HILLS BANCORPORATION - FORM 10-Q - November 4, 2015

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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, 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.


 
SHARES OUTSTANDING
CLASS
October 31, 2015
 
 
Common Stock, no par value
9,335,704
 
 
 
 


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 3



HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts) 
 
September 30, 2015
 
December 31, 2014
ASSETS
(Unaudited)
 
Cash and cash equivalents
$
33,985

 
$
29,174

Investment securities available for sale at fair value (amortized cost September 30, 2015 $244,975; December 31, 2014 $256,920)
247,485

 
258,992

Stock of Federal Home Loan Bank
9,641

 
8,248

Loans held for sale
4,395

 
4,476

Loans, net of allowance for loan losses (September 30, 2015 $25,480; December 31, 2014 $24,020)
2,051,349

 
1,961,369

Property and equipment, net
33,694

 
29,071

Tax credit real estate
16,593

 
17,259

Accrued interest receivable
9,700

 
8,276

Deferred income taxes, net
11,527

 
9,938

Other real estate
573

 
1,213

Goodwill
2,500

 
2,500

Other assets
3,563

 
3,802

Total Assets
$
2,425,005

 
$
2,334,318

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
 
 
Liabilities
 

 
 

Noninterest-bearing deposits
$
297,676

 
$
288,718

Interest-bearing deposits
1,591,300

 
1,546,351

Total deposits
$
1,888,976

 
$
1,835,069

Other borrowings
36,124

 
47,499

Federal Home Loan Bank borrowings
170,000

 
140,000

Accrued interest payable
750

 
902

Other liabilities
25,098

 
20,749

Total Liabilities
$
2,120,948

 
$
2,044,219

 
 
 
 
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
$
35,930

 
$
34,571

 
 
 
 
STOCKHOLDERS' EQUITY
 

 
 

Common stock, no par value; authorized 20,000,000 shares; issued September 30, 2015 10,184,227 shares; December 31, 2014 10,177,854 shares
$
—

 
$
—

Paid in capital
43,395

 
42,925

Retained earnings
288,604

 
271,924

Accumulated other comprehensive loss
(1,343
)
 
(448
)
Unearned ESOP shares
(504
)
 
(504
)
Treasury stock at cost (September 30, 2015 851,132 shares; December 31, 2014 797,422 shares)
(26,095
)
 
(23,798
)
Total Stockholders' Equity
$
304,057

 
$
290,099

Less maximum cash obligation related to ESOP shares
35,930

 
34,571

Total Stockholders' Equity Less Maximum Cash Obligations Related to ESOP Shares
$
268,127

 
$
255,528

Total Liabilities & Stockholders' Equity
$
2,425,005

 
$
2,334,318


See Notes to Consolidated Financial Statements.

Page 4

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
22,159

 
$
20,676

 
$
65,139

 
$
60,775

Investment securities:
 

 
 

 
 
 
 
Taxable
321

 
275

 
907

 
815

Nontaxable
813

 
840

 
2,473

 
2,513

Federal funds sold
2

 
3

 
17

 
29

Total interest income
$
23,295

 
$
21,794

 
$
68,536

 
$
64,132

Interest expense:
 

 
 

 
 
 
 
Deposits
$
1,973

 
$
2,245

 
$
6,247

 
$
7,036

Short-term borrowings
55

 
50

 
114

 
97

FHLB borrowings
1,686

 
1,409

 
4,647

 
4,181

Total interest expense
$
3,714

 
$
3,704

 
$
11,008

 
$
11,314

Net interest income
$
19,581

 
$
18,090

 
$
57,528

 
$
52,818

Provision for loan losses
(95
)
 
(1,008
)
 
360

 
(1,209
)
Net interest income after provision for loan losses
$
19,676

 
$
19,098

 
$
57,168

 
$
54,027

Noninterest income:
 

 
 

 
 
 
 
