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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Commission file number:  0-12668
Hills Bancorporation

Incorporated in Iowa
I.R.S. Employer Identification
 
No. 42-1208067

131 MAIN STREET, HILLS, IOWA 52235

Telephone number: (319) 679-2291

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes  o No

Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

þ Yes  o No

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated Filer                     þ   
Non-accelerated filer    o
Small Reporting Company     o

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes  þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
 
SHARES OUTSTANDING
CLASS
October 31, 2014
 
 
Common Stock, no par value
4,694,840
 
 
 
 



HILLS BANCORPORATION
Index to Form 10-Q

Part I
FINANCIAL INFORMATION
 
 
 
Page
 
 
Number
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Part II
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 

Page 2




HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts) 
 
September 30, 2014
 
December 31, 2013
ASSETS
(Unaudited)
 
Cash and cash equivalents
$
68,864

 
$
43,702

Investment securities available for sale at fair value (amortized cost September 30, 2014 $241,159; December 31, 2013 $236,702)
243,818

 
238,510

Stock of Federal Home Loan Bank
7,651

 
7,579

Loans held for sale
2,484

 
4,927

Loans, net of allowance for loan losses (September 30, 2014 $24,500; December 31, 2013 $25,550)
1,914,139

 
1,801,247

Property and equipment, net
28,623

 
29,836

Tax credit real estate
17,498

 
18,180

Accrued interest receivable
8,980

 
7,676

Deferred income taxes, net
9,090

 
8,605

Other real estate
1,084

 
541

Goodwill
2,500

 
2,500

Other assets
3,550

 
4,492

Total Assets
$
2,308,281

 
$
2,167,795

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
 
 
Liabilities
 

 
 

Noninterest-bearing deposits
$
270,139

 
$
256,788

Interest-bearing deposits
1,569,357

 
1,453,089

Total deposits
$
1,839,496

 
$
1,709,877

Short-term borrowings
36,033

 
42,016

Federal Home Loan Bank borrowings
125,000

 
125,000

Accrued interest payable
906

 
1,102

Other liabilities
20,877

 
16,437

Total Liabilities
$
2,022,312

 
$
1,894,432

 
 
 
 
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
$
32,500

 
$
29,574

 
 
 
 
STOCKHOLDERS' EQUITY
 

 
 

Common stock, no par value; authorized 10,000,000 shares; issued September 30, 2014 5,081,004 shares; December 31, 2013 5,074,894 shares
$

 
$

Paid in capital
42,660

 
42,194

Retained earnings
266,774

 
250,370

Accumulated other comprehensive income
748

 
1,591

Unearned ESOP shares
(1,008
)
 
(1,008
)
Treasury stock at cost (September 30, 2014 391,351 shares; December 31, 2013 347,269 shares)
(23,205
)
 
(19,784
)
Total Stockholders' Equity
$
285,969

 
$
273,363

Less maximum cash obligation related to ESOP shares
32,500

 
29,574

Total Stockholders' Equity Less Maximum Cash Obligations Related to ESOP Shares
$
253,469

 
$
243,789

Total Liabilities & Stockholders' Equity
$
2,308,281

 
$
2,167,795


See Notes to Consolidated Financial Statements.

Page 3


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
20,676

 
$
19,886

 
$
60,775

 
$
59,353

Investment securities:
 

 
 

 
 
 
 
Taxable
275

 
303

 
815

 
957

Nontaxable
840

 
823

 
2,513

 
2,497

Federal funds sold
3

 
11

 
29

 
57

Total interest income
$
21,794

 
$
21,023

 
$
64,132

 
$
62,864

Interest expense:
 

 
 

 
 
 
 
Deposits
$
2,245

 
$
2,684

 
$
7,036

 
$
8,488

Short-term borrowings
50

 
41

 
97

 
102

FHLB borrowings
1,409

 
1,409

 
4,181

 
4,181

Total interest expense
$
3,704

 
$
4,134

 
$
11,314

 
$
12,771

Net interest income
$
18,090

 
$
16,889

 
$
52,818

 
$
50,093

Provision for loan losses
(1,008
)
 
112

 
(1,209
)
 
(309
)
Net interest income after provision for loan losses
$
19,098

 
$
16,777

 
$
54,027

 
$
50,402

Noninterest income:
 

