................... 8,980 5,181 17,650
Loans, net ................................... 311,592 277,774 256,840
Property and equipment, net .................. 6,685 5,861 5,581
Other assets ................................. 7,484 7,560 6,183
-------- -------- --------
$459,811 $427,710 $403,887
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits .......... $ 36,085 $ 34,409 $ 29,496
Interest-bearing demand deposits ............. 37,249 45,220 40,337
Savings deposits ............................. 74,146 71,291 71,301
Time deposits ................................ 226,251 209,602 201,325
Securities sold under agreements to repurchase 9,424 5,832 5,150
FHLB borrowings .............................. 28,965 17,473 15,308
Debt of ESOP plan ............................ -- 73 271
Other liabilities ............................ 2,978 2,680 2,688
Redeemable common stock held by
Employee Stock Ownership Plan ................ 5,241 4,913 4,425
Stockholders' equity ......................... 39,472 36,217 33,586
-------- -------- --------
$459,811 $427,710 $403,887
======== ======== ========
Part I
Item 1. Business (continued)
INTEREST INCOME AND EXPENSE
Year Ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
(In Thousands)
INCOME
Loans (1) ...................................... $27,506 $23,473 $22,864
Taxable securities ............................. 5,189 5,158 4,876
Nontaxable securities (1) ...................... 1,567 1,575 1,589
Federal funds sold ............................. 519 212 524
------- ------- -------
Total interest income ...................... $34,781 $30,418 $29,853
------- ------- -------
EXPENSE
Interest-bearing demand deposits ............... $ 894 $ 1,039 $ 1,093
Savings deposits ............................... 2,618 1,625 1,926
Time deposits .................................. 12,673 10,857 11,342
Securities sold under agreements to repurchase . 409 204 184
FHLB borrowings ................................ 1,874 1,105 963
Interest portion of Employee Stock
Ownership Plan contribution .................. -- 4 12
------- ------- -------
Total interest expense ..................... $18,468 $14,834 $15,520
------- ------- -------
Net interest income ........................ $16,313 $15,584 $14,333
======= ======= =======
(1) Presented on a tax equivalent basis using a federal tax rate of 34%.
INTEREST RATES AND INTEREST DIFFERENTIAL
Year Ended December 31,
-----------------------
1995 1994 1993
----- ----- ------
Average yields:
Taxable securities ................................ 5.42% 5.03% 5.34%
Nontaxable securities ............................. 5.29 5.54 5.92
Nontaxable securities (tax equivalent basis) ...... 8.02 8.39 8.94
Loans (1) ......................................... 8.74 8.34 8.79
Loans (tax equivalent basis) ...................... 8.83 8.45 8.90
Federal funds sold ................................ 5.78 4.09 2.97
Interest-bearing demand deposits .................. 2.40 2.30 2.71
Savings deposits .................................. 3.53 2.28 2.70
Time deposits ..................................... 5.60 5.18 5.63
Securities sold under agreements to repurchase .... 4.34 3.50 3.57
Interest on FHLB borrowings ....................... 6.47 6.32 6.29
Debt of Employee Stock Ownership Plan ............. 0.00 5.48 4.43
Yield on average interest earning assets .......... 7.98 7.52 7.78
Rate on average interest-bearing liabilities ...... 4.91 4.24 4.65
Net interest spread (2) ........................... 3.07 3.28 3.13
Net interest margin (3) ........................... 3.74 3.85 3.73
(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 tax rate of 34% for the
three years presented and a state tax rate of 5% for 1993, 1994 and 1995.
(3) Net interest margin is net interest income, on a tax equivalent basis,
divided by average interest-earning assets.
PART I
Item 1. Business (continued)
CHANGE IN INTEREST INCOME AND EXPENSE
Change Due Change Due Total
To Volume To Rates Change
---------- ---------- --------
(In Thousands)
Year ended December 31, 1995:
Change in interest income:
Loans .............................. $ 2,945 $ 1,088 $ 4,033
Taxable securities ................. (356) 387 31
Nontaxable securities .............. 62 (70) (8)
Federal funds sold ................. 196 111 307
------- ------- -------
$ 2,847 $ 1,516 $ 4,363
------- ------- -------
Change in interest expense:
Interest-bearing demand deposits ....... $ (189) $ 44 $ (145)
Savings deposits ....................... 68 925 993
Time deposits .......................... 899 917 1,816
Securities sold under agreements to
repurchase ........................... 148 57 205
Interest on FHLB borrowings ............ 742 27 769
Other .................................. (2) (2) (4)
------- ------- -------
$ 1,666 $ 1,968 $ 3,634
------- ------- -------
Change in net interest income ............ $ 1,181 $ (452) $ 729
======= ======= =======
Year ended December 31, 1994:
Change in interest income:
Loans ............................. $ 1,802 $(1,193) $ 609
Taxable securities ................ 578 (296) 282
Nontaxable securities ............. 87 (101) (14)
Federal funds sold ................ (461) 149 (312)
------- ------- -------
$ 2,006 $(1,441) $ 565
------- ------- -------
Change in interest expense:
Interest-bearing demand deposits ....... $ 123 $ (177) $ (54)
Savings deposits ....................... -- (301) (301)
Time deposits .......................... 451 (936) (485)
Securities sold under agreements to
repurchase ........................... 24 (4) 20
Interest on FHLB borrowings ............ 137 5 142
Other .................................. (10) 2 (8)
------- ------- -------
$ 725 $(1,411) $ (686)
------- ------- -------
Change in net interest income ............ $ 1,281 $ (30) $ 1,251
======= ======= =======
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.
PART I
Item 1. Business (continued)
LOANS
The following table shows the composition of loans (before deducting the reserve
for loan losses) as of December 31, 1995, 1994, 1993, 1992 and 1991:
December 31,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In Thousands)
Agricultural .................................. $ 19,000 $ 17,826 $ 17,117 $ 16,430 $ 15,372
Commercial and financial ...................... 26,810 26,024 24,721 24,121 28,517
Real estate, construction ..................... 7,937 6,933 7,006 4,759 3,930
Real estate, mortgage ......................... 239,899 225,342 195,527 185,869 148,787
Loans to individuals .......................... 31,640 30,906 24,380 22,787 21,485
-------- -------- -------- -------- --------
Total ............................... $325,286 $307,031 $268,751 $253,966 $218,091
======== ======== ======== ======== ========
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,
1995:
Amount One Year One To Over Five
Of Loans Or Less (1) Five Years Years
-------- ----------- ---------- ---------
(In Thousands)
Commercial, financial and agricultural .................. $ 45,810 $ 21,150 $ 16,992 $ 7,668
Real estate, construction and mortgage .................. 247,836 44,445 140,446 62,945
Other ................................................... 31,640 7,702 17,738 6,200
-------- -------- -------- --------
$325,286 $ 73,297 $175,176 $ 76,813
======== ======== ======== ========
Interest rates on loans are as follows:
Fixed rate .............................................. $237,484 $ 57,710 $154,307 $ 25,467
Variable rate ........................................... 87,802 15,587 20,869 51,346
-------- -------- -------- --------
$325,286 $ 73,297 $175,176 $ 76,813
======== ======== ======== ========
(1) The Bank writes a significant portion of the commercial loans as six-month
notes. However, a significant amount of these notes are renewed when due.
PART I
Item 1. Business (continued)
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Registrant's nonaccrual, past due,
restructured and impaired loans as to interest or principal payment as of
December 31 for each of the years presented:
1995 1994 1993 1992 1991
------ ------ -------- ------ ------
(In Thousands)
Nonaccrual loans ...................... $ 489 $ -- $ -- $ 47 $ 54
Accruing loans past
due 90 days or more ................. 417 822 1,064 463 567
Restructured loans .................... -- -- -- -- --
Impaired loans ........................ 5,465 N/A N/A N/A N/A
The Registrant does not have a significant amount of loans which 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 Registrant has no individual borrower or borrowers engaged in the same or
similar industry exceeding 10% of total loans. The Registrant 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 the loans
have been charged off to the net present value of the future cash flows or the
fair value of the collateral if the loan is collateral dependent.
