HILLS BANCORPORATION
10-Ks and 10-Qs
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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
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For the fiscal year ended December 31, 2010.
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Commission File Number 0-12668.
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HILLS BANCORPORATION
(Exact name of Registrant as specified in its charter)
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Iowa
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42-1208067
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.)
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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 if the Registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
þ
I
ndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o
No
þ
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
þ
No
o
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes
o
No
o
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.
þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller Reporting Company
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
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 January 31, 2011 (based upon reports of beneficial ownership that approximately 81% of the shares are so owned by nonaffiliates and upon the last independently appraised fair value of the Registrant’s common stock of $58.50 per share) was $208,538,051.
The number of shares outstanding of the Registrant's common stock as of February 28, 2011 is 4,397,418 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated March 18, 2011 for the Annual Meeting of the Shareholders of the Registrant to be held April 18, 2011 (the Proxy Statement) are incorporated by reference in Part III of this Form 10-K.
1
HILLS BANCORPORATION
FORM 10-K
TABLE
OF CONTENTS
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Page
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PART I
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Item 1.
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3
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6
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8
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9
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10
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16
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Item 1A.
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33
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Item 1B.
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38
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Item 2.
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39
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Item 3.
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40
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Item 4.
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40
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Part II
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Item 5.
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41
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Item 6.
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44
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Item 7.
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45
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Item 7A.
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67
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Item 8.
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68
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Item 9.
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111
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Item 9A.
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111
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Item 9B.
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112
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Part III
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Item 10.
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112
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Item 11.
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112
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Item 12.
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112
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Item 13.
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112
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Item 14.
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112
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Part IV
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Item 15.
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113
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References in this report to “we,” “us,” “our,” “Bank,” or the “Company” or similar terms refer to Hills Bancorporation and its subsidiary.
G
ENERAL
Hills Bancorporation (the "Company") is a holding company principally engaged, through its subsidiary bank, in the business of banking. The Company was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Company became owner of 100% of the outstanding stock of Hills Bank and Trust Company, Hills, Iowa (“Hills Bank and Trust” or the “Bank”) as of January 23, 1984 when stockholders of Hills Bank and Trust exchanged their shares for shares of the Company. Effective July 1, 1996, the Company formed a new subsidiary, Hills Bank, which acquired for cash all the outstanding shares of a bank in Lisbon, Iowa. Subsequently an office of Hills Bank was opened in Mount Vernon, Iowa, a community that is contiguous to Lisbon. Effective November 17, 2000, Hills Bank was merged into Hills Bank and Trust. On September 20, 1996, another subsidiary, Hills Bank Kalona, acquired cash and other assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. Effective October 26, 2001, Hills Bank Kalona was merged into Hills Bank and Trust.
Through its internet website (
www.hillsbank.com
), the Company makes available, free of charge, by link to the internet website of the Securities and Exchange Commission (
www.sec.gov
), the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed or furnished.
The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers. 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 Bank administers estates, personal trusts, and pension plans and provides farm management and investment advisory and custodial services for individuals, corporations and nonprofit organizations. The Bank makes commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans. In addition, the Bank earns substantial fees from originating mortgages that are sold in the secondary residential real estate market without mortgage servicing rights being retained.
Real Estate Loans
Real estate loans totaled $1.335 billion and comprised 83.96% of the Bank’s loan portfolio as of December 31, 2010. The Bank’s real estate loans include construction loans and mortgage loans.
Item 1. Business (Continued)
Mortgage Loans
. The Bank offers residential, commercial and agricultural real estate loans. As of December 31, 2010, mortgage loans totaled $1.224 billion and comprised 76.93% of the Bank’s loan portfolio.
Residential real estate loans totaled $628.6 million and were 39.51% of the Bank’s loan portfolio as of December 31, 2010. These loans include first and junior liens on 1-to-4 family residences. The Bank originates 1-to-4 family mortgage loans to individuals and businesses within its trade area. The Bank retains a portion of its residential mortgages it originates, and sells the remainder of the loans to third parties. Interest rates for residential real estate mortgages are determined by competitive pricing factors on the secondary market and within the Bank’s trade area. Collateral for residential real estate mortgages is generally the underlying property. Generally, repayment of these loans is from monthly principal and interest payments from the borrower’s personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets that the Bank serves.
Commercial real estate loans totaled $302.0 million and were 18.99% of the Bank’s loan portfolio at December 31, 2010. The Bank originates loans for commercial properties to individuals and businesses within its trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for commercial real estate loans range from one to five years with an amortization period of 25 years or less. The Bank offers both fixed and variable rate loans for commercial real estate.
Multi-family real estate loans totaled $202.6 million and were 12.74% of the Bank’s loan portfolio at December 31, 2010. Multi-family real estate loans are made to individuals and businesses in the Bank’s trade area. These loans are primarily secured by properties such as apartment complexes. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for commercial real estate loans range from one to five years with an amortization period of less than 25 years or less. Generally, interest rates for multi-family loans are fixed for the loan term.
Mortgage loans secured by farmland totaled $90.4 million and were 5.69% of the Bank’s loan portfolio at December 31, 2010. Loans for farmland are made to individuals and businesses within the Bank’s trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for real estate loans secured by farmland range from one to five years with an amortization period of 25 years or less. Generally, interest rates are fixed for mortgage loans secured by farmland.
Construction Loans
. The Bank offers loans both to individuals that are constructing personal residences and to real estate developers and building contractors for the acquisition of land for development and the construction of homes and commercial properties. The Bank makes these loans to established borrowers in the Bank’s trade area. Construction loans generally have a term of one year or less, with interest payable at maturity. Interest rate arrangements are variable for construction projects. Generally, collateral for construction loans is the underlying construction project.
As of December 31, 2010, construction loans for personal residences totaled $25.2 million and were 1.59% of the Bank’s loan portfolio. Construction loans for land development and commercial projects totaled $86.6 million and were 5.44% of the Bank’s loan portfolio. In total, construction loans totaled $111.8 million and were 7.03% of the Bank’s loan portfolio as of December 31, 2010.
Commercial and Financial Loans
The Bank’s commercial and financial loan portfolio totaled $141.6 million and comprised 8.90% of the total loan portfolio at December 31, 2010. The Bank’s commercial and financial loans include loans to contractors, retailers and other businesses. The Bank provides a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment. Although most loans are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial and financial loans generally range from one to five years. Interest rates for commercial loans can be fixed or variable.
Item 1. Business (Continued)
Commercial and Financial Loans (continued)
The Bank’s commercial and financial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of personal guarantees, if applicable. The primary repayment risks of commercial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value.
Agricultural Loans
Agricultural loans include loans made to finance agricultural production and other loans to farmers and farming operations. These loans totaled $65.0 million and constituted 4.09% of the total loan portfolio at December 31, 2010. Agricultural loans, most of which are secured by crops and machinery, are provided to finance capital improvement and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural loans generally have a term of one year and may have a fixed or variable rate.
Consumer Lending
The Bank offers consumer loans including personal loans and automobile loans. These consumer loans typically have shorter terms and lower balances. At December 31, 2010, consumer loans totaled $23.6 million and were 1.48% of the Bank’s total loan portfolio.
Loans to State and Political Subdivisions
Loans to State and Political Subdivisions include only tax-exempt loans. These loans totaled $25.0 million and comprised 1.57% of the Bank’s total loan portfolio at December 31, 2010. Tax-exempt loans increased $15.2 million in 2010. The Bank participated in 2010 in the Midwest Disaster Bond program and was able to offer customers certain real estate loans at tax-exempt interest rates.
The Bank has an established formal loan origination policy. In general, the loan origination policy attempts to reduce the risk of credit loss to the Bank by requiring, among other things, maintenance of minimum loan to value ratios, evidence of appropriate levels of insurance carried by borrowers and documentation of appropriate types and amounts of collateral and sources of expected payment. The collateral relied upon in the loan origination policy is generally the property being financed by the Bank. The source of expected payment is generally the income produced from the property being financed. Personal guarantees are required of individuals owing or controlling at least 20% of the ownership of an entity. Limited or proportional guarantees may be accepted in circumstances if approved by the Company’s Board of Directors. Financial information provided by the borrower is verified as considered necessary by reference to tax returns, or audited, reviewed or compiled financial statements. The Bank does not originate subprime or alt A loans. In order to modify, restructure or otherwise change the terms of a loan, the Bank’s policy is to evaluate each borrower situation individually. Modifications, restructures, extensions and other changes are done to improve the Bank’s position and to protect the Bank’s capital. If a borrower is not current with its payments, any additional loans to such borrowers are evaluated on an individual borrower basis.
The Bank’s business is not seasonal, except that loan origination fees are driven by interest rate movements and are higher in a low rate environment due to customer demand. As of December 31, 2010, the Company had no employees and the Bank had 350 full-time and 73 part-time employees.
Item 1. Business (Continued)
The Company’s results for the year ended December 31, 2010 were affected by the national economic recession and local economic conditions. Continued low interest rates resulted in increased net interest income as total interest expense was reduced by $9.3 million. The provision for loan losses was $8.9 million for the year ended December 31, 2010 as compared to $11.9 million for the year ended December 31, 2009. The provision for loan losses was $11.5 million including the flood-related provision of $4.4 million for the year ended December 31, 2008. The decrease in the provision expense for 2010 reflected a decrease in net charge-offs in 2010, and management’s evaluation of the Company’s loan portfolio and economic conditions in the Company’s trade area. The current trend remains for continued high levels of loan loss reserves, primarily as a result of the current economic conditions in the Company’s trade area. See further discussion of the current economic conditions under Item 1, Economic Conditions, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 2010, net charge offs were $8.9 million or 0.58% of average loans outstanding. The Company did experience steady defaults and foreclosures in 2010 resulting from an increased number of 1-to-4 family residential loans with delinquent payments (as reflected in loans > 90 days past due). Although the Company experienced an increase in defaults and foreclosures during 2010, the Company believes such increase has been less than the level of increase experienced in other regions of the United States. This is due, in part, to the fact that the Company’s trade area did not experience the dramatic rise and subsequent decline in real estate values over the last several years.
Restructured loans totaled $22.4 million as of December 31, 2010. The Company restructured loans for two of its borrowers during 2010, for a total of $9.1 million. Total restructured debt is less than 1.5% of the Company’s total loan portfolio as of December 31, 2010. The increase in restructured loans is reflective of the general economic conditions in the Company’s trade area. Although the number and amount of restructured loans are not material to the Company’s total loan portfolio, each borrower is evaluated individually in order to provide the greatest likelihood of collection of the borrower’s debts to the Company.
For additional discussion of the impact of the current economic recession on the financial condition and results of operations of the Company, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Johnson County and Linn County
The Bank’s trade area includes the Johnson County communities of Iowa City, Coralville, Hills and North Liberty, located near Interstate 80 and Interstate 380 in Eastern Iowa. These communities have a combined population of approximately 100,300. Johnson County, Iowa has a population of approximately 132,500. The University of Iowa in Iowa City has approximately 30,800 students and 32,200 full and part-time employees, including 6,200 employees of The University of Iowa Hospitals and Clinics.
The Bank operates offices in the Linn County, Iowa communities of Lisbon, Marion, Mount Vernon and Cedar Rapids, Iowa. Lisbon has a population of approximately 2,200 and Mount Vernon, located two miles from Lisbon, has a population of about 4,400. Both communities are within easy commuting distances to Cedar Rapids and Iowa City, Iowa. Cedar Rapids has a metropolitan population of approximately 159,100, including approximately 31,400 from adjoining Marion, Iowa and is located approximately 10 miles west of Lisbon, Iowa and approximately 25 miles north of Iowa City on Interstate 380. The total population of Linn County is approximately 212,700. The largest employer in the Cedar Rapids area is Rockwell Collins, Inc., manufacturer of communications instruments, with about 9,400 employees.
Item 1. Business (Continued)
Other large employers in the Johnson and Linn County areas and their approximate number of employees are as follows (Data source is Corridor Business Journal):
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Employer
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Type of Business
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Employees
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Hy-Vee Food Stores
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Grocery Stores
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4,000
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Cedar Rapids and Linn-Mar School Districts
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Education
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3,800
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AEGON USA, Inc.
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Insurance
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3,700
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St. Luke's Hospital
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Health Care
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3,000
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Mercy Medical Center
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Health Care
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2,800
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Heartland Express, Inc.
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Trucking
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2,700
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Wal-Mart Stores, Inc.
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Discount Store
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2,000
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Kirkwood Community College
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Education
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1,900
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Iowa City Community School District
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Education
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1,600
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Veteran's Administration Medical Center
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Health Care
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1,600
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Pearson Educational Measurement
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Information Services - Computers
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1,400
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Mercy Iowa City
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Health Care
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1,300
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ACT, Inc.
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Educational Testing Service
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1,200
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City of Cedar Rapids
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City Government
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1,200
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Alliant Energy
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Energy
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1,200
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Quaker Oats Company
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Cereals and Chemicals
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1,100
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Washington County
The Bank has offices located in Kalona and Wellman, Iowa, which are in Washington County. Kalona is located approximately 20 miles south of Iowa City. Wellman is located approximately 5 miles west of Kalona. Kalona has a population of approximately 2,500 and Wellman has a population of about 1,500. The population of Washington County is approximately 21,600. Both Kalona and Wellman are primarily agricultural communities, but are located within easy driving distance for employment in Iowa City, Coralville and North Liberty (combined population 99,600) and Washington, Iowa (population 7,000).
Item 1. Business (Continued)
C
OMPETITION
Competition among financial institutions in attracting and retaining deposits and making loans is intense. Traditionally, the Company’s most direct competition for deposits has come from commercial banks, savings institutions and credit unions doing business in its areas of operation. Increasingly, the Company has experienced additional competition for deposits from nonbanking sources, such as securities firms, insurance companies, money market mutual funds and financial services subsidiaries of commercial and manufacturing companies. Competition for loans comes primarily from other commercial banks, savings institutions, consumer finance companies, credit unions, mortgage banking companies, insurance companies and other institutional lenders. The Company competes primarily on the basis of products offered, customer service and price. A number of institutions with which the Company competes enjoy the benefits of fewer regulatory constraints and lower cost structures including favorable income tax treatments. Some have greater assets and capital than the Company does and, thus, are better able to compete on the basis of price than the Company is. Technological advances, which may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties, could make it more difficult for the Company to compete in the future.
Effective March 13, 2000, securities firms and insurance companies that elect to become financial holding companies were allowed to acquire banks and other financial institutions. This has increased the number of competitors and intensified the competitive environment in which the Company conducts business. The increasingly competitive environment is primarily a result of changes in regulations and changes in technology and product delivery systems. These competitive trends are likely to continue.
The Bank is in direct competition for loans and deposits and financial services with a number of other banks and credit unions in Johnson, Linn and Washington County. A comparison of the number of office locations and deposits in the three counties as of June, 2010 (most recent date of available data from the FDIC and national credit union websites) is as follows:
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Johnson County
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Linn County
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Washington County
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Offices
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Deposits (in millions)
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Offices
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Deposits (in millions)
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Offices
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Deposits (in millions)
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Hills Bank and Trust Company
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6 | $ | 1,028 | 6 | $ | 286 | 2 | $ | 88 | |||||||||||||||
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Branches of largest competing national bank
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7 | 207 | 8 | 829 | 1 | 21 | ||||||||||||||||||
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Largest competing independent bank
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8 | 501 | 8 | 493 | 2 | 171 | ||||||||||||||||||
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Largest competing credit union
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7 | 752 | 9 | 525 | 1 | 1 | ||||||||||||||||||
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All other bank and credit union offices
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29 | 557 | 75 | 2,699 | 7 | 207 | ||||||||||||||||||
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Total Market in County
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57 | $ | 3,045 | 106 | $ | 4,832 | 13 | $ | 488 | |||||||||||||||
Effective July 1, 2004, all limitations on bank office locations of Iowa law were repealed, effectively allowing statewide branching. Since that date, banks have been allowed to establish an unlimited number of offices in any location in Iowa subject to regulatory approval. Since July 1, 2006, nine new offices have been added in Johnson County and five in Linn County, while the population base has increased by 18,200, or 5.57%, in the two counties in the last four years. The number of banking offices in Washington County has increased by two while its population has remained stable. The total deposits in the three counties increased $1.6 billion or 24.2%, since July 1, 2006.
Item 1. Business (Continued)
T
HE ECONOMY
The Bank’s primary trade territory is Johnson, Linn and Washington Counties, Iowa. The table that follows shows employment information as of December 31, 2010, regarding the labor force and unemployment levels in the three counties in which the Bank has office locations along with comparable data on the United States and the State of Iowa.
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Labor Force
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Unemployed
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Rate %
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United States
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153,690,000 | 14,485,000 | 9.4 | % | ||||||||
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State of Iowa
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1,675,800 | 106,000 | 6.3 | % | ||||||||
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Johnson County
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81,100 | 3,500 | 4.3 | % | ||||||||
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Linn County
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122,300 | 7,400 | 6.0 | % | ||||||||
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Washington County
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12,300 | 600 | 4.9 | % | ||||||||
The unemployment rate for the Bank’s prime market area is favorable and the rate historically has been lower than the unemployment rates for both the United States and the State of Iowa. The unemployment rates in 2009 were 10.0% for the United States, 6.6% for the State of Iowa and 4.4%, 6.4% and 5.6% for Johnson, Linn and Washington Counties, respectively. As noted within the employment table of large employers in Johnson and Linn County, the University of Iowa’s impact on the local economy is very important in maintaining acceptable employment levels. The FY 2010-2011 budget for the University of Iowa, including the University of Iowa Hospital and Clinics, is $2.8 billion with state appropriations of approximately $255 million, or about 9.1% of the total. The state appropriations decreased from $259 million, or about 1.5%, from the FY 2009 – 2010 budget. The University of Iowa Hospitals and Clinics have a FY 2010-2011 budget of $830 million with 9.19% coming from State of Iowa appropriations. The state appropriations for the University of Iowa Hospitals and Clinics increased from 8.60% in the FY 2009-2010 budget.
It is difficult to predict how the national economic struggles and the proposed budget cuts by the newly elected governor for the State of Iowa will impact the State of Iowa going forward. It is unclear what impact the stress of the State budget will continue to have on the University of Iowa and the University of Iowa Hospitals and Clinics. Johnson and Linn Counties have been one of the strongest economic areas in Iowa and have had substantial economic growth in the past ten years. The largest segment of the employed population is employed in manufacturing, management, professional or related occupations.
The economies in the counties continue to be enhanced by local Iowa colleges and the University of Iowa. In addition to providing quality employment, they enroll students who provide economic benefits to the area. The following table indicates Fall 2010 enrollment.