 
 

 
 
 
 
Net gain on sale of loans
$
338

 
$
531

 
$
638

 
$
1,793

Trust fees
1,595

 
1,185

 
4,494

 
3,740

Service charges and fees
2,152

 
2,240

 
6,001

 
6,616

Rental revenue on tax credit real estate
377

 
398

 
1,112

 
1,114

Net gain on sale of other real estate owned and other repossessed assets
186

 
18

 
426

 
168

Other noninterest income
599

 
591

 
1,944

 
1,939

 
$
5,247

 
$
4,963

 
$
14,615

 
$
15,370

 
 
 
 
 
 
 
 
Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
$
6,400

 
$
6,158

 
$
19,042

 
$
18,312

Occupancy
947

 
907

 
2,900

 
2,780

Furniture and equipment
1,212

 
1,183

 
3,685

 
3,650

Office supplies and postage
390

 
445

 
1,157

 
1,163

Advertising and business development
775

 
624

 
2,216

 
1,895

Outside services
1,773

 
1,819

 
4,981

 
5,437

Rental expenses on tax credit real estate
552

 
614

 
1,635

 
1,571

FDIC insurance assessment
282

 
229

 
823

 
760

Other noninterest expense
490

 
432

 
1,177

 
1,298

 
$
12,821

 
$
12,411

 
$
37,616

 
$
36,866

Income before income taxes
$
11,524

 
$
9,329

 
$
31,026

 
$
28,906

Income taxes
3,625

 
2,705

 
9,202

 
8,558

Net income
$
7,899

 
$
6,624

 
$
21,824

 
$
20,348

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
1.69

 
$
1.41

 
$
4.65

 
$
4.32

Diluted
$
1.68

 
$
1.40

 
$
4.64

 
$
4.31

 
See Notes to Consolidated Financial Statements.

Page 4


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Amounts In Thousands)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
7,899

 
$
6,624

 
$
21,824

 
$
20,348

 
 
 
 
 
 
 
 
Other comprehensive loss
 

 
 

 
 
 
 
Securities:
 

 
 

 
 
 
 
Net change in unrealized gain (loss) on securities available for sale
$
26

 
$
(1,084
)
 
$
851

 
$
(4,236
)
Reclassification adjustment for net gains realized in net income

 

 

 
(17
)
Income taxes
(10
)
 
414

 
(325
)
 
1,627

Other comprehensive income (loss) on securities available for sale
$
16

 
$
(670
)
 
$
526

 
$
(2,626
)
Derivatives used in cash flow hedging relationships:
 

 
 

 
 
 
 
Unrealized loss on derivatives
$
(37
)
 
$

 
$
(2,216
)
 
$

Income taxes
14

 

 
847

 

Other comprehensive loss on cash flow hedges
$
(23
)
 
$

 
$
(1,369
)
 
$

 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax
$
(7
)
 
$
(670
)
 
$
(843
)
 
$
(2,626
)
 
 
 
 
 
 
 
 
Comprehensive income
$
7,892

 
$
5,954

 
$
20,981

 
$
17,722

 
See Notes to Consolidated Financial Statements.

Page 5


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts In Thousands, Except Share Amounts)
 
Paid In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Unearned ESOP
Shares
 
Treasury Stock
 
Maximum Cash
Obligation Related
To ESOP Shares
 
Total
Balance, December 31, 2012
$
42,241

 
$
229,625

 
$
3,955

 
$
(1,513
)
 
$
(18,397
)
 
$
(30,715
)
 
$
225,196

Issuance of 6,180 shares of common stock
240

 

 

 

 

 

 
240

Issuance of 1,592 shares of common stock under the employee stock purchase plan
111

 

 

 

 

 

 
111

Unearned restricted stock compensation
(660
)
 

 

 

 

 

 
(660
)
Forfeiture of 375 shares of common stock
(25
)
 

 

 

 

 

 
(25
)
Share-based compensation
21

 

 

 

 

 

 
21

Income tax benefit related to share-based compensation
85

 

 

 

 

 

 
85

Change related to ESOP shares

 

 

 

 

 
2,575

 
2,575

Net income

 
20,348

 

 

