Item 1. Business
Hills Bancorporation (the "Company") is a multi-bank holding company principally engaged in the business of banking. Its three wholly-owned subsidiary banks are Hills Bank and Trust Company, Hills, Iowa ("Hills Bank and Trust"); Hills Bank (formerly Lisbon Bank and Trust Company), Lisbon, Iowa ("Hills Bank Lisbon"); and Hills Bank Kalona, Kalona, Iowa ("Hills Bank Kalona") (hereinafter referred to as the "Banks").
The Company was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Company became owner of 100% of the outstanding stock of Hills Bank and Trust Company as of January 23, 1984 when stockholders of the Bank exchanged their shares for shares of the Company. Effective July 1, 1996, the Company acquired for cash all of the outstanding shares of LBC, Inc., which owned 100% of the outstanding shares of Alliance Bancorporation, which held 100% of the outstanding shares of Hills Bank Lisbon, Lisbon, Iowa. The Company chartered a new subsidiary bank, Hills Bank Kalona, and on September 20, 1996, the subsidiary bank acquired cash, certain assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A.
The Banks are all full-service commercial banks extending their services to individuals, business, governmental units, and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon and Kalona and the surrounding area. This area includes parts of Johnson, Linn, and Washington counties. All of the Banks are actively engaged in all areas of commercial banking, including acceptance of demand; savings and time deposits; making commercial, real estate, agricultural and consumer loans; maintaining night and safe deposit facilities; and performing collection, exchange, and other banking services tailored for individual customers. The Hills Bank and Trust Company's trust department administers estates, personal trusts, and pension and profit-sharing funds and, in connection therewith, provides for farm management and investment advisory and custodial services for individuals, corporations and nonprofit organizations. At this time, trust services are available only at the Hills Bank and Trust Company's locations. The loan activity of the Banks is diversified, with commercial and agricultural loans, real estate loans, automobile, installment, and other consumer loans composing the majority of its loan portfolio. In addition, the Banks earn substantial fees from originating mortgages that are sold in the secondary residential real estate market without mortgage servicing rights being maintained.
Each Bank has established formal loan origination policies. In general, the loan origination policies require individual lenders to reduce the risk of credit loss to the Bank by requiring that, among other things, minimum loan to value ratios be maintained, evidence of appropriate levels of insurance be carried by borrowers and documenting appropriate types and amounts of collateral and sources of expected payment.
The Banks' business is not seasonal, except that loan origination fees are higher during the spring and summer months. The Banks have not undertaken significant new services during the current year that might exceed the limits of their human resources and data processing capabilities.
Iowa City, Coralville, Hills and North Liberty are located near Interstate 80 and Interstate 380 in Eastern Iowa. The communities have a population of approximately 80,000 and Johnson County, Iowa has a population of approximately 96,000. The University of Iowa has over 27,000 students and 15,000 employees, including employees of The University of Iowa Hospitals and Clinics. Johnson County, Iowa has one of the strongest economies in Iowa and has had substantial economic growth in the past ten years. The area is known for its educational institutions, health care facilities, cultural and sports events, and retail centers.
Hills Bank Lisbon is located in Lisbon, Iowa (Linn County), approximately 25 miles north of Iowa City and does not conduct business in the same trade territories as Hills Bank and Trust Company. Lisbon has a population of approximately 1,500 and Mount Vernon, located two miles away, has 3,700 people. In February 1998 Hills Bank opened a new office location in Mount Vernon, Iowa. The 4,200 square foot one-story full-service location in Mount Vernon has four drive-up lanes and a drive-up automatic teller machine. Both communities are strong economically and are easy commuting distances to Cedar Rapids and Iowa City, Iowa. In addition, Mount Vernon is the home of Cornell College, which has approximately 1,200 students.
Hills Bank Kalona is located in Kalona, Iowa (Washington County), approximately 20 miles south of Iowa City with a population of approximately 2,000 people. Kalona is primarily an agriculture community, but is located within easy driving distance for employment in Iowa City and Washington, Iowa.
The commercial banking business is highly competitive and the Company's banks compete with other commercial banks, credit unions, brokerage firms, finance companies, insurance companies, and other financial institutions.
Iowa's banking laws regarding interstate banking and interstate branching are currently more restrictive than many other states. As a result of the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 many of the state-imposed geographic limitations on bank ownership have been liberalized. The 1994 Act expanded opportunities for interstate banking, interstate mergers, and interstate branching in the United States. First, subject to certain limitations, bank holding companies from anywhere in the United States are able to acquire Iowa banks with the permission of the Federal Reserve Board. Second, the 1994 Act authorizes a national or state bank which has its main office in another state to merger with an Iowa bank and operate the Iowa location as a branch office. However, out-of-state bank holding companies cannot acquire Iowa commercial banks unless such banks have been in existence for at least five years. Hills Bank Kalona has been in existence only since September 20, 1996. Iowa also currently has a deposit concentration limit of 10% on the amount of deposits that any one banking organization can control and continue to acquire banks, which applies to both in-state and out-of-state banks. Iowa also has a 35% limit on the aggregate amount of deposits all out-of-state banking organizations can control within Iowa.
In recent years, Norwest Corporation, Mercantile Bancorporation, Firstar Corporation and Nations Bank have acquired a number of independent banks and smaller multi-bank holding companies in various metropolitan areas of Iowa. Each operates under a single charter in Iowa. To date none of the Bank's local competitors have been purchased by the larger regional or national bank holding companies.
As with its law regarding interstate banking and branching, Iowa's intrastate branching statutes are also rather restrictive when compared with those of other states. Generally, bank branch offices may only be operated or acquired in counties contiguous to or cornering upon the county in which the Bank has its principal place of business. Also, a bank in Iowa may not establish a new branch office in a city in which there exists an office of another bank, other than by acquisition of an existing office or bank. Furthermore, the number of bank branch offices allowed within a municipal corporation or an urban complex is limited to four offices in populations of 100,000 or less, five offices in populations of over 100,000 to 200,000, and six offices in areas with populations over 200,000. However, some of Iowa's intrastate branching limitations regarding geographic location of branch offices and the number of branch offices which may be established in an urban complex may be overcome by merging two or more affiliated banking organizations that have been in continuous operation in Iowa for at least five years into a "united community bank."
Iowa law permits the acquisition of an Iowa bank holding company or state bank by an out-of-state bank holding company located anywhere in the United States. Certain restrictions relating to deposit concentrations and requirements of operations have also been established for out-of-state bank holding companies by the Iowa Legislature. The state law prohibits de novo entry and the acquisition of individual branch offices by out-of-state bank holding companies. No state bank may be directly or indirectly acquired by an out-of-state bank holding company that has not been in continuous existence and operation for at least five years.
Hills Bank and Trust Company is in direct competition for deposits, loans and other financial related business with other financial institutions in Johnson County, Iowa as follows:
Approximate Assets As Of December 31, ------------- (In Millions)
Largest competing bank (includes assets in out-of-territory branches) $550 Next largest competing bank 331 Largest competing credit union 152
Hills Bank Kalona and Hills Bank Lisbon compete with other banks in their trade territories. Based upon deposits, their market share compared to the other local banks was approximately 35% and 28%, respectively.
No material portion of the Banks' deposits have been obtained from a single person or a few persons. Accordingly, management of the Banks have no reason to believe that the loss of the deposits of any person or few persons would have a materially adverse effect on the Banks' operations or erode its deposit base. Approximately 6.4% of the Banks' loans have been made to farmers for agricultural purposes. The agricultural sector of the economy has been cyclical with a general trend toward fewer and larger farms. The Banks have not experienced a material adverse effect on their business as a result of defaults on agricultural loans and expects none in the future.
