HILLS BANCORPORATION - FORM 10-Q - May 3, 2017

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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, 2017

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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
Accelerated Filer                     þ   
Non-accelerated filer    o
Small Reporting Company     o
Emerging Growth Company    o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017
 
 
Common Stock, no par value
9,338,187
 
 
 
 


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, 2017
 
December 31, 2016
ASSETS
(Unaudited)
 
Cash and cash equivalents
$
151,273

 
$
38,197

Investment securities available for sale at fair value (amortized cost March 31, 2017 $273,538; December 31, 2016 $269,039)
273,409

 
267,537

Stock of Federal Home Loan Bank
12,607

 
12,413

Loans held for sale
1,656

 
9,806

Loans, net of allowance for loan losses (March 31, 2017 $26,450; December 31, 2016 $26,530)
2,281,541

 
2,251,445

Property and equipment, net
38,335

 
37,859

Tax credit real estate investment
10,539

 
10,563

Accrued interest receivable
10,286

 
9,121

Deferred income taxes, net
12,056

 
12,611

Other real estate
218

 
237

Goodwill
2,500

 
2,500

Other assets
2,632

 
3,481

Total Assets
$
2,797,052

 
$
2,655,770

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
 
 
Liabilities
 

 
 

Noninterest-bearing deposits
$
339,867

 
$
348,505

Interest-bearing deposits
1,833,465

 
1,687,807

Total deposits
$
2,173,332

 
$
2,036,312

Other borrowings
28,086

 
33,489

Federal Home Loan Bank borrowings
235,000

 
235,000

Accrued interest payable
940

 
984

Other liabilities
22,586

 
19,934

Total Liabilities
$
2,459,944

 
$
2,325,719

 
 
 
 
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
$
43,341

 
$
40,781

 
 
 
 
STOCKHOLDERS' EQUITY
 

 
 

Common stock, no par value; authorized 20,000,000 shares; issued March 31, 2017 10,310,582 shares; December 31, 2016 10,227,178 shares
$
—

 
$
—

Paid in capital
48,676

 
44,606

Retained earnings
322,371

 
319,982

Accumulated other comprehensive loss
(2,296
)
 
(3,359
)
Treasury stock at cost (March 31, 2017 972,297 shares; December 31, 2016 962,951 shares)
(31,643
)
 
(31,178
)
Total Stockholders' Equity
$
337,108

 
$
330,051

Less maximum cash obligation related to ESOP shares
43,341

 
40,781

Total Stockholders' Equity Less Maximum Cash Obligations Related to ESOP Shares
$
293,767

 
$
289,270

Total Liabilities & Stockholders' Equity
$
2,797,052

 
$
2,655,770


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,
 
2017
 
2016
Interest income:
 
 
 
Loans, including fees
$
23,890

 
$
22,528

Investment securities:
 

 
 

Taxable
393

 
356

Nontaxable
833

 
828

Federal funds sold
64

 
44

Total interest income
$
25,180

 
$
23,756

Interest expense:
 

 
 

Deposits
$
2,128

 
$
1,921

Short-term borrowings
22

 
30

FHLB borrowings
1,833

 
2,132

Total interest expense
$
3,983

 
$
4,083

Net interest income
$
21,197

 
$
19,673

Provision for loan losses
(814
)
 
549

Net interest income after provision for loan losses
$
22,011

 
$
19,124

Noninterest income:
 

 
 

Net gain on sale of loans
$
316

 
$
289

Trust fees
1,879

 
1,728

Service charges and fees
2,132

 
2,055

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

 
34

Other noninterest income
880

 
767

 
$
5,241

 
$
4,873

 
 
 
 
Noninterest expenses:
 

 
 

Salaries and employee benefits
$
7,980

 
$
6,984

Occupancy
1,042

 
1,001

Furniture and equipment
1,429

 
1,404

Office supplies and postage
461

 
401

Advertising and business development
790

 
786

Outside services
2,008

 
1,776

FDIC insurance assessment
207

 
303

Other noninterest expense
494

 
397

 
$
14,411

 
$
13,052

Income before income taxes
$
12,841

 
$
10,945

Income taxes
3,967

 
3,245

Net income
$
8,874

 
$
7,700

 
 
 
 
Earnings per share:
 

 
 

Basic
$
0.95

 
$
0.83

Diluted
$
0.95

 
$
0.83

 
See Notes to Consolidated Financial Statements.

