HILLS BANCORPORATION - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - HILLS BANCORPORATION	Financial_Report.xls
EX-3.1 - EXHIBIT 3.1 - HILLS BANCORPORATION	exhibit31.htm
EX-32 - EXHIBIT 32 - HILLS BANCORPORATION	exhibit3233115.htm
EX-31 - EXHIBIT 31 - HILLS BANCORPORATION	exhibit3133115.htm

Index

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

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.

Index



	SHARES OUTSTANDING
CLASS	April 30, 2015

Common Stock, no par value	4,685,170

Index

HILLS BANCORPORATION

Index to Form 10-Q

Part I

FINANCIAL INFORMATION



		Page
		Number

Item 1.	Financial Statements

	Consolidated balance sheets, March 31, 2015 (unaudited) and December 31, 2014	4
	Consolidated statements of income (unaudited) for three months ended March 31, 2015 and 2014	5
	Consolidated statements of comprehensive income (unaudited) for three months ended March 31, 2015 and 2014	6
	Consolidated statements of stockholders' equity (unaudited) for three months ended March 31, 2015 and 2014	7
	Consolidated statements of cash flows (unaudited) for three months ended March 31, 2015 and 2014	8
	Notes to consolidated financial statements (condensed)	10

Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	49

	Part II
	OTHER INFORMATION

Item 1.	Legal proceedings	50

Item 1A.	Risk factors	50

Item 2.	Unregistered sales of equity securities and use of proceeds	51

Item 3.	Defaults upon senior securities	51

Item 4.	Mine safety disclosures	51

Item 5.	Other information	51

Item 6.	Exhibits	52

	Signatures	53

	Exhibits Index	54

Page 3

Index

HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts)



	March 31, 2015			December 31, 2014
ASSETS	(Unaudited)			December 31, 2014
Cash and cash equivalents	$	83,345		$	29,174
Investment securities available for sale at fair value (amortized cost March 31, 2015 $256,673; December 31, 2014 $256,920)	259,878			258,992
Stock of Federal Home Loan Bank	8,446			8,248
Loans held for sale	8,311			4,476
Loans, net of allowance for loan losses (March 31, 2015 $24,360; December 31, 2014 $24,020)	1,970,499			1,961,369
Property and equipment, net	32,466			29,071
Tax credit real estate	17,045			17,259
Accrued interest receivable	9,102			8,276
Deferred income taxes, net	10,219			9,938
Other real estate	1,228			1,213
Goodwill	2,500			2,500
Other assets	4,218			3,802
Total Assets	$	2,407,257		$	2,334,318

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Noninterest-bearing deposits	$	280,432		$	288,718
Interest-bearing deposits	1,626,903			1,546,351
Total deposits	$	1,907,335		$	1,835,069
Other borrowings	40,928			47,499
Federal Home Loan Bank borrowings	140,000			140,000
Accrued interest payable	859			902
Other liabilities	26,545			20,749
Total Liabilities	$	2,115,667		$	2,044,219

Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)	$	35,007		$	34,571

STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 10,000,000 shares; issued March 31, 2015 5,089,298 shares; December 31, 2014 5,088,927 shares	$	—		$	—
Paid in capital	43,060			42,925
Retained earnings	273,449			271,924
Accumulated other comprehensive loss	(422		)	(448		)
Unearned ESOP shares	(504		)	(504		)
Treasury stock at cost (March 31, 2015 401,075 shares; December 31, 2014 398,711 shares)	(23,993		)	(23,798		)
Total Stockholders' Equity	$	291,590		$	290,099
Less maximum cash obligation related to ESOP shares	35,007			34,571
Total Stockholders' Equity Less Maximum Cash Obligations Related to ESOP Shares	$	256,583		$	255,528
Total Liabilities & Stockholders' Equity	$	2,407,257		$	2,334,318

See Notes to Consolidated Financial Statements.