The Company does not engage in any business activities apart from its ownership of the Banks and, therefore, does not encounter any competition for its services other than as described above for the Banks.
As the Year 2000 approaches, an important business issue has emerged regarding how existing application software and operating systems can accommodate this date value. Many existing application software products were developed to accommodate a two-digit year. Due to the nature of the banking industry, the subsidiary banks are heavily reliant on data processing, causing the "Year 2000" issue to be a critical issue for the Company. Technology experts believe that many data processing application systems could fail or improperly perform as a result of erroneous calculation or data integrity problems if they are unable to process date information beyond December 31, 1999. The subsidiary banks have responded to this issue by forming a Year 2000 steering committee. The committee is responsible for identifying date sensitive financial applications, obtaining certification and validation related to outside systems, and developing a testing plan for in-house and outside systems in order to insure Year 2000 compliance. Because substantially all the Company's critical data processing equipment and applications are licensed or purchased from outside vendors, it is critical for the Company to assess whether its equipment and applications are Year 2000 compliant, and to replace any items that are not compliant. In this regard, the Company has planned to convert to a new financial accounting system that the Company and the vendor believe to be Year 2000 compliant and to test other critical applications. Subject to the identification of material noncompliance by its outside vendors, the Company currently believes that it will be Year 2000 compliant on a timely basis and thereby meet regulatory requirements concerning the Year 2000 issue and avoid material operational disruptions. In the immediate future, the Company will be completing a number of steps in its Year 2000 compliance program. These steps include completion of a Year 2000 project budget, implementation of customer contacts using notices and questionnaires, preparing a draft assessment report, obtaining an analysis of legal and insurance issues, planning for implementation of improved systems, and developing preliminary testing strategies and audit plans. Although the Company currently does not expect that its expenditures to become Year 2000 compliant will have a material effect on its operations, there can be no assurance that operational difficulties relating to the Year 2000 issue will not be experienced in the future or that more material expenditures will not be required in the future to fully resolve the Year 2000 issue.
The Company and the Banks have undertaken no material research activities during the last three years relating to research and development activities.
The Company is regulated by the Federal Reserve Bank.
All the Banks are regulated by the Federal Deposit Insurance Corporation and the State of Iowa Division of Banking.
The Company had no employees as of December 31, 1997, and the Banks had 191 regular and 63 part-time employees.
The following consolidated statistical information reflects selected balances and operations of the Company and the Banks for the periods indicated. Average refers to an average daily basis for the periods stated.
The following tables show (1) average balances of assets and liabilities, (2) interest income and expense on a tax equivalent basis, (3) interest rates and differential and (4) changes in interest income and expense.
AVERAGE BALANCES (Average Daily Basis)
INTEREST INCOME AND EXPENSE
Year Ended December 31, ------------------------- 1997 1996 1995 ------------------------- (In Thousands)
Income: Loans (1) .................................... $34,814 $29,966 $27,506 Taxable securities ........................... 6,769 6,190 5,189 Nontaxable securities (1) .................... 1,845 1,692 1,567 Federal funds sold ........................... 158 485 519 ------------------------- Total interest income ............. 43,586 38,333 34,781 -------------------------
Expense: Interest-bearing demand deposits ............. 949 819 894 Savings deposits ............................. 4,183 3,668 2,618 Time deposits ................................ 14,162 13,275 12,673 Securities sold under agreements to repurchase 426 326 409 FHLB borrowings .............................. 2,782 1,863 1,874 ------------------------- Total interest expense ............ 22,502 19,951 18,468 -------------------------
Net interest income ............... $21,084 $18,382 $16,313 =========================
(1) Presented on a tax equivalent basis using a federal tax rate of 34%.
INTEREST RATES AND INTEREST DIFFERENTIAL Year Ended December 31, --------------------- 1997 1996 1995 --------------------- Average yields: Taxable securities .................................. 6.12% 5.78% 5.42% Nontaxable securities ............................... 4.84 5.01 5.29 Nontaxable securities (tax equivalent basis) ........ 7.33 7.59 8.02 Loans (1) ........................................... 8.70 8.80 8.74 Loans (tax equivalent basis) ........................ 8.75 8.87 8.83 Federal funds sold .................................. 5.21 5.30 5.78 Interest-bearing demand deposits .................... 2.19 2.20 2.40 Savings deposits .................................... 3.51 3.57 3.53 Time deposits ....................................... 5.66 5.65 5.60 Securities sold under agreements to repurchase ...... 4.87 4.29 4.34 Interest on FHLB borrowings ......................... 6.47 6.44 6.47 Yield on average interest earning assets ............ 8.12 8.05 7.98 Rate on average interest-bearing liabilities ........ 4.84 4.85 4.91 Net interest spread (2) ............................. 3.28 3.20 3.07 Net interest margin (3) ............................. 3.93 3.86 3.74
(1) Nonaccruing loans are not significant and have been included in the average loan balances for purposes of this computation.
(2) Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal and state tax rate of 34% and 5%, respectively, for the three years presented.
(3) Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets.
CHANGE IN INTEREST INCOME AND EXPENSE
Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
LOANS
The following table shows the composition of loans (before deducting the reserve for loan losses) as of December 31 for each of the last five years.
December 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------ (In Thousands)
Agricultural ............ $ 27,636 $ 23,133 $ 19,000 $ 17,826 $ 17,117 Commercial and financial 33,616 30,650 26,810 26,024 24,721 Real estate, construction 8,157 8,846 7,937 6,933 7,006 Real estate, mortgage ... 332,655 279,134 239,899 225,342 195,527 Loans to individuals .... 28,707 33,812 31,640 30,906 24,380 ------------------------------------------------ Total ..... $430,771 $375,575 $325,286 $307,031 $268,751 ================================================
There were no foreign loans outstanding for any of the years presented
MATURITY DISTRIBUTION OF LOANS
The following table shows the principal payments due on loans as of December 31, 1997:
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Company's nonaccrual, past due, restructured and impaired loans as to interest or principal payment as of December 31 for each of the years presented:
1997 1996 1995 1994 1993 ------------------------------------------ (In Thousands)
Nonaccrual loans ................... $ - - $ 339 $ 489 $ -- $ -- Accruing loans past due 90 days or more ......................... 954 1,092 417 822 1,064 Restructured loans ................. - - - - - - - - - - Impaired loans ..................... 9,556 7,811 5,465 N/A N/A
The Company does not have a significant amount of loans which are past due less than 90 days on which there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
Loans are placed on nonaccrual status when management believes the collection of future interest is not reasonably assured. Interest income was not materially affected by this classification.
The Company has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. The Company has no other interest-bearing assets, other than loans, that meet the nonaccrual, past due, restructured or potential problem loan criteria.
No allowance for losses has been recognized for impaired loans because the loans have been charged off to the net present value of the future cash flows or the fair value of the collateral if the loan is collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for each of the last five years: Year Ended December 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------ (In Thousands) Amount of loan loss allowance at beginning of year ............... $7,311 $6,740 $6,210 $5,775 $5,190 ------------------------------------------ Charge-offs: Agriculture ..................... 197 300 101 423 270 Commercial and financial ........ 326 236 387 334 326 Real estate, mortgage ........... 215 127 180 172 165 Loans to individuals ............ 390 308 254 131 300 ------------------------------------------ 1,128 971 922 1,060 1,061 ------------------------------------------ Recoveries: Agriculture ..................... 65 48 218 368 247 Commercial and financial ........ 195 95 226 206 213 Real estate, mortgage ........... 377 215 149 154 87 Loans to individuals ............ 142 80 137 126 178 ------------------------------------------ 779 438 730 854 725 ------------------------------------------ Net charge-offs .................... 349 533 192 206 336 ------------------------------------------ Allowances of acquired banks ....... - - 350 - - - - - - ------------------------------------------ Provision for loan losses (1) ...... 1,048 754 722 641 921 ------------------------------------------ Balance of loan loss allowance at end of year .................. $8,010 $7,311 $6,740 $6,210 $5,775 ========================================== Ratio of net charge-offs during year to average loans outstanding .... 0.09% 0.16% 0.06% 0.07% 0.13% ==========================================
The balance of the loan loss allowance has not been allocated by type of loan. Management regularly reviews the loan portfolio and does not expect any unusual material amount to be charged off during 1998 that would be significantly different than the years ended December 31, 1997, 1996, 1995, 1994 and 1993.