PART I
Item 1. Business (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Registrant's loan loss experience for each of
the last five years:
Year Ended December 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------- -------
(In Thousands)
Amount of loan loss allowance
at beginning of year ....................................... $6,210 $5,775 $5,190 $4,650 $4,100
------ ------ ------ ------ ------
Charge-offs:
Agriculture ................................................ $ 101 $ 423 $ 270 $ 444 $ 75
Commercial and financial ................................... 387 334 326 418 425
Real estate, mortgage ...................................... 180 172 165 97 258
Loans to individuals ....................................... 254 131 300 441 193
------ ------ ------ ------ ------
$ 922 $1,060 $1,061 $1,400 $ 951
------ ------ ------ ------ ------
Recoveries:
Agriculture ................................................ $ 218 $ 368 $ 247 $ 131 $ 72
Commercial and financial ................................... 226 206 213 93 45
Real estate, mortgage ...................................... 149 154 87 522 640
Loans to individuals ....................................... 137 126 178 135 95
------ ------ ------ ------ ------
$ 730 $ 854 $ 725 $ 881 $ 852
------ ------ ------ ------ ------
Net charge-offs .............................................. $ 192 $ 206 $ 336 $ 519 $ 99
------ ------ ------ ------ ------
Provision for loan losses (1) ................................ $ 722 $ 641 $ 921 $1,059 $ 649
------ ------ ------ ------ ------
Balance of loan loss allowance at end of year ................ $6,740 $6,210 $5,775 $5,190 $4,650
====== ====== ====== ====== ======
Ratio of net charge-offs during year to average
loans outstanding ........................................ .06% .07% .13% .22% .05%
====== ====== ====== ====== ======
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 1996 that would be significantly
different than the years ended December 31, 1995, 1994, 1993, 1992 and 1991.
(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 the loan portfolio and such other
factors which deserve current recognition. For income tax purposes, the
allowance is maintained at the maximum allowable amount.
PART I
Item 1. Business (continued)
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Bank reviews and places in risk categories specific borrowings. Based upon
the risk category assigned, the Bank allocates a percentage, as determined by
management, for a required allowance needed. The Bank's risk categories are
similar to those used by federal and state regulatory agencies and consist of
the following:
(1) Potential Watch and Watch
(2) Problem
(3) Substandard
(4) Doubtful
In addition, bank management also reviews and where determined necessary allows
for specific 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,
1995).
A summary of the components of the allowance for loan loss, by risk element, as
of December 31, 1995 is as follows:
(In Thousands)
Potential Watch and Watch Loans .............................. $1,460
Substandard .................................................. 900
Specific borrowers ........................................... 1,875
Constructed model real estate homes .......................... 729
Agricultural loans ........................................... 250
Anticipated charge-offs of the above categories are not determinable at December
31, 1995; however, the Bank has no reason to expect actual charge-offs to be
significantly different from historical charge-offs.
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of
December 31, 1995, 1994 and 1993 and the maturities and yield of the investment
securities as of December 31, 1995:
December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(In Thousands)
Carrying value:
U. S. Treasury securities ................ $ 41,275 $ 52,475 $ 74,160
Obligations of other U. S. Government
agencies and corporations ............ 55,537 36,458 32,373
Obligations of states and political
subdivisions ......................... 21,443 19,255 18,797
Federal Home Loan Bank stock ............. 3,281 1,862 1,564
-------- -------- --------
$121,536 $110,050 $126,894
======== ======== ========
PART 1
Item 1. Business (Continued)
December 31, 1995
-----------------------
Weighted
Carrying Average
Value Yield
-------- --------
(In Thousands)
Type and maturity grouping:
U. S. Treasury maturities:
Within 1 year ..................................... $ 13,000 4.67%
From 1 to 5 years ................................. 28,275 5.82
--------
Total .................................... $ 41,275
--------
Obligations to other U. S. Government agencies
and corporations, maturities:
Within l year ..................................... $ 7,393 4.43%
From 1 to 5 years ................................. 48,144 5.98
--------
Total .................................... $ 55,537
--------
Obligations of states and political subdivisions,
maturities:
Within 1 years .................................... $ 2,686 8.62%
From 1 to 5 years ................................. 10,753 7.83
From 5 to 10 years ................................ 7,939 7.37
Over 10 years ..................................... 65 10.25
--------
$ 21,443
--------
Federal Home Loan Bank stock ........................ $ 3,281 7.30
--------
$121,536
========
The yields are computed on a tax-equivalent basis using a federal tax rate of
34% and a state tax rate of 5%.
As of December 31, 1995, 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.
PART I
Item 1. Business (continued)
DEPOSITS
The following tables show the average deposits and rates paid on such deposits
for the years ended December 31, 1995, 1994 and 1993 and the composition of the
certificates issued in excess of $100,000 as of December 31, 1995:
December 31,
----------------------------------------------------------------------
1995 Rate 1994 Rate 1993 Rate
-------- ------ -------- ------ -------- ------
Average noninterest-bearing deposits .............. $ 36,085 - -% $ 34,409 - -% $ 29,496 - -%
Average interest-bearing demand deposits .......... 37,249 2.40 45,220 2.30 40,337 2.71
Average savings deposits .......................... 74,146 3.53 71,291 2.28 71,301 2.70
Average time deposits ............................. 226,251 5.60 209,602 5.18 201,325 5.63
-------- -------- --------
$373,731 $360,522 $342,459
======== ======== ========
Amount Rate
------ -----
Time certificates issued in amounts of $100,000
or more as of December 31, 1995 with maturity in:
3 months or less .................................... $ 5,195 6.06%
3 through 6 months .................................. 8,956 5.59
6 through 12 months ................................. 6,572 5.61
Over 12 months ...................................... 8,728 6.23
-------
$29,451
=======
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, 1995, 1994 and 1993:
December 31,
------------------------------
1995 1994 1993
------ ------ ------
Return on assets ........................... 1.14% 1.15% 1.16%
Return on stockholders' equity ............. 13.32 13.62 13.91
Dividend payout ratio ...................... 24.12 23.83 22.92
Stockholders' equity to assets ratio ....... 8.58 8.47 8.32
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 1995, 1994 and 1993:
1995 1994 1993
-------- -------- --------
(Amounts In Thousands)
Outstanding as of December 31 ................. $10,019 $ 7,043 $ 4,489
Weighted average interest rate at year end .... 4.25% 3.85% 2.80%
Maximum month-end balance ..................... $12,028 $10,652 $ 6,361
Average month-end balance ..................... 9,424 5,832 5,150
Weighted average interest rate for the year ... 4.34% 3.50% 3.57%
PART I
Item 1. Business (continued)
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding month-end balances, weighted average
interest rates at year end, maximum month-end balances, average balances and
weighted average interest rates during 1995, 1994 and 1993:
1995 1994 1993
-------- -------- --------
Outstanding as of December 31 ................. $30,727 $20,758 $15,790
Weighted average interest rate at year end .... 6.29% 6.30% 6.20%
Maximum month-end balance ..................... $35,758 $20,758 $15,790
Average month-end balance ..................... 28,965 17,473 15,308
Weighted average interest rate for the year ... 6.47% 6.32% 6.29%
Item 2. Properties
The Registrant's office and the office of the Bank is located at 131 Main
Street, Hills, Iowa. The main office is a one-story brick building containing
approximately 8,600 square feet, the major portion of which was built in 1977
and remodeled in 1986. A two-story addition to the main office was completed in
1984, which increased the facilities of the main office by approximately 5,600
square feet.
The Iowa City office of the Bank at 1401 South Gilbert Street is a one-story
brick building containing approximately 7,200 square feet which includes five
drive-up teller lanes and two 24-hour automatic teller machines. In the Spring
of 1995, a 4,200 square foot addition at an approximate cost of $600,000 was
completed, adding additional retail banking space. The Coralville office is a
two-story building built in 1972 that contains approximately 16,700 square feet
of space. That office is equipped with four drive-up teller lanes and one
24-hour automatic teller machine. A 2,800 square foot renovated and expanded
building in North Liberty, Iowa was opened for business in 1986. That office is
a full-service location including three drive-up teller lanes and a drive-up
automatic teller machine.
All of the above properties are owned by the Bank, free and clear of any
mortgages or other encumbrances of any type.
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 Bank has options to renew the lease to 2001.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
The Bank holds no properties which are the subject of hazardous waste clean-up
investigations.
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, 1995.
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters
The Registrant does not believe that an established trading market exists with
respect to its 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 Registrant's stock is not actively traded.