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College
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City
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Enrollment
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The University of Iowa
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Iowa City
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30,825
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Coe College
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Cedar Rapids
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1,336
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Cornell College
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Mount Vernon
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1,191
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Kirkwood Community College
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Cedar Rapids, Iowa City and Washington
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18,456
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Mount Mercy College
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Cedar Rapids
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1,643
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Item 1. Business (Continued)
The Bank also serves a number of smaller communities in Johnson, Linn and Washington counties that are more dependent upon the agricultural economy, which historically has been affected by commodity prices and weather. The average price per acre of farm land continues to be an important factor to consider when reviewing the local economy. The average price per acre in Iowa in 2010 was $5,064 compared to $4,371 in 2009, a 15.85% increase. The range of average land prices in Johnson, Linn and Washington counties is between $5,588 and $5,750 per acre. The three counties average increase was 13.53% in 2010. The Bank’s total agricultural loans comprise about 4.09% of the Bank’s total loans.
S
UPERVISION AND REGULATION
Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Iowa Superintendent of Banking (the “Superintendent”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the “SEC”). The effect of applicable statutes, regulations and regulatory policies can be significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiary Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds and the depositors, rather than the stockholders, of financial institutions. The enforcement powers available to federal and state banking regulators are substantial and include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions.
The following is a summary of the material elements of the regulatory framework applicable to the Company and its subsidiary Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiary Bank.
Regulation of the Company
General
. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide support. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiary as the Federal Reserve may require.
Item 1. Business (Continued)
Investments and Activities
. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares), (ii) acquiring all or substantially all of the assets of another bank or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. On approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking . . . as to be a proper incident thereto.” Under current regulations of the Federal Reserve, the Company either directly or through non-bank subsidiaries would be permitted to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person from acquiring “control” of a bank holding company without prior notice to the appropriate federal bank regulator. “Control” is defined in certain cases as the acquisition of 10% or more of the outstanding shares of a bank or a bank holding company depending on the circumstances surrounding the acquisition.
Regulatory Capital Requirements
Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 4%.
The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentration of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. Current Federal Reserve minimum requirements for a well capitalized organization experiencing significant growth are a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6% and total risk-based capital ratio of 10%. As of December 31, 2010, the Company had regulatory capital in excess of the Federal Reserve’s minimum and well-capitalized definition requirements, with a leverage ratio of 9.70%, with total Tier 1 risk-based capital ratio of 12.33% and a total risk-based capital ratio of 13.59%.
Item 1. Business (Continued)
Dividends
. The Iowa Business Corporation Act (“IBCA”) allows the Company to make distributions, including cash dividends, to its shareholders unless, after giving effect to such distributions, either (i) the Company would not be able to pay its debts as they become due in the ordinary course of business or (ii) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy preferential shareholder rights, if any, that are superior to the rights of those receiving the distribution. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Federal Securities Regulation
. The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Regulation of the Bank
General
. The Bank is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC. As an Iowa-chartered, FDIC insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Superintendent of Banking of the State of Iowa (the “Superintendent”), as the chartering authority for Iowa banks, and the FDIC, as the Bank’s primary federal regulator.
Deposit Insurance
. The deposits of the Bank are insured up to regulatory limits set by the FDIC, and, accordingly in 2010, were subject to deposit insurance assessments based on the Federal Deposit Insurance Reform Act of 2005, as adopted and effective on April 21, 2006. The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium (assessment). The amount assessed to each institution is based on statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the DIF. The FDIC assesses higher rates to those institutions that pose greater risks to the insurance fund. These assessments included a prepayment of three years of insurance premiums which was paid by the Bank on December 30, 2009. The prepayment was intended to cover the Bank’s premiums for 2010, 2011 and 2012. The FDIC Board approved a final rule (the “rule”) on February 7, 2011 that changes the assessment base from domestic deposits to average assets minus average tangible equity, adopts a new large-bank pricing assessment scheme and sets a target size for the Deposit Insurance Fund. The changes will go into effect beginning with the second quarter of 2011 and will be payable at the end of September 2011. The rule finalizes a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the DIF reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (FICO), a mixed-ownership government corporation established in the 1980’s to recapitalize the Federal Savings and Loan Insurance Corporation. The current annualized assessment rate is 1.02 basis points, or approximately .255 basis points per quarter. These assessments will continue until the FICO bonds mature in 2019.
Item 1. Business (Continued)
Capital Requirements
. Among the requirements and restrictions imposed upon state banks by the Superintendent are the requirements to maintain reserves against deposits, restrictions on the nature and amount of loans, and restrictions relating to investments, opening of bank offices and other activities of state banks. Changes in the capital structure of state banks are also approved by the Superintendent. State banks must have a Tier 1 risk-based leverage ratio of 6.5% plus a fully funded loan loss reserve. In certain instances, the Superintendent may mandate higher capital, but the Superintendent has not imposed such a requirement on the Bank. In determining the Tier 1 risk-based leverage ratio, the Superintendent uses total equity capital without unrealized securities gains and the allowance for loan losses less any intangible assets. At December 31, 2010, the Tier 1 risk-based leverage ratio of the Bank was 9.66% and exceeded the ratio required by the Superintendent.
Capital adequacy for banks took on an added dimension with the establishment of a formal system of prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). This system uses bank capital levels to trigger supervisory actions designed to quickly correct banking problems. Capital adequacy zones are used by the federal banking agencies to trigger these actions. The ratios and the definition of “adequate capital” are the same as those used by the agencies in their capital adequacy guidelines.
Federal law provides the federal banking regulators of the Bank with broad power to take prompt corrective action to resolve the problems of undercapitalized banking institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Under prompt corrective action, banks that are inadequately capitalized face a variety of mandatory and discretionary supervisory actions. For example, “undercapitalized banks” must restrict asset growth, obtain prior approval for business expansion, and have an approved plan to restore capital. “Critically undercapitalized banks” must be placed in receivership or conservatorship within 90 days unless some other action would result in lower long-term costs to the deposit insurance fund.
Supervisory Assessments
. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the Superintendent’s examination and supervision operations. Effective July 1, 2002, the Superintendent changed the method of computation of the supervisory assessment from billing for each state examination completed based on an hourly rate, to billing on an annual basis based on the assets of the bank, the expected hours needed to conduct examinations of that size bank and an additional amount if more work is required. For fiscal 2010, the Bank’s Iowa supervisory assessment total was $126,806.
Community Investment and Consumer Protection Laws
. The Community Reinvestment Act requires insured institutions to offer credit products and take other actions that respond to the credit needs of the community. Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act and the Fair Housing Act.
Dividends
. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2010. Notwithstanding the availability of funds for dividends, however, the Superintendent may prohibit the payment of any dividends by the Bank if the Superintendent determines such payment would constitute an unsafe or unsound practice. 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 total risk-based capital to assets of 8%, $49,864,000 of the Bank’s total retained earnings of $185,076,000 as of December 31, 2010 are available for the payment of dividends to the Company.
Item 1. Business (Continued)
Insider Transactions
. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company and its subsidiary, on investments in the stock or other securities of the Company and its subsidiary and the acceptance of the stock or other securities of the Company or its subsidiary as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiary, to principal stockholders of the Company, and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiary or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards
. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
Branching Authority
. Historically, Iowa’s intrastate branching statutes have been rather restrictive when compared with those of other states. Effective July 1, 2004, all limitations on bank office locations were repealed, which effectively allowed statewide branching. Since that date, banks have been allowed to establish an unlimited number of offices in any location in Iowa subject only to regulatory approval.
Under the Riegle-Neal Act, both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to “opt-out” of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Iowa permits interstate bank mergers, subject to certain restrictions, including a prohibition against interstate mergers involving an Iowa bank that has been in existence and continuous operation for fewer than five years.
State Bank Activities
. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the Bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the Bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Item 1. Business (Continued)
Financial Privacy.
In accordance with the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act
. A major focus of governmental policy on financial institutions this decade has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U. S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Item 1. Business (Continued)
C
ONSOLIDATED STATISTICAL INFORMATION
The following consolidated statistical information reflects selected balances and operations of the Company and the Bank for the periods indicated.
The following tables show (1) average balances of assets, liabilities and stockholders’ equity, (2) interest income and expense on a tax equivalent basis, (3) interest rates and interest differential and (4) changes in interest income and expense.
AVERAGE BALANCES
(Average Daily Basis)
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
ASSETS
|
||||||||||||
|
Cash and cash equivalents
|
$ | 50,282 | $ | 36,138 | $ | 21,308 | ||||||
|
Taxable securities
|
107,031 | 110,883 | 114,717 | |||||||||
|
Nontaxable securities
|
98,753 | 99,142 | 96,771 | |||||||||
|
Federal funds sold
|
473 | 19,440 | 863 | |||||||||
|
Loans, net
|
1,519,344 | 1,479,823 | 1,406,447 | |||||||||
|
Property and equipment, net
|
26,588 | 24,258 | 22,208 | |||||||||
|
Other assets
|
60,230 | 48,681 | 37,370 | |||||||||
| $ | 1,862,701 | $ | 1,818,365 | $ | 1,699,684 | |||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||||||
|
Noninterest-bearing demand deposits
|
$ | 180,851 | $ | 170,627 | $ | 155,017 | ||||||
|
Interest-bearing demand deposits
|
235,380 | 219,545 | 182,554 | |||||||||
|
Savings deposits
|
368,517 | 321,208 | 255,026 | |||||||||
|
Time deposits
|
634,703 | 643,413 | 588,691 | |||||||||
|
Short-term borrowings
|
46,670 | 40,810 | 84,119 | |||||||||
|
FHLB borrowings
|
194,651 | 237,556 | 261,399 | |||||||||
|
Other liabilities
|
18,440 | 16,605 | 14,198 | |||||||||
|
Redeemable common stock held by
|
||||||||||||
|
Employee Stock Ownership Plan
|
23,923 | 23,357 | 23,010 | |||||||||
|
Stockholders' equity
|
159,566 | 145,244 | 135,670 | |||||||||
| $ | 1,862,701 | $ | 1,818,365 | $ | 1,699,684 | |||||||
Item 1. Business (Continued)
INTEREST INCOME AND EXPENSE
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Income:
|
||||||||||||
|
Loans (1)
|
$ | 88,495 | $ | 89,184 | $ | 89,525 | ||||||
|
Taxable securities
|
3,380 | 3,786 | 4,734 | |||||||||
|
Nontaxable securities (1)
|
5,067 | 5,187 | 5,204 | |||||||||
|
Federal funds sold
|
74 | 55 | 18 | |||||||||
|
Total interest income
|
97,016 | 98,212 | 99,481 | |||||||||
|
Expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
1,053 | 1,390 | 1,571 | |||||||||
|
Savings deposits
|
2,073 | 3,137 | 3,397 | |||||||||
|
Time deposits
|
16,074 | 20,742 | 23,897 | |||||||||
|
Short-term borrowings
|
523 | 631 | 1,818 | |||||||||
|
FHLB borrowings
|
8,116 | 11,241 | 12,860 | |||||||||
|
Total interest expense
|
27,839 | 37,141 | 43,543 | |||||||||
|
Net interest income
|
$ | 69,177 | $ | 61,071 | $ | 55,938 | ||||||
|
(1) Presented on a tax equivalent basis using a rate of 35% for the three years presented.
|
||||||||||||
Item 1. Business (Continued)
INTEREST RATES AND INTEREST DIFFERENTIAL
|
Years Ended December 31
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Average yields:
|
||||||||||||
|
Loans (1)
|
5.81 | % | 6.01 | % | 6.35 | % | ||||||
|
Loans (tax equivalent basis) (1)
|
5.82 | 6.03 | 6.37 | |||||||||
|
Taxable securities
|
3.16 | 3.41 | 4.13 | |||||||||
|
Nontaxable securities
|
3.34 | 3.40 | 3.50 | |||||||||
|
Nontaxable securities (tax equivalent basis)
|
5.13 | 5.23 | 5.38 | |||||||||
|
Federal funds sold
|
0.26 | 0.16 | 2.05 | |||||||||
|
Average rates paid:
|
||||||||||||
|
Interest-bearing demand deposits
|
0.45 | 0.63 | 0.86 | |||||||||
|
Savings deposits
|
0.56 | 0.98 | 1.33 | |||||||||
|
Time deposits
|
2.53 | 3.22 | 4.06 | |||||||||
|
Short-term borrowings
|
1.06 | 1.48 | 2.09 | |||||||||
|
FHLB borrowings
|
4.17 | 4.73 | 4.92 | |||||||||
|
Yield on average interest-earning assets
|
5.53 | 5.69 | 6.15 | |||||||||
|
Rate on average interest-bearing liabilities
|
1.87 | 2.52 | 3.15 | |||||||||
|
Net interest spread (2)
|
3.66 | 3.17 | 3.00 | |||||||||
|
Net interest margin (3)
|
3.95 | 3.55 | 3.47 | |||||||||
|
(1)
|
Non-accruing 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 rate of 35% for the three years presented. The net interest spread increased 49 basis points in 2010 and increased 17 basis points in 2009.
|
|
(3)
|
Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets. The net interest margin increased 40 basis points in 2010 and increased 8 basis points in 2009. The net interest margin increased in 2010 due to the continued low rate environment. The Company was able to reprice interest-bearing liabilities downward more quickly that the decline in average yields on earning assets.
|
Item 1. Business (Continued)
CHANGES IN INTEREST INCOME AND EXPENSE
|
Changes Due
|
Changes Due
|
Total
|
||||||||||
|
To Volume
|
To Rates
|
Changes
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Year ended December 31, 2010:
|
||||||||||||
|
Change in interest income:
|
||||||||||||
|
Loans
|
$ | 2,294 | $ | (2,983 | ) | $ | (689 | ) | ||||
|
Taxable securities
|
(75 | ) | (331 | ) | (406 | ) | ||||||
|
Nontaxable securities
|
(20 | ) | (100 | ) | (120 | ) | ||||||
|
Federal funds sold
|
19 | - | 19 | |||||||||
| $ | 2,218 | $ | (3,414 | ) | $ | (1,196 | ) | |||||
|
Change in interest expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
(100 | ) | 437 | 337 | ||||||||
|
Savings deposits
|
(499 | ) | 1,563 | 1,064 | ||||||||
|
Time deposits
|
281 | 4,387 | 4,668 | |||||||||
|
Short-term borrowings
|
(107 | ) | 215 | 108 | ||||||||
|
FHLB borrowings
|
2,030 | 1,095 | 3,125 | |||||||||
| 1,605 | 7,697 | 9,302 | ||||||||||
|
Change in net interest income
|
$ | 3,823 | $ | 4,283 | $ | 8,106 | ||||||
|
Year ended December 31, 2009:
|
||||||||||||
|
Change in interest income:
|
||||||||||||
|
Loans
|
$ | 4,657 | $ | (4,998 | ) | $ | (341 | ) | ||||
|
Taxable securities
|
(191 | ) | (757 | ) | (948 | ) | ||||||
|
Nontaxable securities
|
127 | (144 | ) | (17 | ) | |||||||
|
Federal funds sold
|
37 | - | 37 | |||||||||
| $ | 4,630 | $ | (5,899 | ) | $ | (1,269 | ) | |||||
|
Change in interest expense:
|
||||||||||||
|
Interest-bearing demand deposits
|
(321 | ) | 502 | 181 | ||||||||
|
Savings deposits
|
(1,142 | ) | 1,402 | 260 | ||||||||
|
Time deposits
|
(2,222 | ) | 5,377 | 3,155 | ||||||||
|
Short-term borrowings
|
912 | 275 | 1,187 | |||||||||
|
FHLB borrowings
|
1,206 | 413 | 1,619 | |||||||||
| (1,567 | ) | 7,969 | 6,402 | |||||||||
|
Change in net interest income
|
$ | 3,063 | $ | 2,070 | $ | 5,133 | ||||||
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.
Item 1. Business (Continued)
LOANS
The following table shows the composition of loans (before deducting the allowance for loan losses) as of December 31 for each of the last five years. The table does not include loans held for sale to the secondary market.
|
December 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Agricultural
|
$ | 65,004 | $ | 64,598 | $ | 64,198 | $ | 60,004 | $ | 49,223 | ||||||||||
|
Commercial and financial
|
141,619 | 153,997 | 162,170 | 132,070 | 111,441 | |||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
25,232 | 25,821 | 29,343 | 33,209 | 26,266 | |||||||||||||||
|
Construction, land development and commercial
|
86,552 | 95,955 | 111,006 | 89,935 | 87,933 | |||||||||||||||
|
Mortgage, farmland
|
90,448 | 87,300 | 83,499 | 66,554 | 53,822 | |||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
519,533 | 470,328 | 444,474 | 423,177 | 420,642 | |||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
109,036 | 114,742 | 117,086 | 115,604 | 111,077 | |||||||||||||||
|
Mortgage, multi-family
|
202,630 | 190,180 | 180,525 | 167,718 | 166,540 | |||||||||||||||
|
Mortgage, commercial
|
302,020 | 295,070 | 270,158 | 247,749 | 231,408 | |||||||||||||||
|
Loans to individuals
|
23,627 | 25,405 | 26,823 | 29,069 | 32,167 | |||||||||||||||
|
Obligations of state and political subdivisions
|
24,959 | 9,745 | 8,218 | 7,220 | 6,558 | |||||||||||||||
| $ | 1,590,660 | $ | 1,533,141 | $ | 1,497,500 | $ | 1,372,309 | $ | 1,297,077 | |||||||||||
|
Less allowance for loan losses
|
29,230 | 29,160 | 27,660 | 19,710 | 17,850 | |||||||||||||||
| $ | 1,561,430 | $ | 1,503,981 | $ | 1,469,840 | $ | 1,352,599 | $ | 1,279,227 | |||||||||||
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, 2010:
|
Amount
|
One Year
|
One To
|
Over Five
|
|||||||||||||
|
Of Loans
|
Or Less (1)
|
Five Years
|
Years
|
|||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||
|
Commercial
|
$ | 202,996 | $ | 107,820 | $ | 91,026 | $ | 4,150 | ||||||||
|
Real Estate
|
1,338,720 | 254,838 | 901,076 | 182,806 | ||||||||||||
|
Other
|
48,944 | 11,877 | 18,258 | 18,809 | ||||||||||||
|
Totals
|
$ | 1,590,660 | $ | 374,535 | $ | 1,010,360 | $ | 205,765 | ||||||||
|
The types of interest rates applicable to these principal payments are shown below:
|
||||||||||||||||
|
Fixed rate
|
$ | 795,020 | $ | 138,387 | $ | 546,389 | $ | 110,244 | ||||||||
|
Variable rate
|
795,640 | 236,148 | 463,971 | 95,521 | ||||||||||||
| $ | 1,590,660 | $ | 374,535 | $ | 1,010,360 | $ | 205,765 | |||||||||
|
(1)
|
A significant portion of the commercial loans are due in one year or less. A significant percentage of the loans will be re-evaluated prior to their maturity and are likely to be extended.