Page 4

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HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Amounts In Thousands, Except Per Share Amounts)



	Three Months Ended March 31,
	2015			2014
Interest income:
Loans, including fees	$	21,080		$	19,749
Investment securities:
Taxable	286			270
Nontaxable	843			836
Federal funds sold	5			10
Total interest income	$	22,214		$	20,865
Interest expense:
Deposits	$	2,164		$	2,469
Short-term borrowings	17			3
FHLB borrowings	1,454			1,378
Total interest expense	$	3,635		$	3,850
Net interest income	$	18,579		$	17,015
Provision for loan losses	(62		)	45
Net interest income after provision for loan losses	$	18,641		$	16,970
Noninterest income:
Net gain on sale of loans	$	308		$	111
Trust fees	1,569			1,460
Service charges and fees	1,946			1,837
Rental revenue on tax credit real estate	511			357
Net gain on sale of other real estate owned and other repossessed assets	7			72
Other noninterest income	649			584
	$	4,990		$	4,421

Noninterest expenses:
Salaries and employee benefits	$	6,651		$	6,257
Occupancy	1,015			1,009
Furniture and equipment	1,298			1,231
Office supplies and postage	441			382
Advertising and business development	774			628
Outside services	1,814			1,535
Rental expenses on tax credit real estate	602			530
FDIC insurance assessment	289			270
Other noninterest expense	315			416
	$	13,199		$	12,258
Income before income taxes	$	10,432		$	9,133
Income taxes	3,052			2,389
Net income	$	7,380		$	6,744

Earnings per share:
Basic	$	1.58		$	1.43
Diluted	$	1.58		$	1.43

See Notes to Consolidated Financial Statements.

Page 5

Index

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (Amounts In Thousands)



	Three Months Ended March 31,
	2015			2014
Net income	$	7,380		$	6,744

Other comprehensive income (loss)
Securities:
Net change in unrealized gain on securities available for sale	$	1,133		$	84
Reclassification adjustment for net gains realized in net income	—			—
Income taxes	(433		)	(32		)
Other comprehensive income on securities available for sale	$	700		$	52
Derivatives used in cash flow hedging relationships:
Unrealized loss on derivatives	$	(1,092	)	$	(1,079	)
Income taxes	418			413
Other comprehensive loss on cash flow hedges	$	(674	)	$	(666	)

Other comprehensive income (loss), net of tax	$	26		$	(614	)

Comprehensive income	$	7,406		$	6,130

See Notes to Consolidated Financial Statements.

Page 6

Index

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, 2013	$	42,194		$	250,370		$	1,591		$	(1,008	)	$	(19,784	)	$	(29,574	)	$	243,789
Issuance of 3,067 shares of common stock	111			—			—			—			—			—			111
Issuance of 535 shares of common stock under the employee stock purchase plan	39			—			—			—			—			—			39
Unearned restricted stock compensation	59			—			—			—			—			—			59
Forfeiture of 166 shares of common stock	(12		)	—			—			—			—			—			(12		)
Share-based compensation	7			—			—			—			—			—			7
Income tax benefit related to share-based compensation	50			—			—			—			—			—			50
Change related to ESOP shares	—			—			—			—			—			(395		)	(395		)
Net income	—			6,744			—			—			—			—			6,744
Cash dividends ($1.15 per share)	—			(5,421		)	—			—			—			—			(5,421		)
Purchase of 6,855 shares of common stock	—			—			—			—			(517		)	—			(517		)
Other comprehensive loss	—			—			(614		)	—			—			—			(614		)
Balance, March 31, 2014	$	42,448		$	251,693		$	977		$	(1,008	)	$	(20,301	)	$	(29,969	)	$	243,840

Balance, December 31, 2014	$	42,925		$	271,924		$	(448	)	$	(504	)	$	(23,798	)	$	(34,571	)	$	255,528
Issuance of 146 shares of common stock	12			—			—			—			—			—			12
Issuance of 566 shares of common stock under the employee stock purchase plan	45			—			—			—			—			—			45
Unearned restricted stock compensation	89			—			—			—			—			—			89
Forfeiture of 341 shares of common stock	(22		)	—			—			—			—			—			(22		)
Share-based compensation	7			—			—			—			—			—			7
Income tax benefit related to share-based compensation	4			—			—			—			—			—			4
Change related to ESOP shares	—			—			—			—			—			(436		)	(436		)
Net income	—			7,380			—			—			—			—			7,380
Cash dividends ($1.25 per share)	—			(5,855		)	—			—			—			—			(5,855		)
Purchase of 2,364 shares of common stock	—			—			—			—			(195		)	—			(195		)
Other comprehensive income	—			—			26			—			—			—			26
Balance, March 31, 2015	$	43,060		$	273,449		$	(422	)	$	(504	)	$	(23,993	)	$	(35,007	)	$	256,583

See Notes to Consolidated Financial Statements.