During 1995, the Registrant's stock transfer records reflect that 1,774 shares
were traded in a total of fifteen transactions. While the Registrant has no
direct knowledge of the selling price for these shares, based upon information
informally related by shareholders, it believes that in 1995 the range of
selling price of shares was $94 to $100 per share. During 1994, 7,586 shares
were traded in a total of 13 transactions. The selling price of these shares was
believed to be in the $83 to $94 range. As of December 31, 1995, the Registrant
has 934 shareholders.
The Registrant paid aggregate annual cash dividends in 1995 and 1994 of
$1,268,000 and $1,171,000, respectively, or $2.60 per share in 1995 and $2.40
per share in 1994. In January 1996, the Registrant declared and paid a dividend
of $2.85 per share totaling $1,390,000. 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 Bank, and the
future earnings, capital requirements and financial condition of the Registrant.
The Iowa Banking Act was amended effective January 1, 1991 to permit the
acquisition of assets of certain Iowa banks and Iowa-based bank holding
companies by regional bank holding companies subject to newly enacted statutory
criteria and the prior approval of the Iowa Superintendent of Banking
(Superintendent). The 1991 legislation changed but did not repeal the
pre-existing Iowa law which permits the acquisition of Iowa banks by bank
holding companies within limitations based upon the ratio of the aggregate
amount of Iowa-based time and demand deposits of the controlled banks to the
total of the time and demand deposits of all Iowa banks.
The new law permitted an Iowa-based bank holding company to exempt itself for a
specific period of time from acquisition under the new law by a regional bank
holding company if a resolution was passed by its Board of Directors and filed
with the Superintendent before January 1, 1991. On December 21, 1990, the Board
of Directors adopted a resolution exempting the Company under the new law for a
period ending June 30, 1990, unless renewed as provided under the Iowa law. A
certified copy of the resolution is filed annually with the Superintendent, the
latest extending the exemption from December 31, 1995 to December 31, 1996. The
new law also prohibits a regional bank holding company from acquiring an
Iowa-based bank holding company unless each of its subsidiary banks has been in
existence and continuously operated as a bank for five or more years. It is
unclear what, if any impact, this provision will have on the market for the
Company's stock.
PART II
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
1995 1994 1993 1992 1991
--------- --------- --------- --------- ----------
YEAR-END TOTALS
Total assets .......................................... $ 484,607 $ 444,912 $ 417,043 $ 393,581 $ 354,023
Investment securities:
Available for sale .................................. 100,093 90,795 108,097 -- --
Held to maturity .................................... 21,443 19,255 18,797 106,073 102,857
Federal funds sold .................................... 16,080 7,500 3,768 19,893 20,150
Loans, net ............................................ 318,546 300,821 262,976 248,776 213,441
Deposits .............................................. 392,257 372,838 353,486 334,052 312,579
Federal Home Loan Bank notes .......................... 30,727 20,758 15,790 15,000 --
Redeemable common stock ............................... 5,271 5,210 4,616 4,234 3,855
Stockholders' equity .................................. 43,277 36,447 35,943 32,009 28,717
EARNINGS
Interest income ....................................... $ 33,978 $ 29,583 $ 29,031 $ 30,593 $ 31,341
Interest expense ...................................... 18,468 14,834 15,520 17,546 19,325
Provision for loan losses ............................. 722 641 921 1,059 649
Other income .......................................... 3,438 3,311 4,181 3,433 2,700
Other expenses ........................................ 10,975 10,640 10,299 9,163 8,375
Applicable income taxes ............................... 1,994 1,845 1,799 1,837 1,603
Net income ............................................ 5,257 4,934 4,673 4,421 4,089
PER SHARE
Net income ............................................ $ 10.71 $ 10.07 $ 9.60 $ 9.12 $ 8.44
Cash dividends ........................................ 2.60 2.40 2.20 1.95 1.65
Book value as of December 31 .......................... 88.71 74.72 73.71 66.04 59.25
Increase (decrease) in book value due to:
ESOP obligation and debt ............................ (10.80) (10.68) (9.87) (9.54) (9.16)
Unrealized gains (losses) on debt securities ........ .61 (5.32) .58 -- --
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Position
The consolidated balance sheet of the Registrant (hereafter referred to as the
"Company") as of December 31, 1995 reflects total assets of $484,607,000, total
liabilities of $441,330,000, and stockholders' equity of $43,277,000. During
1995, total assets increased $39,695,000 or 8.92% from December 31, 1994 while
deposits and repurchase agreements increased 5.90% or $22,395,000. Investment
securities, which are primarily classified as available for sale, increased
$9,298,000 in 1995. Due to lower interest rates, the unrealized losses on
investment securities as of December 31, 1994 of $4,119,000 had changed to
unrealized gains of $472,000 as of December 31, 1995. Federal funds sold
increased $8,580,000 in 1995 and net loans increased $17,725,000 to
$318,546,000, reflecting another year of loan growth driven primarily by the
demand for single family residential mortgages. During 1995, the deposits of the
Bank grew 5.21%, a lower rate of growth than in recent years. Savings accounts
increased from $66,521,000 at the end of 1994 to $85,502,000 as of December 31,
1995 while the amount of time certificates remained nearly unchanged since 1994.
During 1995, the Bank increased its borrowings from the Federal Home Loan Bank
by a net of $10,000,000 to provide some of the funding for loan growth.
Net Income
Net income for the year ended December 31, 1995 totaled $5,257,000, an increase
of 6.55% from the $4,934,000 reported in 1994. Net income for 1994 was $261,000
or 5.59% greater than 1993 net income of $4,673,000. The increase in net income
for 1995 was primarily attributable to an increase in the average balances of
earning assets plus increased fee income for trust and deposit account charges.
In addition, the reduction of F.D.I.C. insurance premiums in 1995 was a
significant factor. Earnings per common share totaled $10.71, $10.07 and $9.60
for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company's return on average assets was 1.14% in 1995, slightly less than the
1.15% and 1.16% for 1994 and 1993. The return on average stockholders' equity is
a measure of how effectively the Company has generated income on available
capital. Return on average stockholders' equity totaled 13.32%, 13.62% and
13.91% in 1995, 1994 and 1993, respectively.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 1995 as follows:
INTEREST INCOME
----------------------------------------------
Increase (Decrease)
Change In Change In ----------------------------------------------
Average Average Volume Rate Net
Balance Rate Changes Changes Change
-------------- --------- ------------ -------------- --------------
(Amounts In Thousands)
Loans, net $ 33,818 .38% $ 2,945 $ 1,088 $ 4,033
Taxable securities (6,861) .39 (356) 387 31
Nontaxable securities 753 (.37) 62 (70) (8)
Federal funds sold 3,799 1.69 196 111 307
-------------- ------------ -------------- --------------
$ 31,509 $ 2,847 $ 1,516 $ 4,363
============== ============ ============== ==============
INTEREST EXPENSE
----------------------------------------------
Interest-bearing demand
deposits $ (7,971) .10% $ (189) $ 44 $ (145)
Savings deposits 2,855 1.25 68 925 993
Time deposits 16,649 .42 899 917 1,816
Securities sold under agreements
to repurchase 3,592 .84 148 57 205
Other debt (73) .15 (2) (2) (4)
FHLB borrowings 11,492 742 27 769
-------------- ------------ -------------- --------------
$ 26,544 $ 1,666 $ 1,968 $ 3,634
============== ============ ============== ==============
Change in net interest income $ 1,181 $ (452) $ 729
============ ============== ==============
A summary of the net interest spread and margin is as follows:
(Tax Equivalent Basis) 1995 1994 1993
---------------------- ------ ------ ------
Yield on average interest-earning assets ............... 7.98% 7.52% 7.78%
Rate on average interest-bearing liabilities ........... 4.91 4.24 4.65
Net interest spread .................................... 3.07 3.28 3.13
Effect of noninterest bearing funds .................... .67 .57 .60
Net interest margin (tax equivalent interest income
divided by average interest earning assets) ......... 3.74% 3.85% 3.73%
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Loan Losses
The provision for loan losses was $722,000, $641,000 and $921,000 for 1995, 1994
and 1993. Charge-offs, net of recoveries were $192,000 for 1995, $206,000 for
1994 and $336,000 for 1993.
The allowance for loan losses totaled $6,740,000 at December 31, 1995 compared
to $6,210,000 at December 31, 1994. The percentage of the allowance to
outstanding loans was 2.07% and 2.02% at December 31, 1995 and 1994,
respectively. Agricultural loans totaled $19,000,000 at December 31, 1995.