Net gain on sale of loans
$
396

 
$
338

 
$
1,144

 
$
638

Trust fees
1,672

 
1,595

 
4,920

 
4,494

Service charges and fees
2,124

 
2,152

 
6,151

 
6,001

Rental revenue on tax credit real estate
392

 
377

 
1,296

 
1,112

Net gain on sale of other real estate owned and other repossessed assets
22

 
186

 
139

 
426

Other noninterest income
612

 
599

 
2,064

 
1,944

 
$
5,218

 
$
5,247

 
$
15,714

 
$
14,615

 
 
 
 
 
 
 
 
Noninterest expenses:
 

 
 

 
 
 
 
Salaries and employee benefits
$
7,125

 
$
6,400

 
$
20,700

 
$
19,042

Occupancy
919

 
947

 
2,887

 
2,900

Furniture and equipment
1,304

 
1,212

 
3,911

 
3,685

Office supplies and postage
457

 
390

 
1,311

 
1,157

Advertising and business development
854

 
775

 
2,547

 
2,216

Outside services
1,770

 
1,773

 
5,203

 
4,981

Rental expenses on tax credit real estate
558

 
552

 
1,719

 
1,635

FDIC insurance assessment
293

 
282

 
866

 
823

Other noninterest expense
392

 
490

 
1,231

 
1,177

 
$
13,672

 
$
12,821

 
$
40,375

 
$
37,616

Income before income taxes
$
11,222

 
$
11,524

 
$
32,507

 
$
31,026

Income taxes
3,537

 
3,625

 
9,972

 
9,202

Net income
$
7,685

 
$
7,899

 
$
22,535

 
$
21,824

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
0.82

 
$
0.85

 
$
2.41

 
$
2.33

Diluted
$
0.82

 
$
0.84

 
$
2.41

 
$
2.32

 
See Notes to Consolidated Financial Statements.

Page 5

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
7,685

 
$
7,899

 
$
22,535

 
$
21,824

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 
 
 
Securities:
 

 
 

 
 
 
 
Net change in unrealized gain on securities available for sale
$
1,026

 
$
26

 
$
438

 
$
851

Reclassification adjustment for net gains realized in net income
—

 
—

 
—

 
—

Income taxes
(392
)
 
(10
)
 
(167
)
 
(325
)
Other comprehensive income on securities available for sale
$
634

 
$
16

 
$
271

 
$
526

Derivatives used in cash flow hedging relationships:
 

 
 

 
 
 
 
Net change in unrealized loss on derivatives
$
(1,637
)
 
$
(37
)
 
$
(1,889
)
 
$
(2,216
)
Income taxes
626

 
14

 
723

 
847

Other comprehensive loss on cash flow hedges
$
(1,011
)
 
$
(23
)
 
$
(1,166
)
 
$
(1,369
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax
$
(377
)
 
$
(7
)
 
$
(895
)
 
$
(843
)
 
 
 
 
 
 
 
 
Comprehensive income
$
7,308

 
$
7,892

 
$
21,640

 
$
20,981

 
See Notes to Consolidated Financial Statements.

Page 6

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 10,128 shares of common stock
266

 
—

 
—

 
—

 
—

 
—

 
266

Issuance of 3,234 shares of common stock under the employee stock purchase plan
121

 
—

 
—

 
—

 
—

 
—

 
121

Unearned restricted stock compensation
48

 
—

 
—

 
—

 
—

 
—

 
48

Forfeiture of 1,142 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 ($0.575 per share)
—

 
(5,420
)
 
—

 
—

 
—

 
—

 
(5,420
)
Purchase of 88,164 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
42,925

 
$
271,924

 
$
(448
)
 
$
(504
)
 
$
(23,798
)
 
$
(34,571
)
 
$
255,528

Issuance of 3,260 shares of common stock
136

 
—

 
—

 
—

 
—

 
—

 
136

Issuance of 4,155 shares of common stock under the employee stock purchase plan
172

 
—

 
—

 
—

 
—

 
—

 
172

Unearned restricted stock compensation
171

 
—

 
—

 
—

 
—

 
—

 
171

Forfeiture of 1,042 shares of common stock
(37
)
 
