HILLS BANCORPORATION - FORM 10-Q - May 5, 2016

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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 March 31, 2016

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
April 30, 2016
 
 
Common Stock, no par value
9,289,887
 
 
 
 


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) 
 
March 31, 2016
 
December 31, 2015
ASSETS
(Unaudited)
 
Cash and cash equivalents
$
133,672

 
$
35,427

Investment securities available for sale at fair value (amortized cost March 31, 2016 $260,649; December 31, 2015 $261,991)
263,911

 
264,235

Stock of Federal Home Loan Bank
12,624

 
11,834

Loans held for sale
4,571

 
5,554

Loans, net of allowance for loan losses (March 31, 2016 $27,130; December 31, 2015 $26,510)
2,111,075

 
2,099,174

Property and equipment, net
34,414

 
33,522

Tax credit real estate investment
11,370

 
16,314

Accrued interest receivable
10,020

 
8,672

Deferred income taxes, net
12,456

 
11,695

Other real estate
340

 
439

Goodwill
2,500

 
2,500

Other assets
2,535

 
4,241

Total Assets
$
2,599,488

 
$
2,493,607

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
 
 
Liabilities
 

 
 

Noninterest-bearing deposits
$
296,922

 
$
314,968

Interest-bearing deposits
1,682,659

 
1,575,734

Total deposits
$
1,979,581

 
$
1,890,702

Other borrowings
45,381

 
44,051

Federal Home Loan Bank borrowings
240,000

 
225,000

Accrued interest payable
838

 
846

Other liabilities
24,153

 
23,271

Total Liabilities
$
2,289,953

 
$
2,183,870

 
 
 
 
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
$
37,988

 
$
37,562

 
 
 
 
STOCKHOLDERS' EQUITY
 

 
 

Common stock, no par value; authorized 20,000,000 shares; issued March 31, 2016 10,202,503 shares; December 31, 2015 10,199,643 shares
$
—

 
$
—

Paid in capital
43,889

 
43,697

Retained earnings
296,127

 
294,487

Accumulated other comprehensive loss
(1,650
)
 
(1,195
)
Treasury stock at cost (March 31, 2016 912,841 shares; December 31, 2015 877,589 shares)
(28,831
)
 
(27,252
)
Total Stockholders' Equity
$
309,535

 
$
309,737

Less maximum cash obligation related to ESOP shares
37,988

 
37,562

Total Stockholders' Equity Less Maximum Cash Obligations Related to ESOP Shares
$
271,547

 
$
272,175

Total Liabilities & Stockholders' Equity
$
2,599,488

 
$
2,493,607


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 March 31,
 
2016
 
2015
Interest income:
 
 
 
Loans, including fees
$
22,528

 
$
21,080

Investment securities:
 

 
 

Taxable
356

 
286

Nontaxable
828

 
843

Federal funds sold
44

 
5

Total interest income
$
23,756

 
$
22,214

Interest expense:
 

 
 

Deposits
$
1,921

 
$
2,164

Short-term borrowings
30

 
17

FHLB borrowings
2,132

 
1,454

Total interest expense
$
4,083

 
$
3,635

Net interest income
$
19,673

 
$
18,579

Provision for loan losses
549

 
(62
)
Net interest income after provision for loan losses
$
19,124

 
$
18,641

Noninterest income:
 

 
 

Net gain on sale of loans
$
289

 
$
308

Trust fees
1,728

 
1,569

Service charges and fees
2,055

 
1,946

Rental revenue on tax credit real estate
—

 
511

Net gain on sale of other real estate owned and other repossessed assets
34

 
7

Other noninterest income
767

 
649

 
$
4,873

 
$
4,990

 
 
 
 
Noninterest expenses:
 

 
 

Salaries and employee benefits
$
6,984

 
$
6,651

Occupancy
1,001

 
1,015

Furniture and equipment
1,404

 
1,298

Office supplies and postage
401

 
441

Advertising and business development
786

 
774

Outside services
1,776

 
1,814

Rental expenses on tax credit real estate
—

 
602

FDIC insurance assessment
303

 
289

Other noninterest expense
397

 
315

 
$
13,052

 
$
13,199

Income before income taxes
$
10,945

 
$
10,432

Income taxes
3,245

 
3,052

Net income
$
7,700

 
$
7,380

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.83

 
$
0.79

Diluted
$
0.83

 
$
0.79

 
See Notes to Consolidated Financial Statements.

