-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VmquoRg69hNFUwEVniNcvrVVmwbLxPkOpKFGApqQRaB3/0xx7SaPN34osHk6d/ZC vyagmExEZzFe13GUJAN6EQ== 0000743530-96-000025.txt : 19960328 0000743530-96-000025.hdr.sgml : 19960328 ACCESSION NUMBER: 0000743530-96-000025 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLS BANCORPORATION CENTRAL INDEX KEY: 0000732417 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421208067 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12668 FILM NUMBER: 96539079 BUSINESS ADDRESS: STREET 1: 131 MAIN ST CITY: HILLS STATE: IA ZIP: 52235 BUSINESS PHONE: 3196792291 MAIL ADDRESS: STREET 1: 131 MAIN ST CITY: HILLS STATE: IA ZIP: 52235 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995. Commission File Number 0-12668. HILLS BANCORPORATION (Exact name of Registrant as specified in its charter) IOWA 42-1208067 - ------------------------------- --------------------------------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 131 Main Street, Hills, Iowa 52235 - ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (319) 679-2291 Securities Registered pursuant to Section 12 (b) of the Act: None Securities Registered pursuant to Section 12 (g) of the Act: No par value common stock ------------------------- Title of Class Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registrant S-K (229.405 of this chapter) is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] While it is difficult to determine the market value of shares owned by nonaffiliates (within the meaning of such term under the applicable regulations of the Securities and Exchange Commission), the Registrant estimates that the aggregate market value of the Registrant's common stock held by nonaffiliates on March 15, 1996 (based upon reports of beneficial ownership that approximately 80% of the shares are so owned by nonaffiliates and upon information communicated informally to the Registrant by various purchasers and sellers that the sale price for the common stock is generally $100 per share) was $39,029,000. The number of shares outstanding of the Registrant's common stock as of March 15, 1996 is 487,868 shares of no par value common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement dated March 29, 1996, for the Annual Meeting of the Shareholders of the Registrant to be held April 15, 1996 (the Proxy Statement) are incorporated by reference in Part III of this Form 10-K. EXHIBIT INDEX The exhibits index is on page 51. PART I Item 1. Business Hills Bancorporation (the "Registrant") is a one-bank holding company principally engaged in the business of banking through its only wholly-owned subsidiary, Hills Bank and Trust Company, Hills, Iowa (the "Bank"). The Registrant was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Registrant became owner of 100% of the outstanding stock of the Bank as of January 23, 1984 when stockholders of the Bank exchanged their shares for shares of the Registrant. The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers in the State of Iowa, the communities of Hills, Iowa City, Coralville and North Liberty, Iowa, and the surrounding area. It currently operates the main bank in Hills and has office locations in Iowa City on South Gilbert Street and East Washington Street, and additional offices in Coralville and North Liberty. The Bank is 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 trust department administers estates, personal trusts and pension and profit-sharing funds and, in connection therewith, provides farm management and investment advisory and custodial services for individuals, corporations and nonprofit organizations. The loan activity of the Bank 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 Bank earns substantial fees from originating mortgages which are sold in the secondary residential real estate market. The Bank's Board of Directors has established a formal loan origination policy. In general, the loan origination policy requires 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 repayment. The Bank's business is not seasonal, except that loan origination fees are higher during the spring and summer months. The Bank has not undertaken significant new services during the current year or services which might exceed the limits of its human and data processing capabilities. Iowa City and Coralville are located on Interstate 80 in Eastern Iowa. The communities have a population of approximately 80,000. The University of Iowa in Iowa City 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 growth in the past ten years. The area is known for its educational institutions, health care facilities, cultural and sports events and retail centers. The commercial banking business in Iowa is highly competitive and the Company's bank competes with other commercial banks, credit unions, brokerage firms, finance companies, insurance companies, and other financial institutions. Part 1. Item 1. Business (continued) Iowa's banking laws regarding interstate banking and interstate branching are currently more restrictive than many other states. Prior to 1991, Iowa banking law prohibited interstate banking altogether, except for certain grandfathered rights extended to the largest bank holding company conducting business in Iowa, Norwest Corporation, which is headquartered in Minnesota. Since January 1, 1991, Iowa banking law has been less restrictive by allowing limited interstate banking by permitting financial institutions whose operations are principally conducted in Illinois, Missouri, Nebraska, South Dakota, Minnesota, or Wisconsin to conduct business in Iowa by acquiring an existing Iowa banking organization. Conversely, Iowa financial institutions may expand operations into Iowa's six neighboring states, provided such expansion is accomplished by acquisition rather than by branching. Interstate branching by out-of-state banks into Iowa is still expressly prohibited by Iowa statutes. 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, Firstar Corporation and Boatmen's Bancshares, Inc. 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." In September 1994, Congress passed interstate banking and branching legislation, which would (1) permitted nationwide interstate banking effective September 29, 1995, (2) would permit interstate bank branching effective June 1, 1997, and (3) increased each state's deposit concentration limit to 30%, subject to ratification by each particular state. If Iowa elects to do so, it can continue to (1) limit the means by which an out-of-state bank may acquire a bank within the state, (2) prohibit out-of-state banks from branching into the state, and (3) set its own deposit concentration limit. At this time it is uncertain what competitive impact any future interstate banking developments or Iowa banking legislation might have upon the Company and the Bank. The Bank 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, 1995 ------------- (In Millions) Largest competing bank $ 391 Next largest competing bank 305 Next largest competing bank 70 Largest competing credit union 117 Part I Item 1. Business (continued) No material portion of the Bank's deposits has been obtained from a single person or a few persons. Accordingly, management of the Bank has no reason to believe that the loss of the deposits of any person or few persons would have a materially adverse effect on the Bank's operations or erode its deposit base. Approximately 5.8% of the Bank's 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 Bank has not experienced a material adverse effect on its business as a result of defaults on agricultural loans and expects none in the future. The Registrant does not engage in any business activities apart from its ownership of the Bank and therefore does not encounter any competition for its services other than as described above for the Bank. The Registrant and the Bank have undertaken no material research activities during the last three years relating to research and development activities. The Registrant is regulated by the Federal Reserve Bank. The Bank is regulated by the Federal Deposit Insurance Corporation and the State of Iowa Division of Banking. The Registrant had no full-time employees as of December 31, 1995, while the Bank had 147 regular and 53 part-time employees. The following consolidated statistical information reflects selected balances and operations of the Registrant and the Bank for the periods indicated. Average refers to an average monthly basis for the periods stated. The following tables shown (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 (Daily Average Basis) Year Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- (In Thousands) ASSETS Cash and due from banks ...................... $ 9,795 $ 9,951 $ 8,608 Taxable securities ........................... 95,747 102,608 91,253 Nontaxable securities ........................ 19,528 18,775 17,772 Federal funds sold ........................... 8,980 5,181 17,650 Loans, net ................................... 311,592 277,774 256,840 Property and equipment, net .................. 6,685 5,861 5,581 Other assets ................................. 7,484 7,560 6,183 -------- -------- -------- $459,811 $427,710 $403,887 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing demand deposits .......... $ 36,085 $ 34,409 $ 29,496 Interest-bearing demand deposits ............. 37,249 45,220 40,337 Savings deposits ............................. 74,146 71,291 71,301 Time deposits ................................ 226,251 209,602 201,325 Securities sold under agreements to repurchase 9,424 5,832 5,150 FHLB borrowings .............................. 28,965 17,473 15,308 Debt of ESOP plan ............................ -- 73 271 Other liabilities ............................ 2,978 2,680 2,688 Redeemable common stock held by Employee Stock Ownership Plan ................ 5,241 4,913 4,425 Stockholders' equity ......................... 39,472 36,217 33,586 -------- -------- -------- $459,811 $427,710 $403,887 ======== ======== ======== Part I Item 1. Business (continued) INTEREST INCOME AND EXPENSE Year Ended December 31, --------------------------- 1995 1994 1993 ------- ------- ------- (In Thousands) INCOME Loans (1) ...................................... $27,506 $23,473 $22,864 Taxable securities ............................. 5,189 5,158 4,876 Nontaxable securities (1) ...................... 1,567 1,575 1,589 Federal funds sold ............................. 519 212 524 ------- ------- ------- Total interest income ...................... $34,781 $30,418 $29,853 ------- ------- ------- EXPENSE Interest-bearing demand deposits ............... $ 894 $ 1,039 $ 1,093 Savings deposits ............................... 2,618 1,625 1,926 Time deposits .................................. 12,673 10,857 11,342 Securities sold under agreements to repurchase . 409 204 184 FHLB borrowings ................................ 1,874 1,105 963 Interest portion of Employee Stock Ownership Plan contribution .................. -- 4 12 ------- ------- ------- Total interest expense ..................... $18,468 $14,834 $15,520 ------- ------- ------- Net interest income ........................ $16,313 $15,584 $14,333 ======= ======= ======= (1) Presented on a tax equivalent basis using a federal tax rate of 34%. INTEREST RATES AND INTEREST DIFFERENTIAL Year Ended December 31, ----------------------- 1995 1994 1993 ----- ----- ------ Average yields: Taxable securities ................................ 5.42% 5.03% 5.34% Nontaxable securities ............................. 5.29 5.54 5.92 Nontaxable securities (tax equivalent basis) ...... 8.02 8.39 8.94 Loans (1) ......................................... 8.74 8.34 8.79 Loans (tax equivalent basis) ...................... 8.83 8.45 8.90 Federal funds sold ................................ 5.78 4.09 2.97 Interest-bearing demand deposits .................. 2.40 2.30 2.71 Savings deposits .................................. 3.53 2.28 2.70 Time deposits ..................................... 5.60 5.18 5.63 Securities sold under agreements to repurchase .... 4.34 3.50 3.57 Interest on FHLB borrowings ....................... 6.47 6.32 6.29 Debt of Employee Stock Ownership Plan ............. 0.00 5.48 4.43 Yield on average interest earning assets .......... 7.98 7.52 7.78 Rate on average interest-bearing liabilities ...... 4.91 4.24 4.65 Net interest spread (2) ........................... 3.07 3.28 3.13 Net interest margin (3) ........................... 3.74 3.85 3.73 (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 tax rate of 34% for the three years presented and a state tax rate of 5% for 1993, 1994 and 1995. (3) Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets. PART I Item 1. Business (continued) CHANGE IN INTEREST INCOME AND EXPENSE Change Due Change Due Total To Volume To Rates Change ---------- ---------- -------- (In Thousands) Year ended December 31, 1995: Change in interest income: Loans .............................. $ 2,945 $ 1,088 $ 4,033 Taxable securities ................. (356) 387 31 Nontaxable securities .............. 62 (70) (8) Federal funds sold ................. 196 111 307 ------- ------- ------- $ 2,847 $ 1,516 $ 4,363 ------- ------- ------- Change in interest expense: Interest-bearing demand deposits ....... $ (189) $ 44 $ (145) Savings deposits ....................... 68 925 993 Time deposits .......................... 899 917 1,816 Securities sold under agreements to repurchase ........................... 148 57 205 Interest on FHLB borrowings ............ 742 27 769 Other .................................. (2) (2) (4) ------- ------- ------- $ 1,666 $ 1,968 $ 3,634 ------- ------- ------- Change in net interest income ............ $ 1,181 $ (452) $ 729 ======= ======= ======= Year ended December 31, 1994: Change in interest income: Loans ............................. $ 1,802 $(1,193) $ 609 Taxable securities ................ 578 (296) 282 Nontaxable securities ............. 87 (101) (14) Federal funds sold ................ (461) 149 (312) ------- ------- ------- $ 2,006 $(1,441) $ 565 ------- ------- ------- Change in interest expense: Interest-bearing demand deposits ....... $ 123 $ (177) $ (54) Savings deposits ....................... -- (301) (301) Time deposits .......................... 451 (936) (485) Securities sold under agreements to repurchase ........................... 24 (4) 20 Interest on FHLB borrowings ............ 137 5 142 Other .................................. (10) 2 (8) ------- ------- ------- $ 725 $(1,411) $ (686) ------- ------- ------- Change in net interest income ............ $ 1,281 $ (30) $ 1,251 ======= ======= ======= 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. PART I Item 1. Business (continued) LOANS The following table shows the composition of loans (before deducting the reserve for loan losses) as of December 31, 1995, 1994, 1993, 1992 and 1991: December 31, ---------------------------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In Thousands) Agricultural .................................. $ 19,000 $ 17,826 $ 17,117 $ 16,430 $ 15,372 Commercial and financial ...................... 26,810 26,024 24,721 24,121 28,517 Real estate, construction ..................... 7,937 6,933 7,006 4,759 3,930 Real estate, mortgage ......................... 239,899 225,342 195,527 185,869 148,787 Loans to individuals .......................... 31,640 30,906 24,380 22,787 21,485 -------- -------- -------- -------- -------- Total ............................... $325,286 $307,031 $268,751 $253,966 $218,091 ======== ======== ======== ======== ========
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, 1995: Amount One Year One To Over Five Of Loans Or Less (1) Five Years Years -------- ----------- ---------- --------- (In Thousands) Commercial, financial and agricultural .................. $ 45,810 $ 21,150 $ 16,992 $ 7,668 Real estate, construction and mortgage .................. 247,836 44,445 140,446 62,945 Other ................................................... 31,640 7,702 17,738 6,200 -------- -------- -------- -------- $325,286 $ 73,297 $175,176 $ 76,813 ======== ======== ======== ======== Interest rates on loans are as follows: Fixed rate .............................................. $237,484 $ 57,710 $154,307 $ 25,467 Variable rate ........................................... 87,802 15,587 20,869 51,346 -------- -------- -------- -------- $325,286 $ 73,297 $175,176 $ 76,813 ======== ======== ======== ======== (1) The Bank writes a significant portion of the commercial loans as six-month notes. However, a significant amount of these notes are renewed when due.