Page 7

Index

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



	Three Months Ended March 31,
	2015			2014
Cash Flows from Operating Activities
Net income	$	7,380		$	6,744
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation	685			681
Provision for loan losses	(62		)	45
Share-based compensation	7			7
Forfeiture of common stock	(22		)	(12		)
Compensation expensed through issuance of common stock	57			49
Excess tax benefits from share-based compensation	(4		)	(50		)
Provision for deferred income taxes	(295		)	(321		)
Net gain on sale of other real estate owned and other repossessed assets	(7		)	(72		)
Increase in accrued interest receivable	(826		)	(1,075		)
Amortization of discount on investment securities, net	172			216
Increase in other assets	(413		)	(265		)
Increase in accrued interest payable and other liabilities	4,750			3,994
Loans originated for sale	(40,577		)	(16,518		)
Proceeds on sales of loans	37,050			19,686
Net gain on sales of loans	(308		)	(111		)
Net cash and cash equivalents provided by operating activities	$	7,587		$	12,998

Cash Flows from Investing Activities
Proceeds from maturities of investment securities available for sale	$	11,906		$	22,806
Purchases of investment securities available for sale	(12,029		)	(23,480		)
Loans made to customers, net of collections	(9,131		)	(24,557		)
Proceeds on sale of other real estate owned and other repossessed assets	55			489
Purchases of property and equipment	(4,080		)	(190		)
Income from tax credit real estate, net	214			209
Net cash and cash equivalents used in investing activities	$	(13,065	)	$	(24,723	)

Cash Flows from Financing Activities
Net increase in deposits	$	72,266		$	64,326
Net decrease in other borrowings	(6,571		)	(1,439		)
Stock options exercised	—			101
Excess tax benefits related to share-based compensation	4			50
Purchase of treasury stock	(195		)	(517		)
Dividends paid	(5,855		)	(5,421		)
Net cash and cash equivalents provided by financing activities	$	59,649		$	57,100

(Continued)

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

	Three Months Ended March 31,
	2015		2014
Increase in cash and cash equivalents	$	54,171	$	45,375
Cash and cash equivalents:
Beginning of year	29,174		43,702
End of period	$	83,345	$	89,077

Supplemental Disclosures
Cash payments for:
Interest paid to depositors	$	2,207	$	2,535
Interest paid on other obligations	1,471		1,381
Income taxes paid	120		502

Noncash activities:
Increase in maximum cash obligation related to ESOP shares	$	436	$	395
Transfers to other real estate owned	63		800
Sale and financing of other real estate owned	113		—

See Notes to Consolidated Financial Statements.

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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 three month period ended March 31, 2015 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, 2014 filed with the Securities Exchange Commission on March 11, 2015. The consolidated balance sheet as of December 31, 2014, 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 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.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2015-05 by the Company is not expected to have a material impact.

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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 March 31,
	2015			2014
Common shares outstanding at the beginning of the period	4,690,216			4,711,995
Weighted average number of net shares redeemed	(8,568		)	(1,502		)
Weighted average shares outstanding (basic)	4,681,648			4,710,493
Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method	2,490			2,591
Weighted average number of shares (diluted)	4,684,138			4,713,084
Net income (In thousands)	$	7,380		$	6,744
Earnings per share:
Basic	$	1.58		$	1.43
Diluted	$	1.58		$	1.43


Note 3.	Other Comprehensive Income (Loss)

The following table summarizes the balances of each component of accumulated other comprehensive income (AOCI), included in stockholders’ equity, at March 31, 2015 and December 31, 2014:



	March 31, 2015			December 31, 2014
	(amounts in thousands)
Net unrealized gain on available-for-sale securities	$	3,205		$	2,072
Net unrealized loss on derivatives used for cash flow hedges	(3,888		)	(2,796		)
Tax effect	261			276
Net-of-tax amount	$	(422	)	$	(448	)

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)


Note 4.	Securities

The carrying values of investment securities at March 31, 2015 and December 31, 2014 are summarized in the following table (dollars in thousands):