 

 

 
20,348

Cash dividends ($1.10 per share)

 
(5,186
)
 

 

 

 

 
(5,186
)
Purchase of 13,601 shares of common stock

 

 

 

 
(976
)
 

 
(976
)
Other comprehensive loss

 

 
(2,626
)
 

 

 

 
(2,626
)
Balance, September 30, 2013
$
42,013

 
$
244,787

 
$
1,329

 
$
(1,513
)
 
$
(19,373
)
 
$
(28,140
)
 
$
239,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
42,194

 
$
250,370

 
$
1,591

 
$
(1,008
)
 
$
(19,784
)
 
$
(29,574
)
 
$
243,789

Issuance of 5,064 shares of common stock
266

 

 

 

 

 

 
266

Issuance of 1,617 shares of common stock under the employee stock purchase plan
121

 

 

 

 

 

 
121

Unearned restricted stock compensation
48

 

 

 

 

 

 
48

Forfeiture of 571 shares of common stock
(40
)
 

 

 

 

 

 
(40
)
Share-based compensation
21

 

 

 

 

 

 
21

Income tax benefit related to share-based compensation
50

 

 

 

 

 

 
50

Change related to ESOP shares

 

 

 

 

 
(2,926
)
 
(2,926
)
Net income

 
21,824

 

 

 

 

 
21,824

Cash dividends ($1.15 per share)

 
(5,420
)
 

 

 

 

 
(5,420
)
Purchase of 44,082 shares of common stock

 

 

 

 
(3,421
)
 

 
(3,421
)
Other comprehensive loss

 

 
(843
)
 

 

 

 
(843
)
Balance, September 30, 2014
$
42,660

 
$
266,774

 
$
748

 
$
(1,008
)
 
$
(23,205
)
 
$
(32,500
)
 
$
253,469

 
See Notes to Consolidated Financial Statements.

Page 6


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands)

 
Nine Months Ended 
 September 30,
 
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net income
$
21,824

 
$
20,348

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
 

 
 

Depreciation
1,916

 
2,176

Provision for loan losses
(1,209
)
 
(309
)
Net gain on sale of investment securities

 
(17
)
Share-based compensation
21

 
21

Forfeiture of common stock
(40
)
 
(25
)
Compensation expensed through issuance of common stock
286

 
176

Excess tax benefits from share-based compensation
(50
)
 
(85
)
Provision for deferred income taxes
37

 
(103
)
Net gain on sale of other real estate owned and other repossessed assets
(426
)
 
(168
)
Increase in accrued interest receivable
(1,304
)
 
(609
)
Amortization of discount on investment securities, net
654

 
834

Decrease in prepaid FDIC insurance

 
2,957

Decrease in other assets
222

 
3,175

Increase in accrued interest payable and other liabilities
2,845

 
1,287

Loans originated for sale
(80,798
)
 
(178,872
)
Proceeds on sales of loans
83,879

 
206,110

Net gain on sales of loans
(638
)
 
(1,793
)
Net cash and cash equivalents provided by operating activities
$
27,219

 
$
55,103

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Proceeds from maturities of investment securities available for sale
$
46,252

 
$
21,070

Proceeds from sales of investment securities available for sale

 
566

Purchases of investment securities available for sale
(51,434
)
 
(27,721
)
Loans made to customers, net of collections
(113,409
)
 
(71,241
)
Proceeds on sale of other real estate owned and other repossessed assets
1,609

 
1,275

Purchases of property and equipment
(703
)
 
(1,428
)
Income from tax credit real estate, net
682

 
478

Net cash and cash equivalents used in investing activities
$
(117,003
)
 
$
(77,001
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
129,619

 
$
30,761

Net decrease in short-term borrowings
(5,983
)
 
(9,620
)
Stock options exercised
101

 
175

Excess tax benefits related to share-based compensation
50

 
85

Purchase of treasury stock
(3,421
)
 
(976
)
Dividends paid
(5,420
)
 
(5,186
)
Net cash and cash equivalents provided by financing activities
$
114,946

 
$
15,239

 
(Continued)


Page 7


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Increase (decrease) in cash and cash equivalents
$
25,162

 
$
(6,659
)
Cash and cash equivalents:
 

 
 

Beginning of year
43,702

 
63,582

End of period
$
68,864

 
$
56,923

 
 
 
 
Supplemental Disclosures
 

 
 

Cash payments for:
 

 
 

Interest paid to depositors
$
7,232

 
$
8,757

Interest paid on other obligations
4,278

 
4,283

Income taxes paid
8,072

 
6,800

 
 
 
 
Noncash activities:
 

 
 

Increase (decrease) in maximum cash obligation related to ESOP shares
$
2,926

 
$
(2,575
)
Transfers to other real estate owned
1,726

 
949

 
See Notes to Consolidated Financial Statements.