Page 5

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

 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
8,874

 
$
7,700

 
 
 
 
Other comprehensive income (loss)
 

 
 

Securities:
 

 
 

Net change in unrealized loss on securities available for sale
$
1,373

 
$
1,018

Reclassification adjustment for net gains realized in net income
—

 
—

Income taxes
(526
)
 
(390
)
Other comprehensive income on securities available for sale
$
847

 
$
628

Derivatives used in cash flow hedging relationships:
 

 
 

Net change in unrealized loss on derivatives
$
349

 
$
(1,753
)
Income taxes
(133
)
 
670

Other comprehensive income (loss) on cash flow hedges
$
216

 
$
(1,083
)
 
 
 
 
Other comprehensive income (loss), net of tax
$
1,063

 
$
(455
)
 
 
 
 
Comprehensive income
$
9,937

 
$
7,245

 
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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
44,606

 
$
319,982

 
$
(3,359
)
 
$
—

 
$
(31,178
)
 
$
(40,781
)
 
$
289,270

Issuance of 84,638 shares of common stock
3,966

 
—

 
—

 
—

 
—

 
—

 
3,966

Unearned restricted stock compensation
96

 
—

 
—

 
—

 
—

 
—

 
96

Forfeiture of 1,234 shares of common stock
(48
)
 
—

 
—

 
—

 
—

 
—

 
(48
)
Share-based compensation
12

 
—

 
—

 
—

 
—

 
—

 
12

Income tax benefit related to share-based compensation
44

 
—

 
—

 
—

 
—

 
—

 
44

Change related to ESOP shares
—

 
—

 
—

 
—

 
—

 
(2,560
)
 
(2,560
)
Net income
—

 
8,874

 
—

 
—

 
—

 
—

 
8,874

Cash dividends ($0.70 per share)
—

 
(6,485
)
 
—

 
—

 
—

 
—

 
(6,485
)
Purchase of 9,346 shares of common stock
—

 
—

 
—

 
—

 
(465
)
 
—

 
(465
)
Other comprehensive income
—

 
—

 
1,063

 
—

 
—

 
—

 
1,063

Balance, March 31, 2017
$
48,676

 
$
322,371

 
$
(2,296
)
 
$
—

 
$
(31,643
)
 
$
(43,341
)
 
$
293,767

 
See Notes to Consolidated Financial Statements.

Page 7

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

 
Three Months Ended 
 March 31,
 
2017
 
2016
Cash Flows from Operating Activities
 
 
 
Net income
$
8,874

 
$
7,700

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

 
 

Depreciation
757

 
727

Provision for loan losses
(814
)
 
549

Share-based compensation
12

 
7

Forfeiture of common stock
(48
)
 
—

Compensation expensed through issuance of common stock
85

 
127

Excess tax benefits from share-based compensation
(44
)
 
(2
)
Provision for deferred income taxes
(104
)
 
(481
)
Net gain on sale of other real estate owned and other repossessed assets
(34
)
 
(34
)
Increase in accrued interest receivable
(1,165
)
 
(1,348
)
Amortization of premium on investment securities, net
151

 
148

Decrease in other assets
1,241

 
739

Increase in accrued interest payable and other liabilities
2,704

 
1,567

Loans originated for sale
(23,735
)
 
(32,243
)
Proceeds on sales of loans
32,201

 
33,515

Net gain on sales of loans
(316
)
 
(289
)
Net cash and cash equivalents provided by operating activities
$
19,765

 
$
10,682

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Proceeds from maturities of investment securities available for sale
$
8,206

 
$
11,031

Purchases of investment securities available for sale
(13,049
)
 
(10,627
)
Loans made to customers, net of collections
(29,401
)
 