(1) For financial reporting purposes, management regularly reviews the loan portfolio and determines a provision for loan losses based upon the impact of economic conditions on the borrower's ability to repay, past collection experience, the risk characteristics of the loan portfolio and such other factors which deserve current recognition. For income tax purposes, the allowance is maintained at the maximum allowable amount.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Banks review and place in risk categories specific borrowings. Based upon the risk category assigned, the Banks allocate a percentage, as determined by management, for a required allowance needed. The risk categories are similar to those used by federal and state regulatory agencies and consist of the following:
(1) Potential Watch and Watch (2) Problem (3) Substandard (4) Doubtful
In addition, each bank's management also reviews and, where determined necessary, allows for specific allowances based upon reviews of specific borrowers and provides general allowances for areas which management believes are of higher credit risk (agricultural loans and constructed model real estate homes as of December 31, 1997).
A summary of the components of the allowance for loan loss, by risk element, as of December 31, 1997 and 1996 is as follows:
1997 1996 ----------------- (In Thousands)
Potential Watch and Watch Loans ............... $2,600 $1,769 Substandard ................................... 1,507 1,337 Specific borrowers ............................ 1,550 2,009 Constructed model real estate homes ........... 682 858 Agricultural loans ............................ 250 250
Anticipated charge-offs of the above categories are not determinable at December 31, 1997; however, the Banks have no reason to expect actual charge-offs to be significantly different from historical charge-offs.
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities as of December 31, 1997, 1996 and 1995 and the maturities and yield of the investment securities as of December 31, 1997:
INVESTMENT SECURITIES
The yields are computed on a tax-equivalent basis using a federal tax rate of 34% and a state tax rate of 5%.
As of December 31, 1997, there were no investment securities of any issuer, other than securities of the U. S. Government and U. S. Government agencies and corporations, exceeding 10% of stockholders' equity.
The weighted average yield is based on the amortized cost of the investment securities.
DEPOSITS
The following tables show the average deposits and rates paid on such deposits for the years ended December 31, 1997, 1996 and 1995 and the composition of the certificates issued in excess of $100,000 as of December 31, 1997:
Time certificates issued in amounts of $100,000 or more as of December 31, 1997 with Amount Rate ------------------------ maturity in: 3 months or less $ 9,200 6.03% 3 through 6 months 7,950 5.14 6 through 12 months 13,727 5.64 Over 12 months 7,497 6.22 -------------- $ 38,374 ==============
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average stockholders' equity and average assets for the years ended December 31, 1997, 1996 and 1995:
December 31, ------------------------------ 1997 1996 1995 ------------------------------
Return on assets ........................... 1.24% 1.22% 1.14% Return on stockholders' equity ............. 14.62 13.97 13.32 Dividend payout ratio ...................... 21.69 22.62 24.12 Stockholders' equity to assets ratio ....... 8.47 8.72 8.58
SHORT-TERM BORROWINGS
The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of federal funds purchased and securities sold under agreements to repurchase during 1997, 1996 and 1995:
1997 1996 1995 --------------------------- (Amounts In Thousands)
Outstanding as of December 31 ............. $ 9,008 $6,071 $10,019 Weighted average interest rate at year end 4.30% 4.31% 4.25% Maximum month-end balance ................. 16,104 9,112 12,028 Average month-end balance ................. 8,740 7,607 9,424 Weighted average interest rate for the year 4.87% 4.29% 4.34%
FEDERAL HOME LOAN BANK BORROWINGS
The following table shows outstanding month-end balances, weighted average interest rates at year end, maximum month-end balances, average balances and weighted average interest rates during 1997, 1996 and 1995:
1997 1996 1995 ---------------------------------
Outstanding as of December 31 ............. $50,764 $25,795 $30,727 Weighted average interest rate at year end 6.42% 6.42% 6.29% Maximum month-end balance ................. 50,764 30,826 35,758 Average month-end balance ................. 43,026 28,914 28,965 Weighted average interest rate for the year 6.47% 6.44% 6.47%
PART I
Item 2.
Item 2. Properties
The Company's office and the main bank of Hills Bank and Trust Company is located at 131 Main Street, Hills, Iowa. The Hills office is a brick building containing approximately 14,200 square feet, a portion of which was built in 1977 and remodeled in 1986. A two-story addition was completed in 1984.
The branch offices of Hills Bank and Trust Company are as follows:
1. Iowa City office located at 1401 South Gilbert Street is a one-story brick building containing approximately 11,400 square feet. The branch has five drive-up teller lanes and a drive-up 24-hour automatic teller machine. The Bank's trust department is located here.
2. Coralville office is a two-story building built in 1972 that contains approximately 16,700 square feet of space. This office is equipped with four drive-up teller lanes and one 24-hour automatic teller machine.
3. A 2,800 square foot renovated and expanded building in North Liberty, Iowa was opened for business in 1986. That office is a full-service location including three drive-up teller lanes and a drive-up automatic teller machine.
4. The Bank leases an office at 132 East Washington Street in downtown Iowa City with approximately 2,500 square feet. The office has two 24-hour automatic teller machines and two private offices in addition to a tellers' and customer service area. The Bank has options to renew the lease in 2001.
The main office of Hills Bank Lisbon is a two-story brick building in Lisbon, Iowa with approximately 3,000 square feet of banking retail space located on the first floor. The building was extensively remodeled in 1996 and has one drive-up lane and a walk-up 24-hour automatic teller machine. Hills Bank Lisbon added its first office location in Mount Vernon, Iowa in February 1998 with the completion of a full service, 4,200 square foot office, with four drive-up lanes and a drive-up automatic teller machine.
Hills Bank Kalona in Kalona is a 6,400 square foot building that contains a walk-up 24-hour automatic teller machine and one drive-up lane. This is an older building that has been remodeled a number of times.
All of the above properties, with the exception of the East Washington Street branch which is being leased, are owned by the Bank, free and clear of any mortgages or other encumbrances of any type.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings.
Neither the Company nor the Banks hold any properties which are the subject of hazardous waste clean up investigations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the three months ended December 31, 1997.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
There is no established trading market for the Company's common stock. Its stock is not listed with any exchange or quoted in an automated quotation system of a registered securities association, nor is there any broker/dealer acting as a market maker for its stock. A bid and ask price is quoted in an Iowa City local paper and the quotes are provided by a local broker. The Company's stock is not actively traded.
During 1997, the Company's stock transfer records reflect that 7,314 shares were traded in a total of 12 transactions. While the Company has no direct knowledge of the selling price for these shares, based upon information informally related by shareholders, it believes that in 1997 the range of selling price of shares was $40.00 to $48.00 per share. During 1996, 5,716 shares were traded in a total of 29 transactions. The 1996 price of these shares was believed to be in the $33.34 to $40.00 range. In 1995, 5,322 shares were traded in 15 transactions. As of December 31, 1997, the Company has 1,035 shareholders.