Page 8


HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X.  These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown.  Certain prior year amounts have been reclassified to conform to the current year presentation.  The Company considers that it operates as one business segment, a commercial bank.

Operating results for the nine month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2014.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the “Company”) for the year ended December 31, 2013 filed with the Securities Exchange Commission on March 11, 2014.  The consolidated balance sheet as of December 31, 2013, has been derived from the audited consolidated financial statements for that period.

The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC.

Effect of New Financial Accounting Standards:

In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects", to amend FASB ASC Topic 323, Investments – Equity Method and Joint Ventures.  The objective of this standard is to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit.  The amendments in the standard permit, but do not require, reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The standard will be effective for the Company beginning January 1, 2015; however, early adoption is permitted.  The Company does have significant investments in such qualified affordable housing projects and is currently reviewing the provisions of this standard to determine what, if any, impacts it may have on the Company’s financial position or results of operations.

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  ASU 2014-4 clarifies that an in substance foreclosure repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additional disclosures are required.  ASU 2014-4 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014.  The adoption of ASU 2014-4 by the Company is not expected to have a material impact.

In May 2014, The FASB and International Accounting Standards Board (IASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised good or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. For financial institutions, significant changes are not expected given that most financial instruments are not in the scope of the accounting standard update. ASU 2014-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently reviewing the provisions of this standard to determine the application to financial institutions. The adoption of ASU 2014-09 by the Company is not expected to have a material impact.

Page 9

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 2.
Earnings Per Share

Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding.  ESOP shares are considered outstanding for this calculation unless unearned.

The computation of basic and diluted earnings per share for the periods presented is as follows:

 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Common shares outstanding at the beginning of the period
4,696,591

 
4,708,910

 
4,711,995

 
4,712,328

Weighted average number of net shares redeemed
(10,673
)
 
(720
)
 
(12,490
)
 
(364
)
Weighted average shares outstanding (basic)
4,685,918

 
4,708,190

 
4,699,505

 
4,711,964

Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method
2,139

 
3,220

 
2,365

 
3,755

Weighted average number of shares (diluted)
4,688,057

 
4,711,410

 
4,701,870

 
4,715,719

Net income (In thousands)
$
7,899

 
$
6,624

 
$
21,824

 
$
20,348

Earnings per share:
 

 
 

 
 

 
 

Basic
$
1.69

 
$
1.41

 
$
4.65

 
$
4.32

Diluted
$
1.68

 
$
1.40

 
$
4.64

 
$
4.31



Page 10

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 3.
Other Comprehensive Income

The following table summarizes the balances of each component of accumulated other comprehensive income (AOCI), included in stockholders’ equity, at September 30, 2014 and December 31, 2013:

 
September 30, 2014

December 31, 2013
 
(amounts in thousands)
Net unrealized gain on available-for-sale securities
$
2,659

 
$
1,808

Net unrealized (loss) gain on derivatives used for cash flow hedges
(1,447
)
 
769

Tax effect
(464
)
 
(986
)
Net-of-tax amount
$
748

 
$
1,591

 
Amounts reclassified from AOCI and the affected line items in the statement of income during the three and nine months ended September 30, 2014 and 2013, were as follows:

 
Amounts reclassifed from AOCI
 
 
 
Three Months Ended September 30,
 
 
 
2014
 
2013
 
Affected Line Item in the Statements of Income
 
(amounts in thousands)
 
 
Unrealized gains on available-for-sale securities
$

 
$

 
Other noninterest income
Tax effect

 

 
Tax (expense) benefit
Total reclassification out of AOCI
$

 
$

 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
Affected Line Item in the Statements of Income
 