	March 31, 2015				December 31, 2014
	Amount		Percent		Amount		Percent
Securities available for sale
U.S. Treasury	$	22,569	8.68	%	$	22,333	8.62	%
Other securities (FHLB, FHLMC and FNMA)	65,951		25.38		67,691		26.14
State and political subdivisions	171,358		65.94		168,968		65.24
Total securities available for sale	$	259,878	100.00	%	$	258,992	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 March 31, 2015 or December 31, 2014. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of March 31, 2015 and December 31, 2014 (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
March 31, 2015:
U.S. Treasury	$	22,362	$	207	$	—		$	22,569
Other securities (FHLB, FHLMC and FNMA)	65,693		294		(36		)	65,951
State and political subdivisions	168,618		2,921		(181		)	171,358
Total	$	256,673	$	3,422	$	(217	)	$	259,878
December 31, 2014:
U.S. Treasury	$	22,351	$	18	$	(36	)	$	22,333
Other securities (FHLB, FHLMC and FNMA)	67,644		147		(100		)	67,691
State and political subdivisions	166,925		2,499		(456		)	168,968
Total	$	256,920	$	2,664	$	(592	)	$	258,992

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at March 31, 2015, were as follows (in thousands):



	Amortized Cost		Fair Value
Due in one year or less	$	41,404	$	41,510
Due after one year through five years	143,583		145,765
Due after five years through ten years	70,361		71,278
Due over ten years	1,325		1,325
Total	$	256,673	$	259,878

As of March 31, 2015 investment securities with a carrying value of $62.34 million were pledged to collateralize repurchase agreements, derivative financial instruments, and other borrowings.

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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 March 31, 2015 and December 31, 2014 (in thousands):



	Less than 12 months								12 months or more								Total
March 31, 2015 Description of Securities	#	Fair Value		Unrealized Loss			%		#	Fair Value		Unrealized Loss			%		#	Fair Value		Unrealized Loss			%
U.S. Treasury	—	$	—	$	—		—	%	—	$	—	$	—		—	%	—	$	—	$	—		—	%

Other securities (FHLB, FHLMC and FNMA)	5	13,423		(36		)	0.27	%	—	—		—			—	%	5	13,423		(36		)	0.27	%

State and political subdivisions	66	14,617		(70		)	0.48	%	28	6,070		(111		)	1.83	%	94	20,687		(181		)	0.87	%

Total temporarily impaired securities	71	$	28,040	$	(106	)	0.38	%	28	$	6,070	$	(111	)	1.83	%	99	$	34,110	$	(217	)	0.64	%



	Less than 12 months								12 months or more								Total
December 31, 2014 Description of Securities	#	Fair Value		Unrealized Loss			%		#	Fair Value		Unrealized Loss			%		#	Fair Value		Unrealized Loss			%
U.S. Treasury	5	$	12,396	$	(36	)	0.29	%	—	$	—	$	—		—	%	5	$	12,396	$	(36	)	0.29	%

Other securities (FHLB, FHLMC and FNMA)	10	24,382		(100		)	0.41		—	—		—			—		10	24,382		(100		)	0.41

State and political subdivisions	91	21,724		(124		)	0.57		78	16,154		(332		)	2.06		169	37,878		(456		)	1.20

Total temporarily impaired securities	106	$	58,502	$	(260	)	0.44	%	78	$	16,154	$	(332	)	2.06	%	184	$	74,656	$	(592	)	0.79	%

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.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)


Note 5.	Loans

Classes of loans are as follows:



	March 31, 2015		December 31, 2014
	(Amounts In Thousands)
Agricultural	$	88,574	$	97,645
Commercial and financial	180,392		174,738
Real estate:
Construction, 1 to 4 family residential	50,541		45,949
Construction, land development and commercial	76,003		77,020
Mortgage, farmland	169,058		162,503
Mortgage, 1 to 4 family first liens	678,054		672,674
Mortgage, 1 to 4 family junior liens	110,728		110,284
Mortgage, multi-family	243,441		245,213
Mortgage, commercial	321,216		321,601
Loans to individuals	21,003		21,342
Obligations of state and political subdivisions	55,160		55,729
	$	1,994,170	$	1,984,698
Net unamortized fees and costs	689		691
	$	1,994,859	$	1,985,389
Less allowance for loan losses	24,360		24,020
	$	1,970,499	$	1,961,369

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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 months ended March 31, 2015 were as follows:



	Three Months Ended March 31, 2015
	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	$	2,515		$	4,231		$	2,241		$	2,672	$	7,419		$	4,195		$	747		$	24,020
Charge-offs	(43		)	(66		)	(84		)	—		(347		)	(179		)	(48		)	(767		)
Recoveries	82			401			151			6		413			70			46			1,169
Provision	(10		)	(208		)	(58		)	99		(29		)	39			105			(62		)

Ending balance	$	2,544		$	4,358		$	2,250		$	2,777	$	7,456		$	4,125		$	850		$	24,360

Ending balance, individually evaluated for impairment	$	13		$	7		$	33		$	26	$	68		$	8		$	—		$	155

Ending balance, collectively evaluated for impairment	$	2,531		$	4,351		$	2,217		$	2,751	$	7,388		$	4,117		$	850		$	24,205

Loans:

Ending balance	$	88,574		$	180,392		$	126,544		$	169,058	$	788,782		$	564,657		$	76,163		$	1,994,170

Ending balance, individually evaluated for impairment	$	1,851		$	2,284		$	954		$	2,464	$	3,559		$	9,536		$	—		$	20,648

Ending balance, collectively evaluated for impairment	$	86,723		$	178,108		$	125,590		$	166,594	$	785,223		$	555,121		$	76,163		$	1,973,522

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Index

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Changes in the allowance for loan losses for the three months ended March 31, 2014 were as follows:



	Three Months Ended March 31, 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	(100		)	(84		)	(2		)	—		(307		)	—			(33		)	$	(526	)
Recoveries	3			350			186			—		179			41			32			$	791
Provision	1,307			(480		)	(141		)	225		(315		)	(564		)	13			$	45

Ending balance	$	4,062		$	4,519		$	2,961		$	2,782	$	6,621		$	4,264		$	651		$	25,860

Ending balance, individually evaluated for impairment	$	3		$	14		$	14		$	—	$	58		$	208		$	—		$	297

Ending balance, collectively evaluated for impairment	$	4,059		$	4,505		$	2,947		$	2,782	$	6,563		$	4,056		$	651		$	25,563

Loans:

Ending balance	$	88,218		$	162,855		$	99,830		$	145,620	$	715,688		$	564,919		$	73,054		$	1,850,184

Ending balance, individually evaluated for impairment	$	274		$	2,669		$	1,285		$	284	$	4,011		$	17,662		$	—		$	26,185

Ending balance, collectively evaluated for impairment	$	87,944		$	160,186		$	98,545		$	145,336	$	711,677		$	547,257		$	73,054		$	1,823,999

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The following table presents the credit quality indicators by type of loans in each category as of March 31, 2015 and December 31, 2014, respectively (amounts in thousands):



	Agricultural		Commercial and Financial		Real Estate: Construction, 1 to 4 family residential		Real Estate: Construction, land development and commercial
March 31, 2015
Grade:
Excellent	$	1,270	$	4,428	$	—	$	271
Good	12,913		29,593		7,011		16,109
Satisfactory	37,680		107,829		30,039		44,116
Monitor	11,883		21,105		8,729		3,652
Special Mention	22,156		12,009		3,586		11,658
Substandard	2,672		5,428		1,176		197
Total	$	88,574	$	180,392	$	50,541	$	76,003



	Real Estate: Mortgage, farmland		Real Estate: Mortgage, 1 to 4 family first liens		Real Estate: Mortgage, 1 to 4 family junior liens		Real Estate: Mortgage, multi- family
March 31, 2015
Grade:
Excellent	$	2,701	$	464	$	—	$	6,925
Good	34,038		21,627		3,166		72,585
Satisfactory	105,477		575,973		99,103		111,397
Monitor	12,233		43,324		3,963		35,196
Special Mention	11,119		18,082		2,425		16,972
Substandard	3,490		18,584		2,071		366
Total	$	169,058	$	678,054	$	110,728	$	243,441



	Real Estate: Mortgage, commercial		Loans to individuals		Obligations of state and political subdivisions		Total
March 31, 2015
Grade:
Excellent	$	15,466	$	—	$	2,422	$	33,947
Good	82,434		95		42,677		322,248
Satisfactory	184,925		20,095		10,035		1,326,669
Monitor	22,407		340		—		162,832
Special Mention	10,076		287		26		108,396
Substandard	5,908		186		—		40,078
Total	$	321,216	$	21,003	$	55,160	$

HILLS BANCORPORATION - FORM 10-Q - May 6, 2015

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