The Company paid aggregate annual cash dividends in 1997 and 1996 of $1,537,000 and $1,391,000, respectively, or $1.05 per share in 1997 and $.95 per share in 1996. In January 1998, the Company declared and paid a dividend of $1.20 per share totaling $1,761,000. The decision to declare any such cash dividends in the future and the amount thereof rests within the discretion of the Board of Directors and will remain subject to, among other things, certain regulatory restrictions imposed on the payment of dividends by the Banks, and the future earnings, capital requirements and financial condition of the Company.
PART II
Item 6.
Item 6. Selected Financial Data
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
PART II
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward Looking Statements
The discussion following contains certain forward looking statements with respect to the financial condition, the results of operations and business of the Company. These statements involve certain risks and uncertainties which are often inherent in the ongoing operation of financial institutions such as the Company's subsidiary banks.
For example, a financial institution may accept deposits at fixed interest rates, at different times and for different terms, and lend funds at fixed interest rates, at different times and for different terms. In doing so, it accepts the risk that its cost of funds may rise while the use of those funds may be at a fixed rate. Similarly, although market rates of interest may decline, the financial institution may have committed, by virtue of the term of a deposit, to pay what essentially becomes an above-market rate.
Loans, and the reserve for loan losses, carry the risk that borrowers will not repay all funds in a timely manner, as well as the risk of total loss. The collateral pledged as security for loans may or may not have the value which has been attributed to it. The loan loss reserve, while believed to be adequate, may prove inadequate if one or more large-balance borrowers, or numerous mid-balance borrowers, or a combination of both, experience financial difficulty for a variety of reasons. These reasons may relate to the financial circumstances of an individual borrower, or may be caused by negative economic circumstances of an individual borrower, or may be caused by negative economic circumstances at the local, regional, national or international level which are beyond the control of the borrowers or the lender.
Because the business of banking is of a highly regulated nature, the decisions of governmental entities can have a major effect on operating results.
All of these uncertainties, as well as others, are present in the operation of a financial institution, and stockholders are cautioned that management's view of the future, which serves as the basis for both the ongoing operation of the Company and the forward looking statements included in this report, may prove to be other than anticipated.
Financial Position
In 1997, net loans increased $54.5 million, primarily in real estate mortgage loans, as demand remains high and rates continue to be attractive.
Total assets increased 11.80% in 1997, compared to an increase of 11.32% in 1996. In 1997 net loans increased $54.5 million, primarily in real estate mortgage loans, as demand remained high and rates continued to be attractive. The growth in assets in 1996 was attributable to strong loan demand and the acquisition of approximately $39 million of investment securities, federal funds sold and loans acquired in two purchase business transactions that occurred in the third quarter. Approximately 42% of the total loan growth in 1996 was attributable to the purchase business transactions.
Deposits increased 6.60% in 1997 compared to an increase of 14.74% in 1996. Federal Home Loan Bank note borrowings in 1997 increased by a net $25.0 million and the advances were used to fund the loan growth. Of the $57.8 million increase in deposits in 1996, approximately $39 million was deposits acquired in the purchases.
Components of Diluted Earnings Per Share
1997 1996 1995 - --------------------------------------------------------------------------
Net interest income ........................... $13.64 $11.87 $10.53 Provision for loan losses ..................... (0.71) (0.51) (0.49) Noninterest income ............................ 4.00 2.61 2.34 Noninterest expense ........................... (10.44) (8.14) (7.46) ------------------------ Income before income taxes ...... 6.49 5.83 4.92 Income tax expense ............................ (1.71) (1.68) (1.35) ------------------------ Net income ...................... $ 4.78 $ 4.15 $ 3.57 ========================
Higher net income per share in 1997 resulted from increases in net interest income and noninterest income, but were partially offset by higher noninterest expense. Both noninterest income and noninterest expense for 1997 included the recognition of $1,054,000 gain on the transfer of a marketable equity security to Hills Bancorporation Foundation, a private charitable foundation. As a result of the stock contribution, Hills Bancorporation received an income tax benefit of approximately $340,000, which is reflected as a reduction in the income tax expense for 1997. Each of the years benefited from low provisions for loan losses, a result of a strong local economy and a loan portfolio that is concentrated in well secured real estate loans.
Net Interest Income
Net interest income is the excess of the interest and fees received on interest-earning assets over the interest expense of the interest-bearing liabilities. The measure is shown on a tax-equivalent basis to make the interest earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 1997 as follows:
A summary of the net interest spread and margin is as follows:
Loan Losses
The provision for loan losses was $1,048,000, $754,000 and $722,000 for 1997, 1996 and 1995. Charge-offs, net of recoveries were $349,000 for 1997, $533,000 for 1996 and $192,000 for 1995.
The allowance for loan losses totaled $8,010,000 at December 31, 1997 compared to $7,311,000 at December 31, 1996. The percentage of the allowance to outstanding loans was 1.86% and 1.95% at December 31, 1997 and 1996, respectively. Agricultural loans totaled $27,636,000 at December 31, 1997. Management has assessed the risks for agricultural loans higher than the other loans due to unpredictable commodity prices, the effects of weather on crops, and uncertainties regarding government support programs. Therefore, the allowance for loan losses includes general and specific reserves for these loans.
The economy remains strong in the Banks' trade areas of Johnson, Washington and Linn counties, Iowa. Unemployment remains low, the University of Iowa enrollment is stable, the University of Iowa Hospitals and Clinics and, for the most part, area businesses have maintained stable employment levels. The allowance for loan losses is an estimate by the Banks to reserve for loan losses based upon management's evaluation of the total loan portfolio and current economic conditions. There are no known trends or uncertainties that are reasonably likely to have a material effect on the allowance for loan losses in the near-term.
Other Income
Dollars Per Share, Based on Weighted Average Diluted Shares Outstanding 1997 1996 1995 - --------------------------------------------------------------------------
Real estate origination fees ................ $0.26 $0.22 $0.20 Trust fees .................................. 0.92 0.61 0.51 Deposit account charges and fees ............ 1.28 1.11 1.09 Other fees and charges ...................... 0.81 0.71 0.62 Other (sale of portfolio) ................... 0.10 Investment securities gains (losses) ........ 0.63 (0.04) (0.08) ------------------------ $4.00 $2.61 $2.34 ========================
Total other income increased $2,070,000 or 53.5% in 1997, including net gains on sale of investment securities of $940,000, which included a $1,054,000 gain on the sale of a marketable equity security. Additional increases were $455,000 in trust fees, $248,000 in deposit account charges and fees, $153,000 in other fees and charges and $154,000 gain on the sale of the student loan portfolio of approximately $8 million. Total other income increased $430,000 in 1996 compared to 1995, which was primarily due to higher trust fees and deposit account charges. Trust fees have increased in 1997, 1996 and 1995 because of new accounts and the effect of higher balances under management. There were $940,000 in investment securities gains in 1997 following losses of $57,000 and $111,000 in 1996 and 1995, respectively.