(amounts in thousands)
 
 
Unrealized gains on available-for-sale securities
$

 
$
17

 
Other noninterest income
Tax effect

 
(7
)
 
Tax (expense) benefit
Total reclassification out of AOCI
$

 
$
10

 
 



Page 11

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4.
Securities

The carrying values of investment securities at September 30, 2014 and December 31, 2013 are summarized in the following table (dollars in thousands):

 
September 30, 2014
 
December 31, 2013
 
Amount
 
Percent
 
Amount
 
Percent
Securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
19,794

 
8.12
%
 
$

 
%
State and political subdivisions
154,198

 
63.24

 
151,366

 
63.46

Other securities (FHLB, FHLMC and FNMA)
69,826

 
28.64

 
87,144

 
36.54

Total securities available for sale
$
243,818

 
100.00
%
 
$
238,510

 
100.00
%

Investment securities have been classified in the consolidated balance sheets according to management’s intent.  Available-for-sale securities consist of debt securities not classified as trading or held to maturity.  Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity.  There were no trading or held to maturity securities as of September 30, 2014 or December 31, 2013. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of September 30, 2014 and December 31, 2013 (in thousands):

 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated Fair
Value
September 30, 2014:
 
 
 
 
 
 
 
U.S. Treasury
$
19,828

 
$
6

 
$
(40
)
 
$
19,794

State and political subdivisions
151,632

 
2,969

 
(403
)
 
154,198

Other securities (FHLB, FHLMC and FNMA)
69,699

 
191

 
(64
)
 
69,826

Total
$
241,159

 
$
3,166

 
$
(507
)
 
$
243,818

December 31, 2013:
 

 
 

 
 

 
 

U.S. Treasury
$

 
$

 
$

 
$

State and political subdivisions
149,704

 
3,182

 
(1,520
)
 
151,366

Other securities (FHLB, FHLMC and FNMA)
86,998

 
316

 
(170
)
 
87,144

Total
$
236,702

 
$
3,498

 
$
(1,690
)
 
$
238,510


The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at September 30, 2014, were as follows (in thousands):
 
 
Amortized
Cost
 
Fair Value
Due in one year or less
$
35,464

 
$
35,621

Due after one year through five years
136,084

 
138,213

Due after five years through ten years
69,611

 
69,984

Due over ten years

 

Total
$
241,159

 
$
243,818


As of September 30, 2014 investment securities with a carrying value of $36.03 million were pledged to collateralize short-term borrowings.


Page 12

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following table shows the fair value, gross unrealized losses and the percentage of fair value represented by gross unrealized losses of applicable investment securities owned by the Company, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2014 and December 31, 2013 (in thousands):

 
Less than 12 months
 
12 months or more
 
Total
September 30, 2014
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
4

 
$
9,876

 
$
(40
)
 
0.41
%
 

 
$

 
$

 
%
 
4

 
$
9,876

 
$
(40
)
 
0.41
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
57

 
14,490

 
(76
)
 
0.52
%
 
95

 
19,873

 
(327
)
 
1.65
%
 
152

 
34,363

 
(403
)
 
1.17
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
5

 
10,505

 
(46
)
 
0.44
%
 
2

 
4,359

 
(18
)
 
0.41
%
 
7

 
14,864

 
(64
)
 
0.43
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
66

 
$
34,871

 
$
(162
)
 
0.46
%
 
97

 
$
24,232

 
$
(345
)
 
1.42
%
 
163

 
$
59,103

 
$
(507
)
 
0.86
%

 
Less than 12 months
 
12 months or more
 
Total
December 31, 2013
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury

 
$

 
$

 
%
 

 
$

 
$

 
%
 

 
$

 
$

 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
164

 
36,212

 
(1,259
)
 
3.48
%
 
25

 
5,565

 
(261
)
 
4.69
%
 
189

 
41,777

 
(1,520
)
 
3.64
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
10

 
21,810

 
(149
)
 
0.68
%
 
1

 
2,557

 
(21
)
 
0.82
%
 
11

 
24,367

 
(170
)
 
0.70
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
174

 
$
58,022

 
$
(1,408
)
 
2.43
%
 
26

 
$
8,122

 
$
(282
)
 
3.47
%
 
200

 
$
66,144

 
$
(1,690
)
 
2.56
%

The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments.  None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.  The unrealized losses are due to changes in interest rates.  The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table.  Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis.