|
Item 1. Business (Continued)
IMPAIRED LOANS AND NON-PERFORMING ASSETS
The following table summarizes the Company's impaired loans and non-performing assets as of December 31 for each of the years presented:
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Nonaccrual loans
|
$ | 3,848 | $ | 5,360 | $ | 1,327 | $ | 4,948 | $ | 879 | ||||||||||
|
Accruing loans past due 90 days or more
|
5,345 | 7,009 | 5,049 | 6,019 | 4,983 | |||||||||||||||
|
Restructured loans
|
22,355 | 15,135 | 4,478 | - | - | |||||||||||||||
|
Total impaired loans (1)
|
31,548 | 27,504 | 10,854 | 10,967 | 5,862 | |||||||||||||||
|
Other real estate
|
2,233 | 3,227 | 5,155 | 473 | 801 | |||||||||||||||
|
Non-performing assets (includes impaired loans and other real estate)
|
33,781 | 30,731 | 16,009 | 11,440 | 6,663 | |||||||||||||||
|
Loans held for investment
|
1,590,660 | 1,533,141 | 1,497,500 | 1,372,309 | 1,297,077 | |||||||||||||||
|
Ratio of allowance for loan losses to loans held for investment
|
1.84 | % | 1.90 | % | 1.85 | % | 1.44 | % | 1.38 | % | ||||||||||
|
Ratio of allowance for loan losses to impaired loans
|
92.65 | 106.02 | 254.84 | 179.72 | 336.23 | |||||||||||||||
|
Ratio of impaired loans to total loans held for investment
|
1.98 | 1.79 | 0.72 | 0.80 | 0.45 | |||||||||||||||
|
Ratio of non-performing assets to total assets
|
1.75 | 1.68 | 0.90 | 0.69 | 0.43 | |||||||||||||||
|
(1)
|
The Company has revised the total of impaired loans from previous filings. The revised total has decreased by $47,761,000, $41,332,000, $28,616,000, and $8,819,000 as of December 31, 2009, 2008, 2007, and 2006, respectively. The revision was made to align with the regulatory definition of impaired loans. In previous filings, the Company included all loans that were evaluated for potential impairment as part of our quarterly allowance for loan loss calculation in the non-performing loan total. The Company revised the presentation of impaired loans to include only nonaccrual loans, accruing loans greater than 90 days past due and restructured loans. The resulting change in the presentation of impaired loan total does not have any impact on the allowance for loan loss policy, allowance for loan loss calculation or the provision for loan loss for any periods presented. The loans that were removed from the presentation were evaluated for potential impairment. As these loans were not considered impaired, the appropriate allocation was calculated using historical loss rates, as adjusted for qualitative factors. The revised impaired loan presentation allows the Company to better compare itself to its appropriate peer group as the revised impaired loan presentation corresponds with the regulatory definition.
|
The ratio of allowance for loan losses to impaired loans decreased to 92.65% as of December 31, 2010 compared to 106.02% as of the same period in 2009. This decrease is due to losses recognized on impaired loans for the year ended December 31, 2010. The impaired loans of $31,548,000 had an allocated reserve of $810,000 as of December 31, 2010. See Note 3 to the Consolidated Financial Statements for additional disclosures on impaired loans.
Item 1. Business (Continued)
The following table summarizes the Company's impaired loans as of December 31 of each of the years presented:
|
December 31, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
| Accruing loans | Accruing loans | |||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
Non-accrual
|
past due
|
Restructured
|
|||||||||||||||||||
|
loans (1)
|
90 days
|
loans
|
loans (1)
|
90 days
|
loans
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
(Amounts In Thousands)
|
|||||||||||||||||||||||
|
Agriculture
|
$ | - | $ | 104 | $ | - | $ | - | $ | 8 | $ | - | ||||||||||||
|
Commercial and financial
|
2,647 | 1,045 | 2,301 | 958 | 280 | 3,134 | ||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
- | 271 | - | - | 260 | - | ||||||||||||||||||
|
Construction, land development and commercial
|
1,546 | 145 | 2,118 | 2,645 | 1,202 | 2,442 | ||||||||||||||||||
|
Mortgage, farmland
|
147 | - | - | - | 172 | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
1,783 | 3,053 | 779 | 1,534 | 3,528 | 1,672 | ||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
26 | 483 | 963 | - | 140 | 613 | ||||||||||||||||||
|
Mortgage, multi-family
|
1,837 | - | 4,775 | - | 906 | 4,867 | ||||||||||||||||||
|
Mortgage, commercial
|
260 | 229 | 11,419 | 223 | 469 | 2,407 | ||||||||||||||||||
|
Loans to individuals
|
- | 15 | - | - | 44 | - | ||||||||||||||||||
| $ | 8,246 | $ | 5,345 | $ | 22,355 | $ | 5,360 | $ | 7,009 | $ | 15,135 | |||||||||||||
|
December 31, 2008
|
December 31, 2007
|
|||||||||||||||||||||||
| Accruing loans | Accruing loans | |||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
Non-accrual
|
past due
|
Restructured
|
|||||||||||||||||||
|
loans (1)
|
90 days
|
loans
|
loans
|
90 days
|
loans
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
(Amounts In Thousands)
|
|||||||||||||||||||||||
|
Agriculture
|
$ | - | $ | - | $ | - | $ | 109 | $ | 34 | $ | - | ||||||||||||
|
Commercial and financial
|
661 | 429 | 199 | 491 | 795 | - | ||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
1,325 | 208 | 1,010 | 369 | - | - | ||||||||||||||||||
|
Construction, land development and commercial
|
- | 515 | 3,269 | 302 | 750 | - | ||||||||||||||||||
|
Mortgage, farmland
|
- | - | - | - | - | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
549 | 2,741 | - | - | 3,897 | - | ||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
- | 363 | - | 18 | 211 | - | ||||||||||||||||||
|
Mortgage, multi-family
|
- | 90 | - | - | - | - | ||||||||||||||||||
|
Mortgage, commercial
|
- | 605 | - | 3,659 | 222 | - | ||||||||||||||||||
|
Loans to individuals
|
- | 98 | - | - | 110 | - | ||||||||||||||||||
| $ | 2,535 | $ | 5,049 | $ | 4,478 | $ | 4,948 | $ | 6,019 | $ | - | |||||||||||||
|
December 31, 2006
|
||||||||||||||||||||||||
| Accruing loans | ||||||||||||||||||||||||
|
Non-accrual
|
past due
|
Restructured
|
||||||||||||||||||||||
|
loans
|
90 days
|
loans
|
||||||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||
|
Agriculture
|
$ | 445 | $ | 25 | $ | - | ||||||||||||||||||
|
Commercial and financial
|
212 | 307 | - | |||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
- | 506 | - | |||||||||||||||||||||
|
Construction, land development and commercial
|
- | 695 | - | |||||||||||||||||||||
|
Mortgage, farmland
|
44 | 43 | - | |||||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
- | 1,783 | - | |||||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
- | 47 | - | |||||||||||||||||||||
|
Mortgage, multi-family
|
- | - | - | |||||||||||||||||||||
|
Mortgage, commercial
|
178 | 1,157 | - | |||||||||||||||||||||
|
Loans to individuals
|
- | 420 | - | |||||||||||||||||||||
| $ | 879 | $ | 4,983 | $ | - | |||||||||||||||||||
(1) Includes gross non-accrual loans. There were $4,398,000, $0 and $1,208,000 of restructured loans included within non-accrual loans as of December 31, 2010, 2009 and 2008, respectively.
Item 1. Business (Continued)
Impaired loans increased by $4.0 million from December 31, 2009 to December 31, 2010. Impaired loans include any loan that has been placed on nonaccrual status, loans past due 90 days or more and still accruing interest and restructured loans. Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement. The increase in impaired loans is due mainly to the restructuring of one large commercial mortgage borrower with an aggregate loan balance of $8.8 million during the year ended December 31, 2010. This increase is offset by pay downs of $0.8 million from two unrelated first mortgage borrowers, pay downs of $0.5 million from two unrelated construction and land development borrowers and $0.8 million of recognized losses from two unrelated commercial borrowers, which the Bank had adequately reserved for in previous quarters. The losses were determined after further review of the real estate values and collateral position for the customer’s properties. The increase of impaired loans from 2009 to 2010 is further offset by a decrease in loans greater than 90 days past due and still accruing interest of $1.7 million. Most of the impaired loans are secured by real estate and are believed to be adequately collateralized.
For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible. In general, this is the amount that the carrying value of the loan exceeds the related appraised value. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the impairment is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variables affecting its value may have changed since the appraisal was performed, consistent with the December 2006 joint interagency guidance on the allowance for loan losses. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide additional charge off or loss allocations based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a loss allocation may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional loss allocation may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value.
For flood-related properties located in Linn County, Iowa, the Company has not used external appraisals to determine the fair market value of collateral. Due to the wide-spread flooding in June 2008, there was a lack of appropriate arms-length transactions to support useful appraisals especially for 1-to-4 family residences. Instead, the Company has utilized assessed values and independent realtor market evaluations on individual properties. The Company believes these tools have been an appropriate measure in estimating the fair market value of such properties in this situation.
The Company does not have a significant amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
Loans 90 days past due that are still accruing interest decreased $1.7 million from December 31, 2009 to December 31, 2010. Real estate loans make up approximately $5.6 million, or 68%, of total non-accrual loans as of December 31, 2010. As of December 31, 2010 and 2009, loans 90 days past due and accruing were 0.34% and 0.46% of total loans, respectively. The average balance of the past due loans also decreased in 2010 as compared to 2009. The average past due loan balance was $73,000 as of December 31, 2010 compared to $95,000 as of December 31, 2009. The loans 90 days past due and still accruing are believed to be adequately collateralized. Loans are placed on non-accrual status when management believes the collection of future principal and interest is not reasonably assured.
Item 1. Business (Continued)
The increase in non-accrual loans from December 31, 2009 to December 31, 2010 relates to two borrower relationships that had an aggregate balance of approximately $4.4 million as of December 31, 2010 which was offset by the payoff for two borrowers of $1.1 million. Non-accrual loans represent 0.52% of total loans as of December 31, 2010 compared to 0.35% of total loans as of December 31, 2009. The non-accrual loans are considered to be impaired loans for purposes of reviewing the adequacy of the loan loss reserve. Interest income was reduced by $384,000, $293,000 and $93,000 for the years ended December 31, 2010, 2009 and 2008, respectively, by the classification of the loans as non-accrual.
The Bank regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans are impaired in accordance with ASC 310. If the loans are impaired, the Bank determines if a specific allowance is appropriate. In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured. Loans that are determined not to be impaired and for which there are no specific allowances are classified into one or more risk categories. Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed. The determination concerning the appropriate percentage begins with historical loss experience factors, which are then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in restructured loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.
The Company has no individual borrower or borrowers engaged in the same or similar industry exceeding 10% of total loans. The Company has no interest-bearing assets, other than loans, that meet the non-accrual, past due, restructured or potential problem loan criteria.
The Bank may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments or an extension of the maturity date. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that would otherwise not be considered. Restructured loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. The Bank restructured loans with an aggregate principal amount totaling $9.3 million and $11.5 million during the years ended December 31, 2010 and 2009, respectively. All of the loans are considered to be troubled debt restructurings as defined under FASB ASC 310-40. Of the $9.3 million restructured in 2010, $8.8 million related to one customer relationship and consisted of five loans. The loans were re-written into two notes using the “Policy Statement on Prudent Commercial Real Estate Loan Workouts” issued by the joint interagency regulators, including the Bank’s main regulator, the FDIC, in October 2009. The first note was equal to 80% of the updated 2009 appraised value for the property with a maturity date of five years. The interest rate for the first note is 5.95% and is considered a market interest rate by the Company. The second note was for the remaining loan balance with a five year maturity and a below market interest rate of 4.0%. At the time of the restructure, the second note was fully charged off which did not impact the allowance requirement as the Company had already factored this information into the December 31, 2009 allowance for loan loss calculation. The restructure was completed as it allowed the debt that is recorded on the books to be supported by an updated appraisal.
The Bank has commitments to lend additional borrowings to restructured loan customers. These commitments are in the normal course of business and allow the borrowers to build pre-sold homes and commercial property and which increase their overall cash flow. The additional borrowings are not used to facilitate payments on these loans.
Item 1. Business (Continued)
Below is a summary of information for restructured loans:
|
December 31, 2010
|
||||||||||||
|
Number of
|
Recorded
|
Commitments
|
||||||||||
|
contracts
|
investment
|
outstanding
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Agriculture
|
- | $ | - | - | ||||||||
|
Commercial and financial
|
2 | 2,301 | 155 | |||||||||
|
Real estate:
|
||||||||||||
|
Construction, 1 to 4 family residential
|
- | - | 1,106 | |||||||||
|
Construction, land development and commercial
|
4 | 2,118 | 2,008 | |||||||||
|
Mortgage, farmland
|
- | - | - | |||||||||
|
Mortgage, 1 to 4 family first liens
|
3 | 779 | - | |||||||||
|
Mortgage, 1 to 4 family junior liens
|
2 | 963 | - | |||||||||
|
Mortgage, multi-family
|
3 | 4,775 | - | |||||||||
|
Mortgage, commercial
|
4 | 11,419 | - | |||||||||
|
Loans to individuals
|
- | - | - | |||||||||
| 18 | $ | 22,355 | $ | 3,269 | ||||||||
|
December 31, 2009
|
||||||||||||
|
Number of
|
Recorded
|
|||||||||||
|
contracts
|
investment
|
|||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Agriculture
|
- | $ | - | |||||||||
|
Commercial and financial
|
2 | 3,134 | ||||||||||
|
Real estate:
|
||||||||||||
|
Construction, 1 to 4 family residential
|
- | - | ||||||||||
|
Construction, land development and commercial
|
5 | 2,442 | ||||||||||
|
Mortgage, farmland
|
- | - | ||||||||||
|
Mortgage, 1 to 4 family first liens
|
7 | 1,672 | ||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1 | 613 | ||||||||||
|
Mortgage, multi-family
|
3 | 4,867 | ||||||||||
|
Mortgage, commercial
|
2 | 2,407 | ||||||||||
|
Loans to individuals
|
- | - | ||||||||||
| 20 | $ | 15,135 | ||||||||||
Residential real estate loan products that include features such as loan-to-values in excess of 100%, interest only payments or adjustable-rate mortgages, which expose a borrower to payment increases in excess of changes in the market interest rate, increase the credit risk of a loan. The Bank has not offered and does not offer this type of loan product.
Item 1. Business (Continued)
Specific allowances for losses on impaired loans are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral if the loan is collateral dependent.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Bank's loan loss experience for the year ended December 31, 2010:
|
Agricultural
|
Commercial and Financial
|
Real Estate:
Construction
and land
development
|
Real
estate:
Mortgage, farmland
|
Real estate:
Mortgage, 1 to
4 family
|
Real estate:
Mortgage, multi-
family and commercial
|
Other
|
Total
|
|||||||||
|
2010
|
||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||
|
Beginning balance
|
$ 2,967
|
$ 7,090
|
$ 4,811
|
$ 1,417
|
$ 7,484
|
$ 4,742
|
$ 649
|
$ 29,160
|
||||||||
|
Charge-offs
|
(18)
|
(3,647)
|
(1,202)
|
(52)
|
(4,343)
|
(1,507)
|
(423)
|
(11,192)
|
||||||||
|
Recoveries
|
248
|
946
|
81
|
44
|
583
|
152
|
283
|
2,337
|
||||||||
|
Provision
|
(1,027)
|
2,353
|
704
|
73
|
4,228
|
2,270
|
324
|
8,925
|
||||||||
|
Ending balance
|
$ 2,170
|
$ 6,742
|
$ 4,394
|
$ 1,482
|
$ 7,952
|
$ 5,657
|
$ 833
|
$ 29,230
|
||||||||
The ratio of net charge-offs to average net loans outstanding during the year ended December 31, 2010 was 0.58%.
Item 1. Business (Continued)
The following table summarizes the Bank's loan loss experience for the years ended December 31, 2009, 2008, 2007, and 2006:
|
Year Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||
|
Balance, beginning
|
$ | 27,660 | $ | 19,710 | $ | 17,850 | $ | 15,360 | ||||||||
|
Charge-offs:
|
||||||||||||||||
|
Agricultural
|
82 | 99 | 343 | 40 | ||||||||||||
|
Commercial and financial
|
5,161 | 1,359 | 1,422 | 677 | ||||||||||||
|
Real estate:
|
||||||||||||||||
|
Construction, 1 to 4 family residential
|
124 | 47 | 45 | 8 | ||||||||||||
|
Construction, land development and commercial
|
312 | 15 | - | 13 | ||||||||||||
|
Mortgage, farmland
|
22 | - | 58 | - | ||||||||||||
|
Mortgage, 1 to 4 family first liens
|
1,438 | 1,205 | 141 | 128 | ||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1,626 | 964 | 321 | 308 | ||||||||||||
|
Mortgage, multi-family
|
398 | 92 | - | 72 | ||||||||||||
|
Mortgage, commercial
|
1,774 | 104 | 57 | - | ||||||||||||
|
Loans to individuals
|
515 | 604 | 531 | 627 | ||||||||||||
| 11,452 | 4,489 | 2,918 | 1,873 | |||||||||||||
|
Recoveries:
|
||||||||||||||||
|
Agricultural
|
20 | 61 | 44 | 44 | ||||||||||||
|
Commercial and financial
|
415 | 340 | 479 | 643 | ||||||||||||
|
Real estate:
|
||||||||||||||||
|
Construction, 1 to 4 family residential
|
49 | - | 2 | 2 | ||||||||||||
|
Construction, land development and commercial
|
- | - | - | - | ||||||||||||
|
Mortgage, farmland
|
1 | 4 | 18 | 6 | ||||||||||||
|
Mortgage, 1 to 4 family first liens
|
49 | 25 | 89 | 144 | ||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
187 | 79 | 130 | 44 | ||||||||||||
|
Mortgage, multi-family
|
- | 95 | 2 | - | ||||||||||||
|
Mortgage, commercial
|
7 | 33 | 58 | 27 | ||||||||||||
|
Loans to individuals
|
277 | 295 | 427 | 442 | ||||||||||||
| 1,005 | 932 | 1,249 | 1,352 | |||||||||||||
|
Net charge-offs
|
10,447 | 3,557 | 1,669 | 521 | ||||||||||||
|
Provision charged to expense (1)
|
11,947 | 11,507 | 3,529 | 3,011 | ||||||||||||
|
Balance, ending
|
$ | 29,160 | $ | 27,660 | $ | 19,710 | $ | 17,850 | ||||||||
|
Ratio of net charge-offs (recoveries)
during year to average net loans outstanding
|
0.71 | % | 0.25 | % | 0.13 | % | 0.04 | % | ||||||||
|
(1)
|
For financial reporting purposes, management reviews the loan portfolio and determines the allowance for loan losses, which represents management’s judgment of the probable losses inherent in the Company’s loan portfolio. The loan loss provision is the amount necessary to adjust the allowance to the level considered appropriate by management. The adequacy of the allowance is reviewed quarterly and considers the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition. The growth of the loan portfolio and the trends in problem and watch loans are significant elements in the determination of the provision for loan losses.