Other Expenses
Dollars Per Share, Based on Weighted Average Diluted Shares Outstanding 1997 1996 1995 - ----------------------------------------------------------------------------
Salaries and employees benefits .................... $4.79 $4.15 $3.73 Occupancy .......................................... 0.68 0.60 0.54 Furniture and fixtures ............................. 0.96 0.75 0.75 F.D.I.C. insurance ................................. 0.04 0.01 0.29 Supplies and postage ............................... 0.60 0.55 0.49 Contributions ...................................... 0.75 0.06 0.06 Other .............................................. 2.62 2.02 1.60 -------------------- $10.44 $8.14 $7.46 ====================
Total other expenses increased $3,443,000 or 28.6% in 1997 following increases of 9.86% for 1996 and 3.31% for 1995, respectively. Contributions for 1997 includes the $1,054,000 gift to the Hills Bancorporation Foundation. Salaries and employee benefits increased $981,000, due to a full year of salaries for personnel at the two banks acquired during 1996 and the number of full-time equivalent employees increasing by 23 from December 31, 1996. In 1996 an increase of $645,000 in salaries and employee benefits was partially offset by a decrease of $416,000 in FDIC insurance after the first full year in which the lower FDIC insurance rates became effective. Salaries increased $487,000 in 1996, due partly to an increase of 28 full-time equivalent employees, primarily attributable to additional positions added at the acquired banks. The increase in employees occurred in early July and late September 1996. For 1995 there were eleven full-time equivalents added. Medical insurance has had only modest increases in the past three years. Occupancy and furniture and fixtures had total increase of $438,000 in 1997 due to this being the first full year of operations for the banks acquired in 1996 and the acquisition of new data processing equipment.
Income Taxes
Income tax expense was $2,545,000, $2,478,000 and $1,994,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The corresponding percentage of tax expense compared to income before income taxes is 26.4% in 1997, 28.7% in 1996 and 27.5% in 1995.
Impact of Recently Issued Accounting Standards
The adoption of new accounting standards had no effect on financial position or results of operations in 1997, and the adoption of several recently issued standards is not expected to have a significant effect.
Interest Rate Sensitivity and Liquidity Analysis
At December 31, 1997, the Company's interest rate sensitivity report is as follows (in thousands):
A portion of the interest-bearing checking, savings, and money market accounts have been included in the above table as maturing immediately and the rest of these deposits are shown as more than one year. The classifications are used because the Banks' historical data indicates that these have been very stable deposits without much interest rate fluctuation. Historically, these accounts would not need to be adjusted upward as quickly in a period of rate increases so the interest risk exposure would be less than the repricing schedule indicates.
Inflation
Inflation has an impact on the growth of total assets and has resulted in the need to increase equity capital to maintain an appropriate equity to asset ratio. The results of operations have been affected by inflation, but the effect has been minimal.
Liquidity and Capital Resources
On an unconsolidated basis, Hills Bancorporation (the holding company) had cash balances of $408,000 as of December 31, 1997. In 1997, the holding company received dividends of $2,515,000 from its subsidiary banks and used those funds to make a $750,000 capital contribution to a subsidiary bank, pay dividends to its stockholders of $1,537,000 and increase its cash position by $114,000.
As of December 31, 1997 and 1996, stockholders' equity before deducting for the maximum cash obligation related to ESOP was $59,182,000 and $53,751,000, respectively. This measure of equity as a percent of total assets was 9.81% at December 31, 1997 and 9.96% at December 31, 1996. These ratios are competitive with the Company's peers. As of December 31, 1997, total equity was 8.54% of assets compared to 8.77% of assets at the prior year end. The ability of the Company to pay dividends to its shareholders is dependent upon the earnings and capital adequacy of the subsidiaries banks, which affects the Banks' dividends to the Company. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. In order to maintain acceptable capital ratios in the subsidiary banks, certain of their retained earnings are not available for the payment of dividends. Retained earnings available for the payment of dividends to the Company total approximately $4,902,000 as of December 31, 1997.
The Company and the Banks are subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Banks are subject to Prompt Corrective Action Rules as determined and enforced by the Federal Reserve. These regulations establish minimum capital requirements which member banks must maintain.
As of December 31, 1997, risk-based capital standards require 8% of risk-weighted assets. At least half of that 8% must consist of Tier I core capital (common stockholders' equity, noncumulative perpetual preferred stock, and minority interest in the equity accounts of consolidated subsidiaries), and the remainder may be Tier II supplementary capital (perpetual debt, intermediate-term preferred stock, cumulative perpetual, long-term and convertible preferred stock, and loan loss reserve up to a maximum of 1.25% of risk-weighted assets). Total risk-weighted assets are determined by weighing the assets according to their risk characteristics. Certain off-balance sheet items (such as standby letters of credit and firm loan commitments) are multiplied by "credit conversion factors" to translate them into balance sheet equivalents before assigning them risk weightings. Any bank having a capital ratio less than the 8% minimum required level must, within 60 days, submit to the Federal Reserve a plan describing the means and schedule by which the Bank shall achieve the applicable minimum capital ratios.
A comparison of the Company's capital as of December 31, 1997 with minimum requirements is presented below:
Minimum Actual Requirements ----------------------------
Tier I Risk-Based Capital 13.97% 4% Total Risk-Based Capital 15.23 8 Leverage Ratio 9.09 3
Each of the Banks is classified as "well capitalized" by FDIC capital guidelines.
On a consolidated basis, 1997 cash flows from operations provided $9,644,000 and another $57,615,000 was provided by net increases in deposits of $32,646,000 and Federal Home Loan Bank borrowings of $24,969,000. These cash flows were invested in net loans of $55,545,000 and net securities of $6,194,000. In addition, $2,171,000 was used to purchase property and equipment.
At December 31, 1997, the Company had total outstanding loan commitments of $97,530,000. Management believes that its liquidity levels are appropriate and that it has borrowing capacity from the Federal Home Loan Bank and other sources.
Commitments and Trends
The Company has no material commitments or plans which will materially affect its liquidity or capital resources. The acquisition of property and equipment may be in cash purchases, or they may be financed if favorable terms are available.
The Company is currently involved in the assessment phase of its Year 2000 plan. Critical applications have been identified and an outside consultant has been engaged to assist with obtaining certification from outside vendors. Upon completion of the assessment phase, applications will be tested. To date, the Company has incurred expenses related to this issue in the form of outside consulting fees as well as time spent by internal staff, but the expense has not been significant. In 1998, the subsidiary banks are converting to a new financial accounting system, which will be Year 2000 compliant. As a result, costs for hardware upgrades have been incurred in 1997. Additional hardware and software costs are expected in 1998 related to the conversion. These costs are not expected to have a significant impact on the earnings or future liquidity of the Company.
As of December 31, 1997, the Company is not aware of any known trends or uncertainties which are expected that will have a material effect on the financial condition of the Company.
PART II
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposures
The Company's primary market risk exposure is to changes in interest rates. The Company's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond the Company's control, such as market interest rates and competition, may also have an impact on the Company's interest income and interest expense. In the absence of other factors, the Company's overall yield on interest-earning assets will increase as will its cost of funds on its interest-bearing liabilities when market rates increase over an extended period of time. Inversely, the Company's yields and cost of funds will decrease when market rates decline. The Company is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time.
The Banks maintain an asset/liability committee which meets at least quarterly to review the interest rate sensitivity position and to review various strategies as to interest rate risk management. In addition, the Banks use a simulation model to review various assumptions relating to interest rate movement. The model attempts to limit rate risk even if it appears the Banks' asset and liability maturities are perfectly matched and a favorable interest margin is present.
In order to minimize the potential effects of adverse material and prolonged increases or decreases in market interest rates on the Company's operations, management has implemented an asset/liability program designed to mitigate the Company's interest rate sensitivity. The program emphasizes the origination of adjustable rate loans, which are held in the portfolio, the investment of excess cash in short or intermediate term interest-earning assets, and the solicitation of passbook or transaction deposit accounts which are less sensitive to changes in interest rates and can be repriced rapidly.
Based on the data following, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would result from an increase in the Company's cost of funds that would not be immediately offset by an increase in its yield on earning assets which would tend to reduce net interest income. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income.
The following table provides quantitative information with respect to interest sensitive assets and liabilities.