Management has an ongoing concern about agricultural loans due to unpredictable
commodity prices, the effects of weather on crop production, and continued
uncertainties regarding government programs. Therefore, the allowance for loan
losses has been established to reflect this concern.
The economy remains strong in the Bank's trade area of Johnson County, Iowa.
Unemployment remains low, the University of Iowa enrollment is stable, the
University of Iowa Hospitals and Clinics continue to grow and, for the most
part, area businesses have maintained stable employment levels. The allowance
for loan losses is an estimate by the Bank to reserve for loan losses based upon
management's evaluation of the total loan portfolio and current economic
conditions. There are no trends or uncertainties that are reasonably likely to
have a material effect on the allowance for loan losses in the near-term.
Other Income
Noninterest income continues to be very important. Fees and other income
increased from $3,311,000 in 1994 to $3,438,000 in 1995. Total other income in
1993 was $4,181,000. Fees received from loans originated and sold in the
secondary market totaled $294,000, $402,000 and $1,337,000 for 1995, 1994 and
1993, respectively. Trust fees increased $74,000 in 1995 to $755,000 and grew
$114,000 in 1994. These increases are due largely to additional assets under
management and not due to fee increases. Increases in deposit account charges
and other fees in 1995 of $57,000 to $2,500,000 compared to the $166,000
increase between 1994 and 1993 and were due to the volume of new accounts and
selected increases in deposit account fees. Other income for 1995 includes
investment securities losses of $111,000 compared to $215,000 in 1994 and none
in 1993. The securities losses were taken primarily in the last quarter of 1995
and 1994 to remove low yielding investment securities and to take advantage of
higher return yields available upon reinvestment of the proceeds.
Other Expenses
Other expenses for the years ended December 31, 1995, 1994 and 1993 totaled
$10,975,000, $10,640,000 and $10,299,000, respectively. The increases in these
expenses totaled $335,000 and $341,000 in 1995 and 1994, respectively. The total
of other expenses increased 3.15% and 3.31% for the years ended December 31,
1995 and 1994. Of these increases, $365,000 in 1995 and $360,000 in 1994 related
to salaries and employee benefits. The number of full-time equivalent employees
at December 31, 1995 was 173, compared to 162 at December 31, 1994 and 158 at
December 31, 1993. For 1995, the increase in salaries is a result of eleven more
full-time equivalent employees and normal salary increases. Increases in
salaries affect other payroll related expenses such as payroll taxes, medical
and health benefits and the ESOP and profit-sharing contributions. Medical
insurance costs were contained in 1995 and 1994 as a result of the Bank's
partial self-insurance plan which has had favorable experience. The Bank is
responsible for all claims up to a ceiling amount per employee with the Bank
being insured for excess claims per employee and toal claims for all bank
employees.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Occupancy and furniture and equipment expenses totaled $1,891,000, $1,701,000
and $1,609,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. An increase of $190,000 in 1995 resulted from increases in
property taxes, repairs and maintenance, depreciation on new computer equipment
and depreciation on the new equipment and building in Iowa City. The increase of
$92,000 from 1993 to 1994 is the result of increases in property taxes, and
overall increases in repairs, maintenance, and depreciation on new computer
equipment.
F.D.I.C. insurance expense has decreased from $793,000 in 1994 to $424,000 in
1995. This decrease of $369,000 resulted from a premium retroactively adjusted
back to June 1, 1995 from $.23 per $100 in deposits to $.04. The Bank's premium
for 1996 will be $200,000, to change depending on the total insurance fund that
is accumulated for all banks.
Other operating expenses totaled $2,443,000, $2,378,000 and $2,562,000 for the
years ended December 31, 1995, 1994 and 1993. Other expenses include
professional fees, outside services, marketing and business promotions,
insurance, and other expenses. For 1994, other operating expenses decreased
$184,000 which included decreases in professional fees of $56,000 and marketing
of $94,000.
Income Taxes
Income tax expense was $1,994,000, $1,845,000 and $1,799,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The corresponding percentage of
tax expense compared to income before income taxes is 27.5% in 1995, 27.2% in
1994 and 27.8% in 1993.
Impact of Recently Issued Accounting Standards
The adoption of new accounting standards had no effect on financial position or
results of operations in 1995, and the adoption of several recently issued
standards is not expected to have a significant effect.
Liquidity and Capital Resources
An important factor in the earnings performance of the Bank is the ability to
maintain a proper balance between rate sensitive assets and rate sensitive
liabilities. Liquidity management involves the ability to meet the cash flow
requirements of depositors desiring to withdraw funds or borrowers needing
funds. The Bank maintains an asset/liability committee which meets at least once
a month to review the interest rate sensitivity position and to review various
strategies as to interest rate risk management. In addition, the Bank uses a
simulation model to review various assumptions relating to interest rate
movement. The model attempts to limit rate risk even if it appears the Bank's
asset and liability maturities are perfectly matched and a favorable interest
margin is present.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest Rate Sensitivity
At December 31, 1995, the Company's interest rate sensitivity report is as
follows (in thousands):
Repricing
Maturities More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
----------- -------- -------- -------- -------- --------- --------
Earning assets:
Federal funds sold ............. $ 16,080 $ -- $ -- $ -- $ -- $ -- $ 16,080
Investment securities .......... -- 300 2,300 5,302 15,081 98,553 121,536
Loans .......................... -- 30,545 15,421 28,155 51,589 199,576 325,286
-------- -------- -------- -------- -------- -------- --------
Total earning assets $ 16,080 $ 30,845 $ 17,721 $ 33,457 $ 66,670 $298,129 $462,902
-------- -------- -------- -------- -------- -------- --------
Sources of funds:
Interest-bearing checking and
savings accounts ............. $ 45,266 $ -- $ -- $ -- $ -- $ 75,699 $120,965
Certificates of deposit ........ -- 7,842 15,620 41,474 49,732 113,697 228,365
Other borrowings - FHLB ........ -- -- -- -- 5,032 25,695 30,727
Repurchase agreements .......... 10,019 -- -- -- -- -- 10,019
-------- -------- -------- -------- -------- -------- --------
$ 55,285 $ 7,842 15,620 $ 41,474 $ 54,764 $215,091 $390,076
Other sources .................. -- -- -- -- -- 72,826 72,826
-------- -------- -------- -------- -------- -------- --------
Total sources ...... $ 55,285 $ 7,842 $ 15,620 $ 41,474 $ 54,764 $287,917 $462,902
-------- -------- -------- -------- -------- -------- --------
Repricing differences .......... $(39,205) $ 23,003 $ 2,101 $ (8,017) $ 11,906 $ 10,212 $ --
======== ======== ======== ======== ======== ======== ========
A portion of the interest-bearing checking, savings, and money market accounts
have been included in the above table as maturing immediately and the rest of
these deposits are shown as more than one year. The classifications are used
because the Bank's 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.
PART II
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.
Capital
As of December 31, 1995 and 1994, equity before deducting for the maximum cash
obligation related to ESOP was $48,548,000 and $41,657,000, respectively. This
measure of equity as a percent of total assets was 10.02% at December 31, 1995
and 9.36% at December 31, 1994. These ratios are competitive with the Bank's
peers. As of December 31, 1995, total equity was 8.93% of assets compared to
8.19% 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 bank, which affects the Bank's dividends to the
Company. The Bank is subject to certain statutory and regulatory restrictions on
the amount it may pay in dividends. In order to maintain acceptable capital
ratios in the subsidiary bank, certain of its retained earnings are not
available for the payment of dividends. Retained earnings available for the
payment of dividends to the Company total approximately $8,700,000 as of
December 31, 1995.
The Company and the Bank are subject to the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the Bank is 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, 1995, risk-based capital standards require 8% of
risk-weighted assets. At least half of that 8% must consist of Tier I core
capital (common stockholder's 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.
A comparison of capital as of December 31, 1995 with minimum requirements is
presented below:
Actual
------------------ Minimum
Company Bank Requirements
------- ------ ------------
Tier I Risk-Based Capital ............. 14.33% 14.10% 4%
Total Risk-Based Capital .............. 15.59 15.36 8
Leverage Ratio ........................ 9.96 9.80 3
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Commitments and Trends
In February 1996, the Company announced the stock purchase of a Lisbon, Iowa
bank holding company and the purchase of certain assets and assumption of
deposits of the Kalona, Iowa branch office of Boatmen's Bank Iowa, N.A. The
Lisbon bank has approximately $16.5 million in assets and deposits of
approximately $15 million. The Kalona office has assets of approximately $23
million and deposits of approximately $23 million. It is expected that both
banks will be owned by the Company and operated as separately chartered banks.