Page 5

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

 
Three Months Ended March 31,
 
2016
 
2015
Net income
$
7,700

 
$
7,380

 
 
 
 
Other comprehensive income (loss)
 

 
 

Securities:
 

 
 

Net change in unrealized gain on securities available for sale
$
1,018

 
$
1,133

Reclassification adjustment for net gains realized in net income
—

 
—

Income taxes
(390
)
 
(433
)
Other comprehensive income on securities available for sale
$
628

 
$
700

Derivatives used in cash flow hedging relationships:
 

 
 

Net change in unrealized loss on derivatives
$
(1,753
)
 
$
(1,092
)
Income taxes
670

 
418

Other comprehensive loss on cash flow hedges
$
(1,083
)
 
$
(674
)
 
 
 
 
Other comprehensive (loss) income, net of tax
$
(455
)
 
$
26

 
 
 
 
Comprehensive income
$
7,245

 
$
7,406

 
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, 2014
$
42,925

 
$
271,924

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

Issuance of 292 shares of common stock
12

 
—

 
—

 
—

 
—

 
—

 
12

Issuance of 1,132 shares of common stock under the employee stock purchase plan
45

 
—

 
—

 
—

 
—

 
—

 
45

Unearned restricted stock compensation
89

 
—

 
—

 
—

 
—

 
—

 
89

Forfeiture of 682 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 ($0.625 per share)
—

 
(5,855
)
 
—

 
—

 
—

 
—

 
(5,855
)
Purchase of 4,728 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
$
43,697

 
$
294,487

 
$
(1,195
)
 
$
—

 
$
(27,252
)
 
$
(37,562
)
 
$
272,175

Issuance of 1,626 shares of common stock
73

 
—

 
—

 
—

 
—

 
—

 
73

Issuance of 1,234 shares of common stock under the employee stock purchase plan
54

 
—

 
—

 
—

 
—

 
—

 
54

Unearned restricted stock compensation
56

 
—

 
—

 
—

 
—

 
—

 
56

Share-based compensation
7

 
—

 
—

 
—

 
—

 
—

 
7

Income tax benefit related to share-based compensation
2

 
—

 
—

 
—

 
—

 
—

 
2

Change related to ESOP shares
—

 
—

 
—

 
—

 
—

 
(426
)
 
(426
)
Net income
—

 
7,700

 
—

 
—

 
—

 
—

 
7,700

Cash dividends ($0.65 per share)
—

 
(6,060
)
 
—

 
—

 
—

 
—

 
(6,060
)
Purchase of 35,252 shares of common stock
—

 
—

 
—

 
—

 
(1,579
)
 
—

 
(1,579
)
Other comprehensive loss
—

 
—

 
(455
)
 
—

 
—

 
—

 
(455
)
Balance, March 31, 2016
$
43,889

 
$
296,127

 
$
(1,650
)
 
$
—

 
$
(28,831
)
 
$
(37,988
)
 
$
271,547

 
See Notes to Consolidated Financial Statements.

Page 7

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

 
Three Months Ended 
 March 31,
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
Net income
$
7,700

 
$
7,380

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

 
 

Depreciation
727

 
685

Provision for loan losses
549

 
(62
)
Share-based compensation
7

 
7

Forfeiture of common stock
—

 
(22
)
Compensation expensed through issuance of common stock
127

 
57

Excess tax benefits from share-based compensation
(2
)
 
(4
)
Provision for deferred income taxes
(481
)
 
(295
)
Net gain on sale of other real estate owned and other repossessed assets
(34
)
 
(7
)
Increase in accrued interest receivable
(1,348
)
 
(826
)
Amortization of premium on investment securities, net
148

 
172

Decrease (increase) in other assets
739

 
(413
)
Increase in accrued interest payable and other liabilities
1,567

 
4,750

Loans originated for sale
(32,243
)
 