The following table provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements are included on Pages 31 through 58. The Company does not meet the requirements of Item 302 of Regulation S-K to include the supplementary financial information required by that item.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders Hills Bancorporation Hills, Iowa
We have audited the accompanying consolidated balance sheets of Hills Bancorporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hills Bancorporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles.
/s/McGLADREY & PULLEN, LLP
Iowa City, Iowa February 6, 1998
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (In Thousands, Except Shares)
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995 (In Thousands, Except Per Share Amounts)
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 7 AND 9) Years Ended December 31, 1997, 1996 and 1995 (In Thousands, Except Share Amounts)
See Notes to Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 (In Thousands)
See Notes to Financial Statements.
HILLS BANCORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a multi-bank holding company engaged in the business of banking. The Company's three wholly-owned subsidiary commercial banks are Hills Bank and Trust Company, Hills, Iowa; Hills Bank, Lisbon, Iowa; and Hills Bank Kalona, Kalona, Iowa. The Banks are all full-service commercial banks extending their services to individuals, businesses, governmental units, and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, and Kalona, Iowa.
The Banks compete with other financial institutions and nonfinancial institutions providing similar financial products. Although the loan activity of the Banks is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, each Bank's credit is concentrated in real estate loans.
Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Investment securities: Held-to-maturity securities consist solely of debt securities which the Company has the positive intent and ability to hold to maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities and marketable equity 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 securities as of December 31, 1997 and 1996.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual lives of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Interest on debt securities is recognized in income as accrued. Realized gains and losses are included in income, determined on the basis of the cost of the specific securities sold.
Loans: Loans are stated at the amount of unpaid principal, reduced by the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes the collectibility of principal is unlikely. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The Banks make continuous reviews of the loan portfolio and considers current economic conditions, historical loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance.
Loans are considered impaired when, based on current information and events, it is probable the Company will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to impaired loans has been computed based on the present value of the estimated future cash flows of interest and principal discounted at the loans effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans or of collateral value is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Interest income on impaired loans is recognized on the cash basis.
The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due.
Loan fees and origination costs are reflected in the statement of income as collected or incurred. Compared to the net deferral method, this practice had no significant effect on income.
Property and equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using primarily declining-balance methods over the estimated useful lives of 7-40 years for buildings and improvements and 3-20 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Intangible assets: Intangible assets consist principally of goodwill which represents the excess of cost over fair value of net assets acquired in business combinations of two banks in 1996 accounted for under the purchase method. Goodwill is amortized on a straight-line basis over the estimated period to be benefited, 15 years. The carrying value of goodwill is reviewed periodically for impairment. Goodwill totaled $3,543,000 and $3,804,000, net of accumulated amortization of $354,000 and $93,000 as of December 31, 1997 and 1996 and is included in other assets.
Stock options: Compensation expense for stock issued through stock options plans is accounted for using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method, compensation is measured as the difference between the estimated fair value of the stock at the date of award less the amount required to be paid for the stock. The difference, if any, is charged to expense over the periods of service.
Common stock held by ESOP: The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash.
Trust assets: Trust assets, other than cash deposits, held by the Banks in fiduciary or agency capacities for its customers are not included in these statements since they are not assets of the Company.
Earnings per share: The FASB has issued Statement No. 128, "Earnings Per Share," which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation of basic and diluted earnings per share by all entities that have common stock or potential common stock, such as options, warrants and convertible securities outstanding. Basic per-share amounts are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator). Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock unless the effect is to reduce the loss or increase the income per common share from continuing operations. Statement No. 128 has been applied for annual and interim periods ending after December 15, 1997, and earnings per share for prior periods have been retroactively restated, which had no effect on reported earnings per share.
Following is a reconciliation of the denominator:
Statement of cash flows: For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans originated by the Banks, deposits and federal funds purchased and sold are reported net.
Recently issued accounting standards: SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. The Statement requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. It is not expected that this Statement will materially affect the presentation of the Company's comprehensive income.
Fair value of financial instruments: FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Off-balance sheet instruments: Fair values for outstanding letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the outstanding letters of credit is not believed to be significant at December 31, 1997. Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding.
Cash and cash equivalents and federal funds sold: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.
Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are determined using estimated future cash flows, discounted at the interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values of demand deposits equal their carrying amounts which represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase agreements approximate their fair values.
Long-term borrowings: The fair values of the Banks' long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Banks' current incremental borrowing rates for similar types of borrowing arrangements.
Note 2. Investment Securities
The amortized cost and fair value of investment securities available for sale are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------ (Amounts In Thousands) December 31, 1997: U. S. Treasury ................. $ 39,858 $ 331 $ - - $ 40,189 U. S. Government agencies and corporations ................ 65,054 404 (13) 65,445 State and political subdivisions 3,806 46 - - 3,852 ------------------------------------------ Total ............... $108,718 $ 781 $ (13) $109,486 ==========================================
December 31, 1996: U. S. Treasury ................. $ 45,100 $ 220 $ (107) $ 45,213 U. S. Government agencies and corporations ................ 57,405 295 (303) 57,397 State and political subdivisions 1,329 20 - - 1,349 Other debt securities .......... 2,263 39 (3) 2,299 Marketable equity securities ... - - 881 - - 881 ------------------------------------------ Total ............... $106,097 $ 1,455 $ (413) $107,139 ==========================================
The amortized cost and fair value of debt securities held to maturity are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------- (Amounts In Thousands) December 31, 1997: States and political subdivisions . $23,840 $ 405 $ (15) $24,230 ========================================
December 31, 1996: States and political subdivisions . $22,098 $ 239 $ (105) $22,232 ========================================
The contractual maturity distribution of investment securities as of December 31, 1997 is summarized as follows:
Available For Sale Held to Maturity ------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------- (Amounts In Thousands)
Due in one year or less .............. $ 24,915 $ 24,973 $ 2,431 $ 2,435 Due after one year through five years 83,304 84,005 12,058 12,256 Due after five years through ten years 499 508 9,214 9,396 Due over ten years ................... - - - - 137 143 ----------------------------------- Total .................. $108,718 $109,486 $ 23,840 $ 24,230 ===================================
As of December 31, 1997, investment securities with a carrying value of $38,043 were pledged to collateralize public and trust deposits, short-term borrowings, and for other purposes, as required or permitted by law.
For the years ended December 31, 1997, 1996 and 1995, net gains or losses from the sale of investment securities were as follows:
Year Ended December 31, ------------------------------- 1997 1996 1995 ------------------------------- (Amounts In Thousands)
Gross gains ............................ $1,059 $ - - $ - - Gross (losses) ......................... (119) (57) (111) ------------------------------- Net gains (losses) ....... $ 940 $ (57) $ (111) ===============================
Included in 1997 gains was the contribution of a marketable equity security to a private charitable foundation organized by the Company, upon which a gain of $1,054,000 was recognized. The marketable equity security was an investment in a development stage company that later went public in 1996.
Note 3. Loans
The composition of loans is as follows:
Changes in the allowance for loan losses are as follows:
Year Ended December 31, --------------------------- 1997 1996 1995 --------------------------- (Amounts In Thousands)
Balance, beginning ...................... $7,311 $6,740 $6,210 Provision charged to expenses ........ 1,048 754 722 Recoveries ........................... 779 438 730 Allowances of acquired banks ......... - - 350 - - Loans charged off .................... (1,128) (971) (922) -------------------------- Balance, ending ......................... $8,010 $7,311 $6,740 ==========================
Information about impaired loans as of and for the years ended December 31, 1997 and 1996 is as follows:
No allowance for credit losses has been recognized for impaired loans because the loans have been charged off to the net present value of the future cash flows or to the fair value of the collateral if the loan is collateral dependent.