Both acquisitions are subject to various regulatory approvals. It is anticipated
that both acquisitions will be completed in the third quarter of 1996.
The acquisitions of the two banks is expected to require an investment of
approximately $6,000,000 and the funds for the acquisitions are expected to be
provided from cash and the maturities of investment securities.
Other than the previously mentioned acquisitions, the Company has no material
commitments or plans which will materially affect its liquidity or capital
resources. The acquisition of property and equipment may be in cash purchases,
or they may be financed if favorable terms are available.
As of December 31, 1995, the Company is of the opinion that there are no known
trends or uncertainties which are expected that will have a material effect on
the financial condition of the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements are included on Pages 25 through 47. The Registrant
does not meet the requirements of Item 302 of Regulation S-K to include the
supplementary financial information required by that item.
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 subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1995, 1994 and 1993. 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 subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years ended December 31, 1995,
1994 and 1993 in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
---------------------------
Iowa City, Iowa
January 25, 1996, except for Note 13, as to which the
date is February 7, 1996
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In Thousands, Except Share Amounts)
ASSETS 1995 1994
--------- ---------
Cash and due from banks (Note 9) .............................. $ 11,883 $ 10,805
Investment securities (Note 2):
Available for sale (amortized cost 1995 $99,621;
1994 $94,914) ........................................... 100,093 90,795
Held to maturity (fair value 1995 $21,754;
1994 $18,924) ........................................... 21,443 19,255
Federal funds sold ............................................ 16,080 7,500
Loans, net (Notes 3, 7 and 10) ................................ 318,546 300,821
Property and equipment, net (Note 4) .......................... 6,996 6,350
Accrued interest receivable ................................... 4,446 3,776
Deferred income taxes, net (Note 8) ........................... 1,474 2,935
Other assets .................................................. 3,646 2,675
--------- ---------
$ 484,607 $ 444,912
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits ............................... $ 42,927 $ 35,470
Interest-bearing deposits (Note 5) ......................... 349,330 337,368
--------- ---------
Total deposits ................................. $ 392,257 $ 372,838
Securities sold under agreements to repurchase ............. 10,019 7,043
Federal Home Loan Bank notes (Note 7) ...................... 30,727 20,758
Accrued interest payable ................................... 1,885 1,548
Other liabilities .......................................... 1,171 1,068
--------- ---------
$ 436,059 $ 403,255
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 13)
REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK
OWNERSHIP PLAN (ESOP) (Note 6) ............................. $ 5,271 $ 5,210
--------- ---------
STOCKHOLDERS' EQUITY (Note 9)
Capital stock, no par value; authorized
2,000,000 shares; issued 1995 487,868 shares;
1994 487,773 shares ..................................... $ 8,925 $ 8,915
Retained earnings .......................................... 39,325 35,336
Unrealized gains (losses) on debt securities, net .......... 298 (2,594)
--------- ---------
$ 48,548 $ 41,657
Less maximum cash obligation related to ESOP shares (Note 6) 5,271 5,210
--------- ---------
$ 43,277 $ 36,447
--------- ---------
$ 484,607 $ 444,912
========= =========
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
(In Thousands, Except Share Amounts)
1995 1994 1993
--------- --------- ---------
Interest income:
Interest and fees on loans ..................... $ 27,236 $ 23,173 $ 22,572
Interest on investment securities:
Taxable ..................................... 5,189 5,158 4,883
Nontaxable .................................. 1,034 1,040 1,052
Interest on federal funds sold ................. 519 212 524
--------- --------- ---------
Total interest income ............. $ 33,978 $ 29,583 $ 29,031
--------- --------- ---------
Interest expense:
Interest on deposits ........................... $ 16,185 $ 13,521 $ 14,361
Interest on securities sold under agreements
to repurchase ............................... 409 204 184
Interest on FHLB borrowings .................... 1,874 1,105 963
Other .......................................... -- 4 12
--------- --------- ---------
Total interest expense ............ $ 18,468 $ 14,834 $ 15,520
--------- --------- ---------
Net interest income ............... $ 15,510 $ 14,749 $ 13,511
Provision for loan losses (Note 3) ................ 722 641 921
--------- --------- ---------
Net interest income after provision
for loan losses ................. $ 14,788 $ 14,108 $ 12,590
--------- --------- ---------
Other income:
Loan origination fees .......................... $ 294 $ 402 $ 1,337
Trust fees ..................................... 755 681 567
Deposit account charges and fees ............... 1,606 1,500 1,449
Other fees and charges ......................... 894 943 828
Investment securities losses (Note 2) .......... (111) (215) --
--------- --------- ---------
$ 3,438 $ 3,311 $ 4,181
--------- --------- ---------
Other expenses:
Salaries and employee benefits ................. $ 5,492 $ 5,127 $ 4,767
Occupancy ...................................... 792 712 691
Furniture and equipment ........................ 1,099 989 918
F.D.I.C. insurance ............................. 424 793 753
Office supplies and postage .................... 725 641 608
Other .......................................... 2,443 2,378 2,562
--------- --------- ---------
$ 10,975 $ 10,640 $ 10,299
--------- --------- ---------
Income before income taxes ........ $ 7,251 $ 6,779 $ 6,472
Federal and state income taxes (Note 8) ........... 1,994 1,845 1,799
--------- --------- ---------
Net income ........................ $ 5,257 $ 4,934 $ 4,673
========= ========= =========
Average common and common equivalent shares ....... 490,928 489,782 486,690
========= ========= =========
Earnings per common and common equivalent share ... $ 10.71 $ 10.07 $ 9.60
========= ========= =========
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 6 AND 9)
Years Ended December 31, 1995, 1994 and 1993
(In Thousands, Except Share Data)
Less
Maximum
Unrealized Cash
Gains Less Obligation
On Debt ESOP Related
Capital Retained Securities, Debt To ESOP
Stock Earnings Net Guarantee Shares Total
-------- -------- ----------- --------- ----------- --------
Balance, December 31, 1992 ......................... $ 8,668 $ 27,966 $ -- $ (391) $ (4,234) $ 32,009
Issuance of 2,922 shares of common stock (Note 6) 230 -- -- -- -- 230
Payment on debt of ESOP ......................... -- -- -- 196 -- 196
Change related to ESOP shares ................... -- -- -- -- (382) (382)
Net income ...................................... -- 4,673 -- -- -- 4,673
Cash dividends ($2.20 per share) ................ -- (1,066) -- -- -- (1,066)
Cumulative effect of accounting change .......... -- -- 283 -- -- 283
-------- -------- -------- -------- --------- --------
Balance, December 31, 1993 ......................... $ 8,898 $ 31,573 $ 283 $ (195) $ (4,616) $ 35,943
Issuance of 370 shares of common stock .......... 34 -- -- -- -- 34
Redemption of 219 shares of common stock ........ (17) -- -- -- -- (17)
Payment on debt of ESOP ......................... -- -- -- 195 -- 195
Change related to ESOP shares ................... -- -- -- -- (594) (594)
Net income ...................................... -- 4,934 -- -- -- 4,934
Cash dividends ($2.40 per share) ................ -- (1,171) -- -- -- (1,171)
Unrealized (losses) on debt securities, net ..... -- -- (2,877) -- -- (2,877)
-------- -------- -------- -------- --------- --------
Balance, December 31, 1994 ......................... $ 8,915 $ 35,336 $ (2,594) $ -- $ (5,210) $ 36,447
Issuance of 203 shares of common stock .......... 20 -- -- -- -- 20
Redemption of 108 shares of common stock ........ (10) -- -- -- -- (10)
Change related to ESOP shares ................... -- -- -- -- (61) (61)
Net income ...................................... -- 5,257 -- -- -- 5,257
Cash dividends ($2.60 per share) ................ -- (1,268) -- -- -- (1,268)
Unrealized gains on debt securities, net ........ -- -- 2,892 -- -- 2,892
-------- -------- -------- -------- --------- --------
Balance, December 31, 1995 ......................... $ 8,925 $ 39,325 $ 298 $ -- $ (5,271) $ 43,277
======== ======== ======== ======== ========= ========
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(In Thousands)
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................. $ 5,257 $ 4,934 $ 4,673
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................................................. 837 703 639
Provision for loan losses ................................................ 722 641 921
Compensation paid by issuance of common stock ............................ 10 17 230
Deferred income taxes .................................................... (238) (145) (245)
(Increase) in accrued interest receivable ................................ (670) (57) (5)
Amortization of bond discount ............................................ 494 764 951