(40,577
)
Proceeds on sales of loans
33,515

 
37,050

Net gain on sales of loans
(289
)
 
(308
)
Net cash and cash equivalents provided by operating activities
$
10,682

 
$
7,587

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Proceeds from maturities of investment securities available for sale
$
11,031

 
$
11,906

Purchases of investment securities available for sale
(10,627
)
 
(12,029
)
Loans made to customers, net of collections
(8,995
)
 
(9,131
)
Proceeds on sale of other real estate owned and other repossessed assets
133

 
55

Purchases of property and equipment
(1,619
)
 
(4,080
)
Income from tax credit real estate, net
68

 
214

Net cash and cash equivalents used in investing activities
$
(10,009
)
 
$
(13,065
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
88,879

 
$
72,266

Net increase (decrease) in other borrowings
1,330

 
(6,571
)
Net increase in FHLB borrowings
15,000

 
—

Excess tax benefits related to share-based compensation
2

 
4

Purchase of treasury stock
(1,579
)
 
(195
)
Dividends paid
(6,060
)
 
(5,855
)
Net cash and cash equivalents provided by financing activities
$
97,572

 
$
59,649

 
(Continued)


Page 8

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Increase in cash and cash equivalents
$
98,245

 
$
54,171

Cash and cash equivalents:
 

 
 

Beginning of period
35,427

 
29,174

End of period
$
133,672

 
$
83,345

 
 
 
 
Supplemental Disclosures
 

 
 

Cash payments for:
 

 
 

Interest paid to depositors
$
1,929

 
$
2,207

Interest paid on other obligations
2,162

 
1,471

Income taxes paid
342

 
120

 
 
 
 
Noncash activities:
 

 
 

Increase in maximum cash obligation related to ESOP shares
$
426

 
$
436

Transfers to other real estate owned
—

 
63

Sale and financing of other real estate owned
135

 
113

 
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 three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016.  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, 2015 filed with the Securities Exchange Commission on March 9, 2016.  The consolidated balance sheet as of December 31, 2015, 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 adopted the accounting standard for the period ending March 31, 2016 and have changed the accounting for its tax credit limited partnership investments to the equity method. The impact of the change was determined to not be material.
 
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 adopted ASU 2015-03 for the period ending March 31, 2016. There was no material impact on the 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. If it does, 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 did not have a material impact.

Page 10
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)



In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 created Subtopic 321-10, Investments-Equity Securities which is applicable to all entities except those in industries that account for substantially all investments at fair value through earnings or the change in net assets. Under this new subtopic, equity securities are generally required to be measured at fair value with unrealized holding gains and losses reflected in net income. ASU 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of ASU 2016-01 by the Company is not expected to have a material impact.

In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), Leases. The ASU provides guidance requiring lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. Under this new ASU, lessees will recognize right-of use assets and lease liabilities for most leases currently accounted for as operating leases under generally accepted accounting principles. For public companies, ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU 2016-02 by the Company is not expected to have a material impact.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 applies to all entities that offer certain prepaid stored - value products. The ASU provides guidance for the derecognition of financial liabilities related to the issuance of these products and aligns the recognition of breakage to current authoritative guidance. For public companies, ASU 2016-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of ASU 2016-04 by the Company is not expected to have a material impact.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for share-based payment transaction, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is currently reviewing the provisions of this standard to determine the impact on the Company's financial statements.


Page 11
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 March 31,
 
2016
 
2015
Common shares outstanding at the beginning of the period
9,322,054

 
9,380,432

Weighted average number of net shares redeemed
(14,370
)
 
(17,136
)
Weighted average shares outstanding (basic)
9,307,684

 
9,363,296

Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method
6,130

 
4,980

Weighted average number of shares (diluted)
9,313,814

 
9,368,276

Net income (In thousands)
$
7,700

 
$
7,380

Earnings per share:
 

 
 

Basic
$
0.83

 
$
0.79

Diluted
$
0.83

 
$
0.79


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, 2016 and December 31, 2015:

 
March 31, 2016

December 31, 2015
 
(amounts in thousands)
Net unrealized gain on available-for-sale securities
$
3,262

 
$
2,244

Net unrealized loss on derivatives used for cash flow hedges
(5,933
)
 