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Item 1. Business (Continued)
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The Company evaluates the following loans to determine impairment: 1) all nonaccrual and restructured loans, 2) all non consumer and non 1 – 4 family residential loans with prior charge-offs, and 3) all non consumer and non 1-4 family loan relationships classified as substandard.
The following table presents the allowance for loan losses by type of loans and the percentage in each category to total loans as of December 31, 2010, 2009, 2008, 2007 and 2006:
|
2010
|
2009
|
|||||||||||||||||||||||
|
Amount
|
% of Total Allowance
|
% of Loans
to Total Loans
|
Amount
|
% of Total Allowance
|
% of Loans
to Total Loans
|
|||||||||||||||||||
|
(In Thousands)
|
(In Thousands)
|
|||||||||||||||||||||||
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Agricultural
|
$ | 2,170 | 7.42 | % | 4.09 | % | $ | 2,967 | 10.17 | % | 4.21 | % | ||||||||||||
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Commercial and financial
|
6,742 | 23.07 | 8.90 | 7,090 | 24.31 | 10.04 | ||||||||||||||||||
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Real estate:
|
||||||||||||||||||||||||
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Construction, 1 to 4 family residential
|
752 | 2.57 | 1.59 | 836 | 2.87 | 1.68 | ||||||||||||||||||
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Construction, land development and commercial
|
3,642 | 12.46 | 5.44 | 3,975 | 13.63 | 6.26 | ||||||||||||||||||
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Mortgage, farmland
|
1,482 | 5.07 | 5.69 | 1,417 | 4.86 | 5.69 | ||||||||||||||||||
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Mortgage, 1 to 4 family first liens
|
5,782 | 19.78 | 32.66 | 6,091 | 20.89 | 30.68 | ||||||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
2,170 | 7.42 | 6.85 | 1,393 | 4.78 | 7.49 | ||||||||||||||||||
|
Mortgage, multi-family
|
1,486 | 5.09 | 12.74 | 1,723 | 5.91 | 12.40 | ||||||||||||||||||
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Mortgage, commercial
|
4,171 | 14.27 | 18.99 | 3,019 | 10.36 | 19.25 | ||||||||||||||||||
|
Loans to individuals
|
525 | 1.80 | 1.48 | 639 | 2.19 | 1.66 | ||||||||||||||||||
|
Obligations of state and political subdivisions
|
308 | 1.05 | 1.57 | 10 | 0.03 | 0.64 | ||||||||||||||||||
| $ | 29,230 | 100.00 | % | 100.00 | % | $ | 29,160 | 100.00 | % | 100.00 | % | |||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||
|
Agricultural
|
$ | 2,258 | 8.17 | % | 4.29 | % | $ | 1,614 | 8.19 | % | 4.37 | % | ||||||||||||
|
Commercial and financial
|
5,357 | 19.37 | 10.83 | 4,382 | 22.23 | 9.62 | ||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||
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Construction, 1 to 4 family residential
|
626 | 2.26 | 1.96 | 650 | 3.30 | 2.42 | ||||||||||||||||||
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Construction, land development and commercial
|
3,986 | 14.41 | 7.41 | 1,918 | 9.73 | 6.55 | ||||||||||||||||||
|
Mortgage, farmland
|
1,210 | 4.37 | 5.58 | 428 | 2.17 | 4.85 | ||||||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
6,035 | 21.82 | 29.68 | 4,616 | 23.42 | 30.84 | ||||||||||||||||||
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Mortgage, 1 to 4 family junior liens
|
1,346 | 4.87 | 7.82 | 1,262 | 6.40 | 8.42 | ||||||||||||||||||
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Mortgage, multi-family
|
1,569 | 5.67 | 12.06 | 1,466 | 7.44 | 12.23 | ||||||||||||||||||
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Mortgage, commercial
|
4,642 | 16.78 | 18.04 | 2,563 | 13.00 | 18.05 | ||||||||||||||||||
|
Loans to individuals
|
611 | 2.21 | 1.78 | 803 | 4.08 | 2.12 | ||||||||||||||||||
|
Obligations of state and political subdivisions
|
20 | 0.07 | 0.55 | 8 | 0.04 | 0.53 | ||||||||||||||||||
| $ | 27,660 | 100.00 | % | 100.00 | % | $ | 19,710 | 100.00 | % | 100.00 | % | |||||||||||||
| 2006 | ||||||||||||||||||||||||
|
Agricultural
|
$ | 1,509 | 8.45 | % | 3.79 | % | ||||||||||||||||||
|
Commercial and financial
|
3,700 | 20.73 | 8.59 | |||||||||||||||||||||
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Real estate:
|
||||||||||||||||||||||||
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Construction, 1 to 4 family residential
|
475 | 2.66 | 2.03 | |||||||||||||||||||||
|
Construction, land development and commercial
|
1,589 | 8.90 | 6.78 | |||||||||||||||||||||
|
Mortgage, farmland
|
332 | 1.86 | 4.15 | |||||||||||||||||||||
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Mortgage, 1 to 4 family first liens
|
4,566 | 25.58 | 32.43 | |||||||||||||||||||||
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Mortgage, 1 to 4 family junior liens
|
1,206 | 6.75 | 8.56 | |||||||||||||||||||||
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Mortgage, multi-family
|
1,433 | 8.03 | 12.84 | |||||||||||||||||||||
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Mortgage, commercial
|
2,245 | 12.58 | 17.84 | |||||||||||||||||||||
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Loans to individuals
|
788 | 4.42 | 2.48 | |||||||||||||||||||||
|
Obligations of state and political subdivisions
|
7 | 0.04 | 0.51 | |||||||||||||||||||||
| $ | 17,850 | 100.00 | % | 100.00 | % | |||||||||||||||||||
Item 1. Business (Continued)
The allowance for loan losses increased $70,000 in 2010. For 2010, there was an increase of $3,497,000 due to the volume increase in pass rated loans outstanding of $67.6 million in 2010. There was an offsetting $3,427,000 decrease in the amount allocated to the allowance due to a combination of improvement in credit quality and losses recognized.
Watch loan balances were $111.3 million at December 31, 2010 and $95.6 million at December 31, 2009. These asset quality changes decreased the provision by $1.2 million based upon the relative mix of watch loans by category. The $15.7 million increase in watch loans is related to management’s evaluation of its loan portfolio. The total increase of $15.7 million is comprised of approximately $22.0 million in commercial real estate mortgages, $1.0 million in 1-to-4 family residential mortgages, $2.5 million in construction 1 – 4 family real estate and $1.3 million in construction land development and commercial real estate. The increase is offset by a decrease in the watch classification of $6.9 million for commercial loans, $2.8 million in real estate farmland, $0.9 million in 1 – 4 family junior mortgages, and $0.5 million in agricultural operating loans.
Substandard loan balances were $84.8 million at December 31, 2010 and $88.0 million at December 31, 2009. These asset quality changes decreased the provision by $2.3 million at December 31, 2010 due to the mix of the substandard loans and reduced balances. The decrease of $3.2 million in substandard loans at December 31, 2010 includes $1.4 million in agricultural operating loans, $1.7 million in construction 1 – 4 family residential real estate loans, $9.9 million in commercial loans, $1.0 million in agricultural real estate loans, and $0.7 million in commercial and financial loans. Those decreases were offset by increases in $1.3 million of construction, land development and commercial real estate loans, $4.9 million of 1-to-4 family residential mortgages, $4.8 million of multi-family mortgages, and $0.5 million in 1-4 family junior mortgages.
The amount of problem and watch loans considered in the allowance for loan losses computation increased by approximately $61.0 million in 2009. The increase in problem and watch loans for 2009 included, $6.3 million of commercial real estate loans, $24.1 million in commercial loans, $2.9 million in construction loans, $12.4 million in residential mortgages, $6.2 million in agricultural loans, $4.2 million in agricultural real estate loans, $2.9 million in multi-family residential mortgages.
The subprime mortgage banking environment has experienced considerable strain from rising delinquencies and liquidity pressures and many subprime mortgage lenders have failed. The increased scrutiny of the subprime lending market and heightened perceptions of the risks associated with bank loan portfolios are factors that have had a negative impact on general market conditions. The Company’s underwriting standards have been structured to limit exposure to the types of loans that are currently experiencing high foreclosures and loss rates. Management believes that the Company’s mortgage loan portfolio has minimal exposure to loans generally considered to be subprime loans.
Item 1. Business (Continued)
In addition, there has been a slowdown in the housing market in the Company’s trade area. This has been evidenced by reduced levels of new and existing home sales, stagnant to declining property values, a decline in building permits, and an increase in the time houses remain on the market. The Company believes that the allowance for loan losses is at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions continue to deteriorate, certain borrowers may experience difficulty and the level of impaired loans, charge-offs and delinquencies could continue to rise and require increases in the provision for loan losses. The Company will continue to monitor the adequacy of the allowance on a quarterly basis and will consider the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition.
INVESTMENT SECURITIES
The following tables show the carrying value of the investment securities held by the Bank, including stock of the Federal Home Loan Bank, as of December 31, 2010, 2009 and 2008 and the maturities and weighted average yields of the investment securities, computed on a tax-equivalent basis using a federal tax rate of 35%, as of December 31, 2010:
|
December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Carrying value:
|
||||||||||||
|
Other securities (FHLB, FHLMC and FNMA)
|
$ | 97,836 | $ | 99,090 | $ | 99,849 | ||||||
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Stock of the Federal Home Loan Bank
|
11,105 | 12,453 | 14,247 | |||||||||
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Obligations of state and political subdivisions
|
107,662 | 102,555 | 100,463 | |||||||||
| $ | 216,603 | $ | 214,098 | $ | 214,559 | |||||||
|
December 31, 2010
|
||||||||
|
Weighted
|
||||||||
|
Carrying
|
Average
|
|||||||
|
Value
|
Yield
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Other securities (FHLB, FHLMC and FNMA), maturities:
|
||||||||
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Within 1 year
|
$ | 30,110 | 3.53 | % | ||||
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From 1 to 5 years
|
67,726 | 2.71 | ||||||
| $ | 97,836 | |||||||
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Stock of the Federal Home Loan Bank
|
$ | 11,105 | 2.51 | % | ||||
|
Obligations of state and political subdivisions, maturities:
|
||||||||
|
Within 1 year
|
$ | 8,793 | 4.98 | % | ||||
|
From 1 to 5 years
|
43,673 | 5.05 | ||||||
|
From 5 to 10 years
|
54,551 | 4.80 | ||||||
|
Over 10 years
|
645 | 5.54 | ||||||
| $ | 107,662 | |||||||
|
Total
|
$ | 216,603 | ||||||
Item 1. Business (Continued)
INVESTMENT SECURITIES
As of December 31, 2010, the Company held no investment securities exceeding 10% of stockholders’ equity, other than securities of the U. S. Government agencies and corporations. The Company does not hold any investments in FNMA preferred stock, any pooled trust preferred stocks or other investments except as detailed in the table above.
DEPOSITS
The following tables show the amounts of average deposits and average rates paid on such deposits for the years ended December 31, 2010, 2009 and 2008 and the composition of the certificates of deposit issued in denominations in excess of $100,000 as of December 31, 2010, 2009 and 2008:
|
December 31,
|
||||||||||||||||||||||||
|
2010
|
Rate
|
2009
|
Rate
|
2008
|
Rate
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||
|
Average noninterest-bearing deposits
|
$ | 180,851 | - | $ | 170,627 | - | $ | 155,017 | - | |||||||||||||||
|
Average interest-bearing demand deposits
|
235,380 | 0.45 | % | 219,545 | 0.63 | % | 182,554 | 0.86 | % | |||||||||||||||
|
Average savings deposits
|
368,517 | 0.56 | 321,208 | 0.98 | 255,026 | 1.33 | ||||||||||||||||||
|
Average time deposits
|
634,703 | 2.53 | 643,413 | 3.22 | 588,691 | 4.06 | ||||||||||||||||||
| $ | 1,419,451 | $ | 1,354,793 | $ | 1,181,288 | |||||||||||||||||||
|
Time certificates issued in amounts
|
||||||||||||||||||||||||
|
of $100,000 or more with maturity in:
|
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||
|
3 months or less
|
$ | 37,739 | 1.89 | % | $ | 26,900 | 2.61 | % | $ | 19,976 | 3.59 | % | ||||||||||||
|
3 through 6 months
|
29,287 | 2.59 | 31,870 | 3.50 | 21,483 | 3.15 | ||||||||||||||||||
|
6 through 12 months
|
38,489 | 2.34 | 43,597 | 2.24 | 57,300 | 3.40 | ||||||||||||||||||
|
Over 12 months
|
76,641 | 2.71 | 72,542 | 3.01 | 63,151 | 4.12 | ||||||||||||||||||
| $ | 182,156 | $ | 174,909 | $ | 161,910 | |||||||||||||||||||
Brokered deposits totaled $28.8 million and $13.0 million as of December 31, 2010 and 2009, respectively with an average interest rate of 0.81% and 2.04% as of December 31, 2010 and 2009, respectively. As of December 31, 2010, brokered deposits of $21.5 million are included in savings deposits and $7.3 million are included in time deposits. At December 31, 2009, brokered deposits of $2.0 million were included in savings deposits and $11.0 million were included in time deposits. Brokered time deposits in increments greater than $100,000 as of December 31, 2010 and 2009 were $4.7 million and $5.0 million, respectively.
There were no deposits in foreign banking offices.
RETURN ON STOCKHOLDERS' EQUITY AND ASSETS
The following table presents the return on average assets, return on average stockholders' equity, the dividend payout ratio and average stockholders’ equity to average assets ratio for the years ended December 31, 2010, 2009 and 2008:
|
2010
|
2009
|
2008
|
||||||||||
|
Return on average assets
|
1.25 | % | 0.88 | % | 0.83 | % | ||||||
|
Return on average stockholders' equity
|
14.61 | 11.01 | 10.42 | |||||||||
|
Dividend payout ratio
|
17.26 | 25.28 | 28.90 | |||||||||
|
Average stockholders' equity to average assets ratio
|
8.57 | 7.99 | 7.98 | |||||||||
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 2010, 2009 and 2008:
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Outstanding balance as of December 31
|
$ | 46,928 | $ | 68,534 | $ | 99,937 | ||||||
|
Weighted average interest rate at year end
|
0.84 | % | 0.76 | % | 1.20 | % | ||||||
|
Maximum month-end balance
|
78,145 | 83,920 | 110,492 | |||||||||
|
Average month-end balance
|
46,670 | 40,810 | 84,119 | |||||||||
|
Weighted average interest rate for the year
|
1.06 | % | 1.48 | % | 2.09 | % | ||||||
FEDERAL HOME LOAN BANK 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 Home Loan Bank borrowings during 2010, 2009 and 2008:
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Outstanding balance as of December 31
|
$ | 195,000 | $ | 225,000 | $ | 265,000 | ||||||
|
Weighted average interest rate at year end
|
4.01 | % | 4.59 | % | 4.79 | % | ||||||
|
Maximum month-end balance
|
195,000 | 265,000 | 265,348 | |||||||||
|
Average month-end balance
|
194,651 | 237,556 | 261,399 | |||||||||
|
Weighted average interest rate for the year
|
4.17 | % | 4.73 | % | 4.92 | % | ||||||
The performance of our Company is subject to various risks. We consider the risks described below to be the most significant risks we face, but such risks are not the only risk factors that could affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or results of operations. For a discussion of the impact of risks on our financial condition and results of operations in recent years and on forward looking statements contained in this report, reference is made to Item 7 below.
We may be adversely affected by economic conditions in the local economies in which we conduct our operations, and in the United States in general.
Unfavorable or uncertain economic and market conditions may adversely affect our business and profitability. Our business faces various material risks, including credit risk and the risk that the demand for our products and services will decrease. Decreases in consumer confidence, real estate values, interest rates and investment returns, usually associated with a downturn, could make the types of loans we originate less profitable and could increase our credit risk and litigation expense.
Despite a recent trend toward stabilization and some limited improvement in some aspects of the local economy, adverse changes in the U.S. economy in recent years led to an increased level of commercial and consumer delinquencies, reduced consumer confidence, decreased market valuations and liquidity, increased market volatility and a widespread reduction of business activity generally. Although levels of unemployment appear to be relatively stable and are not as severe in the Bank’s trade area as in some other parts of the United States, they remain at elevated levels. The ability of banks and bank holding companies to raise capital or borrow in the debt markets has become more difficult compared to recent years. The resulting economic pressure and lack of confidence in the financial markets may adversely affect our business, our financial condition and our results of operations, as well as the business of our customers. Foreign or domestic terrorism or geopolitical events could shock commodity and financial markets and prolong or worsen the current recession. A worsening of economic conditions would likely exacerbate the adverse effects of these difficult conditions.
As a result of these conditions, there is a potential for new federal or state laws and regulations (including regulations to be adopted under the Dodd-Frank Act) regarding lending and funding practices and liquidity standards, and bank regulatory agencies have been and are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the issuance of formal or informal enforcement actions or orders. The impact of provisions of the Dodd-Frank Act, regulations to be adopted under the Dodd-Frank Act, and new legislation in response to these developments may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance or our stock price.
Our profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money or other assets.
We are exposed to the risk that third parties that owe us money or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Our rights against third parties may not be enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses and/or adversely affect our ability to use those securities or obligations for liquidity purposes. We rely on representations of potential borrowers and/or guarantors as to the accuracy and completeness of certain financial information. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements or other information that is materially misleading.
Our financial condition has not been materially impacted by the deterioration in the credit quality of third parties except as related to borrower credit quality. As of December 31, 2010, the Company held two investment securities considered to be less than investment grade. The aggregate fair value of these B1 rated bonds is $425,000 while their amortized cost is $505,000, representing an unrealized loss of $80,000. Management believes that the allowance for loan losses is adequate to absorb probable losses on any existing loans that may become uncollectible but cannot predict loan losses with certainty and cannot assure that the our allowance for loan losses will prove sufficient to cover actual losses in the future.