—

 
—

 
—

 
—

 
—

 
(37
)
Share-based compensation
21

 
—

 
—

 
—

 
—

 
—

 
21

Income tax benefit related to share-based compensation
7

 
—

 
—

 
—

 
—

 
—

 
7

Change related to ESOP shares
—

 
—

 
—

 
—

 
—

 
(1,359
)
 
(1,359
)
Net income
—

 
22,535

 
—

 
—

 
—

 
—

 
22,535

Cash dividends ($0.625 per share)
—

 
(5,855
)
 
—

 
—

 
—

 
—

 
(5,855
)
Purchase of 53,710 shares of common stock
—

 
—

 
—

 
—

 
(2,297
)
 
—

 
(2,297
)
Other comprehensive loss
—

 
—

 
(895
)
 
—

 
—

 
—

 
(895
)
Balance, September 30, 2015
$
43,395

 
$
288,604

 
$
(1,343
)
 
$
(504
)
 
$
(26,095
)
 
$
(35,930
)
 
$
268,127

 
See Notes to Consolidated Financial Statements.

Page 7

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

 
Nine Months Ended 
 September 30,
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
Net income
$
22,535

 
$
21,824

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

 
 

Depreciation
2,055

 
1,916

Provision for loan losses
360

 
(1,209
)
Share-based compensation
21

 
21

Forfeiture of common stock
(37
)
 
(40
)
Compensation expensed through issuance of common stock
308

 
286

Excess tax benefits from share-based compensation
(7
)
 
(50
)
Provision for deferred income taxes
(1,033
)
 
37

Net gain on sale of other real estate owned and other repossessed assets
(139
)
 
(426
)
Increase in accrued interest receivable
(1,424
)
 
(1,304
)
Amortization of discount on investment securities, net
498

 
654

Decrease in other assets
246

 
222

Increase in accrued interest payable and other liabilities
2,479

 
2,845

Loans originated for sale
(133,522
)
 
(80,798
)
Proceeds on sales of loans
134,747

 
83,879

Net gain on sales of loans
(1,144
)
 
(638
)
Net cash and cash equivalents provided by operating activities
$
25,943

 
$
27,219

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Proceeds from maturities of investment securities available for sale
$
45,901

 
$
46,252

Purchases of investment securities available for sale
(35,847
)
 
(51,434
)
Loans made to customers, net of collections
(90,695
)
 
(113,409
)
Proceeds on sale of other real estate owned and other repossessed assets
1,134

 
1,609

Purchases of property and equipment
(6,678
)
 
(703
)
Income from tax credit real estate, net
666

 
682

Net cash and cash equivalents used in investing activities
$
(85,519
)
 
$
(117,003
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
53,907

 
$
129,619

Net decrease in other borrowings
(11,375
)
 
(5,983
)
Net increase in FHLB borrowings
30,000

 
—

Borrowings from FRB
4

 
—

Payments on FRB borrowings
(4
)
 
—

Stock options exercised
—

 
101

Excess tax benefits related to share-based compensation
7

 
50

Purchase of treasury stock
(2,297
)
 
(3,421
)
Dividends paid
(5,855
)
 
(5,420
)
Net cash and cash equivalents provided by financing activities
$
64,387

 
$
114,946

 
(Continued)


Page 8

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Increase in cash and cash equivalents
$
4,811

 
$
25,162

Cash and cash equivalents:
 

 
 

Beginning of year
29,174

 
43,702

End of period
$
33,985

 
$
68,864

 
 
 
 
Supplemental Disclosures
 

 
 

Cash payments for:
 

 
 

Interest paid to depositors
$
6,399

 
$
7,232

Interest paid on other obligations
4,761

 
4,278

Income taxes paid
10,072

 
8,072

 
 
 
 
Noncash activities:
 

 
 

Increase in maximum cash obligation related to ESOP shares
$
1,359

 
$
2,926

Transfers to other real estate owned
355

 
1,726

Sale and financing of other real estate owned
452

 
242

 
See Notes to Consolidated Financial Statements.