(4,180
)
Tax effect
$
1,021

 
$
741

Net-of-tax amount
$
(1,650
)
 
$
(1,195
)
 





Page 12
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4.
Securities

The carrying values of investment securities at March 31, 2016 and December 31, 2015 are summarized in the following table (dollars in thousands):

 
March 31, 2016
 
December 31, 2015
 
Amount
 
Percent
 
Amount
 
Percent
Securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
25,175

 
9.54
%
 
$
24,978

 
9.45
%
Other securities (FHLB, FHLMC and FNMA)
62,258

 
23.59

 
65,328

 
24.72

State and political subdivisions
176,478

 
66.87

 
173,929

 
65.83

Total securities available for sale
$
263,911

 
100.00
%
 
$
264,235

 
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, 2016 or December 31, 2015. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of March 31, 2016 and December 31, 2015 (in thousands):

 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated Fair
Value
March 31, 2016:
 
 
 
 
 
 
 
U.S. Treasury
$
24,905

 
$
270

 
$
—

 
$
25,175

Other securities (FHLB, FHLMC and FNMA)
61,980

 
292

 
(14
)
 
62,258

State and political subdivisions
173,764

 
2,815

 
(101
)
 
176,478

Total
$
260,649

 
$
3,377

 
$
(115
)
 
$
263,911

December 31, 2015:
 

 
 

 
 

 
 

U.S. Treasury
$
24,893

 
$
92

 
$
(7
)
 
$
24,978

Other securities (FHLB, FHLMC and FNMA)
65,400

 
81

 
(153
)
 
65,328

State and political subdivisions
171,698

 
2,375

 
(144
)
 
173,929

Total
$
261,991

 
$
2,548

 
$
(304
)
 
$
264,235


The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at March 31, 2016, were as follows (in thousands):
 
 
Amortized
Cost
 
Fair Value
Due in one year or less
$
41,343

 
$
41,412

Due after one year through five years
149,479

 
151,349

Due after five years through ten years
67,533

 
68,847

Due over ten years
2,294

 
2,303

Total
$
260,649

 
$
263,911


As of March 31, 2016 investment securities with a carrying value of $71.79 million were pledged to collateralize repurchase agreements, derivative financial instruments, and other borrowings.


Page 13
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, 2016 and December 31, 2015 (in thousands):

 
Less than 12 months
 
12 months or more
 
Total
March 31, 2016
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

 
8,924

 
(14
)
 
0.16

 
—

 
—

 
—

 
—

 
4

 
8,924

 
(14
)
 
0.16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
44

 
11,020

 
(73
)
 
0.66

 
14

 
2,650

 
(28
)
 
1.06

 
58

 
13,670

 
(101
)
 
0.74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
48

 
$
19,944

 
$
(87
)
 
0.44
%
 
14

 
$
2,650

 
$
(28
)
 
1.06
%
 
62

 
$
22,594

 
$
(115
)
 
0.51
%

 
Less than 12 months
 
12 months or more
 
Total
December 31, 2015
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
3

 
$
7,455

 
$
(7
)
 
0.09
%
 
—

 
$
—

 
$
—

 
—
%
 
3

 
$
7,455

 
$
(7
)
 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
15

 
36,830

 
(153
)
 
0.42

 
—

 
—

 
—

 
—

 
15

 
36,830

 
(153
)
 
0.42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
56

 
13,557

 
(70
)
 
0.52

 
27

 
5,633

 
(74
)
 
1.31

 
83

 
19,190

 
(144
)
 
0.75

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
74

 
$
57,842

 
$
(230
)
 
0.40
%
 
27

 
$
5,633

 
$
(74
)
 
1.31
%
 
101

 
$
63,475

 
$
(304
)
 
0.48
%

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 14
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5.
Loans

Classes of loans are as follows:

 
March 31,
2016
 
December 31,
2015
 
(Amounts In Thousands)
Agricultural
$
90,620

 
$
101,588

Commercial and financial
173,736

 
184,199

Real estate:
 
 
 