(8,995
)
Proceeds on sale of other real estate owned and other repossessed assets
172

 
133

Purchases of property and equipment
(1,233
)
 
(1,619
)
Income from tax credit real estate, net
24

 
68

Net cash and cash equivalents used in investing activities
$
(35,281
)
 
$
(10,009
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
137,020

 
$
88,879

Net (decrease) increase in other borrowings
(5,403
)
 
1,330

Net increase in FHLB borrowings
—

 
15,000

Issuance of common stock, net of costs
3,762

 
—

Stock options exercised
119

 
—

Excess tax benefits related to share-based compensation
44

 
2

Purchase of treasury stock
(465
)
 
(1,579
)
Dividends paid
(6,485
)
 
(6,060
)
Net cash and cash equivalents provided by financing activities
$
128,592

 
$
97,572

 
(Continued)


Page 8

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Increase in cash and cash equivalents
$
113,076

 
$
98,245

Cash and cash equivalents:
 

 
 

Beginning of period
38,197

 
35,427

End of period
$
151,273

 
$
133,672

 
 
 
 
Supplemental Disclosures
 

 
 

Cash payments for:
 

 
 

Interest paid to depositors
$
2,172

 
$
1,929

Interest paid on other obligations
1,855

 
2,162

Income taxes paid
—

 
342

 
 
 
 
Noncash activities:
 

 
 

Increase in maximum cash obligation related to ESOP shares
$
2,560

 
$
426

Transfers to other real estate owned
95

 
—

Sale and financing of other real estate owned
214

 
135

 
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, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.  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, 2016 filed with the Securities Exchange Commission on March 3, 2017.  The consolidated balance sheet as of December 31, 2016, 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 in the process of evaluating its noninterest income streams and how they might be impacted by the new guidance. The adoption of ASU 2014-09 by the Company is not expected to have a material impact.

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.

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


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 adopted ASU 2016-09 for the period ending March 31, 2017. There was no material impact on the financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (CECL). The ASU changes the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. For public companies, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This ASU adds an SEC paragraph and amends other Topics pursuant to an SEC staff Announcement made at the September 22, 2016 Emerging Issues Task Force (EITF) meeting. The SEC paragraph applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU provides that a company should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. If the company does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, the company should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the company when adopted. Additional qualitative disclosures should include a description of the effect of the accounting policies that the company expects to apply and a comparison to the company's current accounting policies. Also, the company should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 250), Simplifying the Test for Goodwill Impairment. The ASU simplifies the goodwill impairment test by permitting a company to perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized when the carrying amount exceeds fair value. For public companies, ASU 2017-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2017-04 by the Company is not expected to have a material impact.

In March 2017, the FASB issued ASU No. 2017-08, Receivable - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for certain callable debt securities held at a premium. The premium will be amortized to the earliest call date. For public companies, ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-08 for the period ending March 31, 2017. There was no material impact on the 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.

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

 
Three Months Ended March 31,
 
2017
 
2016
Common shares outstanding at the beginning of the period
9,264,227

 
9,322,054

Weighted average number of net shares issued (redeemed)
61,124

 
(14,370
)
Weighted average shares outstanding (basic)
9,325,351

 
9,307,684

Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method
6,190

 
6,130

Weighted average number of shares (diluted)
9,331,541

 
9,313,814

Net income (In thousands)
$
8,874

 
$
7,700

Earnings per share:
 

 
 

Basic
$
0.95

 
$
0.83

Diluted
$
0.95

 
$
0.83


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, 2017 and December 31, 2016:

 
March 31,
2017

December 31, 2016
 
(amounts in thousands)
Net unrealized loss on available-for-sale securities
$
(129
)
 
$
(1,502
)
Net unrealized loss on derivatives used for cash flow hedges
(3,589
)
 
(3,938
)
Tax effect
$
1,422

 
$
2,081

Net-of-tax amount
$
(2,296
)
 
$
(3,359
)
 





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

Note 4.
Securities

The carrying values of investment securities at March 31, 2017 and December 31, 2016 are summarized in the following table (dollars in thousands):