Page 9

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, 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. In August 2015, FASB issued ASU 2015-14 deferring the effective date for annual periods and interim periods within those annual periods after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently reviewing the provisions of this standard to determine the application to financial institutions.

In February 2015, the FASB issued ASU No. 2015-02 (Topic 810), Consolidation. The ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIE) or voting interest entities (VOE). The standard relaxes existing criteria for determining when fees paid to a decision maker or service provider do not represent a variable interest by focusing on whether those fees are "at market". The ASU eliminates both the consolidation model specific to limited partnerships and the current presumption that a general partner controls a limited partnership. For public companies, ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently reviewing the provisions of this standard to determine the impact on the Company's financial statements.
 
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company has determined that the adoption of ASU 2015-03 will not have a material impact on the Company's financial statements.

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.


Page 10
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.

On March 24, 2015, the Company declared a payment of a 2-for-1 stock split of each issued and unissued share of the Company's common stock outstanding as of April 27, 2015. The additional shares were issued as a result of the stock split and were mailed to the shareholders as of May 4, 2015. All shares and earnings per share numbers have been restated for the stock split.

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,
 
2015
 
2014
 
2015
 
2014
Common shares outstanding at the beginning of the period
9,351,859

 
9,393,182

 
9,365,176

 
9,423,990

Weighted average number of net shares redeemed
(10,342
)
 
(21,346
)
 
(11,936
)
 
(24,980
)
Weighted average shares outstanding (basic)
9,341,517

 
9,371,836

 
9,353,240

 
9,399,010

Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method
5,590

 
4,278

 
5,285

 
4,730

Weighted average number of shares (diluted)
9,347,107

 
9,376,114

 
9,358,525

 
9,403,740

Net income (In thousands)
$
7,685

 
$
7,899

 
$
22,535

 
$
21,824

Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.82

 
$
0.85

 
$
2.41

 
$
2.33

Diluted
$
0.82

 
$
0.84

 
$
2.41

 
$
2.32


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 September 30, 2015 and December 31, 2014:

 
September 30, 2015

December 31, 2014
 
(amounts in thousands)
Net unrealized gain on available-for-sale securities
$
2,510

 
$
2,072

Net unrealized loss on derivatives used for cash flow hedges
(4,685
)
 
(2,796
)
Tax effect
832

 
276

Net-of-tax amount
$
(1,343
)
 
$
(448
)
 





Page 11
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4.
Securities

The carrying values of investment securities at September 30, 2015 and December 31, 2014 are summarized in the following table (dollars in thousands):

 
September 30, 2015
 
December 31, 2014
 
Amount
 
Percent
 
Amount
 
Percent
Securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
22,643

 
9.15
%
 
$
22,333

 
8.62
%
Other securities (FHLB, FHLMC and FNMA)
67,419

 
27.24

 
67,691

 
26.14

State and political subdivisions
157,423

 
63.61

 
168,968

 
65.24

Total securities available for sale
$
247,485

 
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 September 30, 2015 or December 31, 2014. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of September 30, 2015 and December 31, 2014 (in thousands):

 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated Fair
Value
September 30, 2015:
 
 
 
 
 
 
 
U.S. Treasury
$
22,385

 
$
258

 
$
—

 
$
22,643

Other securities (FHLB, FHLMC and FNMA)
67,095

 
335

 
(11
)
 
67,419

State and political subdivisions
155,495

 
2,210

 
(282
)
 
157,423

Total
$
244,975

 
$
2,803

 
$
(293
)
 
$
247,485

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 September 30, 2015, were as follows (in thousands):
 
 
Amortized
Cost
 
Fair Value
Due in one year or less
$
31,404

 
$
31,517

Due after one year through five years
144,620

 
146,563

Due after five years through ten years
67,597

 
68,048

Due over ten years
1,354

 
1,357

Total
$
244,975

 
$
247,485


As of September 30, 2015 investment securities with a carrying value of $36.12 million were pledged to collateralize repurchase agreements, derivative financial instruments, and other 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, 2015 and December 31, 2014 (in thousands):