PART I Item 1. Business (continued) NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The following table summarizes the Registrant's nonaccrual, past due, restructured and impaired loans as to interest or principal payment as of December 31 for each of the years presented: 1995 1994 1993 1992 1991 ------ ------ -------- ------ ------ (In Thousands) Nonaccrual loans ...................... $ 489 $ -- $ -- $ 47 $ 54 Accruing loans past due 90 days or more ................. 417 822 1,064 463 567 Restructured loans .................... -- -- -- -- -- Impaired loans ........................ 5,465 N/A N/A N/A N/A
The Registrant 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 Registrant has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. The Registrant 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. PART I Item 1. Business (continued) SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Registrant's loan loss experience for each of the last five years: Year Ended December 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 ------- ------ ------ ------- ------- (In Thousands) Amount of loan loss allowance at beginning of year ....................................... $6,210 $5,775 $5,190 $4,650 $4,100 ------ ------ ------ ------ ------ Charge-offs: Agriculture ................................................ $ 101 $ 423 $ 270 $ 444 $ 75 Commercial and financial ................................... 387 334 326 418 425 Real estate, mortgage ...................................... 180 172 165 97 258 Loans to individuals ....................................... 254 131 300 441 193 ------ ------ ------ ------ ------ $ 922 $1,060 $1,061 $1,400 $ 951 ------ ------ ------ ------ ------ Recoveries: Agriculture ................................................ $ 218 $ 368 $ 247 $ 131 $ 72 Commercial and financial ................................... 226 206 213 93 45 Real estate, mortgage ...................................... 149 154 87 522 640 Loans to individuals ....................................... 137 126 178 135 95 ------ ------ ------ ------ ------ $ 730 $ 854 $ 725 $ 881 $ 852 ------ ------ ------ ------ ------ Net charge-offs .............................................. $ 192 $ 206 $ 336 $ 519 $ 99 ------ ------ ------ ------ ------ Provision for loan losses (1) ................................ $ 722 $ 641 $ 921 $1,059 $ 649 ------ ------ ------ ------ ------ Balance of loan loss allowance at end of year ................ $6,740 $6,210 $5,775 $5,190 $4,650 ====== ====== ====== ====== ====== Ratio of net charge-offs during year to average loans outstanding ........................................ .06% .07% .13% .22% .05% ====== ====== ====== ====== ====== 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 1996 that would be significantly different than the years ended December 31, 1995, 1994, 1993, 1992 and 1991. (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.
PART I Item 1. Business (continued) ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The Bank reviews and places in risk categories specific borrowings. Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed. The Bank's 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, bank 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, 1995). A summary of the components of the allowance for loan loss, by risk element, as of December 31, 1995 is as follows: (In Thousands) Potential Watch and Watch Loans .............................. $1,460 Substandard .................................................. 900 Specific borrowers ........................................... 1,875 Constructed model real estate homes .......................... 729 Agricultural loans ........................................... 250 Anticipated charge-offs of the above categories are not determinable at December 31, 1995; however, the Bank has 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, 1995, 1994 and 1993 and the maturities and yield of the investment securities as of December 31, 1995: December 31, -------------------------------- 1995 1994 1993 -------- -------- -------- (In Thousands) Carrying value: U. S. Treasury securities ................ $ 41,275 $ 52,475 $ 74,160 Obligations of other U. S. Government agencies and corporations ............ 55,537 36,458 32,373 Obligations of states and political subdivisions ......................... 21,443 19,255 18,797 Federal Home Loan Bank stock ............. 3,281 1,862 1,564 -------- -------- -------- $121,536 $110,050 $126,894 ======== ======== ======== PART 1 Item 1. Business (Continued) December 31, 1995 ----------------------- Weighted Carrying Average Value Yield -------- -------- (In Thousands) Type and maturity grouping: U. S. Treasury maturities: Within 1 year ..................................... $ 13,000 4.67% From 1 to 5 years ................................. 28,275 5.82 -------- Total .................................... $ 41,275 -------- Obligations to other U. S. Government agencies and corporations, maturities: Within l year ..................................... $ 7,393 4.43% From 1 to 5 years ................................. 48,144 5.98 -------- Total .................................... $ 55,537 -------- Obligations of states and political subdivisions, maturities: Within 1 years .................................... $ 2,686 8.62% From 1 to 5 years ................................. 10,753 7.83 From 5 to 10 years ................................ 7,939 7.37 Over 10 years ..................................... 65 10.25 -------- $ 21,443 -------- Federal Home Loan Bank stock ........................ $ 3,281 7.30 -------- $121,536 ======== 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, 1995, 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. PART I Item 1. Business (continued) DEPOSITS The following tables show the average deposits and rates paid on such deposits for the years ended December 31, 1995, 1994 and 1993 and the composition of the certificates issued in excess of $100,000 as of December 31, 1995: December 31, ---------------------------------------------------------------------- 1995 Rate 1994 Rate 1993 Rate -------- ------ -------- ------ -------- ------ Average noninterest-bearing deposits .............. $ 36,085 - -% $ 34,409 - -% $ 29,496 - -% Average interest-bearing demand deposits .......... 37,249 2.40 45,220 2.30 40,337 2.71 Average savings deposits .......................... 74,146 3.53 71,291 2.28 71,301 2.70 Average time deposits ............................. 226,251 5.60 209,602 5.18 201,325 5.63 -------- -------- -------- $373,731 $360,522 $342,459 ======== ======== ========
Amount Rate ------ ----- Time certificates issued in amounts of $100,000 or more as of December 31, 1995 with maturity in: 3 months or less .................................... $ 5,195 6.06% 3 through 6 months .................................. 8,956 5.59 6 through 12 months ................................. 6,572 5.61 Over 12 months ...................................... 8,728 6.23 ------- $29,451 ======= 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, 1995, 1994 and 1993: December 31, ------------------------------ 1995 1994 1993 ------ ------ ------ Return on assets ........................... 1.14% 1.15% 1.16% Return on stockholders' equity ............. 13.32 13.62 13.91 Dividend payout ratio ...................... 24.12 23.83 22.92 Stockholders' equity to assets ratio ....... 8.58 8.47 8.32 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 1995, 1994 and 1993: 1995 1994 1993 -------- -------- -------- (Amounts In Thousands) Outstanding as of December 31 ................. $10,019 $ 7,043 $ 4,489 Weighted average interest rate at year end .... 4.25% 3.85% 2.80% Maximum month-end balance ..................... $12,028 $10,652 $ 6,361 Average month-end balance ..................... 9,424 5,832 5,150 Weighted average interest rate for the year ... 4.34% 3.50% 3.57% PART I Item 1. Business (continued) 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 1995, 1994 and 1993: 1995 1994 1993 -------- -------- -------- Outstanding as of December 31 ................. $30,727 $20,758 $15,790 Weighted average interest rate at year end .... 6.29% 6.30% 6.20% Maximum month-end balance ..................... $35,758 $20,758 $15,790 Average month-end balance ..................... 28,965 17,473 15,308 Weighted average interest rate for the year ... 6.47% 6.32% 6.29% Item 2. Properties The Registrant's office and the office of the Bank is located at 131 Main Street, Hills, Iowa. The main office is a one-story brick building containing approximately 8,600 square feet, the major portion of which was built in 1977 and remodeled in 1986. A two-story addition to the main office was completed in 1984, which increased the facilities of the main office by approximately 5,600 square feet. The Iowa City office of the Bank at 1401 South Gilbert Street is a one-story brick building containing approximately 7,200 square feet which includes five drive-up teller lanes and two 24-hour automatic teller machines. In the Spring of 1995, a 4,200 square foot addition at an approximate cost of $600,000 was completed, adding additional retail banking space. The Coralville office is a two-story building built in 1972 that contains approximately 16,700 square feet of space. That office is equipped with four drive-up teller lanes and one 24-hour automatic teller machine. 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. All of the above properties are owned by the Bank, free and clear of any mortgages or other encumbrances of any type. 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 to 2001. Item 3. Legal Proceedings There are no material pending legal proceedings. The Bank holds no properties which are the subject of hazardous waste clean-up investigations. 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, 1995. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Registrant does not believe that an established trading market exists with respect to its 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 Registrant's stock is not actively traded. During 1995, the Registrant's stock transfer records reflect that 1,774 shares were traded in a total of fifteen transactions. While the Registrant has no direct knowledge of the selling price for these shares, based upon information informally related by shareholders, it believes that in 1995 the range of selling price of shares was $94 to $100 per share. During 1994, 7,586 shares were traded in a total of 13 transactions. The selling price of these shares was believed to be in the $83 to $94 range. As of December 31, 1995, the Registrant has 934 shareholders. The Registrant paid aggregate annual cash dividends in 1995 and 1994 of $1,268,000 and $1,171,000, respectively, or $2.60 per share in 1995 and $2.40 per share in 1994. In January 1996, the Registrant declared and paid a dividend of $2.85 per share totaling $1,390,000. 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 Bank, and the future earnings, capital requirements and financial condition of the Registrant. The Iowa Banking Act was amended effective January 1, 1991 to permit the acquisition of assets of certain Iowa banks and Iowa-based bank holding companies by regional bank holding companies subject to newly enacted statutory criteria and the prior approval of the Iowa Superintendent of Banking (Superintendent). The 1991 legislation changed but did not repeal the pre-existing Iowa law which permits the acquisition of Iowa banks by bank holding companies within limitations based upon the ratio of the aggregate amount of Iowa-based time and demand deposits of the controlled banks to the total of the time and demand deposits of all Iowa banks. The new law permitted an Iowa-based bank holding company to exempt itself for a specific period of time from acquisition under the new law by a regional bank holding company if a resolution was passed by its Board of Directors and filed with the Superintendent before January 1, 1991. On December 21, 1990, the Board of Directors adopted a resolution exempting the Company under the new law for a period ending June 30, 1990, unless renewed as provided under the Iowa law. A certified copy of the resolution is filed annually with the Superintendent, the latest extending the exemption from December 31, 1995 to December 31, 1996. The new law also prohibits a regional bank holding company from acquiring an Iowa-based bank holding company unless each of its subsidiary banks has been in existence and continuously operated as a bank for five or more years. It is unclear what, if any impact, this provision will have on the market for the Company's stock. PART II Item 6. Selected Financial Data CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY 1995 1994 1993 1992 1991 --------- --------- --------- --------- ---------- YEAR-END TOTALS Total assets .......................................... $ 484,607 $ 444,912 $ 417,043 $ 393,581 $ 354,023 Investment securities: Available for sale .................................. 100,093 90,795 108,097 -- -- Held to maturity .................................... 21,443 19,255 18,797 106,073 102,857 Federal funds sold .................................... 16,080 7,500 3,768 19,893 20,150 Loans, net ............................................ 318,546 300,821 262,976 248,776 213,441 Deposits .............................................. 392,257 372,838 353,486 334,052 312,579 Federal Home Loan Bank notes .......................... 30,727 20,758 15,790 15,000 -- Redeemable common stock ............................... 5,271 5,210 4,616 4,234 3,855 Stockholders' equity .................................. 43,277 36,447 35,943 32,009 28,717 EARNINGS Interest income ....................................... $ 33,978 $ 29,583 $ 29,031 $ 30,593 $ 31,341 Interest expense ...................................... 18,468 14,834 15,520 17,546 19,325 Provision for loan losses ............................. 722 641 921 1,059 649 Other income .......................................... 3,438 3,311 4,181 3,433 2,700 Other expenses ........................................ 10,975 10,640 10,299 9,163 8,375 Applicable income taxes ............................... 1,994 1,845 1,799 1,837 1,603 Net income ............................................ 5,257 4,934 4,673 4,421 4,089 PER SHARE Net income ............................................ $ 10.71 $ 10.07 $ 9.60 $ 9.12 $ 8.44 Cash dividends ........................................ 2.60 2.40 2.20 1.95 1.65 Book value as of December 31 .......................... 88.71 74.72 73.71 66.04 59.25 Increase (decrease) in book value due to: ESOP obligation and debt ............................ (10.80) (10.68) (9.87) (9.54) (9.16) Unrealized gains (losses) on debt securities ........ .61 (5.32) .58 -- --
PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Position The consolidated balance sheet of the Registrant (hereafter referred to as the "Company") as of December 31, 1995 reflects total assets of $484,607,000, total liabilities of $441,330,000, and stockholders' equity of $43,277,000. During 1995, total assets increased $39,695,000 or 8.92% from December 31, 1994 while deposits and repurchase agreements increased 5.90% or $22,395,000. Investment securities, which are primarily classified as available for sale, increased $9,298,000 in 1995. Due to lower interest rates, the unrealized losses on investment securities as of December 31, 1994 of $4,119,000 had changed to unrealized gains of $472,000 as of December 31, 1995. Federal funds sold increased $8,580,000 in 1995 and net loans increased $17,725,000 to $318,546,000, reflecting another year of loan growth driven primarily by the demand for single family residential mortgages. During 1995, the deposits of the Bank grew 5.21%, a lower rate of growth than in recent years. Savings accounts increased from $66,521,000 at the end of 1994 to $85,502,000 as of December 31, 1995 while the amount of time certificates remained nearly unchanged since 1994. During 1995, the Bank increased its borrowings from the Federal Home Loan Bank by a net of $10,000,000 to provide some of the funding for loan growth. Net Income Net income for the year ended December 31, 1995 totaled $5,257,000, an increase of 6.55% from the $4,934,000 reported in 1994. Net income for 1994 was $261,000 or 5.59% greater than 1993 net income of $4,673,000. The increase in net income for 1995 was primarily attributable to an increase in the average balances of earning assets plus increased fee income for trust and deposit account charges. In addition, the reduction of F.D.I.C. insurance premiums in 1995 was a significant factor. Earnings per common share totaled $10.71, $10.07 and $9.60 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's return on average assets was 1.14% in 1995, slightly less than the 1.15% and 1.16% for 1994 and 1993. The return on average stockholders' equity is a measure of how effectively the Company has generated income on available capital. Return on average stockholders' equity totaled 13.32%, 13.62% and 13.91% in 1995, 1994 and 1993, respectively. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 1995 as follows: INTEREST INCOME ---------------------------------------------- Increase (Decrease) Change In Change In ---------------------------------------------- Average Average Volume Rate Net Balance Rate Changes Changes Change -------------- --------- ------------ -------------- -------------- (Amounts In Thousands) Loans, net $ 33,818 .38% $ 2,945 $ 1,088 $ 4,033 Taxable securities (6,861) .39 (356) 387 31 Nontaxable securities 753 (.37) 62 (70) (8) Federal funds sold 3,799 1.69 196 111 307 -------------- ------------ -------------- -------------- $ 31,509 $ 2,847 $ 1,516 $ 4,363 ============== ============ ============== ============== INTEREST EXPENSE ---------------------------------------------- Interest-bearing demand deposits $ (7,971) .10% $ (189) $ 44 $ (145) Savings deposits 2,855 1.25 68 925 993 Time deposits 16,649 .42 899 917 1,816 Securities sold under agreements to repurchase 3,592 .84 148 57 205 Other debt (73) .15 (2) (2) (4) FHLB borrowings 11,492 742 27 769 -------------- ------------ -------------- -------------- $ 26,544 $ 1,666 $ 1,968 $ 3,634 ============== ============ ============== ============== Change in net interest income $ 1,181 $ (452) $ 729 ============ ============== ==============
A summary of the net interest spread and margin is as follows: (Tax Equivalent Basis) 1995 1994 1993 ---------------------- ------ ------ ------ Yield on average interest-earning assets ............... 7.98% 7.52% 7.78% Rate on average interest-bearing liabilities ........... 4.91 4.24 4.65 Net interest spread .................................... 3.07 3.28 3.13 Effect of noninterest bearing funds .................... .67 .57 .60 Net interest margin (tax equivalent interest income divided by average interest earning assets) ......... 3.74% 3.85% 3.73% PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Loan Losses The provision for loan losses was $722,000, $641,000 and $921,000 for 1995, 1994 and 1993. Charge-offs, net of recoveries were $192,000 for 1995, $206,000 for 1994 and $336,000 for 1993. The allowance for loan losses totaled $6,740,000 at December 31, 1995 compared to $6,210,000 at December 31, 1994. The percentage of the allowance to outstanding loans was 2.07% and 2.02% at December 31, 1995 and 1994, respectively. Agricultural loans totaled $19,000,000 at December 31, 1995. Management has an ongoing concern about agricultural loans due to unpredictable commodity prices, the effects of weather on crop production, and continued uncertainties regarding government programs. Therefore, the allowance for loan losses has been established to reflect this concern. The economy remains strong in the Bank's trade area of Johnson County, Iowa. Unemployment remains low, the University of Iowa enrollment is stable, the University of Iowa Hospitals and Clinics continue to grow and, for the most part, area businesses have maintained stable employment levels. The allowance for loan losses is an estimate by the Bank to reserve for loan losses based upon management's evaluation of the total loan portfolio and current economic conditions. There are no trends or uncertainties that are reasonably likely to have a material effect on the allowance for loan losses in the near-term. Other Income Noninterest income continues to be very important. Fees and other income increased from $3,311,000 in 1994 to $3,438,000 in 1995. Total other income in 1993 was $4,181,000. Fees received from loans originated and sold in the secondary market totaled $294,000, $402,000 and $1,337,000 for 1995, 1994 and 1993, respectively. Trust fees increased $74,000 in 1995 to $755,000 and grew $114,000 in 1994. These increases are due largely to additional assets under management and not due to fee increases. Increases in deposit account charges and other fees in 1995 of $57,000 to $2,500,000 compared to the $166,000 increase between 1994 and 1993 and were due to the volume of new accounts and selected increases in deposit account fees. Other income for 1995 includes investment securities losses of $111,000 compared to $215,000 in 1994 and none in 1993. The securities losses were taken primarily in the last quarter of 1995 and 1994 to remove low yielding investment securities and to take advantage of higher return yields available upon reinvestment of the proceeds. Other Expenses Other expenses for the years ended December 31, 1995, 1994 and 1993 totaled $10,975,000, $10,640,000 and $10,299,000, respectively. The increases in these expenses totaled $335,000 and $341,000 in 1995 and 1994, respectively. The total of other expenses increased 3.15% and 3.31% for the years ended December 31, 1995 and 1994. Of these increases, $365,000 in 1995 and $360,000 in 1994 related to salaries and employee benefits. The number of full-time equivalent employees at December 31, 1995 was 173, compared to 162 at December 31, 1994 and 158 at December 31, 1993. For 1995, the increase in salaries is a result of eleven more full-time equivalent employees and normal salary increases. Increases in salaries affect other payroll related expenses such as payroll taxes, medical and health benefits and the ESOP and profit-sharing contributions. Medical insurance costs were contained in 1995 and 1994 as a result of the Bank's partial self-insurance plan which has had favorable experience. The Bank is responsible for all claims up to a ceiling amount per employee with the Bank being insured for excess claims per employee and toal claims for all bank employees. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Occupancy and furniture and equipment expenses totaled $1,891,000, $1,701,000 and $1,609,000 for the years ended December 31, 1995, 1994 and 1993, respectively. An increase of $190,000 in 1995 resulted from increases in property taxes, repairs and maintenance, depreciation on new computer equipment and depreciation on the new equipment and building in Iowa City. The increase of $92,000 from 1993 to 1994 is the result of increases in property taxes, and overall increases in repairs, maintenance, and depreciation on new computer equipment. F.D.I.C. insurance expense has decreased from $793,000 in 1994 to $424,000 in 1995. This decrease of $369,000 resulted from a premium retroactively adjusted back to June 1, 1995 from $.23 per $100 in deposits to $.04. The Bank's premium for 1996 will be $200,000, to change depending on the total insurance fund that is accumulated for all banks. Other operating expenses totaled $2,443,000, $2,378,000 and $2,562,000 for the years ended December 31, 1995, 1994 and 1993. Other expenses include professional fees, outside services, marketing and business promotions, insurance, and other expenses. For 1994, other operating expenses decreased $184,000 which included decreases in professional fees of $56,000 and marketing of $94,000. Income Taxes Income tax expense was $1,994,000, $1,845,000 and $1,799,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The corresponding percentage of tax expense compared to income before income taxes is 27.5% in 1995, 27.2% in 1994 and 27.8% in 1993. Impact of Recently Issued Accounting Standards The adoption of new accounting standards had no effect on financial position or results of operations in 1995, and the adoption of several recently issued standards is not expected to have a significant effect. Liquidity and Capital Resources An important factor in the earnings performance of the Bank is the ability to maintain a proper balance between rate sensitive assets and rate sensitive liabilities. Liquidity management involves the ability to meet the cash flow requirements of depositors desiring to withdraw funds or borrowers needing funds. The Bank maintains an asset/liability committee which meets at least once a month to review the interest rate sensitivity position and to review various strategies as to interest rate risk management. In addition, the Bank uses a simulation model to review various assumptions relating to interest rate movement. The model attempts to limit rate risk even if it appears the Bank's asset and liability maturities are perfectly matched and a favorable interest margin is present. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Interest Rate Sensitivity At December 31, 1995, the Company's interest rate sensitivity report is as follows (in thousands): Repricing Maturities More Than Immediately 2-30 31-90 91-180 181-365 One Year Total ----------- -------- -------- -------- -------- --------- -------- Earning assets: Federal funds sold ............. $ 16,080 $ -- $ -- $ -- $ -- $ -- $ 16,080 Investment securities .......... -- 300 2,300 5,302 15,081 98,553 121,536 Loans .......................... -- 30,545 15,421 28,155 51,589 199,576 325,286 -------- -------- -------- -------- -------- -------- -------- Total earning assets $ 16,080 $ 30,845 $ 17,721 $ 33,457 $ 66,670 $298,129 $462,902 -------- -------- -------- -------- -------- -------- -------- Sources of funds: Interest-bearing checking and savings accounts ............. $ 45,266 $ -- $ -- $ -- $ -- $ 75,699 $120,965 Certificates of deposit ........ -- 7,842 15,620 41,474 49,732 113,697 228,365 Other borrowings - FHLB ........ -- -- -- -- 5,032 25,695 30,727 Repurchase agreements .......... 10,019 -- -- -- -- -- 10,019 -------- -------- -------- -------- -------- -------- -------- $ 55,285 $ 7,842 15,620 $ 41,474 $ 54,764 $215,091 $390,076 Other sources .................. -- -- -- -- -- 72,826 72,826 -------- -------- -------- -------- -------- -------- -------- Total sources ...... $ 55,285 $ 7,842 $ 15,620 $ 41,474 $ 54,764 $287,917 $462,902 -------- -------- -------- -------- -------- -------- -------- Repricing differences .......... $(39,205) $ 23,003 $ 2,101 $ (8,017) $ 11,906 $ 10,212 $ -- ======== ======== ======== ======== ======== ======== ========