Note 4. Property and Equipment
The major classes of property and equipment and the total accumulated depreciation are as follows:
December 31, ------------------- 1997 1996 ------------------- (Amounts In Thousands)
Land .................................... $1,950 $1,700 Buildings and improvements .............. 7,149 6,475 Furniture and equipment ................. 9,065 8,007 ------------------- 18,164 16,182 Less accumulated depreciation ........... 8,727 7,773 ------------------- Net ....................... $9,437 $8,409 ===================
Note 5. Interest-Bearing Deposits
A summary of these deposits is as follows:
December 31, ------------------ 1997 1996 ------------------ (Amounts In Thousands)
NOW and other demand .................................... $ 46,526 $ 43,017 Savings ................................................. 121,785 115,037 Time, $100,000 and over ................................. 38,374 32,635 Other time .............................................. 220,911 213,218 ------------------ $427,596 $403,907 ==================
Note 6. Federal Home Loan Bank Borrowings
As of December 31, 1997, the borrowings were as follows:
(In Thousands) ----------
Due June 5, 1998, 5.74% .................................... $10,000 Due July 2, 1998, 5.83% .................................... 5,000 Due April 9, 1999, 6.55% ................................... 7,000 Due August 5, 1999, 6.57% .................................. 5,000 Due January 24, 2000, 6.21% ................................ 10,000 Due February 22, 2000, 7.73% ............................... 5,000 Due April 9, 2000, 6.71% ................................... 3,000 Due November 18, 2002, 5.33% ............................... 5,000 Due August 17, 2005, 7.12% ................................. 100 Due August 11, 2008, 6.00% ................................. 664 ------- $50,764 =======
The borrowings are collateralized by 1-4 family mortgage loans with a face amount of $65,993,000. As of December 31, 1997, the Company held Federal Home Loan Bank stock with a cost of $4,738,000 which is included in investment securities.
Note 7. Employee Benefit Plans
The Company has an unleveraged Employee Stock Ownership Plan (the "Plan") to which it makes discretionary cash contributions. The Company's contribution to the Plan totaled $49,000, $42,000 and $76,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value. To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. As of December 31, 1997, 160,049 shares held by the ESOP, at a fair value of $48 per share, have been reclassified from stockholders' equity to liabilities.
The Company has a profit-sharing plan with a 401(k) feature which provides for discretionary annual contributions in amounts to be determined by the Board of Directors. The profit-sharing contribution totaled $394,000, $340,000 and $419,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has a Stock Incentive Plan for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or stock awards. A Stock Option Committee may grant options at prices equal to the fair value of the stock at the date of the grant. Options expire 10 years from the date of the grant. Directors may exercise options immediately and officers' rights under the plan vest over a five-year period from the date of the grant. Additional compensation is accrued equivalent to the amount of dividends that would have been paid on the stock had the options been exercised. Such compensation is payable upon exercise of the options. No compensation expense has been charged to expense using the intrinsic value based method as prescribed by APB No. 25. Had compensation expense been determined based on the grant date fair values of the awards, as prescribed by SFAS No. 123, reported net income and earnings per common and common equivalent share would have been as follows:
Years Ended December 31, --------------------------- 1997 1996 1995 ---------------------------
Pro forma net income (in thousands) ...... $ 7,084 $ 6,144 $ 5,257 Pro forma earnings per share: Basic ................................. 4.83 4.19 3.59 Diluted ............................... 4.77 4.15 3.57
The pro forma effects of applying SFAS are not indicative of future amounts since, among other reasons, the pro forma requirements of SFAS No. 123 have been applied only to options granted after December 31, 1994. No options were granted during 1996 or 1995.
The fair value of each grant is established at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1997: Dividend rate 2.19%; price volatility of 4.64%; risk-free interest rate of 6.63%; and an expected life of 5 years.
A summary of the stock options are as follows: Weighted Average Number Exercise Of Shares Price -----------------
Balance, December 31, 1995 .................... 46,569 $25.76 Exercised .................................. - - - - Forfeited .................................. - - - - ---------------- Balance, December 31, 1996 .................... 46,569 25.76 Granted .................................... 2,055 41.00 Exercised .................................. (2,055) 25.33 Forfeited .................................. - - - - ----------------- Balance, December 31, 1997 .................... 46,569 $26.45 =================
1997 1996 1995 ------------------------
Number of options exercisable, end of year .......... 22,605 22,605 22,605 Weighted-average fair value of options granted during the year .................................. $13.22 $ - - $ - -
Other pertinent information related to the options outstanding at December 31, 1997 is as follows:
Remaining Exercise Number Contractual Number Price Outstanding Life Exercisable - -------- --------------------------------------------------------------
$25.33 20,550 63 Months 20,550 41.00 2,055 111 Months 2,055 26.17 23,964 66 Months - - ------ ------ 46,569 22,605 ====== ======
The committee is also authorized to grant awards of common stock and authorized the issuance of 938, 1,936 and 609 shares of common stock to a group of employees in 1997, 1996 and 1995, respectively.
As of December 31, 1997, option to purchase 83,176 shares of common stock were available for future grants.
Note 8. Income Taxes
Income taxes for the years ended December 31, 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995 ------------------------ (Amounts In Thousands)
Current: Federal .......................................... $2,399 $2,098 $1,828 State ............................................ 563 457 404 Deferred ............................................ (417) (77) (238) ----------------------- $2,545 $2,478 $1,994 =======================
Deferred income tax liabilities and assets arose from the following temporary differences: December 31, ---------------------- 1997 1996 1995 ---------------------- (Amounts In Thousands) Deferred income tax assets: Allowance for loan losses ................... $2,622 $2,264 $2,135 Certain accrued expenses .................... 302 205 166 Other ....................................... 8 7 43 ---------------------- Gross tax assets ................. 2,932 2,476 2,344 ---------------------- Deferred income tax liabilities: Property and equipment ...................... 644 621 591 FHLB dividends .............................. 130 130 105 Unrealized gains on debt securities ......... 283 366 174 Other ....................................... 16 - - - - ---------------------- Gross tax liabilities ............ 1,073 1,117 870 ---------------------- Net deferred income tax asset .... $1,859 $1,359 $1,474 ======================
The net change in the deferred income taxes for the years ended December 31, 1997, 1996 and 1995 is reflected in the financial statements as follows:
Year Ended December 31, -------------------------- 1997 1996 1995 -------------------------- (Amounts In Thousands)
Statement of income ............................. $ (417) $ (77) $ (238) Statement of stockholders' equity ............... (83) 192 1,699 -------------------------- $ (500) $ 115 $1,461 ==========================
The income tax provisions for the years ended December 31, 1997, 1996 and 1995 are less than the amounts computed by applying the maximum effective federal income tax rate to the income before income taxes because of the following items:
Note 9. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash Restrictions
Federal regulatory agencies have adopted various capital standards for financial institutions, including risk-based capital standards. The primary objectives of the risk-based capital framework are to provide a more consistent system for comparing capital positions of financial institutions and to take into account the different risks among financial institutions' assets and off-balance sheet items.
Risk-based capital standards include requirements for a minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory agencies consider the published capital levels as minimum levels and may require a financial institution to maintain capital at higher levels.
A comparison of the Company's capital as of December 31, 1997 with the minimum requirements is presented below.
Minimum Actual Requirements --------------------------
Tier 1 Risk-Based Capital ..................... 13.97% 4.00% Total Risk-Based Capital ...................... 15.23 8.00 Leverage Ratio ................................ 9.09 3.00
According to FDIC capital guidelines, all of the Banks are considered to be "Well Capitalized."
The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Banks. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the Banks, certain of their retained earnings are not available for the payment of dividends. To maintain a ratio of capital to assets of 8%, retained earnings which otherwise could be available for the payment of dividends to the Company total approximately $4,902,000 as of December 31, 1997.