 
Less than 12 months
 
12 months or more
 
Total
September 30, 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)
4

 
9,416

 
(11
)
 
0.12

 
—

 
—

 
—

 
—

 
4

 
9,416

 
(11
)
 
0.12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
105

 
23,698

 
(178
)
 
0.75

 
27

 
5,861

 
(104
)
 
1.77

 
132

 
29,559

 
(282
)
 
0.95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
109

 
$
33,114

 
$
(189
)
 
0.57
%
 
27

 
$
5,861

 
$
(104
)
 
1.77
%
 
136

 
$
38,975

 
$
(293
)
 
0.75
%

 
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.


Page 13
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5.
Loans

Classes of loans are as follows:

 
September 30,
2015
 
December 31,
2014
 
(Amounts In Thousands)
Agricultural
$
93,533

 
$
97,645

Commercial and financial
173,029

 
174,738

Real estate:
 
 
 
Construction, 1 to 4 family residential
54,706

 
45,949

Construction, land development and commercial
91,742

 
77,020

Mortgage, farmland
179,981

 
162,503

Mortgage, 1 to 4 family first liens
715,575

 
672,674

Mortgage, 1 to 4 family junior liens
115,657

 
110,284

Mortgage, multi-family
251,512

 
245,213

Mortgage, commercial
323,454

 
321,601

Loans to individuals
22,960

 
21,342

Obligations of state and political subdivisions
53,930

 
55,729

 
$
2,076,079

 
$
1,984,698

Net unamortized fees and costs
750

 
691

 
$
2,076,829

 
$
1,985,389

Less allowance for loan losses
25,480

 
24,020

 
$
2,051,349

 
$
1,961,369



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, 2015 were as follows:

 
Three Months Ended September 30, 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
$
2,783

 
$
4,698

 
$
3,025

 
$
2,825

 
$
7,396

 
$
4,111

 
$
962

 
$
25,800

Charge-offs
(69
)
 
(18
)
 
(100
)
 
—

 
(135
)
 
(305
)
 
(137
)
 
(764
)
Recoveries
32

 
318

 
40

 
—

 
92

 
4

 
53

 
539

Provision
117

 
(303
)
 
(379
)
 
107

 
70

 
320

 
(27
)
 
(95
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,863

 
$
4,695

 
$
2,586

 
$
2,932

 
$
7,423

 
$
4,130

 
$
851

 
$
25,480




Nine Months Ended September 30, 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
(325
)
 
(334
)
 
(247
)
 
—

 
(803
)
 
(486
)
 
(287
)
 
(2,482
)
Recoveries
115

 
1,053

 
343

 
6

 
652

 
1,274

 
139

 
3,582

Provision
558

 
(255
)
 
249

 
254

 
155

 
(853
)
 
252

 
360

 


 


 


 


 


 


 


 


Ending balance
$
2,863

 
$
4,695

 
$
2,586

 
$
2,932

 
$
7,423

 
$
4,130

 
$
851

 
$
25,480

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
2

 
$
471

 
$
12

 
$
—

 
$
102

 
$
50

 
$
26

 
$
663

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
2,861

 
$
4,224

 
$
2,574

 
$
2,932

 
$
7,321

 
$
4,080

 
$
825

 
$
24,817

 


 


 


 


 


 


 


 


Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
93,533

 
$
173,029

 
$
146,448

 
$
179,981

 
$
831,232

 
$
574,966

 
$
76,890

 
$
2,076,079

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
1,611

 
$
2,364

 
$
1,231

 
$
2,298

 
$
4,259

 
$
3,069

 
$
26

 
$
14,858

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
91,922

 
$
170,665

 
$
145,217

 
$
177,683

 
$
826,973

 
$
571,897

 
$
76,864

 
$
2,061,221


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, 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