Flooding or some other natural disaster and the continuing adverse effects of 2008 flooding could harm the Company’s business.
The severe flooding that occurred in 2008 affected our loan portfolio by damaging properties pledged as collateral and by impairing certain borrowers’ abilities to repay their loans. As a result of the floods, we made a significant provision for loan losses in 2008. The area in which the Company operates may experience flooding and other natural disasters in the future, and some of those events may have effects similar to those caused by the 2008 flooding. The Company had two offices that were flooded in 2008. These offices were remodeled and reopened in the same locations.
Changing interest rates may adversely affect our profits.
Our income and cash flows depend to a great extent on the difference between the interest rates earned by us on interest-earning assets such as loans and investment securities and the interest rates paid by us on interest-bearing liabilities such as deposits and borrowings. If interest rates decrease, our net interest income could be negatively affected if interest earned on interest-earning assets, such as loans, mortgage-related securities, and other investment securities, decreases more quickly than interest paid on interest-bearing liabilities, such as deposits and borrowings. This would cause our net income to go down. In addition, if interest rates decline, our loans and investments may be prepaid earlier than expected, which may also lower our income. Rising interest rates may hurt our income because they may reduce the demand for loans and the value of our investment securities. Higher interest rates could adversely affect housing and other sectors of the economy that are interest-rate sensitive. Higher interest rates could cause deterioration in the quality of our loan portfolio. Interest rates are highly sensitive to many factors that are beyond our control, including general economics conditions and monetary policies established by the Federal Reserve Board. Interest rates do and will continue to fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that will cause rates to change.
We experience intense competition for loans and deposits.
Competition among financial institutions in attracting and retaining deposits and making loans is intense. Traditionally, our most direct competition for deposits has come from commercial banks, savings institutions and credit unions (which do not pay federal or state income taxes) doing business in our areas of operation. Increasingly, we have experienced additional competition for deposits from nonbanking sources, such as securities firms, insurance companies, money market mutual funds and corporate and financial services subsidiaries of commercial and manufacturing companies. Competition for loans comes primarily from other commercial banks, savings institutions, consumer finance companies, credit unions, mortgage banking companies, insurance companies and other institutional lenders. We compete primarily on the basis of products offered, customer service and price. A number of institutions with which we compete enjoy the benefits of fewer regulatory constraints and lower cost structures. Some have greater assets and capital than we do and, thus, are better able to compete on the basis of price than we are. The increasingly competitive environment is primarily a result of changes in regulation and changes in technology and product delivery systems. These competitive trends are likely to continue.
Item 1A. Risk Factors (Continued)
If we do not continue to meet or exceed regulatory capital requirements and maintain our “well-capitalized” status, there could be an adverse effect on the manner in which we do business and on the confidence of our customers in us.
Under regulatory capital adequacy guidelines, we must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. Failure to meet minimum capital requirements could have a material effect on our financial condition and could subject us to a variety of enforcement actions, as well as certain restrictions on our business. Failure to maintain the status of “well capitalized” under the regulatory framework could adversely affect the confidence that our customers have in us, which can lead to a decline in the demand for or a reduction in the prices that we are able to charge for our products and services. We may at some point need to raise additional capital to maintain our “well capitalized” status. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and non-performance. Our allowance for loan losses is based on our historical loss experience as well as an evaluation of the risks associated with its loan portfolio, including the size and composition of the loan portfolio, current economic conditions and concentrations within the portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material negative effect on our financial condition and results of operations.
Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Real estate loans, which constitute a large portion of our loan portfolio, include home equity, commercial, construction and resident loans, and such loans are concentrated in the Bank’s trade area, a small geographic area in Southeast Iowa. As of December 31, 2010, approximately 84% of our loans had real estate as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in our market could increase the credit risk associated with our loan portfolio. Also, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Item 1A. Risk Factors (Continued)
Our real estate loans also include construction loans, including land acquisition and development. Construction, land acquisition and development lending involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, commercial construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.
Commercial loans make up a significant portion of our loan portfolio.
Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Repayment of our commercial loans is often dependent on the cash flows of the borrower, which may be unpredictable. Most often, this collateral is accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The other types of collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Our agricultural loans may involve a greater degree of risk than other loans, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.
Payments on agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary crops in our market areas are corn and soybeans. Accordingly, adverse circumstances affecting these crops could have an adverse effect on our agricultural real estate loan portfolio.
We also originate agricultural operating loans. As with agricultural real estate loans, the repayment of operating loans is dependent on the successful operation or management of the farm property. Likewise, agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. The primary livestock in our market areas is hogs. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.
Item 1A. Risk Factors (Continued)
A decline in local and national real estate markets may impact our operations and/or financial condition.
There has been a slowdown in the national housing market as evidenced by reports of reduced levels of new and existing home sales, increasing inventories of houses on the market, stagnant to declining property values, a decline in building permits, and an increase in the time houses remain on the market. In recent years, some lenders made many adjustable-rate mortgage loans, lowered their credit standards with respect to mortgage loans and home equity loans, and created collateralized debt obligations which included such mortgage loans. The slowdown in the national housing market created uncertainty and liquidity issues relating to the value of such mortgage loans, which causes disruption in credit markets. The extent to which local real estate mortgage loans have been adversely affected has varied. Although management believes that the Bank has maintained appropriate lending standards and that these trends have yet to materially affect our local economy or our business and profitability, no assurance can be given that these conditions will not directly or indirectly affect our operations. If these conditions continue or worsen, they may result in a decrease in interest income or an adverse impact on our loan losses.
If we are unable to continuously attract deposits and other short-term funding, our financial condition, including our capital ratios, our results of operations and our business prospects could be harmed.
In managing our liquidity, our primary source of short-term funding is customer deposits. Our ability to continue to attract these deposits, and other short-term funding sources, is subject to variability based upon a number of factors, including the relative interest rates we are prepared to pay for these liabilities and the perception of safety of those deposits or short-term obligations relative to alternative short-term investments. The availability and cost of credit in short-term markets depends upon market perceptions of our liquidity and creditworthiness. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated changes in event-driven reductions in liquidity. In such events, our cost of funds may increase, thereby reducing our net interest revenue, or we may need to dispose of a portion of our investment portfolio, which, depending on market conditions, could result in our realizing a loss or experiencing other adverse consequences.
We are subject to risks arising from increases in FDIC insurance premiums.
The deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (the “DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. These assessments included a prepayment of three years of insurance premiums which was paid by the Bank on December 30, 2009. The prepayment was intended to cover the Bank’s premiums for 2010, 2011 and 2012. The FDIC Board approved a final rule (the “rule”) on February 7, 2011 that changes the assessment base from domestic deposits to average assets minus average tangible equity, adopts a new large-bank pricing assessment scheme and sets a target size for the Deposit Insurance Fund. The changes will go into effect beginning with the second quarter of 2011 and will be payable at the end of September of 2011. The rule finalizes a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the DIF reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent.
Conditions in the financial markets may limit our access to funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in the amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in the domestic and worldwide credit markets.
As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered certificates of deposit, repurchase agreements, federal funds purchased, lines of credit and Federal Home Loan Bank advances. Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. Our financial flexibility could be constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our results of operations and financial condition would be negatively affected.
None.
The Company's office and the main office of the Bank are located at 131 Main Street, Hills, Iowa. This is a brick building containing approximately 45,000 square feet. A portion of the building was built in 1977, a two-story addition was completed in 1984, and a two-story brick addition was completed in February 2001. With the completion of the 2001 addition, the entire Bank’s processing and administrative systems, including trust, were consolidated in Hills, Iowa. On January 11, 2010, the Company placed into service the permanent Cedar Rapids location at 3905 Blairs Ferry Road NE for a total cost of $4.0 million. This full service office consists of approximately 7,000 square foot of retail space on the upper level and an additional 6,000 square foot in the lower level, which will be used for community events.
The following table sets forth certain information concerning the other branches of the Bank as of December 31, 2010:
|
Approximate
|
||||||
|
Location of Branch
|
Square Feet
|
Status
|
||||
|
3905 Blairs Ferry Road NE
|
Cedar Rapids, Iowa
|
13,000
|
Owned
|
|||
|
240 3rd Avenue SE
|
Cedar Rapids, Iowa
|
7,000
|
Leased
|
|||
|
3610 Williams Boulevard SW
|
Cedar Rapids, Iowa
|
8,200
|
Owned
|
|||
|
1009 2nd Street
|
Coralville, Iowa
|
23,000
|
Owned
|
|||
|
2771 Oakdale Boulevard
Trust and Wealth Management
|
Coralville, Iowa
|
6,600
|
Leased
|
|||
|
201 South Clinton Street
|
Iowa City, Iowa
|
5,800
|
Leased
|
|||
|
1401 South Gilbert Street
|
Iowa City, Iowa
|
15,400
|
Owned
|
|||
|
2621 Muscatine Avenue
|
Iowa City, Iowa
|
5,800
|
Owned
|
|||
|
Oaknoll Retirement Residence
limited purpose office
|
Iowa City, Iowa
|
NA
|
NA
|
|||
|
120 5th Street
|
Kalona, Iowa
|
6,400
|
Owned
|
|||
|
103 West Main Street
|
Lisbon, Iowa
|
3,000
|
Owned
|
|||
|
800 11th Street
|
Marion, Iowa
|
8,400
|
Owned
|
|||
|
720 First Avenue SE
|
Mount Vernon, Iowa
|
4,200
|
Owned
|
|||
|
25 Highway 965 North
|
North Liberty, Iowa
|
2,800
|
Owned
|
|||
|
229 8th Avenue
|
Wellman, Iowa
|
2,000
|
Owned
|
|||
All of the properties owned by the Bank are free and clear of any mortgages or other encumbrances of any type. See Note 14 to the Consolidated Financial Statements for minimum future rental commitments for leased properties and information regarding the construction of an additional Bank location in 2011.
There are no material pending legal proceedings. Neither the Company nor the Bank holds any properties that are the subject of hazardous waste clean-up investigations.
PART II
Item 5.
Market
for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
As of January 31, 2011, the Company had 1,726 stockholders. There is no established trading market for the Company's common stock, and the Company's stock is not actively traded. Our common stock is not listed on the NASDAQ stock market or any other stock exchange. While there is no established public trading market for our common stock, our shares are currently quoted by various market makers on The Pink Sheets, which is an over-the-counter quotation service for participant broker-dealers operated by the OTC Markets Group, Inc.
The high and low bid information for the Company’s stock for each quarter of the two most recent fiscal years, as reported by The Pink Sheets, is provided below. The prices indicated reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
|
2010
|
2009
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
1st quarter
|
$ | 51.00 | $ | 49.00 | $ | 53.00 | $ | 43.50 | ||||||||
|
2nd quarter
|
$ | 54.00 | $ | 52.00 | $ | 53.00 | $ | 46.00 | ||||||||
|
3rd quarter
|
$ | 54.00 | $ | 54.00 | $ | 48.30 | $ | 48.30 | ||||||||
|
4th quarter
|
$ | 64.00 | $ | 54.00 | $ | 49.00 | $ | 45.00 | ||||||||
In addition, based on the Company’s stock transfer records and information informally provided to the Company, privately negotiated stock trading transactions have been as follows:
|
Year
|
Number of Shares Traded
|
Number of Transactions
|
High Selling Price
|
Low Selling Price
|
|
|
2010
|
41,648
|
60
|
$ 58.50
|
$ 53.00
|
(1)
|
|
2009
|
116,157
|
83
|
$ 57.00
|
$ 52.50
|
(2)
|
|
2008
|
96,781
|
77
|
$ 55.00
|
$ 53.00
|
(3)
|
|
(1)
|
2010 transactions included repurchases by the Company of 29,494 shares of stock under the 2005 Stock Repurchase Program. 2010 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $53.00 to $58.50 per share.
|
||||
|
(2)
|
2009 transactions included repurchases by the Company of 39,806 shares of stock under the 2005 Stock Repurchase Program. 2009 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $52.50 to $57.00 per share.
|
||||
|
(3)
|
2008 transactions included repurchases by the Company of 63,469 shares of stock under the 2005 Stock Repurchase Program. 2008 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $53.00 to $55.00 per share.
|
||||
All transactions under the 2005 Stock Repurchase Program were at a price equal to the most recent quarterly independent appraisal of the shares of the Company's common stock.
The Company paid aggregate annual cash dividends in 2010, 2009 and 2008 of $4,024,000, $4,041,000 and $4,086,000 respectively, or $0.91 per share in 2010, 2009 and 2008. In January 2011, the Company declared and paid a dividend of $1.00 per share totaling $4,398,337. 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 Company.
PART II
The following performance graph provides information regarding cumulative, five-year shareholder returns on an indexed basis of the Company's Common Stock compared to the NASDAQ Market Index and the Regional-Southwest Banks Index prepared by HEMSCOTT of Richmond, Virginia. The latter index reflects the performance of forty-seven bank holding companies operating principally in the Midwest as selected by HEMSCOTT. The indexes assume the investment of $100 on December 31, 2005 in Company Common Stock, the NASDAQ Index and the Regional-Southwest Banks Index, with all dividends reinvested.
Hills Bancorporation
Performance Graph (2005-2010)
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
|
HILLS BANCORPORATION
|
$ | 100.00 | $ | 109.40 | $ | 117.96 | $ | 124.51 | $ | 121.97 | $ | 136.94 | ||||||||||||
|
REGIONAL-SOUTHWEST BANKS
|
$ | 100.00 | $ | 113.70 | $ | 100.88 | $ | 92.92 | $ | 91.14 | $ | 101.92 | ||||||||||||
|
NASDAQ MARKET INDEX
|
$ | 100.00 | $ | 110.25 | $ | 121.88 | $ | 73.10 | $ | 106.22 | $ | 125.36 | ||||||||||||
|
Note regarding the performance graph: Cumulative five-year Shareholder returns on an indexed basis. The indexes assume the investment of $100 in year with all dividends reinvested.
|
||||||||||||||||||||||||
PART II
The following table sets forth the Company’s equity compensation plan information as of December 31, 2010, all of which relates to stock options issued under stock option plans approved by stockholders of the Company:
|
Number of securities to
be issued upon
exercise
of outstanding options,
|
Weighted-average
exercise
price of outstanding
options, warrants and rights
|
Number of securities remaining
available for future issuance under
equity compensation plans
|
||||||||||
|
Plan Category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity compensation
plans approved by
security holders
|
27,955 | $ | 33.83 | 93,900 | ||||||||
|
Equity compensation
plans not approved
by security holders
|
- | - | - | |||||||||
|
Total
|
27,955 | 33.83 | 93,900 | |||||||||
On July 26, 2005, the Company’s Board of Directors authorized a program to repurchase up to a total of 750,000 shares of the Company’s common stock (the “2005 Stock Repurchase Program”). The authorization is set to expire on December 31, 2013. The Company expects the purchases pursuant to the 2005 Stock Repurchase Program to be made from time to time in private transactions at a price equal to the most recent quarterly independent appraisal of the shares of the Company’s common stock and with the Board reviewing the overall results of the 2005 Stock Repurchase Program on a quarterly basis. All purchases made pursuant to the 2005 Stock Repurchase Program since its inception have been made on that basis. The amount and timing of stock repurchases will be based on various factors, such as the Board’s assessment of the Company’s capital structure and liquidity, the amount of interest shown by shareholders in selling shares of stock to the Company at their appraised value, and applicable regulatory, legal and accounting factors.
The following table sets forth information about the Company’s stock purchases pursuant to the 2005 Stock Repurchase Program for the quarter ended December 31, 2010:
|
Period in 2010
|
Total number of shares purchased
|
Average price paid per share
|
Total number of shares purchased as part of publicly announced plans or programs
|
Maximum number of shares that may yet be purchased under the plans or programs
|
||||||||||||
|
October 1 to October 31
|
360 | $ | 57.00 | 222,303 | 527,697 | |||||||||||
|
November 1 to November 30
|
3,094 | 57.00 | 225,397 | 524,603 | ||||||||||||
|
December 1 to December 31
|
785 | 58.50 | 226,182 | 523,818 | ||||||||||||
|
Total
|
4,239 | $ | 57.29 | 226,182 | 523,818 | |||||||||||
CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31, 2010. This data should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
YEAR-END TOTALS (Amounts in Thousands)
|
||||||||||||||||||||
|
Total assets
|
$ | 1,931,283 | $ | 1,830,626 | $ | 1,780,793 | $ | 1,661,098 | $ | 1,551,233 | ||||||||||
|
Investment securities
|
216,603 | 214,098 | 214,559 | 213,768 | 190,984 | |||||||||||||||
|
Loans held for sale
|
10,390 | 7,976 | 8,490 | 6,792 | 3,808 | |||||||||||||||
|
Loans, net
|
1,561,430 | 1,503,981 | 1,469,840 | 1,352,599 | 1,279,227 | |||||||||||||||
|
Deposits
|
1,480,741 | 1,347,427 | 1,237,886 | 1,143,926 | 1,107,409 | |||||||||||||||
|
Federal Home Loan Bank borrowings
|
195,000 | 225,000 | 265,000 | 265,348 | 235,379 | |||||||||||||||
|
Redeemable common stock
|
24,945 | 22,900 | 23,815 | 22,205 | 20,940 | |||||||||||||||
|
Stockholders' equity
|
166,269 | 151,775 | 139,362 | 130,690 | 118,639 | |||||||||||||||
|
EARNINGS (Amounts in Thousands)
|
||||||||||||||||||||
|
Interest income
|
$ | 94,987 | $ | 96,195 | $ | 97,475 | $ | 96,928 | $ | 87,618 | ||||||||||
|
Interest expense
|
27,839 | 37,141 | 43,481 | 49,952 | 42,362 | |||||||||||||||
|
Provision for loan losses
|
8,925 | 11,947 | 11,507 | 3,529 | 3,011 | |||||||||||||||
|
Other income
|
20,099 | 18,909 | 16,670 | 15,984 | 14,611 | |||||||||||||||
|
Other expenses
|
45,748 | 44,813 | 39,461 | 36,150 | 34,364 | |||||||||||||||
|
Income taxes
|
9,258 | 5,218 | 5,556 | 7,138 | 6,933 | |||||||||||||||
|
Net income
|
23,316 | 15,985 | 14,140 | 16,143 | 15,559 | |||||||||||||||
|
PER SHARE
|
||||||||||||||||||||
|
Net income:
|
||||||||||||||||||||
|
Basic
|
$ | 5.29 | $ | 3.61 | $ | 3.16 | $ | 3.59 | $ | 3.42 | ||||||||||
|
Diluted
|
5.28 | 3.60 | 3.15 | 3.57 | 3.39 | |||||||||||||||
|
Cash dividends
|
0.91 | 0.91 | 0.91 | 0.86 | 0.81 | |||||||||||||||
|
Book value as of December 31
|
37.80 | 34.32 | 31.38 | 29.11 | 26.34 | |||||||||||||||
|
Increase (decrease) in book value
due to:
|
||||||||||||||||||||
|
ESOP obligation
|
(5.67 | ) | (5.18 | ) | (5.36 | ) | (4.95 | ) | (4.65 | ) | ||||||||||
| Accumulated other comprehensive income (loss) | 0.63 | 0.95 | 0.82 | 0.14 | (0.28 | ) | ||||||||||||||
|
SELECTED RATIOS
|
||||||||||||||||||||
|
Return on average assets
|
1.25 | % | 0.88 | % | 0.83 | % | 1.02 | % | 1.04 | % | ||||||||||
|
Return on average equity
|
14.61 | 11.01 | 10.42 | 13.06 | 13.74 | |||||||||||||||
|
Net interest margin
|
3.95 | 3.55 | 3.47 | 3.24 | 3.31 | |||||||||||||||
|
Average stockholders' equity toaverage total assets
|
8.57 | 7.99 | 7.98 | 7.78 | 7.56 | |||||||||||||||
|
Dividend payout ratio
|
17.26 | 25.28 | 28.90 | 23.99 | 23.75 | |||||||||||||||
Item 7.