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 Bank's 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. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. Capital As of December 31, 1995 and 1994, equity before deducting for the maximum cash obligation related to ESOP was $48,548,000 and $41,657,000, respectively. This measure of equity as a percent of total assets was 10.02% at December 31, 1995 and 9.36% at December 31, 1994. These ratios are competitive with the Bank's peers. As of December 31, 1995, total equity was 8.93% of assets compared to 8.19% 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 subsidiary bank, which affects the Bank's dividends to the Company. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. In order to maintain acceptable capital ratios in the subsidiary bank, certain of its retained earnings are not available for the payment of dividends. Retained earnings available for the payment of dividends to the Company total approximately $8,700,000 as of December 31, 1995. The Company and the Bank are subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Bank is 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, 1995, risk-based capital standards require 8% of risk-weighted assets. At least half of that 8% must consist of Tier I core capital (common stockholder's 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 capital as of December 31, 1995 with minimum requirements is presented below: Actual ------------------ Minimum Company Bank Requirements ------- ------ ------------ Tier I Risk-Based Capital ............. 14.33% 14.10% 4% Total Risk-Based Capital .............. 15.59 15.36 8 Leverage Ratio ........................ 9.96 9.80 3 PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Commitments and Trends In February 1996, the Company announced the stock purchase of a Lisbon, Iowa bank holding company and the purchase of certain assets and assumption of deposits of the Kalona, Iowa branch office of Boatmen's Bank Iowa, N.A. The Lisbon bank has approximately $16.5 million in assets and deposits of approximately $15 million. The Kalona office has assets of approximately $23 million and deposits of approximately $23 million. It is expected that both banks will be owned by the Company and operated as separately chartered banks. Both acquisitions are subject to various regulatory approvals. It is anticipated that both acquisitions will be completed in the third quarter of 1996. The acquisitions of the two banks is expected to require an investment of approximately $6,000,000 and the funds for the acquisitions are expected to be provided from cash and the maturities of investment securities. Other than the previously mentioned acquisitions, 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. As of December 31, 1995, the Company is of the opinion that there are no known trends or uncertainties which are expected that will have a material effect on the financial condition of the Company. Item 8. Financial Statements and Supplementary Data The financial statements are included on Pages 25 through 47. The Registrant 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 subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 1995, 1994 and 1993. 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 subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles. /s/ McGLADREY & PULLEN, LLP --------------------------- Iowa City, Iowa January 25, 1996, except for Note 13, as to which the date is February 7, 1996 HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 (In Thousands, Except Share Amounts) ASSETS 1995 1994 --------- --------- Cash and due from banks (Note 9) .............................. $ 11,883 $ 10,805 Investment securities (Note 2): Available for sale (amortized cost 1995 $99,621; 1994 $94,914) ........................................... 100,093 90,795 Held to maturity (fair value 1995 $21,754; 1994 $18,924) ........................................... 21,443 19,255 Federal funds sold ............................................ 16,080 7,500 Loans, net (Notes 3, 7 and 10) ................................ 318,546 300,821 Property and equipment, net (Note 4) .......................... 6,996 6,350 Accrued interest receivable ................................... 4,446 3,776 Deferred income taxes, net (Note 8) ........................... 1,474 2,935 Other assets .................................................. 3,646 2,675 --------- --------- $ 484,607 $ 444,912 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest-bearing deposits ............................... $ 42,927 $ 35,470 Interest-bearing deposits (Note 5) ......................... 349,330 337,368 --------- --------- Total deposits ................................. $ 392,257 $ 372,838 Securities sold under agreements to repurchase ............. 10,019 7,043 Federal Home Loan Bank notes (Note 7) ...................... 30,727 20,758 Accrued interest payable ................................... 1,885 1,548 Other liabilities .......................................... 1,171 1,068 --------- --------- $ 436,059 $ 403,255 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes 6 and 13) REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) (Note 6) ............................. $ 5,271 $ 5,210 --------- --------- STOCKHOLDERS' EQUITY (Note 9) Capital stock, no par value; authorized 2,000,000 shares; issued 1995 487,868 shares; 1994 487,773 shares ..................................... $ 8,925 $ 8,915 Retained earnings .......................................... 39,325 35,336 Unrealized gains (losses) on debt securities, net .......... 298 (2,594) --------- --------- $ 48,548 $ 41,657 Less maximum cash obligation related to ESOP shares (Note 6) 5,271 5,210 --------- --------- $ 43,277 $ 36,447 --------- --------- $ 484,607 $ 444,912 ========= =========
See Notes to Financial Statements. HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1995, 1994 and 1993 (In Thousands, Except Share Amounts) 1995 1994 1993 --------- --------- --------- Interest income: Interest and fees on loans ..................... $ 27,236 $ 23,173 $ 22,572 Interest on investment securities: Taxable ..................................... 5,189 5,158 4,883 Nontaxable .................................. 1,034 1,040 1,052 Interest on federal funds sold ................. 519 212 524 --------- --------- --------- Total interest income ............. $ 33,978 $ 29,583 $ 29,031 --------- --------- --------- Interest expense: Interest on deposits ........................... $ 16,185 $ 13,521 $ 14,361 Interest on securities sold under agreements to repurchase ............................... 409 204 184 Interest on FHLB borrowings .................... 1,874 1,105 963 Other .......................................... -- 4 12 --------- --------- --------- Total interest expense ............ $ 18,468 $ 14,834 $ 15,520 --------- --------- --------- Net interest income ............... $ 15,510 $ 14,749 $ 13,511 Provision for loan losses (Note 3) ................ 722 641 921 --------- --------- --------- Net interest income after provision for loan losses ................. $ 14,788 $ 14,108 $ 12,590 --------- --------- --------- Other income: Loan origination fees .......................... $ 294 $ 402 $ 1,337 Trust fees ..................................... 755 681 567 Deposit account charges and fees ............... 1,606 1,500 1,449 Other fees and charges ......................... 894 943 828 Investment securities losses (Note 2) .......... (111) (215) -- --------- --------- --------- $ 3,438 $ 3,311 $ 4,181 --------- --------- --------- Other expenses: Salaries and employee benefits ................. $ 5,492 $ 5,127 $ 4,767 Occupancy ...................................... 792 712 691 Furniture and equipment ........................ 1,099 989 918 F.D.I.C. insurance ............................. 424 793 753 Office supplies and postage .................... 725 641 608 Other .......................................... 2,443 2,378 2,562 --------- --------- --------- $ 10,975 $ 10,640 $ 10,299 --------- --------- --------- Income before income taxes ........ $ 7,251 $ 6,779 $ 6,472 Federal and state income taxes (Note 8) ........... 1,994 1,845 1,799 --------- --------- --------- Net income ........................ $ 5,257 $ 4,934 $ 4,673 ========= ========= ========= Average common and common equivalent shares ....... 490,928 489,782 486,690 ========= ========= ========= Earnings per common and common equivalent share ... $ 10.71 $ 10.07 $ 9.60 ========= ========= =========
See Notes to Financial Statements. HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 6 AND 9) Years Ended December 31, 1995, 1994 and 1993 (In Thousands, Except Share Data) Less Maximum Unrealized Cash Gains Less Obligation On Debt ESOP Related Capital Retained Securities, Debt To ESOP Stock Earnings Net Guarantee Shares Total -------- -------- ----------- --------- ----------- -------- Balance, December 31, 1992 ......................... $ 8,668 $ 27,966 $ -- $ (391) $ (4,234) $ 32,009 Issuance of 2,922 shares of common stock (Note 6) 230 -- -- -- -- 230 Payment on debt of ESOP ......................... -- -- -- 196 -- 196 Change related to ESOP shares ................... -- -- -- -- (382) (382) Net income ...................................... -- 4,673 -- -- -- 4,673 Cash dividends ($2.20 per share) ................ -- (1,066) -- -- -- (1,066) Cumulative effect of accounting change .......... -- -- 283 -- -- 283 -------- -------- -------- -------- --------- -------- Balance, December 31, 1993 ......................... $ 8,898 $ 31,573 $ 283 $ (195) $ (4,616) $ 35,943 Issuance of 370 shares of common stock .......... 34 -- -- -- -- 34 Redemption of 219 shares of common stock ........ (17) -- -- -- -- (17) Payment on debt of ESOP ......................... -- -- -- 195 -- 195 Change related to ESOP shares ................... -- -- -- -- (594) (594) Net income ...................................... -- 4,934 -- -- -- 4,934 Cash dividends ($2.40 per share) ................ -- (1,171) -- -- -- (1,171) Unrealized (losses) on debt securities, net ..... -- -- (2,877) -- -- (2,877) -------- -------- -------- -------- --------- -------- Balance, December 31, 1994 ......................... $ 8,915 $ 35,336 $ (2,594) $ -- $ (5,210) $ 36,447 Issuance of 203 shares of common stock .......... 20 -- -- -- -- 20 Redemption of 108 shares of common stock ........ (10) -- -- -- -- (10) Change related to ESOP shares ................... -- -- -- -- (61) (61) Net income ...................................... -- 5,257 -- -- -- 5,257 Cash dividends ($2.60 per share) ................ -- (1,268) -- -- -- (1,268) Unrealized gains on debt securities, net ........ -- -- 2,892 -- -- 2,892 -------- -------- -------- -------- --------- -------- Balance, December 31, 1995 ......................... $ 8,925 $ 39,325 $ 298 $ -- $ (5,271) $ 43,277 ======== ======== ======== ======== ========= ========
See Notes to Financial Statements. HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (In Thousands) 1995 1994 1993 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................................................. $ 5,257 $ 4,934 $ 4,673 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................. 837 703 639 Provision for loan losses ................................................ 722 641 921 Compensation paid by issuance of common stock ............................ 10 17 230 Deferred income taxes .................................................... (238) (145) (245) (Increase) in accrued interest receivable ................................ (670) (57) (5) Amortization of bond discount ............................................ 494 764 951 (Increase) in other assets ............................................... (971) (14) (2,113) Increase in accrued interest and other liabilities ........................................................... 440 92 122 -------- -------- -------- Net cash provided by operating activities ....................... $ 5,881 $ 6,935 $ 5,173 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities: Available for sale ....................................................... $ 19,404 $ 29,216 $ -- Held to maturity ......................................................... 2,653 2,674 46,304 Proceeds from sales of available for sale securities ........................ 11,013 8,961 -- Purchases of investment securities: Available for sale ....................................................... (35,563) (26,180) -- Held to maturity ......................................................... (4,896) (3,184) (67,603) Federal funds sold, net ..................................................... (8,580) (3,732) 16,125 Loans made to customers, net of collections ................................. (18,447) (38,485) (15,121) Purchases of property and equipment ......................................... (1,483) (1,210) (1,199) -------- -------- -------- Net cash (used in) investing activities ......................... $(35,899) $(31,940) $(21,494) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits .................................................... $ 19,419 $ 19,352 $ 19,434 Net increase (decrease) in securities sold under agreements to repurchase ...................................... 2,976 2,554 (1,004) Borrowings from FHLB ........................................................ 15,000 5,000 790 Payments on FHLB notes ...................................................... (5,031) (32) -- Dividends paid .............................................................. (1,268) (1,171) (1,066) -------- -------- -------- Net cash provided by financing activities ....................... $ 31,096 $ 25,703 $ 18,154 -------- -------- -------- Increase in cash and due from banks ............................. $ 1,078 $ 698 $ 1,833 CASH AND DUE FROM BANKS Beginning ................................................................... 10,805 10,107 8,274 -------- -------- -------- Ending ...................................................................... $ 11,883 $ 10,805 $ 10,107 ======== ======== ========
See Notes to Financial Statements. HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (In Thousands) 1995 1994 1993 -------- -------- -------- SUPPLEMENTAL DISCLOSURES Cash payments for: Interest paid to depositors and others ......... $ 15,868 $ 13,417 $ 14,614 Interest paid on other obligations ............. 2,263 1,313 1,166 Income taxes ................................... 2,099 1,981 2,068 Noncash financing transactions: Increase in stockholders' equity related to ESOP debt ................................ $ -- $ 195 $ 196 Increase in maximum cash obligation related to ESOP shares ...................... 61 594 382 Net unrealized gains (losses) on debt securities 4,591 (4,593) 474