Page 13

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5.
Loans

Classes of loans are as follows:

 
September 30,
2014
 
December 31,
2013
 
(Amounts In Thousands)
Agricultural
$
86,243

 
$
82,138

Commercial and financial
179,872

 
166,102

Real estate:
 
 
 
Construction, 1 to 4 family residential
39,551

 
30,309

Construction, land development and commercial
80,273

 
69,182

Mortgage, farmland
145,070

 
142,685

Mortgage, 1 to 4 family first liens
658,766

 
605,687

Mortgage, 1 to 4 family junior liens
107,443

 
105,785

Mortgage, multi-family
241,768

 
244,090

Mortgage, commercial
322,714

 
315,187

Loans to individuals
20,324

 
19,824

Obligations of state and political subdivisions
55,940

 
45,167

 
$
1,937,964

 
$
1,826,156

Net unamortized fees and costs
675

 
641

 
$
1,938,639

 
$
1,826,797

Less allowance for loan losses
24,500

 
25,550

 
$
1,914,139

 
$
1,801,247



Page 14

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Changes in the allowance for loan losses, the allowance for loan losses applicable to impaired loans and the related loan balance of impaired loans for the three and nine months ended September 30, 2014 were as follows:

 
Three Months Ended September 30, 2014
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage, 1 to 4
family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,036

 
$
4,832

 
$
3,431

 
$
2,749

 
$
6,831

 
$
3,739

 
$
732

 
$
25,350

Charge-offs

 
(60
)
 

 

 
(471
)
 

 
(50
)
 
(581
)
Recoveries
60

 
258

 
37

 

 
244

 
99

 
41

 
739

Provision
(402
)
 
(328
)
 
(483
)
 
(173
)
 
497

 
(98
)
 
(21
)
 
(1,008
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,694

 
$
4,702

 
$
2,985

 
$
2,576

 
$
7,101

 
$
3,740

 
$
702

 
$
24,500



Nine Months Ended September 30, 2014
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage, 1 to 4
family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,852

 
$
4,733

 
$
2,918

 
$
2,557

 
$
7,064

 
$
4,787

 
$
639

 
$
25,550

Charge-offs
(125
)
 
(515
)
 
(247
)
 

 
(963
)
 
(48
)
 
(255
)
 
(2,153
)
Recoveries
65

 
867

 
311

 

 
696

 
259

 
114

 
2,312

Provision
(98
)
 
(383
)
 
3

 
19

 
304

 
(1,258
)
 
204

 
(1,209
)
 


 


 


 


 


 


 


 


Ending balance
$
2,694

 
$
4,702

 
$
2,985

 
$
2,576

 
$
7,101

 
$
3,740

 
$
702

 
$
24,500

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
2

 
$
10

 
$
28

 
$
21

 
$
73

 
$
11

 
$

 
$
145

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
2,692

 
$
4,692

 
$
2,957

 
$
2,555

 
$
7,028

 
$
3,729

 
$
702

 
$
24,355

 


 


 


 


 


 


 


 


Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
86,243

 
$
179,872

 
$
119,824

 
$
145,070

 
$
766,209

 
$
564,482

 
$
76,264

 
$
1,937,964

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
1,772

 
$
2,737

 
$
475

 
$
2,267

 
$
5,117

 
$
17,847

 
$

 
$
30,215

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
84,471

 
$
177,135

 
$
119,349

 
$
142,803

 
$
761,092

 
$
546,635

 
$
76,264

 
$
1,907,749


Page 15

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Changes in the allowance for loan losses for the three and nine months ended September 30, 2013 were as follows:
 
Three Months Ended September 30, 2013
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage, 1 to 4
family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,379

 
$
4,878

 
$
2,988

 
$
2,150

 
$
6,984

 
$
4,370

 
$
651

 
$
24,400

Charge-offs

 
(283
)
 

 

 
(103
)
 
(44
)
 
(19
)
 
(449
)
Recoveries
12

 
220

 
76

 

 
85

 
258

 
36

 
687

Provision
150

 </