Management's
Discussion and Analysis of Financial Condition a
nd Results of Operation
The following discussion by management is presented regarding the financial results for Hills Bancorporation (the “Company”) for the dates and periods indicated. The discussion should be read in conjunction with the “Selected Consolidated Five-Year Statistical Summary” and the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
An overview of the year 2010 is presented following the section discussing a special note regarding forward looking statements.
Special Note Regarding Forward Looking Statements
This report contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following:
|
·
|
The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets.
|
|
·
|
The effects of recent financial market disruptions and the current global economic recession, and monetary and other governmental actions designed to address such disruptions and recession.
|
|
·
|
The financial strength of the counterparties with which the Company or the Company’s customers do business and as to which the Company has investment or financial exposure.
|
|
·
|
The credit quality and credit agency ratings of the securities in the Company’s investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the affected securities and the recognition of an impairment loss.
|
|
·
|
The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company.
|
|
·
|
The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.
|
|
·
|
The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.
|
|
·
|
The ability of the Company to obtain new customers and to retain existing customers.
|
|
·
|
The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.
|
Item 7. Management's Discussion and Analysis of Financial Condition a
nd Results of Operation (Continued)
|
·
|
Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
|
|
·
|
The ability of the Company to develop and maintain secure and reliable electronic systems.
|
|
·
|
The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
|
|
·
|
Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.
|
|
·
|
The economic impact of natural disasters, terrorist attacks and military actions.
|
|
·
|
Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.
|
|
·
|
The costs, effects and outcomes of existing or future litigation.
|
|
·
|
Changes in accounting policies and practices that may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.
|
|
·
|
The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
|
These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.
Overview
The Company is a bank holding company engaged, through its wholly-owned subsidiary bank, in the business of commercial banking. The Company’s subsidiary is Hills Bank and Trust Company, Hills, Iowa (the “Bank”). The Bank was formed in Hills, Iowa in 1904. 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, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids and Marion, Iowa.
The Company’s net income for 2010 was $23,316,000 compared to $15,985,000 in 2009. Diluted earnings per share were $5.28 and $3.60 for the years ended December 31, 2010 and 2009, respectively.
The Bank’s net interest income is the largest component of the Bank’s revenue, and it is a function of the average earning assets and the net interest margin percentage. Net interest margin is the ratio of net interest income to average earning assets. For the year ended December 31, 2010, net interest income increased by $8.1 million. In 2010, the Bank achieved a net interest margin of 3.95% compared to 3.55% in 2009, which resulted in $4.3 million of the increase in net interest income. The remaining $3.8 million of the increase in net interest income was attributable to growth of $29.3 million in the Bank’s average earning assets.
Highlights with respect to items on the Company’s balance sheet as of December 31, 2010 included the following:
|
·
|
Net loans totaling $1.572 billion.
|
|
·
|
Loan growth, net of allowance for loan losses, in 2010 of $59.9 million.
|
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
|
·
|
Deposit growth of $133.3 million in 2010. Deposits increased to $1.481 billion and included $28.8 million of brokered deposits.
|
|
·
|
Short-term borrowings decreased $21.6 million.
|
|
·
|
Federal Home Loan Bank borrowings decreased $30.0 million.
|
|
·
|
Stockholders’ equity increased $14.5 million to $166.3 million in 2010, with dividends having been paid in 2010 of $4.0 million.
|
Reference is made to Note 1 of the Company’s consolidated financial statements for a discussion of fair value measurements which relate to methods used by the Company in recording assets and liabilities on its consolidated financial statements.
The return on average equity was 14.61% in 2010 compared to 11.01% in 2009. The returns for the three previous years, 2008, 2007 and 2006, were 10.42%, 13.06 and 13.74%, respectively. The total equity of the Company remains strong as of December 31, 2010 with total risk-based capital at 13.59% and Tier 1 risk-based capital at 12.33%. The minimum regulatory guidelines are 8% and 4% respectively. The Company paid a dividend per share of $.91 in each of the years ended December 31, 2010, 2009 and 2008.
A detailed discussion of the financial position and results of operations follows this overview.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policies to be those which are related to the allowance for loan losses. The Company's allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in impaired loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest and the state of certain industries. Determinations relating to the possible level of future loan losses are based in part on subjective judgments by management. The future impact of the global recession has introduced additional uncertainty into such determinations. Future loan losses in excess of current estimates, could materially adversely affect our results of operations or financial position. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan portfolio, it will enhance its methodology accordingly. This discussion of the Company’s critical accounting policies should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein, as well as other relevant portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although management believes the levels of the allowance as of December 31, 2010 and 2009 were adequate to absorb probable losses inherent in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
Financial Position
|
Year End Amounts (Amounts In Thousands)
|
2010
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||
|
Total assets
|
$ | 1,931,283 | $ | 1,830,626 | $ | 1,780,793 | $ | 1,661,098 | $ | 1,551,233 | ||||||||||
|
Investment securities
|
216,603 | 214,098 | 214,559 | 213,768 | 190,984 | |||||||||||||||
|
Loans, net of allowance for losses ("Net Loans")
|
1,571,820 | 1,511,957 | 1,478,330 | 1,359,391 | 1,283,035 | |||||||||||||||
|
Deposits
|
1,480,741 | 1,347,427 | 1,237,886 | 1,143,926 | 1,107,409 | |||||||||||||||
|
Federal Home Loan Bank borrowings
|
195,000 | 225,000 | 265,000 | 265,348 | 235,379 | |||||||||||||||
|
Stockholders' equity
|
166,269 | 151,775 | 139,362 | 130,690 | 118,639 | |||||||||||||||
Total assets at December 31, 2010 increased $100.7 million, or 5.50%, from the prior year-end. Asset growth from 2008 to 2009 was $49.8 million and represented a 2.8% increase. The largest growth in assets occurred in Net Loans, which increased $59.9 million and $33.6 million for the years ended December 31, 2010 and 2009, respectively. Net Loans at the end of 2010 include loans held for sale to the secondary market of $10.4 million compared to $8.0 million at the end of 2009. Loans held for investment represent the largest component of the Bank’s earning assets. Loans held for investment were $1,590,660,000 and $1,533,141,000 at December 31, 2010 and 2009, respectively. The Company’s net income for 2010 was $23,316,000 compared to $15,985,000 in 2009 and $14,140,000 in 2008. Net income for 2010 increased by $7,331,000 from 2009, or 45.86%, while net income for 2009 increased $1,845,000, or 13.05%, from 2008.
The Bank’s net interest income is the largest component of the Bank’s revenue, and it is a function of the average earning assets and the net interest margin percentage. For the year ended December 31, 2010, net interest income increased by $8,094,000 compared to 2009. In 2010, the Bank achieved a net interest margin of 3.95% compared to 3.55% in 2009, which resulted in $4.3 million of the increase in net interest income. The remaining $3.8 million of the increase in net interest income was attributable to growth of $29.3 million in the Bank’s average earning assets. Net interest income increased $5,122,000 for the year ended December 31, 2009 compared to 2008. This increase in net interest income was due to an increase in average earning assets of $105.7 million in 2009 and an increase of 8 basis points in net interest margin. The net interest spread increased 49 basis points in 2010 and increased 17 basis points in 2009. The increase in the net interest margin and net interest spread in 2010 are the result of continued low interest rates. The Company was able to reprice some liabilities more quickly than some assets (particularly loans) repriced resulting in increased net interest margin and spread. The rate paid on average interest-bearing liabilities decreased 65 basis points in 2010 after decreasing 63 basis points in 2009. In comparison, the rate provided by average earning assets decreased 16 basis points in 2010 after decreasing 46 basis points in 2009.
Interest rates are also discussed in the net income overview that follows this financial position review. During 2010, the Federal Open Market Committee maintained the target rate at 0.25%. Interest rates on loans are generally affected by the target rate since interest rates for the U.S. Treasury market normally correlate to the Federal Reserve Board federal funds rate. In pricing of loans and deposits, the Bank considers the U.S. Treasury indexes as benchmarks in determining interest rates. As of December 31, 2010, the average rate indexes for the one, three and five year indexes were 0.30%, 1.05% and 2.02%, respectively. The one year index decreased 26.83% from December 31, 2009, the three year index decreased 29.53% and the five year index decreased 19.2%. During 2010 and 2009, the average federal funds rate remained the same at 0.25%.
The local economy that generated increased demand for loans was a significant factor in the trend of increasing net loans in each of the last five years. The global recession may weaken the local economy resulting in fewer creditworthy borrowers and less robust loan demand. Therefore, the trend of increasing net loans may not be indicative of future performance.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
Loans secured by real estate represent the largest increase in loan growth. These loans increased $56.1 million in 2010 and increased $43.3 million in 2009. Loans secured by real estate include loans for one-to-four family residential properties, multi-family properties, agricultural real estate and commercial real estate.
On a net basis, the Company originated $69,049,000 and $51,771,000 in loans to customers for the years ended December 31, 2010 and 2009, respectively. Net loan originations increased 33.37% in 2010 compared to 2009. The increase in loan originations in 2010 as compared to 2009 is reflective of the overall economic conditions in the Company’s trade area. The Company does not engage in significant participation activity and does not purchase participations from outside its established trade area. It is the Company’s policy to purchase or sell participations related to existing customers or to participate in community development activity. The Company had participations purchased of $4,148,000, $4,062,000 and $4,174,000 as of December 31, 2010, 2009 and 2008, respectively. The participations purchased were less than one percent of loans held for investment for each of the three years.
The Company did not experience a material change in the composition of its loans held for investment in 2010 or 2009. Residential real estate loans, including first and junior liens, were $628,569,000, $585,070,000 and $561,560,000 as of December 31, 2010, 2009 and 2008, respectively. The dollar total of residential real estate loans increased 7.43% in 2010 and 4.19% in 2009. Residential real estate loans were 39.51% of the loan portfolio at December 31, 2010, 38.17% at December 31, 2009 and 37.50% at December 31, 2008. Commercial real estate loans totaled $302,020,000 at December 31, 2010, a 2.36% increase over the December 31, 2009 total of $295,070,000. Commercial real estate loans increased 9.22% in 2009. Commercial real estate loans totaled $270,158,000 at December 31, 2008. Commercial real estate loans represented 18.99%, 19.25% and 18.04% of the Company’s loan portfolio as of December 31, 2010, 2009 and 2008, respectively. The Company monitors its commercial real estate level so that it does not have a concentration of 300% of its capital.
In the Company’s trade area, the number of commercial real estate building permits remained relatively stable with 65 permits issued in Johnson County, Iowa in 2010, 60 in 2009 and 64 in 2008. The value of commercial building permits in Johnson County, Iowa remained flat in 2010 at $6.2 million compared to $6.1 million in 2009. Commercial real estate building permit information for 2010 was not available at the time of this report for Linn County. While there has been weakness in the national commercial real estate markets, the Company has not experienced the high level of stress or deterioration in its commercial real estate portfolio that has occurred in some other markets. Based on information available from the National Association of Realtors, commercial construction has declined approximately 19% in Iowa while sales prices have declined 8% and sales volume has declined 23% in 2010.
The following tables present residential real estate trends in the United States, Midwest, Iowa and the two largest counties in the Company’s trade area.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
|
1-to-4 Family Residential Real Estate Sales Statistics
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
United States
|
||||||||||||
|
- Number of Sales
|
4,908,000 | 5,156,000 | 4,913,000 | |||||||||
|
- Average Sales Price
|
$ | 220,000 | $ | 216,900 | $ | 242,700 | ||||||
|
Midwest
|
||||||||||||
|
- Number of Sales
|
1,076,000 | 1,163,000 | 1,129,000 | |||||||||
|
- Average Sales Price
|
$ | 172,500 | $ | 171,100 | $ | 183,400 | ||||||
|
Iowa
|
||||||||||||
|
- Number of Sales
|
56,300 | 58,000 | 55,700 | |||||||||
|
- Average Sales Price
|
$ | 140,589 | $ | 140,899 | $ | 144,113 | ||||||
|
Johnson County, Iowa
|
||||||||||||
|
- Number of Sales
|
2,227 | 2,386 | 1,821 | |||||||||
|
- Average Sales Price
|
$ | 177,636 | $ | 183,691 | $ | 196,769 | ||||||
|
Linn County, Iowa
|
||||||||||||
|
- Number of Sales
|
3,867 | 3,981 | 4,153 | |||||||||
|
- Average Sales Price
|
$ | 155,056 | $ | 150,564 | $ | 152,688 | ||||||
|
1-to-4 Family Residential Real Estate Building Permits
|
||||||||||||
|
($ values in Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
United States
|
||||||||||||
|
- Number of Permits
|
456,530 | 461,838 | 609,959 | |||||||||
|
- Total Value of Permits
|
$ | 88,986,665 | $ | 84,461,301 | $ | 114,211,061 | ||||||
|
Midwest
|
||||||||||||
|
- Number of Permits
|
79,678 | 79,338 | 100,750 | |||||||||
|
- Total Value of Permits
|
$ | 14,780,234 | $ | 14,250,061 | $ | 18,619,731 | ||||||
|
Iowa
|
||||||||||||
|
- Number of Permits
|
6,257 | 6,180 | 6,678 | |||||||||
|
- Total Value of Permits
|
$ | 1,089,404 | $ | 1,057,795 | $ | 1,141,335 | ||||||
|
Johnson County, Iowa
|
||||||||||||
|
- Number of Permits
|
391 | 608 | 609 | |||||||||
|
- Total Value of Permits
|
$ | 83,021 | $ | 119,518 | $ | 113,775 | ||||||
|
Linn County, Iowa
|
||||||||||||
|
- Number of Permits
|
680 | 743 | 760 | |||||||||
|
- Total Value of Permits
|
$ | 73,742 | $ | 88,106 | $ | 92,783 | ||||||
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
|
Multi-Family Residential Real Estate Building Permits
|
||||||||||||
|
($ values in Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
United States
|
||||||||||||
|
- Number of Permits
|
130,628 | 121,125 | 295,400 | |||||||||
|
- Total Value of Permits
|
$ | 12,020,951 | $ | 10,948,997 | $ | 27,402,396 | ||||||
|
Midwest
|
||||||||||||
|
- Number of Permits
|
20,740 | 21,006 | 36,982 | |||||||||
|
- Total Value of Permits
|
$ | 1,876,063 | $ | 1,668,544 | $ | 3,154,486 | ||||||
|
Iowa
|
||||||||||||
|
- Number of Permits
|
1,055 | 1,549 | 1,734 | |||||||||
|
- Total Value of Permits
|
$ | 101,127 | $ | 140,449 | $ | 177,302 | ||||||
|
Johnson County, Iowa
|
||||||||||||
|
- Number of Permits
|
6 | 7 | 12 | |||||||||
|
- Total Value of Permits
|
$ | 10,935 | $ | 7,789 | $ | 17,970 | ||||||
|
Linn County, Iowa
|
||||||||||||
|
- Number of Permits
|
2 | 22 | 4 | |||||||||
|
- Total Value of Permits
|
$ | 606 | $ | 18,693 | $ | 1,915 | ||||||
The sales and building permit trends in the Company’s trade area have followed similar patterns as national, regional and state trends. Decreases in housing prices have been less severe in the Company’s trade area as average sales prices have decreased less than national averages. In addition, average sales prices have been affected by flood-related sales (especially in Linn County, Iowa) and several flood-related housing programs in both Linn and Johnson County. The decreased level of building permits is reflective of the overall activity in the Company’s trade area.
The overall economy in the Company’s trade area, Johnson, Linn and Washington Counties, remains in stable condition with levels of unemployment that remain below national and state levels. The following table shows unemployment as of December 31, 2010, 2009 and 2008 and median income information as of December 31, 2009, 2008 and 2007, as December 31, 2010 information is not available as of the date of this report:
|
Unemployment Rate %
|
Median Income
|
|||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
United States
|
9.4 | % | 10.0 | % | 7.2 | % | 50,221 | 52,029 | 50,740 | |||||||||||||||
|
State of Iowa
|
6.3 | % | 6.6 | % | 4.6 | % | 48,065 | 49,007 | 47,324 | |||||||||||||||
|
Johnson County
|
4.3 | % | 4.4 | % | 3.3 | % | 48,955 | 54,871 | 51,587 | |||||||||||||||
|
Linn County
|
6.0 | % | 6.4 | % | 4.5 | % | 53,700 | 55,173 | 53,076 | |||||||||||||||
|
Washington County
|
4.9 | % | 5.6 | % | 4.6 | % | 49,760 | 50,130 | 50,265 | |||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
It is uncertain how the overall national economic downturn will impact the Company’s trade area. There could be continued downward pressure on the Iowa economy and the unemployment rates could rise in 2011. Competition for quality loans and deposits will continue to be a challenge. In Johnson and Linn Counties, new banks and credit unions have been opened in the last few years. Between 2006 and 2010, nine new banking locations were added in Johnson County, five in Linn County and two in Washington County. The 16 new locations include an office of one of the state’s largest credit unions. The increased competition for both loans and deposits could result in a lower interest rate margin that could result in lower net interest income if the volume of loans and deposits does not increase to offset any such reduction in the interest margin.