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 one-bank holding company engaged in the business of banking through its wholly-owned subsidiary, Hills Bank and Trust Company, Hills, Iowa (the "Bank"). The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units, and institutional customers primarily in the communities of Hills, Iowa City, Coralville, and North Liberty, Iowa. It operates the main bank in Hills and has office locations in downtown Iowa City, on South Gilbert Street in Iowa City, Coralville and North Liberty. The Bank competes with other financial institutions and nonfinancial institutions providing financial products. Although the loan activity of the Bank is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, the 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 subsidiary, Hills Bank and Trust Company. 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. Premiums and discounts on investments in 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. There were no trading securities as of December 31, 1995 and 1994. 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 reasonably be anticipated. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The Bank makes 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. On January 1, 1995, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FASB Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which requires loans to be 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. The effect of the adoption of these statements was not material. The accrual of interest income on impaired 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. Interest income on impaired loans is recognized on the cash basis. Loan fees and origination costs are reflected in the statement of income as collected or incurred. Compared to the net deferral method, this practice has no significant effect on income. 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. 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 market 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 Bank in fiduciary or agency capacities for its customers are not included in these statements since they are not assets of the Company. Earnings per common and common equivalent share: Earnings per common and common equivalent share are determined by dividing net income by the weighted average number of common and common equivalent shares outstanding during the year. Dilutive common stock equivalents related to the stock option plan were determined using the treasury stock method. Earnings per share and common equivalent shares assuming full dilution are the same as earnings per common and common equivalent share. 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 Bank, deposits and federal funds purchased and sold are reported net. Recently issued accounting standards: The Company believes the adoption of recently issued accounting standards will not have a material or significant impact on its consolidated financial statements. 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, 1995. 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 borrowings under repurchase agreements approximate their fair values. Long-term borrowings: The fair values of the Bank's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Note 2. Investment Securities The amortized cost and fair value of debt securities available for sale are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- (Amounts In Thousands) December 31, 1995: U. S. Treasury .......... $ 41,094 $ 330 $ 149 $ 41,275 U. S. Government agencies and corporations ......... 58,527 511 220 58,818 -------- -------- -------- -------- Total .......... $ 99,621 $ 841 $ 369 $100,093 ======== ======== ======== ======== December 31, 1994: U. S. Treasury ........... $54,894 $ 2 $ (2,421) $ 52,475 U. S. Government agencies and corporations .......... 40,020 -- (1,700) 38,320 ------- ------- -------- -------- Total ........... $94,914 $ 2 $ (4,121) $ 90,795 ======= ======= ======== ======== 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, 1995: States and political subdivisions ........... $21,443 $ 387 $ 76 $21,754 ======= ======= ======= ======= December 31, 1994: States and political subdivisions ........... $19,255 $ 144 $ (475) $ 18,924 ======= ======= ======= ======== Gross losses realized on sales of investment securities totaled $111,000, $215,000 and none for the years ended December 31, 1995, 1994 and 1993. The contractual maturity distribution of investment securities as of December 31, 1995 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 ............ $ 20,393 $ 20,274 $ 2,686 $ 2,706 Due after one year through five years ...................... 79,228 79,819 10,753 10,919 Due after five years through ten years ....................... -- -- 7,939 8,058 Due over ten years ................. -- -- 65 71 -------- -------- -------- -------- Total .................. $ 99,621 $100,093 $ 21,443 $ 21,754 ======== ======== ======== ======== As of December 31, 1995 investment securities with a carrying value of $27,139 were pledged to collateralize public and trust deposits, short-term borrowings, and for other purposes, as required or permitted by law. Note 3. Loans The composition of loans is as follows: December 31, ------------------------- 1995 1994 -------- -------- (Amounts In Thousands) Agricultural ................................. $ 19,000 $ 17,826 Commercial and financial ..................... 26,810 26,024 Real estate: Construction .............................. 7,937 6,933 Mortgage .................................. 239,899 225,342 Loans to individuals ......................... 31,640 30,906 -------- -------- $325,286 $307,031 Less allowance for loan losses ............... 6,740 6,210 -------- -------- $318,546 $300,821 ======== ======== Changes in the allowance for loan losses are as follows: Year Ended December 31, ---------------------------------- 1995 1994 1993 ------- ------- -------- (Amounts In Thousands) Balance, beginning ...................... $ 6,210 $ 5,775 $ 5,190 Provision charged to expenses ........ 722 641 921 Recoveries ........................... 730 854 725 Loans charged off .................... (922) (1,060) (1,061) ------- ------- ------- Balance, ending ......................... $ 6,740 $ 6,210 $ 5,775 ======= ======= ======= Information about impaired loans as of and for the year ended December 31, 1995 is as follows: Loans receivable for which there is a related allowance for credit losses $ -- Loans receivable for which there is no related allowance for credit losses 5,465 ------ Total impaired loans $5,465 ====== Related allowance for credit losses $ - - Average balance 5,617 Interest income recognized 491 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, -------------------- 1995 1994 ------- ------- (Amounts In Thousands) Land .................................... $ 1,362 $ 1,362 Buildings and improvements .............. 5,358 4,620 Furniture and equipment ................. 6,900 6,256 ------- ------- $13,620 $12,238 Less accumulated depreciation ........... 6,624 5,888 ------- ------- Net ......................... $ 6,996 $ 6,350 ======= ======= Note 5. Interest-Bearing Deposits A summary of these deposits is as follows: December 31, -------------------------- 1995 1994 -------- -------- (Amounts In Thousands) NOW and other demand ....................... $ 35,463 $ 47,008 Savings .................................... 85,502 66,521 Time, $100,000 and over .................... 29,451 27,252 Other time ................................. 198,914 196,587 -------- -------- $349,330 $337,368 ======== ======== Note 6. Employee Benefit Plans The Company has an Employee Stock Ownership Plan established to provide retirement benefits for its employees. The Plan borrowed $1,953,000 from a bank in 1985 and acquired 57,400 shares of the Company's stock, which were pledged as collateral on the bank note. The Company committed to annual ESOP contributions sufficient to service the debt until the debt was retired in 1994 and has made discretionary contributions normally in the maximum amount permitted by IRS regulations. The Company's contribution to the Plan has been allocated as follows: 1995 1994 1993 ---- ---- ---- (Amounts In Thousands) Compensation ...................... $ 76 $ 67 $513 Interest .......................... -- 4 12 ---- ---- ---- $ 76 $ 71 $525 ==== ==== ==== 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 market 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, 1995, 52,711 shares held by the ESOP, at a fair value of $100 per share, have been reclassified from stockholders' equity to liabilities. In 1994, the Company adopted 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 $419,000 for 1995 and $464,000 for 1994. The Company has a Stock Incentive Plan for certain key employees and directors whereby 43,600 shares of common stock have been reserved for awards in the form of stock options or stock awards. A Stock Option Committee grants 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. The committee is authorized to grant awards of common stock and authorized the issuance of 203 and 370 shares of common stock to a group of employees in 1995 and 1994, respectively. A summary of the stock option transactions are as follows: Number Of Option Shares Price ------ ------ Balance, January 1, 1994 .................. 15,523 $76.00-$78.50 Exercised .............................. -- Forfeited .............................. -- ------ Balance, December 31, 1994 ................ 15,523 Exercised .............................. -- Forfeited .............................. -- ------ Balance, December 31, 1995 ................ 15,523 $76.00-$78.50 ====== As of December 31, 1995, options for 7,535 shares of common stock were exercisable. Note 7. Federal Home Loan Bank Borrowings As of December 31, 1995 the borrowings were as follows: (In Thousands) Due August 31, 1996, 5.41% ................................. $ 5,000 Due August 29, 1997, 6.60% ................................. 5,000 Due June 5, 1998, 5.74% .................................... 10,000 Due August 5, 1999, 6.57% .................................. 5,000 Due February 22, 2000, 7.73% ............................... 5,000 Due August 11, 2008, 6.00% ................................. 727 ------- $30,727 ======= The borrowings are collateralized by 1-4 family mortgage loans with a face amount of $46,090. Note 8. Income Taxes Income taxes for the years ended December 31, 1995, 1994 and 1993 are summarized as follows: 1995 1994 1993 ------- ------- -------- (Amounts In Thousands) Current: Federal .................. $ 1,828 $ 1,630 $ 1,718 State .................... 404 360 326 Deferred .................... (238) (145) (245) ------- ------- ------- $ 1,994 $ 1,845 $ 1,799 ======= ======= ======= Deferred income tax liabilities and assets arose from the following temporary differences: December 31, ------------------------ 1995 1994 1993 ------ ------ ------ (Amounts In Thousands) Deferred income tax assets: Unrealized losses on debt securities ... $ -- $1,525 $ -- Allowance for loan losses .............. 2,135 1,938 1,760 Certain accrued expenses ............... 166 107 96 Other .................................. 43 24 24 ------ ------ ------ Gross tax assets .............. $2,344 $3,594 $1,880 ------ ------ ------ Deferred income tax liabilities: Property and equipment ................. $ 591 $ 570 $ 535 FHLB dividends ......................... 105 80 80 Unrealized gains on debt securities .... 174 -- 190 Other .................................. -- 9 -- ------ ------ ------ Gross tax liabilities ......... 870 659 805 ------ ------ ------ Net deferred income tax asset . $1,474 $2,935 $1,075 ====== ====== ====== The net change in the deferred income taxes for the years ended December 31, 1995, 1994 and 1993 is reflected in the financial statements as follows: Year Ended December 31, ---------------------------------- 1995 1994 1993 ------- ------- -------- (Amounts In Thousands) Statement of income ..................... $ (238) $ (145) $ (245) Statement of stockholders' equity ....... 1,699 (1,715) 190 ------- ------- ------- $ 1,461 $(1,860) $ (55) ------- ------- ------- The income tax provisions for the years ended December 31, 1995, 1994 and 1993 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: 1995 1994 1993 ------------------- ------------------- ------------------ % Of % Of % Of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------- ------ ------- ------ ------- ------ (Amounts In Thousands) Expected provision .... $ 2,465 34.0% $ 2,305 34.0% $ 2,200 34.0% Tax-exempt interest ..... (530) (7.3) (551) (8.1) (543) (8.4) Interest expense limitation ... 87 1.2 75 1.1 68 1.1 State income taxes, net of federal income tax benefit ...... 245 3.4 225 3.3 247 3.8 Income tax credits ...... (250) (3.5) (195) (2.9) (110) (1.7) Other ........... (23) (.3) (14) (.2) (63) (1.0) ------- ------ ------- ------ ------- ------ $ 1,994 27.5% $ 1,845 27.2% $ 1,799 27.8% ======= ====== ======= ====== ======= ====== 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 Bank's capital as of December 31, 1995 with the minimum requirements is presented below. Minimum Actual Requirements ------- ------------ Tier 1 Risk-Based Capital ..................... 14.10% 4.00% Total Risk-Based Capital ...................... 15.36 8.00 Leverage Ratio ................................ 9.80 3.00 According to FDIC capital guidelines, the Bank is considered to be "Well Capitalized." The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios in the Bank certain of its retained earnings are not available for the payment of dividends. To maintain a ratio of capital to assets of 8%, retained earnings which could be available for the payment of dividends to the Company total approximately $8,700,000 as of December 31, 1995. The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $3,389,000 and $4,764,000 as of December 31, 1995 and 1994, 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 Bank 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, 1995 and 1994: Year Ended December 31, --------------------------- 1995 1994 ------- -------- (Amounts In Thousands) Balance, beginning ....................... $ 9,011 $ 8,097 Advances .............................. 1,327 1,493 Collections ........................... (790) (579) ------- ------- Balance, ending .......................... $ 9,548 $ 9,011 ======= ======= 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, 1995 and 1994 are as follows: 1995 1994 --------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (Amounts In Thousands) Cash and due from banks .............................. $ 11,883 $ 11,883 $ 10,805 $ 10,805 Federal funds sold .................... 16,080 16,080 7,500 7,500 Investment securities ................. 121,536 121,847 110,050 109,719 Loans ................................. 318,546 321,553 300,821 300,101 Accrued interest receivable ......................... 4,446 4,446 3,776 3,776 Deposits .............................. 392,257 394,390 372,838 371,703 Securities sold under agreements to repurchase ......................... 10,019 10,019 7,043 7,043 Borrowings from Federal Home Loan Bank ............................... 30,727 30,973 20,758 20,854 Accrued interest payable ............................ 1,885 1,885 1,548 1,548 Face Amount Face Amount ----------- ----------- Off-balance sheet instruments: Loan commit- ments $ ......................... 50,456 $ -- $ 61,976 $ -- Letters of credit .................. 5,822 -- 4,694 --