(Increase) in other assets ............................................... (971) (14) (2,113)
Increase in accrued interest and other
liabilities ........................................................... 440 92 122
-------- -------- --------
Net cash provided by operating activities ....................... $ 5,881 $ 6,935 $ 5,173
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Available for sale ....................................................... $ 19,404 $ 29,216 $ --
Held to maturity ......................................................... 2,653 2,674 46,304
Proceeds from sales of available for sale securities ........................ 11,013 8,961 --
Purchases of investment securities:
Available for sale ....................................................... (35,563) (26,180) --
Held to maturity ......................................................... (4,896) (3,184) (67,603)
Federal funds sold, net ..................................................... (8,580) (3,732) 16,125
Loans made to customers, net of collections ................................. (18,447) (38,485) (15,121)
Purchases of property and equipment ......................................... (1,483) (1,210) (1,199)
-------- -------- --------
Net cash (used in) investing activities ......................... $(35,899) $(31,940) $(21,494)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits .................................................... $ 19,419 $ 19,352 $ 19,434
Net increase (decrease) in securities
sold under agreements to repurchase ...................................... 2,976 2,554 (1,004)
Borrowings from FHLB ........................................................ 15,000 5,000 790
Payments on FHLB notes ...................................................... (5,031) (32) --
Dividends paid .............................................................. (1,268) (1,171) (1,066)
-------- -------- --------
Net cash provided by financing activities ....................... $ 31,096 $ 25,703 $ 18,154
-------- -------- --------
Increase in cash and due from banks ............................. $ 1,078 $ 698 $ 1,833
CASH AND DUE FROM BANKS
Beginning ................................................................... 10,805 10,107 8,274
-------- -------- --------
Ending ...................................................................... $ 11,883 $ 10,805 $ 10,107
======== ======== ========
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(In Thousands)
1995 1994 1993
-------- -------- --------
SUPPLEMENTAL DISCLOSURES
Cash payments for:
Interest paid to depositors and others ......... $ 15,868 $ 13,417 $ 14,614
Interest paid on other obligations ............. 2,263 1,313 1,166
Income taxes ................................... 2,099 1,981 2,068
Noncash financing transactions:
Increase in stockholders' equity related
to ESOP debt ................................ $ -- $ 195 $ 196
Increase in maximum cash obligation
related to ESOP shares ...................... 61 594 382
Net unrealized gains (losses) on debt securities 4,591 (4,593) 474
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 one-bank holding company
engaged in the business of banking through its wholly-owned subsidiary,
Hills Bank and Trust Company, Hills, Iowa (the "Bank"). The Bank is a
full-service commercial bank extending its services to individuals,
businesses, governmental units, and institutional customers primarily
in the communities of Hills, Iowa City, Coralville, and North Liberty,
Iowa. It operates the main bank in Hills and has office locations in
downtown Iowa City, on South Gilbert Street in Iowa City, Coralville
and North Liberty. The Bank competes with other financial institutions
and nonfinancial institutions providing financial products. Although
the loan activity of the Bank is diversified with commercial and
agricultural loans, real estate loans, automobile, installment and
other consumer loans, the 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.
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Hills Bank and Trust Company.
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 and marketable
equity 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.
Premiums and discounts on investments in 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). Interest on debt securities is recognized in
income as accrued. Realized gains and losses are included in income,
determined on the basis of the cost of the specific securities sold.
There were no trading securities as of December 31, 1995 and 1994.
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 collectibility of principal is unlikely.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can reasonably be anticipated. The
allowance is increased by provisions charged to expense and is reduced
by net charge-offs. The Bank makes 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.
On January 1, 1995, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by FASB
Statement No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which requires loans to be
considered impaired when, based on current information and events, it
is probable the Company 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. The effect of the adoption of
these statements was not material.
The accrual of interest income on impaired 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. Interest income on impaired loans is recognized on the cash
basis.
Loan fees and origination costs are reflected in the statement of
income as collected or incurred. Compared to the net deferral method,
this practice has no significant effect on income.
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.
Stock options:
Compensation expense for stock issued through stock options 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 market 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 Bank in fiduciary
or agency capacities for its customers are not included in these
statements since they are not assets of the Company.
Earnings per common and common equivalent share:
Earnings per common and common equivalent share are determined by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the year. Dilutive common stock
equivalents related to the stock option plan were determined using the
treasury stock method. Earnings per share and common equivalent shares
assuming full dilution are the same as earnings per common and common
equivalent share.
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 Bank,
deposits and federal funds purchased and sold are reported net.
Recently issued accounting standards:
The Company believes the adoption of recently issued accounting
standards will not have a material or significant impact on its
consolidated financial statements.
Fair value of financial instruments:
FASB Statement No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values 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. Statement 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented 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 at December
31, 1995. 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 borrowings under repurchase agreements
approximate their fair values.
Long-term borrowings:
The fair values of the Bank's long-term borrowings (other than
deposits) are estimated using discounted cash flow analyses, based
on the Bank's current incremental borrowing rates for similar
types of borrowing arrangements.
Note 2. Investment Securities
The amortized cost and fair value of debt securities available for sale
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(Amounts In Thousands)
December 31, 1995:
U. S. Treasury .......... $ 41,094 $ 330 $ 149 $ 41,275
U. S. Government
agencies and
corporations ......... 58,527 511 220 58,818
-------- -------- -------- --------
Total .......... $ 99,621 $ 841 $ 369 $100,093
======== ======== ======== ========
December 31, 1994:
U. S. Treasury ........... $54,894 $ 2 $ (2,421) $ 52,475
U. S. Government
agencies and
corporations .......... 40,020 -- (1,700) 38,320
------- ------- -------- --------
Total ........... $94,914 $ 2 $ (4,121) $ 90,795
======= ======= ======== ========
The amortized cost and fair value of debt securities held to maturity
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(Amounts In Thousands)
December 31, 1995:
States and political
subdivisions ........... $21,443 $ 387 $ 76 $21,754
======= ======= ======= =======
December 31, 1994:
States and political
subdivisions ........... $19,255 $ 144 $ (475) $ 18,924
======= ======= ======= ========
Gross losses realized on sales of investment securities totaled
$111,000, $215,000 and none for the years ended December 31, 1995, 1994
and 1993.
The contractual maturity distribution of investment securities as of
December 31, 1995 is summarized as follows:
Available For Sale Held To Maturity
------------------ -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(Amounts In Thousands)
Due in one year or less ............ $ 20,393 $ 20,274 $ 2,686 $ 2,706
Due after one year through
five years ...................... 79,228 79,819 10,753 10,919
Due after five years through
ten years ....................... -- -- 7,939 8,058
Due over ten years ................. -- -- 65 71
-------- -------- -------- --------
Total .................. $ 99,621 $100,093 $ 21,443 $ 21,754
======== ======== ======== ========
As of December 31, 1995 investment securities with a carrying value of
$27,139 were pledged to collateralize public and trust deposits,
short-term borrowings, and for other purposes, as required or permitted
by law.