The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $4,503,000 and $3,974,000 as of December 31, 1997 and 1996, respectively.
Note 10. Related Party Transactions
Certain directors of the Company and companies with which they are affiliated and certain principal officers are customers of, and have banking transactions with, the Banks in the ordinary course of business. Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.
The following is an analysis of the changes in the loans to related parties during the years ended December 31, 1997 and 1996:
Year Ended December 31, ------------------ 1997 1996 ------------------ (Amounts In Thousands)
Balance, beginning .............. $ 9,232 $ 9,548 Advances ..................... 2,243 1,502 Collections .................. (964) (1,818) ------------------ Balance, ending ................. $10,511 $ 9,232 ==================
Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.
Note 11. Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 are as follows:
Note 12. Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company only):
BALANCE SHEETS December 31, 1997 and 1996 (Amounts In Thousands)
ASSETS 1997 1996 - ---------------------------------------------------------------------------
Cash ................................................... $ 408 $ 294 Investment securities available for sale ............... 300 1,181 Investment in subsidiary banks ......................... 57,774 52,355 Other assets ........................................... 940 693 ----------------- Total assets ............................. $59,422 $54,523 =================
LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------
Liabilities ............................................ $ 240 $ 772 ---------------- Redeemable common stock held by ESOP ................... 7,682 6,416 ---------------- Stockholders' equity: Capital stock ....................................... 9,070 8,997 Retained earnings ................................... 49,627 44,078 Unrealized gains on investment securities, net ...... 485 676 ---------------- 59,182 53,751 Less maximum cash obligation related to ESOP shares . 7,682 6,416 ---------------- Total stockholders' equity ............... 51,500 47,335 ---------------- Total liabilities and stockholders' equity $59,422 $54,523 ================
STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995 (Amounts In Thousands)
STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 (Amounts In Thousands)
Note 13. Commitments and Contingencies
Concentrations of credit risk: All of the Banks' loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within each Bank's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $11,006,000. The concentrations of credit by type of loan are set forth in Note 3. Outstanding letters of credit were granted primarily to commercial borrowers. Although the Banks have a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in Johnson County, Iowa.
Contingencies: In the normal course of business, the Banks are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the accompanying financial statements.
Year 2000 plans: Information technology experts believe that many data processing application systems could fail or improperly perform as a result of erroneous calculation or data integrity problems if they are unable to process data information beyond December 31, 1999, an issue known as Year 2000. The Company is heavily dependent upon computer processing and has addressed this issue by forming a Year 2000 committee responsible for identifying and testing critical applications and vendors. The Company expects the plan to be completed by December 31, 1998. Management believes the costs associated with Year 2000 will not be material to the financial statements.
Financial instruments with off-balance sheet risk: The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, credit card participations and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card participations and standby letters of credit is represented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. A summary of the Banks' commitments at December 31, 1997 and 1996 is as follows:
1997 1996 ---------------- (Amounts In Thousands)
Firm loan commitments and unused portion of lines of credit: Home equity loans ....................................... $ 4,861 $ 3,979 Credit card participants ................................ 6,896 6,336 Commercial, real estate and home construction ........... 38,784 23,862 Commercial lines ........................................ 46,989 38,145 Outstanding letters of credit .............................. 9,779 9,583
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties. Credit card participations are the unused portion of the holders' credit limits. Such amounts represent the maximum amount of additional unsecured borrowings.
Outstanding letters of credit are the conditional commitments issued by the Banks to guarantee the performance of a customer to a third party and collateralize the customer's borrowing arrangement with other creditors. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Banks deem necessary.
Note 14. Business Acquisitions
Effective July 1, 1996, the Company acquired for cash all of the outstanding shares of LBC, Inc., which owned 100% of the outstanding shares of Alliance Bancorporation, which held 100% of the outstanding shares of the Lisbon Bank and Trust Company, Lisbon, Iowa. The total acquisition cost was $3,042,000. The excess of the total acquisition cost over the fair value of the net assets acquired of $1,373,000 is being amortized over 15 years by the straight-line method.
The Company chartered a new subsidiary bank, Hills Bank Kalona, and on September 20, 1996, the subsidiary bank acquired cash, certain assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. The total acquisition cost was $5,031,000. The excess of the cost over the fair value of the net assets acquired was $2,523,000 and is being amortized over 15 years by the straight-line method.
The acquisitions were accounted for as purchases and the results of operations since the acquisition dates are included in the consolidated financial statements.
Unaudited pro forma net income for 1996 and 1995, as though the Banks had been acquired as of January 1, 1994, is not significantly different than reported net income of the Company after consideration of goodwill amortization and imputed interest on borrowed funds.
A summary of the net assets acquired of these two institutions is as follows:
(Amounts In Thousands) ----------
Cash purchase price .......................................... $ 8,073 ========
Assets acquired: Cash and due from banks ................................... $ 910 Investment securities available for sale .................. 6,640 Federal funds sold ........................................ 11,448 Loans ..................................................... 20,665 Property and equipment .................................... 1,438 Accrued interest receivable ............................... 317 Intangible assets ......................................... 3,896 Other assets .............................................. 1,938 Liabilities assumed: Deposits and accrued interest ............................. (39,019) Borrowings from FHLB ...................................... (100) Other liabilities ......................................... (60) -------- $ 8,073 ========
PART II
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors is contained in the Registrant's Proxy Statement under the heading "Information Concerning Nominees for Election as Directors" and "Information Concerning Directors Other Than Nominees," which sections are incorporated herein by this reference.
The following table sets forth the name, age and principal occupation of the Executive Officers of the Registrant and Executive Officers of the Bank. All officers of the Registrant and the Bank are elected annually for one-year terms of office.
PART III
Item 11.
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Executive Compensation and Benefits," which section is incorporated herein by this reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and "Report on Executive Compensation," which sections are incorporated herein by this reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's Proxy Statement under the heading "Loans To and Certain Other Transactions With Executive Officers and Directors," which section is incorporated herein by this reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HILLS BANCORPORATION
Date MARCH 30, 1998 By /s/ Dwight O. Seegmiller ------------------------- ------------------------------------------- Dwight O. Seegmiller, Director and President
Date MARCH 30, 1998 By /s/ James G. Pratt ------------------------- ------------------------------------------- James G. Pratt, Treasurer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date MARCH 30, 1998 By /s/ Willis M. Bywater ------------------------- ------------------------------------------- Willis M. Bywater, Director
Date MARCH 30, 1998 By /s/ Thomas J. Gill ------------------------- ------------------------------------------- Thomas J. Gill, Director
Date MARCH 30, 1998 By /s/ Donald H. Gringer ------------------------- ------------------------------------------- Donald H. Gringer, Director
Date MARCH 30, 1998 By /s/ Richard W. Oberman ------------------------- ------------------------------------------- Richard W. Oberman, Director
Date MARCH 30, 1998 By /s/ Theodore H. Pacha ------------------------- ------------------------------------------- Theodore H. Pacha, Director
Date MARCH 30, 1998 By /s/ Ann M. Rhodes ------------------------- ------------------------------------------- Ann M. Rhodes, Director
Date MARCH 30, 1998 By /s/ Ronald E. Stutsman ------------------------- ------------------------------------------- Ronald E. Stutsman, Director
Date MARCH 30, 1998 By /s/ Earl M. Yoder ------------------------- ------------------------------------------- Earl M. Yoder, Director
Date MARCH 30, 1998 By /s/ Sheldon E. Yoder ------------------------- ------------------------------------------- Sheldon E. Yoder
HILLS BANCORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
EXHIBIT INDEX