 
March 31, 2017
 
December 31, 2016
 
Amount
 
Percent
 
Amount
 
Percent
Securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
32,389

 
11.85
%
 
$
27,482

 
10.27
%
Other securities (FHLB, FHLMC and FNMA)
57,744

 
21.12

 
61,660

 
23.05

State and political subdivisions
183,276

 
67.03

 
178,395

 
66.68

Total securities available for sale
$
273,409

 
100.00
%
 
$
267,537

 
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, 2017 or December 31, 2016. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of March 31, 2017 and December 31, 2016 (in thousands):

 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated Fair
Value
March 31, 2017:
 
 
 
 
 
 
 
U.S. Treasury
$
32,320

 
$
80

 
$
(11
)
 
$
32,389

Other securities (FHLB, FHLMC and FNMA)
58,029

 
45

 
(330
)
 
57,744

State and political subdivisions
183,189

 
1,020

 
(933
)
 
183,276

Total
$
273,538

 
$
1,145

 
$
(1,274
)
 
$
273,409

December 31, 2016:
 

 
 

 
 

 
 

U.S. Treasury
$
27,418

 
$
82

 
$
(18
)
 
$
27,482

Other securities (FHLB, FHLMC and FNMA)
62,047

 
65

 
(452
)
 
61,660

State and political subdivisions
179,574

 
626

 
(1,805
)
 
178,395

Total
$
269,039

 
$
773

 
$
(2,275
)
 
$
267,537


The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at March 31, 2017, were as follows (in thousands):
 
 
Amortized
Cost
 
Fair Value
Due in one year or less
$
54,197

 
$
54,263

Due after one year through five years
144,824

 
145,067

Due after five years through ten years
73,442

 
73,007

Due over ten years
1,075

 
1,072

Total
$
273,538

 
$
273,409


As of March 31, 2017 investment securities with a carrying value of $45.51 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, 2017 and December 31, 2016 (in thousands):

 
Less than 12 months
 
12 months or more
 
Total
March 31, 2017
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
2

 
$
4,937

 
$
(11
)
 
0.22
%
 
—

 
$
—

 
$
—

 
—
%
 
2

 
$
4,937

 
$
(11
)
 
0.22
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
12

 
29,741

 
(330
)
 
1.11

 
—

 
—

 
—

 
—

 
12

 
29,741

 
(330
)
 
1.11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
237

 
57,946

 
(904
)
 
1.56

 
11

 
1,500

 
(29
)
 
1.93

 
248

 
59,446

 
(933
)
 
1.57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
251

 
$
92,624

 
$
(1,245
)
 
1.34
%
 
11

 
$
1,500

 
$
(29
)
 
1.93
%
 
262

 
$
94,124

 
$
(1,274
)
 
1.35
%

 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
2

 
$
4,957

 
$
(18
)
 
0.36
%
 
—

 
$
—

 
$
—

 
—
%
 
2

 
$
4,957

 
$
(18
)
 
0.36
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
14

 
34,648

 
(452
)
 
1.30

 
—

 
—

 
—

 
—

 
14

 
34,648

 
(452
)
 
1.30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
365

 
87,841

 
(1,762
)
 
2.01

 
11

 
1,486

 
(43
)
 
2.89

 
376

 
89,327

 
(1,805
)
 
2.02

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
381

 
$
127,446

 
$
(2,232
)
 
1.75
%
 
11

 
$
1,486

 
$
(43
)
 
2.89
%
 
392

 
$
128,932

 
$
(2,275
)
 
1.76
%

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,
2017
 
December 31,
2016
 
(Amounts In Thousands)
Agricultural
$
87,934

 
$
92,871

Commercial and financial
199,702

 
192,995

Real estate:
 
 
 