Total deposits increased by $133.3 million in 2010 of which $15.8 million was from brokered deposits. Short-term borrowings, which include federal funds purchased and securities sold under agreements to repurchase, decreased from $68.5 million to $46.9 million. Federal funds purchased decreased by $33.1 million and repurchase agreements increased $11.5 million. FHLB borrowings decreased from $225.0 million to $195.0 million. Deposits increased by $109.5 million in 2009. As of June 30, 2010 (latest data available), Johnson County total deposits were $3.0 billion and the Company’s deposits were $1.0 billion, which represent a 33.3% market share. The Company had 6 office locations in Johnson County as of June 30, 2010. The total banking locations in Johnson County was 57 as of June 30, 2010. At June 30, 2009, the Company’s deposits were $997 million or a 34% market share. At $4.8 billion as of June 30, 2010, the Linn County deposit market is significantly larger than the Johnson County deposit market of $3.0 billion. As of June 30 2010, Linn County had 106 total banking locations. The six Linn County offices of the Company had deposits of $286 million or a 5.92% share of the market. The Company’s Linn County deposits at June 30, 2009 were $272 million and represented a 6.04% market share. In Washington County, the Company’s two offices had deposits of $88 million which was 18.0% of the County’s total deposits of $488 million. Washington County had a total of 13 banking locations as of June 30, 2010. In 2009, the Company’s Washington County deposits were $88 million or an 18.3% market share.
Investment securities increased $2.5 million in 2010. In 2009, investment securities decreased by $0.5 million. The investment portfolio consists of $205.5 million of securities that are stated at fair value, with any unrealized gain or loss, net of income taxes, reported as a separate component of stockholders’ equity. The securities portfolio, which includes tax exempt securities, is used for liquidity and pledging purposes and to provide a rate of return that is acceptable to management. See Note 2 to the Company’s Consolidated Financial Statements.
During 2010, the major funding source for the growth in loans was the $133.3 million increase in deposits. In 2009, the major sources of funding for the growth in loans were deposit growth of $109.5 million. Brokered deposits totaled $28.8 million and $13.0 million as of December 31, 2010 and 2009, respectively. Total advances from the FHLB were $195.0 million and $225.0 million at December 31, 2010 and 2009, respectively. It is expected that the FHLB funding source and brokered deposits funding will be considered in the future if loan growth exceeds deposit increases and the interest rates on funds borrowed from the FHLB and interest rates on brokered deposits are favorable compared to other funding alternatives.
Stockholders’ equity was $166.3 million at December 31, 2010 compared to $151.8 million at December 31, 2009. The Company’s capital resources are discussed in detail in the
Liquidity and Capital Resources
section. Over the last five years, the Company has realized cumulative earnings of $85.1 million and paid shareholders dividends of $19.7 million, or 23.16% of earnings, while still maintaining capital ratios in excess of regulatory requirements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
(Continued)
Net Income Overview
Net income and diluted earnings per share for the last five years are as presented below:
|
Year
|
Net Income
|
% Increase (Decrease)
|
E.P.S.- Diluted
|
|||||||||
|
(In Thousands)
|
||||||||||||
|
2010
|
$ | 23,316 | 45.86 | % | $ | 5.28 | ||||||
|
2009
|
15,985 | 13.05 | 3.60 | |||||||||
|
2008
|
14,140 | (12.41 | ) | 3.15 | ||||||||
|
2007
|
16,143 | 3.75 | 3.57 | |||||||||
|
2006
|
15,559 | 2.35 | 3.39 | |||||||||
Net income for 2010 increased by $7.3 million or 45.86% and diluted earnings per share increased by 46.67%. The increased net interest margin of 40 basis points accounted for an increase of $4.3 million in net interest income. The combined growth in earning assets and improved net interest margin increased net interest income by $8.1 million. Other income increased by $1.2 million and the provision for loan losses decreased by $3.0 million. These changes were offset by increased income taxes of $4.0 million due to the level of pre-tax income and an increase in operating expenses of $0.9 million for the year.
Annual fluctuations in the Company's net income continue to be driven primarily by three important factors. The first important factor is net interest margin. Net interest income of $67.1 million in 2010 was derived from the Company's $1.754 billion of average earning assets and its net interest margin of 3.95%, compared to $1.724 billion of average earning assets and a 3.55% net interest margin in 2009. The importance of net interest margin is illustrated by the fact that a decrease in the net interest margin of 10 basis points to 3.85% would result in a $1.8 million decrease in income before taxes. Similarly, an increase in the net interest margin of 10 basis points to 4.05% would increase income before taxes by $1.8 million. Net interest margin increased in 2009 to 3.55% from 3.47% in 2008.
The second significant factor affecting the Company's net income is the provision for loan losses. The majority of the Company's interest-earning assets are in loans outstanding, which amounted to $1.6 billion at the end of 2010. The Company’s allowance for loan losses was $29.2 million at December 31, 2010. The allowance in 2010 was consistent with 2009 due to modest loan growth of $57.5 million, a decrease in net charge-offs of $1.6 million and a decreased provision for loan losses of $3.0 million. The loan loss provision, which is the amount necessary to adjust the allowance to the level considered appropriate by management, totaled $8,925,000, $11,947,000 and $11,507,000 for 2010, 2009 and 2008, respectively. (See Note 3 to the Consolidated Financial Statements.) A detailed discussion is included in the Provision for Loan Losses section below.
The amount of mortgage loans sold on the secondary market and the resulting gain or loss is the third factor that can cause fluctuations in net income. Loans originated in 2010 totaled $264.2 million compared to $291.2 million in 2009 and $132.0 million in 2008, a decrease of 9.27% from 2009 and an increase of 100.15% from 2008. For the years ended December 31, 2010, 2009 and 2008, the net gain on sale of loans was $3,602,000, $3,874,000 and $1,274,000, respectively. The sale of loans is influenced by the real estate market and interest rates. The average interest rate for a 30 year fixed rate loan during the year ended December 31, 2010 was 4.75%. The average interest rate for the same type of loan was 5.167% for the year ended December 31, 2009. The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The volume of activity in these types of loans is directly related to the level of interest rates. During the years ended December 31, 2010 and 2009, secondary market rates were favorable resulting in substantial volume of loans sold. The servicing of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income. The Company cannot predict the extent to which any future discontinuation of purchases of agency-guaranteed mortgage-backed securities by the Federal
Reserve may result in secondary market rates becoming less favorable and a reduction in secondary market activity involving mortgage loans.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
(Continued)
Net income for 2009 was $15,985,000, or diluted earnings per share of $3.60. For 2009, diluted earnings per share increased by $0.45 per share compared to 2008. Net interest income, including fees, increased $5.1 million for the year ended December 31, 2009 compared to 2008. This increase in net interest income was due to an increase in average earning assets of $119.0 million in 2009. Noninterest income increased 13.43% in 2009 to $18,909,000. Noninterest expense increased from $39,399,000 in 2008 to $44,813,000 in 2009, or 13.74%.
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 factors that have the greatest impact on net interest income are the volume of average earning assets and the net interest margin. The volume of average earning assets has continued to grow each year, primarily due to new loans. The net interest margin increased in 2010 to 3.95% and this compares to 3.55% in 2009, 3.47% in 2008, 3.24% in 2007 and 3.31% in 2006. The measure is shown on a tax-equivalent basis using a rate of 35% to make the interest earned on taxable and nontaxable assets more comparable.
Net interest income on a tax-equivalent basis changed in 2010 as follows:
|
Change In
|
Change In
|
Increase (Decrease)
|
||||||||||||||||||
|
Average
|
Average
|
Volume
|
Rate
|
Net
|
||||||||||||||||
|
Balance
|
Rate
|
Changes
|
Changes
|
Change
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||
|
Loans, net
|
$ | 39,521 | (0.21 | ) % | $ | 2,294 | $ | (2,983 | ) | $ | (689 | ) | ||||||||
|
Taxable securities
|
(3,852 | ) | (0.26 | ) | (75 | ) | (331 | ) | $ | (406 | ) | |||||||||
|
Nontaxable securities
|
(390 | ) | (0.10 | ) | (20 | ) | (100 | ) | $ | (120 | ) | |||||||||
|
Federal funds sold
|
(5,967 | ) | 0.10 | 19 | - | $ | 19 | |||||||||||||
| $ | 29,312 | $ | 2,218 | $ | (3,414 | ) | $ | (1,196 | ) | |||||||||||
|
Interest expense:
|
||||||||||||||||||||
|
Interest-bearing demand deposits
|
$ | 15,835 | (0.18 | ) % | $ | (100 | ) | $ | 437 | $ | 337 | |||||||||
|
Savings deposits
|
47,309 | (0.41 | ) | (499 | ) | 1,563 | $ | 1,064 | ||||||||||||
|
Time deposits
|
(8,711 | ) | (0.69 | ) | 281 | 4,387 | $ | 4,668 | ||||||||||||
|
Short-term borrowings
|
6,584 | (0.42 | ) | (107 | ) | 215 | $ | 108 | ||||||||||||
|
FHLB borrowings
|
(42,905 | ) | (0.56 | ) | 2,030 | 1,095 | $ | 3,125 | ||||||||||||
| $ | 18,112 | $ | 1,605 | $ | 7,697 | $ | 9,302 | |||||||||||||
|
Change in net interest income
|
$ | 3,823 | $ | 4,283 | $ | 8,106 | ||||||||||||||
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. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
Net interest income on a tax equivalent basis changes for 2009 were as follows:
|
Change In
|
Change In
|
Increase (Decrease)
|
||||||||||||||||||
|
Average
|
Average
|
Volume
|
Rate
|
Net
|
||||||||||||||||
|
Balance
|
Rate
|
Changes
|
Changes
|
Change
|
||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||
|
Loans, net
|
$ | 73,375 | (0.34 | ) % | $ | 4,657 | $ | (4,998 | ) | $ | (341 | ) | ||||||||
|
Taxable securities
|
(3,834 | ) | (0.71 | ) | (191 | ) | (757 | ) | $ | (948 | ) | |||||||||
|
Nontaxable securities
|
2,371 | (0.15 | ) | 127 | (144 | ) | $ | (17 | ) | |||||||||||
|
Federal funds sold
|
33,784 | (1.89 | ) | 37 | - | $ | 37 | |||||||||||||
| $ | 105,696 | $ | 4,630 | $ | (5,899 | ) | $ | (1,269 | ) | |||||||||||
|
Interest expense:
|
||||||||||||||||||||
|
Interest-bearing demand deposits
|
$ | 36,991 | (0.23 | ) % | $ | (321 | ) | $ | 502 | $ | 181 | |||||||||
|
Savings deposits
|
66,182 | (0.36 | ) | (1,142 | ) | 1,402 | $ | 260 | ||||||||||||
|
Time deposits
|
54,722 | (0.84 | ) | (2,222 | ) | 5,377 | $ | 3,155 | ||||||||||||
|
Short-term borrowings
|
(43,029 | ) | (0.64 | ) | 912 | 275 | $ | 1,187 | ||||||||||||
|
FHLB borrowings
|
(23,844 | ) | (0.17 | ) | 1,206 | 413 | $ | 1,619 | ||||||||||||
| $ | 91,022 | $ | (1,567 | ) | $ | 7,969 | $ | 6,402 | ||||||||||||
|
Change in net interest income
|
$ | 3,063 | $ | 2,070 | $ | 5,133 | ||||||||||||||
A summary of the net interest spread and margin is as follows:
|
(Tax Equivalent Basis)
|
2010
|
2009
|
2008
|
|||||||||
|
Yield on average interest-earning assets
|
5.53 | % | 5.69 | % | 6.15 | % | ||||||
|
Rate on average interest-bearing liabilities
|
1.87 | 2.52 | 3.15 | |||||||||
|
Net interest spread
|
3.66 | 3.17 | 3.00 | |||||||||
|
Effect of noninterest-bearing funds
|
0.29 | 0.38 | 0.47 | |||||||||
|
Net interest margin (tax equivalent interest income
divided by average interest-earning assets)
|
3.95 | % | 3.55 | % | 3.47 | % | ||||||
The net interest margin increased 40 basis points in 2010 and increased 8 basis points in 2009. The net interest spread increased 49 basis points in 2010 and increased 17 basis points in 2009. The increase in the net interest margin and net interest spread in 2010 are the result of continued low interest rates. The Company is able to reprice some liabilities more quickly than some assets (particularly loans) reprice resulting in increased net interest margin and spread.
Provision for Loan Losses
The provision for loan losses totaled $8,925,000, $11,947,000 and $11,507,000 for 2010, 2009 and 2008, respectively. Loan charge-offs net of recoveries were $8,855,000 in 2010 and $10,447,000 in 2009 and $3,557,000 in 2008. The loan loss provision is the amount necessary to adjust the allowance to the level considered appropriate by management. The provision is computed on a quarterly basis and is a result of management’s determination of the quality of the loan portfolio. The provision reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the impact on the borrowers’ ability to repay, past loss experience, loan collateral values, the level of impaired loans and loans past due ninety days or more. In addition, management considers the credit quality of the loans based on management’s review of problem and watch loans, including loans with historical higher credit risks.
The allowance for loan losses increased $70,000 in 2010. For 2010, there was an increase of $3,497,000 due to the volume increase in pass rated loans outstanding of $67.6 million in 2010. There was an offsetting $3,427,000 decrease in the amount allocated to the allowance due to a combination of improvement in credit quality and losses recognized.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
In accordance with Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues, the Company determines and assigns ratings to loans using factors that include the following: an assessment of the financial condition of the borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If we determine that a loan amount or portion thereof, is uncollectible, the loan’s credit risk rating is immediately downgraded and the uncollectible amount is charged-off. The Bank’s credit and legal departments undertake a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize actual losses.
The Bank regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans are impaired in accordance with ASC 310. If the loans are impaired, the Bank determines if a specific allowance is appropriate. In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured. Loans that are determined not to be impaired and for which there are no specific allowances are classified into one or more risk categories. Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed. The determination concerning the appropriate percentage begins with historical loss experience factors, which are then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in restructured loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.
Specific allowances for losses on impaired loans are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral based on updated appraisals and/or updated collateral analysis for the properties if the loan is collateral dependent. The Company may choose to recognize a charge off related to an impaired loan.
The adequacy of the allowance is reviewed quarterly and adjusted as appropriate after consideration has been given to the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition. The growth of the loan portfolio and the trends in problem and watch loans are significant elements in the determination of the provision for loan losses. Quantitative factors include the Company’s historical loss experience, which is then adjusted for levels and trends in past due, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in restructured loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.
Management has determined that the allowance for loan losses was appropriate at December 31, 2010, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area. This process involves a high degree of management judgment, however the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry peers. This review encompasses levels of total impaired loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
Other factors that are considered in determining the credit quality of the Company’s loan portfolio are the vacancy rates for both residential and commercial and retail space, current equity the borrower has in the property and overall financial strength of the customer including cash flow to continue to fund loan payments. The Company also considers the state of the total economy including unemployment levels, vacancy rates of rental units and demand for commercial and retail space. In most instances, the borrowers have used in their rental projections of income at least a 10% vacancy rate. As of December 31, 2010, the unemployment levels in Johnson County and Linn County were 4.3% and 6.0%, respectively, compared to 4.4% and 6.4% in December of 2009. These levels compare favorably to the State of Iowa at 6.3% and the national unemployment level at 9.4% in December 2010 compared to 6.6% and 10.0%, respectively in December, 2009.
The residential rental vacancy rates in 2010 in Johnson County, the largest trade area for the Company, were estimated at 3.0% in Iowa City, Coralville and North Liberty and 6.5% in the Cedar Rapids area. The estimated vacancy rates for Iowa City, Coralville and North Liberty was 1.41% and 4.5% in the Cedar Rapids area one year ago. The State of Iowa vacancy rate is 7.1% and the national rate is 9.4% with the Midwest rate at 9.6%. These vacancy rates one year ago were 8.9%, 11.1% and 10.9%, respectively. The Company continues to consider those vacancy rates among other factors in its current evaluation of the real estate portion of its loan portfolio. Due to the unstable national economic conditions, favorable vacancy rates may not continue in 2011. Vacancy rates may rise and affect the overall quality of the loan portfolio.
The allowance for loan losses balance is also affected by the charge-offs and recoveries for the periods presented. For the years ended December 31, 2010, 2009 and 2008, recoveries were $2,337,000, $1,005,000 and $932,000, respectively; charge-offs were $11,192,000, $11,452,000 and $4,489,000 in 2010, 2009 and 2008, respectively.
Overall credit quality may continue to deteriorate in 2011. Such a deterioration could cause increases in impaired loans, allowance for loan loss provision expense and net charge-offs. Management will monitor changing market conditions as a part of its allowance for loan loss methodology.
The allowance for loan losses totaled $29,230,000 at December 31, 2010 compared to $29,160,000 at December 31, 2009. The percentage of the allowance to outstanding loans was 1.84% and 1.90% at December 31, 2010 and 2009, respectively. The percentage decrease was due to loan growth and an increase in the amount of “problem” or “watch” loans as a percentage of total loans outstanding. The allowance was based on management’s consideration of a number of factors, including composition of the loan portfolio, loans with higher credit risks and overall increases in Net Loans outstanding. The Company’s methodology for determining the allowance for loan losses was refined in the third quarter of 2010 to revise and update historical loss percentage applied to loan categories under ASC 450-20. The refined methodology did not result in a materially different determination of the allowance for loan losses. The refinements made to the allowance for loan loss calculation in the third quarter of 2010 decreased the allowance for loan loss estimate by $15,000.
Impaired loans increased by $4.0 million from December 31, 2009 to December 31, 2010. Impaired loans include any loan that has been placed on nonaccrual status, loans past due 90 days or more and still accruing interest and restructured loans. Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement. The increase in impaired loans is due mainly to the restructuring of one large commercial mortgage borrower with an aggregate loan balance of $8.8 million during the year ended December 31, 2010. This increase is offset by pay downs of $0.8 million from two unrelated first mortgage borrowers, pay downs of $0.5 million from two unrelated construction and land development borrowers and $0.8 million of recognized loss from two unrelated commercial borrowers, which the Bank had adequately reserved for in previous quarters. The losses were determined after further review of the real estate values and collateral position for the customer’s properties. The increase of impaired loans from 2009 to 2010 is further offset by a decrease in loans greater than 90 days past due and still accruing interest of $1.7 million. Most of the impaired loans are secured by real estate and are believed to be adequately collateralized.