Note 12. Parent Company Only Financial Information Following is condensed financial information of the Company (parent company only): BALANCE SHEETS December 31, 1995 and 1994 (Amounts In Thousands) ASSETS 1995 1994 -------- -------- Cash ................................................. $ 316 $ 271 Investment securities available for sale ............. 300 300 Investment in subsidiary bank ........................ 47,727 40,852 Other assets ......................................... 205 234 -------- -------- Total assets ............................. $ 48,548 $ 41,657 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities .......................................... $ -- $ -- -------- -------- Redeemable common stock held by ESOP ............... $ 5,271 $ 5,210 -------- -------- Stockholders' equity: Capital stock ..................................... $ 8,925 $ 8,915 Retained earnings ................................. 39,325 35,336 Unrealized gains (losses) on debt securities, net ................................ 298 (2,594) -------- -------- $ 48,548 $ 41,657 Less maximum cash obligation related to ESOP shares ................................. 5,271 5,210 -------- -------- Total stockholders' equity ............... $ 43,277 $ 36,447 -------- -------- Total liabilities and stockholders' equity $ 48,548 $ 41,657 ======== ======== STATEMENTS OF INCOME Years Ended December 31, 1995, 1994 and 1993 (Amounts In Thousands) 1995 1994 1993 ------- ------- ------- Interest on investment securities ............. $ 20 $ 11 $ 12 Dividends received from subsidiary ............ 1,272 1,212 1,164 Operating expenses ............................ (20) (20) (69) ------- ------- ------- Income before income taxes and equity in subsidiary's undistributed income ............ $ 1,272 $ 1,203 $ 1,107 Income tax benefit (expense) .................. 2 5 23 ------- ------- ------- $ 1,274 $ 1,208 $ 1,130 Equity in subsidiary's undistributed income ..................................... 3,983 3,726 3,543 ------- ------- ------- Net income ........................ $ 5,257 $ 4,934 $ 4,673 ======= ======= ======= STATEMENTS OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 (Amounts In Thousands) 1995 1994 1993 ------- ------- ------- Cash flows from operating activities: Net income ............................ $ 5,257 $ 4,934 $ 4,673 Noncash items included in net income: Undistributed earnings of subsidiary (3,983) (3,726) (3,543) (Increase) in other assets ......... 39 123 (12) Increase (decrease) in liabilities . -- -- (23) ------- ------- ------- Net cash provided by operating activities ................. $ 1,313 $ 1,331 $ 1,095 ------- ------- ------- Cash flows from investing activities: Proceeds from maturities of investment securities ......................... $ 300 $ 300 $ 3 Purchase of investment securities ..... (300) (300) -- ------- ------- ------- Net cash provided by investing activities ................. $ -- $ -- $ 3 ------- ------- ------- Cash flows (used in) financing activities, cash dividends paid ................... $(1,268) $(1,171) $(1,066) ------- ------- ------- Increase in cash ............. $ 45 $ 160 $ 32 Cash balance: Beginning ............................. 271 111 79 ------- ------- ------- Ending ................................ $ 316 $ 271 $ 111 ======= ======= ======= Note 13. Commitments and Contingencies Concentrations of credit risk: All of the Bank's loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within the Bank's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $8,619,000. 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 Bank has 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 Bank is 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 Bank's financial statements. Financial instruments with off-balance sheet risk: The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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 Bank's 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 Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's commitments at December 31, 1995 and 1994 is as follows: 1995 1994 ------- ------- (Amounts In Thousands) Firm loan commitments and unused portion of lines of credit: Home equity loans ............................... $ 2,333 $ 2,298 Credit card participations ...................... 5,123 5,175 Commercial, real estate and home construction ............................ 18,103 27,178 Commercial lines ................................ 24,897 27,325 Outstanding letters of credit ...................... 5,822 4,694 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 Bank evaluates 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 Bank 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 Bank deems necessary. Note 14. Subsequent Events As of February 7, 1996, the Company entered into agreements to purchase a bank and a branch location of another bank in nearby Lisbon and Kalona, Iowa, respectively. The purchase transactions are subject to regulatory approval and are expected to be completed in the third quarter of 1996. Total assets to be acquired in the transactions are approximately $39 million. The transactions are expected to require an investment of approximately $6 million which will be funded from cash and the maturities of investment securities. PART II Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None PART III 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. Year First Position With Registrant Or Bank Elected And Principal Occupation Officer Of And Employment During The Registrant Name Age Past Five Years (Bank) ---- --- --------------------------------- ---------- Dwight O. Seegmiller ...... 43 Director of Registrant and Bank; President, Registrant and Bank 1986 (1975) William H. Olin, D.D.S .... 72 Director of Registrant and Bank; Chairman of the Board, Bank; 1984 Vice-President of the Registrant; Dentist, University of Iowa Hospitals and Clinics Earlis Rohret ............. 71 Director of Registrant and Bank; Vice-President of the Registrant; Farmer 1984 James G. Pratt ............ 47 Treasurer of Registrant; Senior Vice-President and Controller of Bank 1985 from January 1986 to present (1982) Thomas J. Cilek ........... 49 Secretary of Registrant; Senior Vice-President of Bank from August 1986 1988 to present (1986)
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. 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. 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. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K Form 10-K Reference (a) 1. Financial Statements Independent auditor's report on the financial statements Consolidated balance sheets as of December 31, 1995 and 1994 Consolidated statements of income for the years ended December 31, 1995, 1994 and 1993 Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1994 and 1993 Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993 Notes to financial statements (a) 2. Financial Statements Schedules All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) 3. Exhibits Exhibit 3 - Articles of Incorporation and Bylaws filed as Exhibit 3 of Form 10-K for the year ended December 31, 1993 are incorporated by reference. Exhibit 10(a) - Material Contract (Employee Stock Ownership Plan) filed as Exhibit 10(a) in Form 10-K for the year ended December 31, 1993 is incorporated by reference. Exhibit 10(b) - Material Contract (1993 Stock Incentive Plan) filed as Exhibit 10 (b) in Form 10-K for the year ended December 31, 1993 is incorporated by reference. Exhibit 10(c) - Material Contract is attached (Deferred Compensation Plans) Exhibit 11 - Statement Re Computation of Earnings Per Common Share. Exhibit 21 - Subsidiaries of the Registrant. Exhibit 23 - Consent of Accountants. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K: There were no reports on Form 8-K for the three months ended December 31, 1995. 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 3/25/96 By /s/ Dwight O. Seegmiller -------------------------------------------- Dwight O. Seegmiller, Director and President Date 3/25/96 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 3/25/96 By /s/ Willis M. Bywater -------------------------------------------- Willis M. Bywater, Director Date 3/25/96 By /s/ Thomas J. Gill -------------------------------------------- Thomas J. Gill, Director Date 3/25/96 By /s/ Donald H. Gringer -------------------------------------------- Donald H. Gringer, Director Date 3/25/96 By /s/ Richard W. Oberman -------------------------------------------- Richard W. Oberman, Director Date 3/25/96 By /s/ William H. Olin -------------------------------------------- William H. Olin, Director Date 3/25/96 By /s/ Theodore H. Pacha -------------------------------------------- Theodore H. Pacha, Director Date 3/25/96 By /s/ Ann S. Rhodes -------------------------------------------- Ann M. Rhodes, Director Date 3/25/96 By /s/ Earlis Rohret -------------------------------------------- Earlis Rohret, Director Date 3/25/96 By /s/ Ronald E. Stutsman -------------------------------------------- Ronald E. Stutsman, Director Date 3/25/96 By /s/ Earl M. Yoder -------------------------------------------- Earl M. Yoder, Director HILLS BANCORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 EXHIBIT INDEX Page Number In the Sequential Exhibit Numbering System Number Description For 1995 Form 10-K - ------- ----------- ------------------ 10 Material contracts 11 Statement Re Computation of Earnings Per Common Share 21 Subsidiaries of the Registrant ...................... 23 Consent of Independent Certified Public Accountants . 27 Financial Data Schedule ............................. EX-10 2 HILLS BANK AND TRUST COMPANY DEFERRED COMPENSATION PLAN THIS AGREEMENT, entered into this 1st day of September, 1995, between Hills Bank and Trust Company, a Corporation organized under the laws of the State of Iowa (Employer) and Thomas J. Cilek (Employee). In consideration of the agreements hereinafter contained, the parties hereto agree as follows: 1. The Employer agrees to provide the Employee with a deferred compensation arrangement in conjunction with his employment with the Employer. 2. (a) The Employee shall be given the opportunity to elect to reduce his salary by executing a salary reduction agreement on a form provided by the Employer. Said agreement shall be executed prior to the first pay period to which it is to be applicable, and shall specify the amount and method of reduction in the salary of the Employee. The agreement shall limit the annual amount that can be deferred into the plan by the employee to no more than fifteen percent of said Employee's stated compensation. (b) In addition to the amounts credited to this plan pursuant to paragraph 2(a) above, the Employer may elect to credit an additional amount to the plan. Said amount must be determined by the Employer prior to the end of the calendar year in which it is to be credited to the plan. It is the intent of the Employer to credit an amount into this plan equal to the benefit the Employee is not able to receive in the Employer's qualified plans due to statutory and administrative limitations. 3. (a) The Employer shall credit to a book reserve ("the deferred compensation account") any such amounts that the Employee elects to defer pursuant to paragraph 2(a) above and any additional amounts which the Employer elects to credit to the plan during the year pursuant to paragraph 2(b) above. Amounts to be credited pursuant to paragraph 2(a) shall be credited as of the last day of the month in which the salary reduction is made. Amounts to be credited pursuant to paragraph 2(b) shall be credited as of the date(s) designated by the Employer. (b) Other than the establishment of the deferred compensation account, the Employer shall not be required to set aside or in any way fund any amounts credited to the deferred compensation plan under this agreement. Such book reserve shall constitute an obligation on the part of the Employer that shall be satisfied only from the general assets of the Employer. (c) The deferred compensation account will be adjusted annually by a growth factor to be determined as follows: A. Amounts deferred by the Employee during the year shall accrue interest at a rate equal to the one year treasury constant maturity rate, adjusted on each June 30 and December 31. Such interest accruals shall be calculated from the last day of the month that the Employee's salary deferral is credited to the deferred compensation account up to December 31 of the year of such deferral. The account shall also be credited with interest, at the same rate, on any amounts paid to the Employee from the Employee's deferred compensation account during the year. Such interest shall be calculated from January 1 of the year of payment through the end of month prior to the month in which such payment to the Employee is made. B. The balance of the Employee's deferred compensation account as of January 1 of each year shall be adjusted as of December 31 of the same year by a factor representing the change in the S&P 500 Index for that year. The adjustment shall be calculated by multiplying the January 1 balance (less any payments made to the Employee during the year) by a ratio equal to the S&P Index at December 31 divided by the S&P Index as of the previous January 1. Such adjustment can be either positive or negative. 