Construction, 1 to 4 family residential
63,784

 
57,864

Construction, land development and commercial
125,144

 
121,561

Mortgage, farmland
205,334

 
202,340

Mortgage, 1 to 4 family first liens
780,407

 
767,469

Mortgage, 1 to 4 family junior liens
127,721

 
125,400

Mortgage, multi-family
303,653

 
302,831

Mortgage, commercial
334,067

 
334,198

Loans to individuals
24,710

 
25,157

Obligations of state and political subdivisions
54,709

 
54,462

 
$
2,307,165

 
$
2,277,148

Net unamortized fees and costs
826

 
827

 
$
2,307,991

 
$
2,277,975

Less allowance for loan losses
26,450

 
26,530

 
$
2,281,541

 
$
2,251,445



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, 2017 were as follows:

Three Months Ended March 31, 2017
 
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
$
2,947

 
$
4,531

 
$
2,890

 
$
3,417

 
$
7,677

 
$
4,045

 
$
1,023

 
$
26,530

Charge-offs
—

 
(220
)
 
—

 
—

 
(145
)
 
—

 
(188
)
 
(553
)
Recoveries
38

 
454

 
381

 
—

 
133

 
180

 
101

 
1,287

Provision
(480
)
 
(866
)
 
(177
)
 
90

 
507

 
133

 
(21
)
 
(814
)
 


 


 


 


 


 


 


 


Ending balance
$
2,505

 
$
3,899

 
$
3,094

 
$
3,507

 
$
8,172

 
$
4,358

 
$
915

 
$
26,450

 

 

 

 

 

 

 

 

Ending balance, individually evaluated for impairment
$
587

 
$
144

 
$
72

 
$
345

 
$
62

 
$
15

 
$
36

 
$
1,261

 

 

 

 

 

 

 

 

Ending balance, collectively evaluated for impairment
$
1,918

 
$
3,755

 
$
3,022

 
$
3,162

 
$
8,110

 
$
4,343

 
$
879

 
$
25,189

 


 


 


 


 


 


 


 


Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
87,934

 
$
199,702

 
$
188,928

 
$
205,334

 
$
908,128

 
$
637,720

 
$
79,419

 
$
2,307,165

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
11,388

 
$
1,787

 
$
671

 
$
8,502

 
$
5,521

 
$
2,034

 
$
36

 
$
29,939

 

 

 

 

 

 

 

 

Ending balance, collectively evaluated for impairment
$
76,546

 
$
197,915

 
$
188,257

 
$
196,832

 
$
902,607

 
$
635,686

 
$
79,383

 
$
2,277,226


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, 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 17
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, 2017 and December 31, 2016, 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, 2017
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
3,256

 
$
9,520

 
$
—

 
$
635

Good
14,292

 
38,506

 
5,753

 
22,777

Satisfactory
37,290

 
115,447

 
45,876

 
51,858

Monitor
15,562

 
25,704

 
9,256

 
45,207

Special Mention
4,372

 
6,328

 
1,311

 
4,215

Substandard
13,162

 
4,197

 
1,588

 
452

Total
$
87,934

 
$
199,702

 
$
63,784

 
$
125,144


 
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, 2017
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
2,829

 
$
1,183

 
$
130

 
$
5,882

Good
49,476

 
15,354

 
3,342

 
72,006

Satisfactory
104,287

 
659,704

 
115,372

 
182,985

Monitor
36,334

 
68,035

 
4,891

 
38,867

Special Mention
3,136

 
12,523

 
1,506

 
3,611

Substandard
9,272

 
23,608

 
2,480

 
302

Total
$
205,334

 
$
780,407

 
$
127,721

 
$
303,653


 
Real Estate:
Mortgage,
commercial
 
Loans to
individuals
 
Obligations of state and
political subdivisions
 
Total
March 31, 2017
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
Excellent
$
15,424

 
$
—

 
$
—

 
$
38,859

Good
89,922

 
97

 
34,395

 
345,920

Satisfactory
186,099

 
23,903

 
17,160

 
1,539,981

Monitor
34,981

 
340

 
3,154

 
282,331

Special Mention
3,925

 
193

 
—

 
41,120

Substandard
3,716

 
177

 
—

 
58,954

Total
$
334,067

 
$
24,710

 
$
54,709

 
$