Note 3. Loans
The composition of loans is as follows:
December 31,
-------------------------
1995 1994
-------- --------
(Amounts In Thousands)
Agricultural ................................. $ 19,000 $ 17,826
Commercial and financial ..................... 26,810 26,024
Real estate:
Construction .............................. 7,937 6,933
Mortgage .................................. 239,899 225,342
Loans to individuals ......................... 31,640 30,906
-------- --------
$325,286 $307,031
Less allowance for loan losses ............... 6,740 6,210
-------- --------
$318,546 $300,821
======== ========
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
----------------------------------
1995 1994 1993
------- ------- --------
(Amounts In Thousands)
Balance, beginning ...................... $ 6,210 $ 5,775 $ 5,190
Provision charged to expenses ........ 722 641 921
Recoveries ........................... 730 854 725
Loans charged off .................... (922) (1,060) (1,061)
------- ------- -------
Balance, ending ......................... $ 6,740 $ 6,210 $ 5,775
======= ======= =======
Information about impaired loans as of and for the year ended December
31, 1995 is as follows:
Loans receivable for which there is a
related allowance for credit losses $ --
Loans receivable for which there is no
related allowance for credit losses 5,465
------
Total impaired loans $5,465
======
Related allowance for credit losses $ - -
Average balance 5,617
Interest income recognized 491
No allowance for credit losses has been recognized for impaired loans
because the loans have been charged off 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,
--------------------
1995 1994
------- -------
(Amounts In Thousands)
Land .................................... $ 1,362 $ 1,362
Buildings and improvements .............. 5,358 4,620
Furniture and equipment ................. 6,900 6,256
------- -------
$13,620 $12,238
Less accumulated depreciation ........... 6,624 5,888
------- -------
Net ......................... $ 6,996 $ 6,350
======= =======
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows:
December 31,
--------------------------
1995 1994
-------- --------
(Amounts In Thousands)
NOW and other demand ....................... $ 35,463 $ 47,008
Savings .................................... 85,502 66,521
Time, $100,000 and over .................... 29,451 27,252
Other time ................................. 198,914 196,587
-------- --------
$349,330 $337,368
======== ========
Note 6. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan established to provide
retirement benefits for its employees. The Plan borrowed $1,953,000
from a bank in 1985 and acquired 57,400 shares of the Company's stock,
which were pledged as collateral on the bank note. The Company
committed to annual ESOP contributions sufficient to service the debt
until the debt was retired in 1994 and has made discretionary
contributions normally in the maximum amount permitted by IRS
regulations.
The Company's contribution to the Plan has been allocated as follows:
1995 1994 1993
---- ---- ----
(Amounts In Thousands)
Compensation ...................... $ 76 $ 67 $513
Interest .......................... -- 4 12
---- ---- ----
$ 76 $ 71 $525
==== ==== ====
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 market 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,
1995, 52,711 shares held by the ESOP, at a fair value of $100 per
share, have been reclassified from stockholders' equity to liabilities.
In 1994, the Company adopted 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 $419,000 for 1995 and $464,000 for 1994.
The Company has a Stock Incentive Plan for certain key employees and
directors whereby 43,600 shares of common stock have been reserved for
awards in the form of stock options or stock awards. A Stock Option
Committee grants 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.
Additional compensation is accrued equivalent to the amount of
dividends that would have been paid on the stock had the options been
exercised. Such compensation is payable upon exercise of the options.
The committee is authorized to grant awards of common stock and
authorized the issuance of 203 and 370 shares of common stock to a
group of employees in 1995 and 1994, respectively.
A summary of the stock option transactions are as follows:
Number
Of Option
Shares Price
------ ------
Balance, January 1, 1994 .................. 15,523 $76.00-$78.50
Exercised .............................. --
Forfeited .............................. --
------
Balance, December 31, 1994 ................ 15,523
Exercised .............................. --
Forfeited .............................. --
------
Balance, December 31, 1995 ................ 15,523 $76.00-$78.50
======
As of December 31, 1995, options for 7,535 shares of common stock were
exercisable.
Note 7. Federal Home Loan Bank Borrowings
As of December 31, 1995 the borrowings were as follows:
(In Thousands)
Due August 31, 1996, 5.41% ................................. $ 5,000
Due August 29, 1997, 6.60% ................................. 5,000
Due June 5, 1998, 5.74% .................................... 10,000
Due August 5, 1999, 6.57% .................................. 5,000
Due February 22, 2000, 7.73% ............................... 5,000
Due August 11, 2008, 6.00% ................................. 727
-------
$30,727
=======
The borrowings are collateralized by 1-4 family mortgage loans with a
face amount of $46,090.
Note 8. Income Taxes
Income taxes for the years ended December 31, 1995, 1994 and 1993 are
summarized as follows:
1995 1994 1993
------- ------- --------
(Amounts In Thousands)
Current:
Federal .................. $ 1,828 $ 1,630 $ 1,718
State .................... 404 360 326
Deferred .................... (238) (145) (245)
------- ------- -------
$ 1,994 $ 1,845 $ 1,799
======= ======= =======
Deferred income tax liabilities and assets arose from the following
temporary differences:
December 31,
------------------------
1995 1994 1993
------ ------ ------
(Amounts In Thousands)
Deferred income tax assets:
Unrealized losses on debt securities ... $ -- $1,525 $ --
Allowance for loan losses .............. 2,135 1,938 1,760
Certain accrued expenses ............... 166 107 96
Other .................................. 43 24 24
------ ------ ------
Gross tax assets .............. $2,344 $3,594 $1,880
------ ------ ------
Deferred income tax liabilities:
Property and equipment ................. $ 591 $ 570 $ 535
FHLB dividends ......................... 105 80 80
Unrealized gains on debt securities .... 174 -- 190
Other .................................. -- 9 --
------ ------ ------
Gross tax liabilities ......... 870 659 805
------ ------ ------
Net deferred income tax asset . $1,474 $2,935 $1,075
====== ====== ======
The net change in the deferred income taxes for the years ended
December 31, 1995, 1994 and 1993 is reflected in the financial
statements as follows:
Year Ended December 31,
----------------------------------
1995 1994 1993
------- ------- --------
(Amounts In Thousands)
Statement of income ..................... $ (238) $ (145) $ (245)
Statement of stockholders' equity ....... 1,699 (1,715) 190
------- ------- -------
$ 1,461 $(1,860) $ (55)
------- ------- -------
The income tax provisions for the years ended December 31, 1995, 1994
and 1993 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:
1995 1994 1993
------------------- ------------------- ------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ ------- ------ ------- ------
(Amounts In Thousands)
Expected
provision .... $ 2,465 34.0% $ 2,305 34.0% $ 2,200 34.0%
Tax-exempt
interest ..... (530) (7.3) (551) (8.1) (543) (8.4)
Interest
expense
limitation ... 87 1.2 75 1.1 68 1.1
State income
taxes, net
of federal
income tax
benefit ...... 245 3.4 225 3.3 247 3.8
Income tax
credits ...... (250) (3.5) (195) (2.9) (110) (1.7)
Other ........... (23) (.3) (14) (.2) (63) (1.0)
------- ------ ------- ------ ------- ------
$ 1,994 27.5% $ 1,845 27.2% $ 1,799 27.8%
======= ====== ======= ====== ======= ======
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 Bank's capital as of December 31, 1995 with the
minimum requirements is presented below.
Minimum
Actual Requirements
------- ------------
Tier 1 Risk-Based Capital ..................... 14.10% 4.00%
Total Risk-Based Capital ...................... 15.36 8.00
Leverage Ratio ................................ 9.80 3.00
According to FDIC capital guidelines, the Bank is considered to be
"Well Capitalized."
The ability of the Company to pay dividends to its stockholders is
dependent upon dividends paid by the Bank. The Bank is subject to
certain statutory and regulatory restrictions on the amount it may pay
in dividends. To maintain acceptable capital ratios in the Bank certain
of its retained earnings are not available for the payment of
dividends. To maintain a ratio of capital to assets of 8%, retained
earnings which could be available for the payment of dividends to the
Company total approximately $8,700,000 as of December 31, 1995.