Construction, 1 to 4 family residential
58,293

 
51,346

Construction, land development and commercial
105,607

 
83,121

Mortgage, farmland
189,882

 
187,856

Mortgage, 1 to 4 family first liens
725,924

 
727,160

Mortgage, 1 to 4 family junior liens
118,115

 
117,873

Mortgage, multi-family
284,715

 
271,974

Mortgage, commercial
315,965

 
323,409

Loans to individuals
22,959

 
24,019

Obligations of state and political subdivisions
51,623

 
52,371

 
$
2,137,439

 
$
2,124,916

Net unamortized fees and costs
766

 
768

 
$
2,138,205

 
$
2,125,684

Less allowance for loan losses
27,130

 
26,510

 
$
2,111,075

 
$
2,099,174



Page 15
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, 2016 were as follows:




Three Months Ended March 31, 2016
 
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
$
3,082

 
$
4,517

 
$
2,280

 
$
3,342

 
$
8,172

 
$
4,223

 
$
894

 
$
26,510

Charge-offs
—

 
(55
)
 
—

 
(10
)
 
(344
)
 
(66
)
 
(169
)
 
(644
)
Recoveries
142

 
253

 
52

 
—

 
213

 
11

 
44

 
715

Provision
(270
)
 
(404
)
 
427

 
612

 
(5
)
 
22

 
167

 
549

 


 


 


 


 


 


 


 


Ending balance
$
2,954

 
$
4,311

 
$
2,759

 
$
3,944

 
$
8,036

 
$
4,190

 
$
936

 
$
27,130

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
868

 
$
268

 
$
32

 
$
670

 
$
310

 
$
88

 
$
22

 
$
2,258

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
2,086

 
$
4,043

 
$
2,727

 
$
3,274

 
$
7,726

 
$
4,102

 
$
914

 
$
24,872

 


 


 


 


 


 


 


 


Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
90,620

 
$
173,736

 
$
163,900

 
$
189,882

 
$
844,039

 
$
600,680

 
$
74,582

 
$
2,137,439

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
12,647

 
$
2,406

 
$
1,450

 
$
8,098

 
$
5,594

 
$
3,649

 
$
22

 
$
33,866

 


 


 


 


 


 


 


 


Ending balance, collectively evaluated for impairment
$
77,973

 
$
171,330

 
$
162,450

 
$
181,784

 
$
838,445

 
$
597,031

 
$
74,560

 
$
2,103,573


Page 16
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Changes in the allowance for loan losses 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



The following table presents the credit quality indicators by type of loans in each category as of March 31, 2016 and December 31, 2015, respectively (amounts in thousands):


Page 17
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction, 1 to 4
family residential
 
Real Estate:
Construction, land
development and
commercial
March 31, 2016
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
1,773

 
$
3,050

 
$
—

 
$
255

Good
18,163

 
27,861

 
2,771

 
12,653

Satisfactory
34,358

 
101,014

 
37,546

 
70,736

Monitor
17,368

 
25,804

 
11,144

 
15,110

Special Mention
4,534

 
11,664

 
5,768

 
6,392

Substandard
14,424

 
4,343

 
1,064

 
461

Total
$
90,620

 
$
173,736

 
$
58,293

 
$
105,607


 
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, 2016
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
2,517

 
$
563

 
$
—

 
$
6,560

Good
33,497

 
14,525

 
2,654

 
67,078

Satisfactory
115,190

 
622,556

 
107,567

 
175,070

Monitor
26,787

 
53,133

 
4,227

 
30,733

Special Mention
2,261

 
16,510

 
1,867

 
4,700

Substandard
9,630

 
18,637

 
1,800

 
574

Total
$
189,882

 
$
725,924

 
$
118,115

 
$
284,715


 
Real Estate:
Mortgage,
commercial
 
Loans to
individuals
 
Obligations of state and
political subdivisions
 
Total
March 31, 2016
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
15,990

 
$
—

 
$
2,346

 
$
33,054

Good
80,891

 
92

 
36,454

 
296,639

Satisfactory
183,139

 
22,205

 
12,287

 
1,481,668

Monitor
26,456

 
237

 
518

 
211,517

Special Mention
5,522

 
209

 
18

 
59,445

Substandard
3,967

 
216