5. The value of the deferred compensation account shall constitute the entire amount of deferred compensation due to the Employee pursuant to this agreement. 6. The benefits to be paid to the Employee shall be as follows: (a) In the event of termination of employment, for whatever reason, prior to the attainment of age 60, the value of the deferred compensation account shall be paid in full as soon as is administratively possible after the end of the calendar year of termination. If the value of the deferred compensation account at the end of the calendar year of termination is in excess of $100,000, the Employer shall have the option to pay fifty percent of the deferred compensation account as soon as administratively possible after the end of the calendar year of termination and to pay the balance of the account as soon as administratively possible after the end of the calendar year following the calendar year of termination. For this purpose, the value of the balance of the deferred compensation account after the initial payment shall be determined as of December 31 of the year after the year of termination. (b) In the event of termination of employment, for whatever reason, after the attainment of age 60, the deferred compensation account shall be paid in 10 annual installments commencing in the calendar year following the year of termination of employment. Each installment shall be determined by dividing the value of the deferred compensation account as of the end of the calendar year, by the number of installment payments remaining to be made. Payments made under this paragraph shall be made as soon as is administratively possible following the end of each calendar year. If the deferred compensation account decreases to less than $10,000 as of the end of any calendar year after payments under this paragraph have commenced, the Employer shall have the right to accelerate the payment of the remaining balance in a single lump-sum payment. (c) In the event that the Employee's employment is decreased to part-time status after the attainment of age 60, the Board shall have the right to commence distributions pursuant to paragraph (b) above as if the Employee has terminated employment in the year that his status changes to part-time. The Board shall have the right to elect to commence distribution by the end of any calendar year during or after the change in employment status with distributions beginning in the following year (but not later than the year the employee attains age 65). Once distributions have commenced under this paragraph they will continue pursuant to paragraph (b) regardless of subsequent changes in employment status. (d) If the Employee is still employed at age 65, payment shall commence pursuant to paragraph (b) above as if the Employee terminated employment in the year he reaches age 65. 7. In the event of the death of the Employee prior to the complete payment of benefits payable pursuant to this plan, payments will commence, or continue in favor of the beneficiary designated by the Employee to receive such payments. The beneficiary may be designated or changed (without the consent of any prior beneficiaries) by the Employee on a form provided by the Employer. If no such beneficiary has been designated by the Employee, or if no designated beneficiary shall survive the Employee, payments due pursuant to this plan shall be paid to the personal representative of the Employee's estate. 8. If payments are to be made to a beneficiary due to the death of the Employee, said beneficiary shall be given the option of naming a designated beneficiary. 9. Nothing contained in this agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Employer and the Employee, his designated beneficiary or any other person. In the event that the Employer would decide to fund any obligation due under this agreement, such funds shall continue for all purposes to be a part of the general funds of the Employer and no person other than the Employer shall by virtue of the provisions contained in this agreement have any interest in such funds. To the extent that any person acquires a right to receive payments from the Employer pursuant to this agreement, such right shall be no greater than the right of any unsecured general creditor of the Employer. 10. The rights of the Employee or any other person to the payment of deferred compensation or other benefits under this agreement shall not be assigned, pledged or encumbered except by will or by the laws of descent and distribution. 11. All distributions made under this agreement shall be paid in cash, subject to any required federal or state tax withholding. The Employee shall not have the right to receive a distribution of shares of stock or any other property. 12. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employment of the Employer in any capacity. 13. The Employer shall have the full power and authority to interpret, construe and administer this Plan and the Employer's interpretation and construction thereof, and actions thereunder, including any valuation of the deferred compensation account, or the amount of or the recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. 14. The Employer reserves the right to discontinue the Employee's option to elect a salary reduction amount at any time prior to the Employee's execution of salary reduction agreement. 15. This agreement shall be construed in accordance with and governed by the laws of the State of Iowa. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officers and employees as of the 1st day of September, 1995. HILLS BANK AND TRUST COMPANY By: Employer By: /s/ Thomas J. Cilek --------------------------------- Thomas J. Cilek Employee EX-10 3 HILLS BANK AND TRUST COMPANY DEFERRED COMPENSATION PLAN THIS AGREEMENT, entered into this 1st day of September, 1995, between Hills Bank and Trust Company, a Corporation organized under the laws of the State of Iowa (Employer) and Dwight O. Seegmiller (Employee). In consideration of the agreements hereinafter contained, the parties hereto agree as follows: 1. The Employer agrees to provide the Employee with a deferred compensation arrangement in conjunction with his employment with the Employer. 2. (a) The Employee shall be given the opportunity to elect to reduce his salary by executing a salary reduction agreement on a form provided by the Employer. Said agreement shall be executed prior to the first pay period to which it is to be applicable, and shall specify the amount and method of reduction in the salary of the Employee. The agreement shall limit the annual amount that can be deferred into the plan by the employee to no more than fifteen percent of said Employee's stated compensation. (b) In addition to the amounts credited to this plan pursuant to paragraph 2(a) above, the Employer may elect to credit an additional amount to the plan. Said amount must be determined by the Employer prior to the end of the calendar year in which it is to be credited to the plan. It is the intent of the Employer to credit an amount into this plan equal to the benefit the Employee is not able to receive in the Employer's qualified plans due to statutory and administrative limitations. 3. (a) The Employer shall credit to a book reserve ("the deferred compensation account") any such amounts that the Employee elects to defer pursuant to paragraph 2(a) above and any additional amounts which the Employer elects to credit to the plan during the year pursuant to paragraph 2(b) above. Amounts to be credited pursuant to paragraph 2(a) shall be credited as of the last day of the month in which the salary reduction is made. Amounts to be credited pursuant to paragraph 2(b) shall be credited as of the date(s) designated by the Employer. (b) Other than the establishment of the deferred compensation account, the Employer shall not be required to set aside or in any way fund any amounts credited to the deferred compensation plan under this agreement. Such book reserve shall constitute an obligation on the part of the Employer that shall be satisfied only from the general assets of the Employer. (c) The deferred compensation account will be adjusted annually by a growth factor to be determined as follows: A. Amounts deferred by the Employee during the year shall accrue interest at a rate equal to the one year treasury constant maturity rate, adjusted on each June 30 and December 31. Such interest accruals shall be calculated from the last day of the month that the Employee's salary deferral is credited to the deferred compensation account up to December 31 of the year of such deferral. The account shall also be credited with interest, at the same rate, on any amounts paid to the Employee from the Employee's deferred compensation account during the year. Such interest shall be calculated from January 1 of the year of payment through the end of month prior to the month in which such payment to the Employee is made. B. The balance of the Employee's deferred compensation account as of January 1 of each year shall be adjusted as of December 31 of the same year by a factor representing the change in the S&P 500 Index for that year. The adjustment shall be calculated by multiplying the January 1 balance (less any payments made to the Employee during the year) by a ratio equal to the S&P Index at December 31 divided by the S&P Index as of the previous January 1. Such adjustment can be either positive or negative. 5. The value of the deferred compensation account shall constitute the entire amount of deferred compensation due to the Employee pursuant to this agreement. 6. The benefits to be paid to the Employee shall be as follows: (a) In the event of termination of employment, for whatever reason, prior to the attainment of age 60, the value of the deferred compensation account shall be paid in full as soon as is administratively possible after the end of the calendar year of termination. If the value of the deferred compensation account at the end of the calendar year of termination is in excess of $100,000, the Employer shall have the option to pay fifty percent of the deferred compensation account as soon as administratively possible after the end of the calendar year of termination and to pay the balance of the account as soon as administratively possible after the end of the calendar year following the calendar year of termination. For this purpose, the value of the balance of the deferred compensation account after the initial payment shall be determined as of December 31 of the year after the year of termination. (b) In the event of termination of employment, for whatever reason, after the attainment of age 60, the deferred compensation account shall be paid in 10 annual installments commencing in the calendar year following the year of termination of employment. Each installment shall be determined by dividing the value of the deferred compensation account as of the end of the calendar year, by the number of installment payments remaining to be made. Payments made under this paragraph shall be made as soon as is administratively possible following the end of each calendar year. If the deferred compensation account decreases to less than $10,000 as of the end of any calendar year after payments under this paragraph have commenced, the Employer shall have the right to accelerate the payment of the remaining balance in a single lump-sum payment. (c) In the event that the Employee's employment is decreased to part-time status after the attainment of age 60, the Board shall have the right to commence distributions pursuant to paragraph (b) above as if the Employee has terminated employment in the year that his status changes to part-time. The Board shall have the right to elect to commence distribution by the end of any calendar year during or after the change in employment status with distributions beginning in the following year (but not later than the year the employee attains age 65). Once distributions have commenced under this paragraph they will continue pursuant to paragraph (b) regardless of subsequent changes in employment status. (d) If the Employee is still employed at age 65, payment shall commence pursuant to paragraph (b) above as if the Employee terminated employment in the year he reaches age 65. 7. In the event of the death of the Employee prior to the complete payment of benefits payable pursuant to this plan, payments will commence, or continue in favor of the beneficiary designated by the Employee to receive such payments. The beneficiary may be designated or changed (without the consent of any prior beneficiaries) by the Employee on a form provided by the Employer. If no such beneficiary has been designated by the Employee, or if no designated beneficiary shall survive the Employee, payments due pursuant to this plan shall be paid to the personal representative of the Employee's estate. 8. If payments are to be made to a beneficiary due to the death of the Employee, said beneficiary shall be given the option of naming a designated beneficiary. 