The Bank is required to maintain reserve balances in cash or with the
Federal Reserve Bank. Reserve balances totaled $3,389,000 and
$4,764,000 as of December 31, 1995 and 1994, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and companies with which they are
affiliated and certain principal officers are customers of, and have
banking transactions with, the Bank 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, 1995 and 1994:
Year Ended December 31,
---------------------------
1995 1994
------- --------
(Amounts In Thousands)
Balance, beginning ....................... $ 9,011 $ 8,097
Advances .............................. 1,327 1,493
Collections ........................... (790) (579)
------- -------
Balance, ending .......................... $ 9,548 $ 9,011
======= =======
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, 1995 and 1994 are as follows:
1995 1994
--------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Amounts In Thousands)
Cash and due from
banks .............................. $ 11,883 $ 11,883 $ 10,805 $ 10,805
Federal funds sold .................... 16,080 16,080 7,500 7,500
Investment securities ................. 121,536 121,847 110,050 109,719
Loans ................................. 318,546 321,553 300,821 300,101
Accrued interest
receivable ......................... 4,446 4,446 3,776 3,776
Deposits .............................. 392,257 394,390 372,838 371,703
Securities sold under
agreements to
repurchase ......................... 10,019 10,019 7,043 7,043
Borrowings from
Federal Home Loan
Bank ............................... 30,727 30,973 20,758 20,854
Accrued interest
payable ............................ 1,885 1,885 1,548 1,548
Face Amount Face Amount
----------- -----------
Off-balance sheet
instruments:
Loan commit-
ments $ ......................... 50,456 $ -- $ 61,976 $ --
Letters of credit .................. 5,822 -- 4,694 --
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent
company only):
BALANCE SHEETS
December 31, 1995 and 1994
(Amounts In Thousands)
ASSETS 1995 1994
-------- --------
Cash ................................................. $ 316 $ 271
Investment securities available for sale ............. 300 300
Investment in subsidiary bank ........................ 47,727 40,852
Other assets ......................................... 205 234
-------- --------
Total assets ............................. $ 48,548 $ 41,657
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities .......................................... $ -- $ --
-------- --------
Redeemable common stock held by ESOP ............... $ 5,271 $ 5,210
-------- --------
Stockholders' equity:
Capital stock ..................................... $ 8,925 $ 8,915
Retained earnings ................................. 39,325 35,336
Unrealized gains (losses) on debt
securities, net ................................ 298 (2,594)
-------- --------
$ 48,548 $ 41,657
Less maximum cash obligation related
to ESOP shares ................................. 5,271 5,210
-------- --------
Total stockholders' equity ............... $ 43,277 $ 36,447
-------- --------
Total liabilities and stockholders' equity $ 48,548 $ 41,657
======== ========
STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
(Amounts In Thousands)
1995 1994 1993
------- ------- -------
Interest on investment securities ............. $ 20 $ 11 $ 12
Dividends received from subsidiary ............ 1,272 1,212 1,164
Operating expenses ............................ (20) (20) (69)
------- ------- -------
Income before income taxes
and equity in subsidiary's
undistributed income ............ $ 1,272 $ 1,203 $ 1,107
Income tax benefit (expense) .................. 2 5 23
------- ------- -------
$ 1,274 $ 1,208 $ 1,130
Equity in subsidiary's undistributed
income ..................................... 3,983 3,726 3,543
------- ------- -------
Net income ........................ $ 5,257 $ 4,934 $ 4,673
======= ======= =======
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(Amounts In Thousands)
1995 1994 1993
------- ------- -------
Cash flows from operating activities:
Net income ............................ $ 5,257 $ 4,934 $ 4,673
Noncash items included in net income:
Undistributed earnings of subsidiary (3,983) (3,726) (3,543)
(Increase) in other assets ......... 39 123 (12)
Increase (decrease) in liabilities . -- -- (23)
------- ------- -------
Net cash provided by operating
activities ................. $ 1,313 $ 1,331 $ 1,095
------- ------- -------
Cash flows from investing activities:
Proceeds from maturities of investment
securities ......................... $ 300 $ 300 $ 3
Purchase of investment securities ..... (300) (300) --
------- ------- -------
Net cash provided by investing
activities ................. $ -- $ -- $ 3
------- ------- -------
Cash flows (used in) financing activities,
cash dividends paid ................... $(1,268) $(1,171) $(1,066)
------- ------- -------
Increase in cash ............. $ 45 $ 160 $ 32
Cash balance:
Beginning ............................. 271 111 79
------- ------- -------
Ending ................................ $ 316 $ 271 $ 111
======= ======= =======
Note 13. Commitments and Contingencies
Concentrations of credit risk:
All of the Bank's loans, commitments to extend credit, unused lines of
credit and outstanding letters of credit have been granted to customers
within the Bank's market area. Investments in securities issued by
state and political subdivisions within the state of Iowa totaled
approximately $8,619,000. 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 Bank has 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 Bank is 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 Bank's
financial statements.
Financial instruments with off-balance sheet risk:
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
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 Bank's 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 Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. A summary of
the Bank's commitments at December 31, 1995 and 1994 is as follows:
1995 1994
------- -------
(Amounts In Thousands)
Firm loan commitments and unused portion of
lines of credit:
Home equity loans ............................... $ 2,333 $ 2,298
Credit card participations ...................... 5,123 5,175
Commercial, real estate and
home construction ............................ 18,103 27,178
Commercial lines ................................ 24,897 27,325
Outstanding letters of credit ...................... 5,822 4,694
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 Bank evaluates 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 Bank 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 Bank deems necessary.
Note 14. Subsequent Events
As of February 7, 1996, the Company entered into agreements to purchase
a bank and a branch location of another bank in nearby Lisbon and
Kalona, Iowa, respectively. The purchase transactions are subject to
regulatory approval and are expected to be completed in the third
quarter of 1996. Total assets to be acquired in the transactions are
approximately $39 million. The transactions are expected to require an
investment of approximately $6 million which will be funded from cash
and the maturities of investment securities.
PART II
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
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.
Year First
Position With Registrant Or Bank Elected
And Principal Occupation Officer Of
And Employment During The Registrant
Name Age Past Five Years (Bank)
---- --- --------------------------------- ----------
Dwight O. Seegmiller ...... 43 Director of Registrant and Bank; President, Registrant and Bank 1986
(1975)
William H. Olin, D.D.S .... 72 Director of Registrant and Bank; Chairman of the Board, Bank; 1984
Vice-President of the Registrant; Dentist, University of Iowa
Hospitals and Clinics
Earlis Rohret ............. 71 Director of Registrant and Bank; Vice-President of the Registrant; Farmer 1984
James G. Pratt ............ 47 Treasurer of Registrant; Senior Vice-President and Controller of Bank 1985
from January 1986 to present (1982)
Thomas J. Cilek ........... 49 Secretary of Registrant; Senior Vice-President of Bank from August 1986 1988
to present (1986)
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. 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. 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. Exhibits, Financial Statements, Schedules,
and Reports on Form 8-K
Form 10-K
Reference
(a) 1. Financial Statements
Independent auditor's report on the financial
statements
Consolidated balance sheets as of December 31,
1995 and 1994
Consolidated statements of income for the years
ended December 31, 1995, 1994 and 1993
Consolidated statements of stockholders' equity
for the years ended December 31, 1995, 1994
and 1993
Consolidated statements of cash flows for the years
ended December 31, 1995, 1994 and 1993
Notes to financial statements
(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 December 31, 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 is attached (Deferred
Compensation Plans)
Exhibit 11 - Statement Re Computation of Earnings Per Common
Share.
Exhibit 21 - Subsidiaries of the Registrant.
Exhibit 23 - Consent of Accountants.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended
December 31, 1995.
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
Date 3/25/96 By /s/ Dwight O. Seegmiller
--------------------------------------------
Dwight O. Seegmiller, Director and President
Date 3/25/96 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.
Date 3/25/96 By /s/ Willis M. Bywater
--------------------------------------------
Willis M. Bywater, Director
Date 3/25/96 By /s/ Thomas J. Gill
--------------------------------------------
Thomas J. Gill, Director
Date 3/25/96 By /s/ Donald H. Gringer
--------------------------------------------
Donald H. Gringer, Director
Date 3/25/96 By /s/ Richard W. Oberman
--------------------------------------------
Richard W. Oberman, Director
Date 3/25/96 By /s/ William H. Olin
--------------------------------------------
William H. Olin, Director
Date 3/25/96 By /s/ Theodore H. Pacha
--------------------------------------------
Theodore H. Pacha, Director
Date 3/25/96 By /s/ Ann S. Rhodes
--------------------------------------------
Ann M. Rhodes, Director
Date 3/25/96 By /s/ Earlis Rohret
--------------------------------------------
Earlis Rohret, Director
Date 3/25/96 By /s/ Ronald E. Stutsman
--------------------------------------------
Ronald E. Stutsman, Director
Date 3/25/96 By /s/ Earl M. Yoder
--------------------------------------------
Earl M. Yoder, Director
HILLS BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995
EXHIBIT INDEX
Page Number
In the Sequential
Exhibit Numbering System
Number Description For 1995 Form 10-K
- ------- ----------- ------------------
10 Material contracts
11 Statement Re Computation of Earnings Per Common Share
21 Subsidiaries of the Registrant ......................
23 Consent of Independent Certified Public Accountants .
27 Financial Data Schedule .............................