9. Nothing contained in this agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Employer and the Employee, his designated beneficiary or any other person. In the event that the Employer would decide to fund any obligation due under this agreement, such funds shall continue for all purposes to be a part of the general funds of the Employer and no person other than the Employer shall by virtue of the provisions contained in this agreement have any interest in such funds. To the extent that any person acquires a right to receive payments from the Employer pursuant to this agreement, such right shall be no greater than the right of any unsecured general creditor of the Employer. 10. The rights of the Employee or any other person to the payment of deferred compensation or other benefits under this agreement shall not be assigned, pledged or encumbered except by will or by the laws of descent and distribution. 11. All distributions made under this agreement shall be paid in cash, subject to any required federal or state tax withholding. The Employee shall not have the right to receive a distribution of shares of stock or any other property. 12. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employment of the Employer in any capacity. 13. The Employer shall have the full power and authority to interpret, construe and administer this Plan and the Employer's interpretation and construction thereof, and actions thereunder, including any valuation of the deferred compensation account, or the amount of or the recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. 14. The Employer reserves the right to discontinue the Employee's option to elect a salary reduction amount at any time prior to the Employee's execution of salary reduction agreement. 15. This agreement shall be construed in accordance with and governed by the laws of the State of Iowa. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officers and employees as of the 1st day of September, 1995. HILLS BANK AND TRUST COMPANY By: By: /s/ Dwight O. Seegmiller ----------------------------------- Employer Dwight O. Seegmiller Employee EX-10 4 HILLS BANK AND TRUST COMPANY DEFERRED COMPENSATION PLAN THIS AGREEMENT, entered into this 1st day of September, 1995, between Hills Bank and Trust Company, a Corporation organized under the laws of the State of Iowa (Employer) and James G. Pratt (Employee). In consideration of the agreements hereinafter contained, the parties hereto agree as follows: 1. The Employer agrees to provide the Employee with a deferred compensation arrangement in conjunction with his employment with the Employer. 2. (a) The Employee shall be given the opportunity to elect to reduce his salary by executing a salary reduction agreement on a form provided by the Employer. Said agreement shall be executed prior to the first pay period to which it is to be applicable, and shall specify the amount and method of reduction in the salary of the Employee. The agreement shall limit the annual amount that can be deferred into the plan by the employee to no more than fifteen percent of said Employee's stated compensation. (b) In addition to the amounts credited to this plan pursuant to paragraph 2(a) above, the Employer may elect to credit an additional amount to the plan. Said amount must be determined by the Employer prior to the end of the calendar year in which it is to be credited to the plan. It is the intent of the Employer to credit an amount into this plan equal to the benefit the Employee is not able to receive in the Employer's qualified plans due to statutory and administrative limitations. 3. (a) The Employer shall credit to a book reserve ("the deferred compensation account") any such amounts that the Employee elects to defer pursuant to paragraph 2(a) above and any additional amounts which the Employer elects to credit to the plan during the year pursuant to paragraph 2(b) above. Amounts to be credited pursuant to paragraph 2(a) shall be credited as of the last day of the month in which the salary reduction is made. Amounts to be credited pursuant to paragraph 2(b) shall be credited as of the date(s) designated by the Employer. (b) Other than the establishment of the deferred compensation account, the Employer shall not be required to set aside or in any way fund any amounts credited to the deferred compensation plan under this agreement. Such book reserve shall constitute an obligation on the part of the Employer that shall be satisfied only from the general assets of the Employer. (c) The deferred compensation account will be adjusted annually by a growth factor to be determined as follows: A. Amounts deferred by the Employee during the year shall accrue interest at a rate equal to the one year treasury constant maturity rate, adjusted on each June 30 and December 31. Such interest accruals shall be calculated from the last day of the month that the Employee's salary deferral is credited to the deferred compensation account up to December 31 of the year of such deferral. The account shall also be credited with interest, at the same rate, on any amounts paid to the Employee from the Employee's deferred compensation account during the year. Such interest shall be calculated from January 1 of the year of payment through the end of month prior to the month in which such payment to the Employee is made. B. The balance of the Employee's deferred compensation account as of January 1 of each year shall be adjusted as of December 31 of the same year by a factor representing the change in the S&P 500 Index for that year. The adjustment shall be calculated by multiplying the January 1 balance (less any payments made to the Employee during the year) by a ratio equal to the S&P Index at December 31 divided by the S&P Index as of the previous January 1. Such adjustment can be either positive or negative. 5. The value of the deferred compensation account shall constitute the entire amount of deferred compensation due to the Employee pursuant to this agreement. 6. The benefits to be paid to the Employee shall be as follows: (a) In the event of termination of employment, for whatever reason, prior to the attainment of age 60, the value of the deferred compensation account shall be paid in full as soon as is administratively possible after the end of the calendar year of termination. If the value of the deferred compensation account at the end of the calendar year of termination is in excess of $100,000, the Employer shall have the option to pay fifty percent of the deferred compensation account as soon as administratively possible after the end of the calendar year of termination and to pay the balance of the account as soon as administratively possible after the end of the calendar year following the calendar year of termination. For this purpose, the value of the balance of the deferred compensation account after the initial payment shall be determined as of December 31 of the year after the year of termination. (b) In the event of termination of employment, for whatever reason, after the attainment of age 60, the deferred compensation account shall be paid in 10 annual installments commencing in the calendar year following the year of termination of employment. Each installment shall be determined by dividing the value of the deferred compensation account as of the end of the calendar year, by the number of installment payments remaining to be made. Payments made under this paragraph shall be made as soon as is administratively possible following the end of each calendar year. If the deferred compensation account decreases to less than $10,000 as of the end of any calendar year after payments under this paragraph have commenced, the Employer shall have the right to accelerate the payment of the remaining balance in a single lump-sum payment. (c) In the event that the Employee's employment is decreased to part-time status after the attainment of age 60, the Board shall have the right to commence distributions pursuant to paragraph (b) above as if the Employee has terminated employment in the year that his status changes to part-time. The Board shall have the right to elect to commence distribution by the end of any calendar year during or after the change in employment status with distributions beginning in the following year (but not later than the year the employee attains age 65). Once distributions have commenced under this paragraph they will continue pursuant to paragraph (b) regardless of subsequent changes in employment status. (d) If the Employee is still employed at age 65, payment shall commence pursuant to paragraph (b) above as if the Employee terminated employment in the year he reaches age 65. 7. In the event of the death of the Employee prior to the complete payment of benefits payable pursuant to this plan, payments will commence, or continue in favor of the beneficiary designated by the Employee to receive such payments. The beneficiary may be designated or changed (without the consent of any prior beneficiaries) by the Employee on a form provided by the Employer. If no such beneficiary has been designated by the Employee, or if no designated beneficiary shall survive the Employee, payments due pursuant to this plan shall be paid to the personal representative of the Employee's estate. 8. If payments are to be made to a beneficiary due to the death of the Employee, said beneficiary shall be given the option of naming a designated beneficiary. 9. Nothing contained in this agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Employer and the Employee, his designated beneficiary or any other person. In the event that the Employer would decide to fund any obligation due under this agreement, such funds shall continue for all purposes to be a part of the general funds of the Employer and no person other than the Employer shall by virtue of the provisions contained in this agreement have any interest in such funds. To the extent that any person acquires a right to receive payments from the Employer pursuant to this agreement, such right shall be no greater than the right of any unsecured general creditor of the Employer. 10. The rights of the Employee or any other person to the payment of deferred compensation or other benefits under this agreement shall not be assigned, pledged or encumbered except by will or by the laws of descent and distribution. 11. All distributions made under this agreement shall be paid in cash, subject to any required federal or state tax withholding. The Employee shall not have the right to receive a distribution of shares of stock or any other property. 12. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employment of the Employer in any capacity. 13. The Employer shall have the full power and authority to interpret, construe and administer this Plan and the Employer's interpretation and construction thereof, and actions thereunder, including any valuation of the deferred compensation account, or the amount of or the recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. 14. The Employer reserves the right to discontinue the Employee's option to elect a salary reduction amount at any time prior to the Employee's execution of salary reduction agreement. 15. This agreement shall be construed in accordance with and governed by the laws of the State of Iowa. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officers and employees as of the 1st day of September, 1995. HILLS BANK AND TRUST COMPANY By: By: /s/ James G. Pratt ------------------------------- Employer James G. Pratt Employee EX-11 5 EXHIBIT 11 HILLS BANCORPORATION STATEMENT RE COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES Year Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Shares of common stock, beginning .............. 487,773 487,622 484,700 ======== ======== ======== Shares of common stock, ending ................. 487,868 487,773 487,622 ======== ======== ======== Computation of weighted average number of common and common equivalent shares: Common shares outstanding at the beginning of the year ............................... 487,773 487,622 484,700 Weighted average number of shares issued .... -- -- 1,339 Weighted average of the common equivalent shares attributable to stock options granted, computed under the treasury stock method ............................. 3,155 2,160 651 -------- -------- -------- Weighted average number of common and common equivalent shares .. 490,928 489,782 486,690 ======== ======== ======== Net income (In Thousands) ...................... $ 5,257 $ 4,934 $ 4,673 ======== ======== ======== Earnings per common and common equivalent share ............................ $ 10.71 $ 10.07 $ 9.60 ======== ======== ======== Dividends per common share ..................... $ 2.60 $ 2.40 $ 2.20 ======== ======== ======== EX-21 6 EXHIBIT 21 HILLS BANCORPORATION SUBSIDIARIES OF THE REGISTRANT Name Of Subsidiary State Of Incorporation ------------------ ---------------------- Hills Bank and Trust Company Iowa EX-23 7 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Hills Bancorporation We hereby consent to the incorporation by reference of our report dated January 25, 1996 with respect to the financial statements of Hills Bancorporation and subsidiary included in the Annual Report on Form 10-K of Hills Bancorporation for the year ended December 31, 1995 in Registration Statement No. 33-73606 on Form S-8 filed December 30, 1993 and in Registration Statement No. 33-2657 on Form S-8 filed January 10, 1986 /s/ McGLADREY & PULLEN, LLP ---------------------------- Iowa City, Iowa January 25, 1996 EX-27 8
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1995 FORM 10-K OF HILLS BANCORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR DEC-31-1995 DEC-31-1995 11,883 0 16,080 0 100,093 21,443 21,754 318,546 6,740 484,607 392,257 10,019 8,327 30,727 0 0 8,925 34,352 484,607 27,236 6,223 519 33,978 16,185 18,468 15,510 722 (111) 10,975 7,251 5,257 0 0 5,257 10.71 10.71 3.74 489 417 0 4,501 6,210 922 730 6,740 5,214 0 1,526
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