In June 2008, the Bank’s market area was significantly affected by wide-spread damage caused by floods. As part of the Bank’s review of its loan portfolio after the floods, the Bank analyzed the affected properties and businesses, flood insurance coverage, impact on sources of repayment and underlying collateral, and customer repayment capability. For the year ended December 31, 2008, the provision relating to the 2008 floods totaled $4,366,000. For the year ended December 31, 2009, the provision for loan losses as compared to the 2008 provision (excluding the $4,366,000 flood allocation) increased $4,806,000 or 67.30%. The increase in the 2009 provision was due to the economic conditions facing the national and local market area, lower collateral values, and deterioration of credit quality for various borrowers within the Bank’s portfolio.
The ratio of the allowance for loan losses to impaired loans was 93%, 106% and 255% at December 31, 2010, 2009 and 2008, respectively. The ratio of the allowance for loan losses to impaired loans at December 31, 2008 was affected due to the June 2008 floods as discussed above. This ratio is monitored as a part of the Company’s loan loss methodology. Charge-offs in 2010 were consistent due to the economic conditions facing the Bank’s market areas, a decrease in collateral values and deterioration of credit quality in the Bank’s loan portfolio.
The ratio of impaired loans to total gross loans was 1.98%, 1.79% and .72% at December 31, 2010, 2009 and 2008, respectively. The increase in the 2010 and 2009 ratio is due to the increase in restructured loans (which are all considered troubled debt restructuring). See discussion of restructured loans in Item 1. In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments or extension of the maturity date. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that otherwise would not be considered. Restructured loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. The Bank’s loan restructurings occur on a case-by-case basis in connection with ongoing loan collection processes.
For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible. In general, this is the amount that the carrying value of the loan exceeds the related appraised value. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the impairment is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variable affecting its value may have changed since the appraisal was performed, consistent with the December 2006 joint interagency guidance on the allowance for loan losses. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide additional charge off or loss allocations based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a loss allocation may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional loss allocation may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
For flood-related properties located in Linn County, Iowa, the Company has not used external appraisals to determine the fair market value of collateral. Due to the wide-spread flooding in June 2008, there was a lack of appropriate arms-length transactions to support useful appraisals especially for 1-to-4 family residences. Instead, the Company has utilized assessed values and independent realtor market evaluations on individual properties. The Company believes these tools have been an appropriate measure in estimating the fair market value of such properties in this situation.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
Other Income
The other income of the Company was $20,099,000 in 2010 compared to $18,909,000 in 2009. The increase of $1,190,000 in 2010 was the result of a combination of factors discussed below. In 2009, the total other income increased $2,239,000 from 2008.
The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The gain was $3,602,000 in 2010, $3,874,000 in 2009 and $1,274,000 in 2008. The dollar volume of loans sold in 2010 was approximately 90.73% of the volume in 2009 and 201% of the activity experienced in 2008. The volume of activity in these types of loans is directly related to the level of interest rates. During portions of 2010, secondary market rates were favorable resulting in the increase in the volume of loans sold. The servicing of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income.
Trust fees increased $509,000 to $4,026,000 in 2010. Trust fees decreased $400,000 in 2009. As of December 31, 2010, the Bank’s Trust Department had $980 million in assets under management compared to $901 million and $784 million at December 31, 2009 and 2008, respectively. Trust fees are based on total assets under management. The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 49.16% of assets under management. In 2010, the Dow Jones Industrial Average increased 11.03%. The market value of the Dow Jones Industrial Average increased over 18% in 2009 and decreased over 33% in 2008.
Rental revenue on tax credit real estate increased $479,000 in 2010 due to the additions of tax credit properties in 2009 and 2010. 2010 includes a full year of income related to the property invested in during 2009 and a partial year of income for the property invested in during 2010.
Other noninterest income was $2,828,000 for the year ended December 31, 2010, a $473,000 increase from the same period in 2009. Other noninterest income for the year ended December 31, 2010 included insurance proceeds of $425,000 received as a result of a claim filed by the Company in April 2008. The claim pertained to alleged unauthorized activities by a former employee of the Bank in Bank internal accounts that were discovered during 2007. The total loss to the Company was $575,000 which included $559,000 of funds that were misappropriated and $16,000 of fees expensed during the investigation. The Company’s insurance policies covered the loss and expenses but had a deductible of $150,000, resulting in net proceeds of $425,000.
Other Expenses
Total other expenses were $45,748,000 and $44,813,000 for the years ended December 31, 2010 and 2009, respectively. The increase is $935,000 or 2.09% in 2010 and $5,414,000 or 13.74% in 2009.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
Salaries and employee benefits, the largest component of non-interest expense, increased $787,000 in 2010, a 3.63% change. A component of salaries and employee benefits expense is compensation expense related to the officers’ deferred compensation plan and costs associated with restricted common stock awarded to various officers which increased $411,000 in 2010. This increase is primarily the result of the change in the appraised value of the Company’s common stock. As a result of the Company’s program to repurchase up to a total of 750,000 shares of the Company’s common stock, the Company obtains a quarterly independent appraisal of the shares of stock. The appraised value of the Company’s stock was $58.50 as of December 31, 2010 and $53.00 as of December 31, 2009. Another component of salaries and employee benefits expense is profit sharing plan expense which totaled $1,559,000 in 2010. This expense increased $529,000, or 51.36%, from 2009 and includes the Company’s contribution to its ESOP plan. (See Note 8 to the Consolidated Financial Statements). The increase is primarily the result of the discretionary contribution that was 10% and 6.5% for the years ended December 31, 2010 and 2009, respectively. These increases were offset by a decrease of $165,000 relating to part time salaries in 2010. The Bank had 17 fewer part time employees at December 31, 2010 compared to December 31, 2009.
Occupancy expense increased $265,000 for the year ended December 31, 2010 which included increases of $147,000 in property taxes, $87,000 in bank building depreciation and $50,000 in janitorial expenses. The increases are related to the bank building at 3905 Blairs Ferry Road NE in Cedar Rapids which was placed into service on January 11, 2010.
Furniture and equipment expenses increased $371,000 in 2010 due mainly to an increase maintenance contracts. Maintenance contract expense increased $334,000 during the year ended December 31, 2010 as compared to the same period in 2010. This increase is due to the increased rates of the contracts and additional software programs purchased by the Company.
Advertising and business development expense increased $355,000 from 2009 to 2010. Factors in this increase included increases in charitable contributions of $275,000 and $106,000 increase in costs associated with credit card reward points based on customer usage volumes.
Outside services expense increased $550,000 for the year ended December 31, 2010 compared to the same period in 2009. Outside services include professional fees, courier services and ATM fees, and processing charges for the merchant credit card program, retail credit cards and other data processing services. Credit card, debit card and merchant card processing expenses increased $316,000 due to an increase in the volume of transactions in 2010 compared to 2009. Professional fees were $1,666,000 for the year ended December 31, 2010, an increase of $5,000 over the same period in 2009. This increase includes $233,000 in other professional fees. The increase is offset by a decrease of $131,000 in attorney fees and is due to the Company utilizing in-house counsel for credit-related matters and a decrease of $26,000 in correspondent bank charges, a decrease of $26,000 in audit, tax and accounting fees and a decrease of $20,000 in title insurance fees. Expenses related to courier services decreased $29,000 in 2010 due to the expiration of an ATM rental contract in 2009 which was not renewed. Data processing expense increased $41,000 for the year ended December 31, 2010 when compared to the same period in 2009. This increase is due to monthly fees for a new trust processing system added in 2009. In addition, expenses related to other real estate owned and other repossessed assets were $389,000 for the year ended 2010, an increase of $131,000 from the same period in 2009. The increased expenses are due to the number of properties in other real estate owned in 2010.
Rental expenses on tax credit real estate increased $668,000 in 2010 due to the addition of tax credit properties in 2009 and 2010. 2010 includes a full year of expenses related to the property invested in during 2009 and a partial year of expenses for the property invested in during 2010.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
FDIC insurance assessment expense was $2,074,000 for the year ended December 31, 2010. This is a decrease of $704,000 when compared to the same period in 2009. As of June 30, 2009, the FDIC imposed a five basis point special assessment on each bank’s total assets less Tier 1 capital. The Bank’s special assessment totaled $820,000. There was no special assessment imposed during the year ended December 31, 2010. In addition, the FDIC has raised assessment rates for all banks as part of its restoration plan for the deposit insurance fund. Another component of the increase is an additional 10 basis point assessment related to the Transaction Account Guarantee Program. This Program increased insurance coverage for non-interest bearing deposit accounts in excess of $250,000. At December 31, 2010, the Company had recorded prepaid FDIC insurance of $5,038,000 which represents the FDIC premiums paid by the Bank on December 30, 2009 for the years of 2010, 2011 and 2012. The prepaid FDIC insurance is being amortized on a quarterly basis as premiums are assessed.
During 2009, the Company pre-paid $40.0 million of FHLB advances incurring an early payment penalty of $584,000. There were no penalties incurred in 2010. The $40.0 million in advances consisted of $20.0 million due in June 2009 and $20.0 million due in October 2009, at rates from 5.66% to 6.22%. As a result of the early payment of the FHLB borrowings, the Company’s interest expense on FHLB borrowings decreased. The net impact of the early payment penalty and decreased interest expense was revenue neutral for 2009.
The net loss on sale of other real estate owned and other repossessed assets decreased $1,048,000 to $6,000 for the year ended December 31, 2010. The total net loss on sale of other real estate owned consisted of a $505,000 fair market value adjustment on 11 properties within other real estate owned, a $513,000 gain on sale of 28 properties and a $14,000 loss on sale of 3 properties, for a net loss of $6,000. During the same period in 2009, the loss consisted of $608,000 fair market value adjustment on 11 such properties, a $151,000 gain on sale of 14 such properties and a $597,000 loss on sale of 17 such properties, for a net loss of $1,054,000. The net loss on sale of other real estate owned increased in 2009 due to an increase in the volume of such sales coupled with fair value adjustments based on reduced levels of new and existing home sales, stagnant to declining property values, a decline in building permits, and an increase in the time houses remain on the market. These factors have lead to a reduction in the ultimate sales price of properties versus the carrying value of the property. Also, one large commercial property was sold during 2009 at a loss of $345,000
Other noninterest expense was $1,476,000 for the year ended December 31, 2010, an increase of $313,000 over the same period in 2009. Other noninterest expense includes fraud losses related to customer credit and debit cards, ATM activity and customer deposit accounts. This expense increased $74,000 in 2010 due to increased incidents of unauthorized use of customer credit and debit cards. Expenses related to the deferred compensation plan for the Company’s Board of Directors increased $187,000 in 2010 from 2009 which is primarily the result of the change in the appraised value of the Company’s common stock.
Total other expenses were $39,399,000 for the year ended December 31, 2008. The increase in expenses in 2009 was $5,414,000. This included an increase of $1,406,000 in salaries and benefits, which was the direct result of salary adjustments and increased expense for employee benefits including accrued vacation liability and bonuses paid to real estate lenders for 2009. Occupancy expense increased $535,000 due mainly to increases related to operating two additional locations in 2009. Furniture and equipment expense was $202,000 higher in 2009 when compared to 2008 as a result of the costs related to depreciation expense and equipment and software maintenance contracts. In addition, there was an increase in outside services of $487,000. Outside services include professional fees, courier services and ATM fees. Attorneys’ fees increased $206,000 to due in part of increased activity related to costs of collection efforts and repossession volume. Credit card, debit card and merchant card processing expenses, along with data processing expenses, increased $103,000 due to the volume of transactions. FDIC insurance expense increased $1,913,000 in 2009 due to the FDIC imposed five basis point special assessment on each bank’s total assets less Tier 1 capital. The Company pre-paid $40.0 million of FHLB advances incurring an early payment penalty of $584,000 in 2009, there were no penalties incurred in 2008.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued)
Income Taxes
Income tax expense was $9,258,000, $5,218,000 and $5,556,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Income taxes as a percentage of income before income taxes were 28.42% in 2010, 24.61% in 2009 and 28.21% in 2008. The amount of tax credits were $1,909,000, $1,637,000 and $711,000 for 2010, 2009 and 2008, respectively. In 2010, the Company invested in a seventh tax credit property. Credits related to this new property will be approximately $3.0 million and are expected to be recognized over a ten year period starting in 2010. In 2009, the Company invested in a sixth tax credit property. Credits related to the property in 2009 were approximately $7.2 million and are expected to be recognized over a ten year period starting in 2009.
Impact of Recently Issued Accounting Standards and Recent Legislative Developments
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06,
Improving Disclosures about Fair Value Measurements
(“ASU No. 2010-06”). ASU No. 2010-06 modifies FASB ASC 820,
Fair Value Measurements and Disclosures
. ASU No. 2010-06 requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The FASB also clarified existing fair-value measurement disclosure guidance about the level of disaggregation, inputs, and valuation techniques. ASU No. 2010-06 is effective for financial statements issued for the year beginning after December 15, 2009. The Company adopted this standard effective on January 1, 2010 and the adoption of ASU No. 2010-06 did not have a significant effect on the Company’s consolidated financial statements.
On July 21, 2010, the FASB issued ASU No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, policies and activity involving the allowance for credit losses and the fair value of loans are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. For the Company, this ASU is effective for interim and annual reporting periods after December 15, 2010. The Company included these disclosures in the notes to the consolidated financial statements (see Item 8, Note 3).
Recent Legislative Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act represents the most sweeping financial services industry reform since the 1930’s. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the Dodd-Frank Act. The Dodd-Frank Act is expected to be fully phased in over twelve years. Among other things, the Dodd-Frank Act may result in added costs of doing business and regulatory compliance burdens and affect competition among financial services entities. Uncertainty exists as to the ultimate impact of many provisions of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole and on the Company’s business, results of operations and financial condition. Additional information, including a summary of certain provisions of the Dodd-
Frank Act, is available on the Federal Deposit Insurance Corporation website at
www.fdic.gov/regulations/reform/index.html
.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
(Continued)
Interest Rate Sensitivity and Liquidity Analysis
At December 31, 2010, the Company's interest rate sensitivity report is as follows (amounts in thousands):
|
Repricing
|
||||||||||||||||||||||||||||
|
Maturities
|
Days
|
More Than
|
||||||||||||||||||||||||||
|
Immediately
|
2-30 | 31-90 | 91-180 | 181-365 |
One Year
|
Total
|
||||||||||||||||||||||
|
Earning assets:
|
||||||||||||||||||||||||||||
|
Federal funds sold
|
$ | 42,124 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 42,124 | ||||||||||||||
|
Investment securities
|
- | 960 | 8,025 | 10,835 | 18,380 | 178,403 | 216,603 | |||||||||||||||||||||
|
Loans
|
8,692 | 164,648 | 47,994 | 74,861 | 102,306 | 1,202,549 | 1,601,050 | |||||||||||||||||||||
|
Total
|
50,816 | 165,608 | 56,019 | 85,696 | 120,686 | 1,380,952 | 1,859,777 | |||||||||||||||||||||
|
Sources of funds:
|
||||||||||||||||||||||||||||
|
Interest-bearing checking and savings accounts
|
86,357 | - | - | - | - | 549,207 | 635,564 | |||||||||||||||||||||
|
Certificates of
deposit
|
- | 38,473 | 77,173 | 97,391 | 126,116 | 307,233 | 646,386 | |||||||||||||||||||||
|
Other borrowings -
FHLB
|
- | - | 10,000 | - | - | 185,000 | 195,000 | |||||||||||||||||||||
|
Federal funds and repurchase agreements
|
46,928 | - | - | - | - | - | 46,928 | |||||||||||||||||||||
| 133,285 | 38,473 | 87,173 | 97,391 | 126,116 | 1,041,440 | 1,523,878 | ||||||||||||||||||||||
|
Other sources,
primarily
noninterest-
bearing
|
- | - | - | - | - | 198,791 | 198,791 | |||||||||||||||||||||
|
Total sources
|
133,285 | 38,473 | 87,173 | 97,391 | 126,116 | 1,240,231 | 1,722,669 | |||||||||||||||||||||
|
Interest
Rate Gap
|
$ | (82,469 | ) | $ | 127,135 | $ | (31,154 | ) | $ | (11,695 | ) | $ | (5,430 | ) | $ | 140,721 | $ | 137,108 | ||||||||||
|
Cumulative Interest
Rate Gap at December 31, 2010
|
$ | (82,469 | ) | $ | 44,666 | $ | 13,512 | $ | 1,817 | $ | (3,613 | ) | $ | 137,108 | ||||||||||||||
The table set forth above includes the portion of the balances in interest-bearing checking, savings and money market accounts that management has estimated to mature within 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 re-pricing schedule indicates. The FHLB borrowings are classified based on either their due date or if they are callable on their most likely call date based on the interest rate.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
(Continued)
Effects of Inflation
The consolidated financial statements and the accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact in the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. In the current economic environment, liquidity and interest rate adjustments are features of the Company’s asset/liability management, which are important to the maintenance of acceptable performance levels. The Company attempts to maintain a balance between monetary assets and monetary liabilities, over time, to offset the potential effects of changing interest rates.
Liquidity and Capital Resources
On an unconsolidated basis, the Company had cash balances of $757,000 as of December 31, 2010. In 2010, the Company received dividends of $5,375,000 from its subsidiary Bank and used those funds to pay dividends to its stockholders of $4,024,000 and to fund purchases of treasury stock under the 2005 Stock Repurchase Program. The total purchase of treasury stock under the 2005 Stock Repurchase Program totaled $1,627,000 and $2,312,000 for the years ended December 31, 2010 and 2009, respectively.
The ability of the Company to pay dividends to its shareholders is dependent upon the earnings and capital adequacy of its 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 totaled approximately $49,864,000, $38,851,000 and $31,990,000 as of December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 and 2009, stockholders' equity, before deducting for the maximum cash obligation related to the ESOP, was $191,214,000 and $174,675,000, respectively. This measure of stockholders’ equity as a percent of total assets was 9.90% at December 31, 2010 and 9.54% at December 31, 2009. As of December 31, 2010, total equity was 8.61% of assets compared to 8.29% of assets at the prior year end.
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 that member banks must maintain.
As of December 31, 2010, risk-based capital standards require 8% of risk-weighted assets. At least half of that 8% must consist of Tier I core capital (common stockholders' equity, non-cumulative 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 weighting 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.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation (Continued)
The Bank is an insured state bank, incorporated under the laws of the state of Iowa. As such, the Bank is subject to regulation, supervision and periodic examination by the Superintendent of Banking of the State of Iowa (the "Superintendent"). Among the requirements and restrictions imposed upon state banks by the Superintendent are the requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made by state banks, and restrictions relating to investments, opening of bank offices and other activities of state banks. Changes in the capital structure of state banks are also approved by the Superintendent. State banks must have a Tier 1 risk-based leverage ratio of 6.5% plus a fully funded loan loss reserve. In certain circumstances, the Superintendent may mandate higher capital, but the Superintendent has not imposed such a requirement on the Bank. In determining the Tier 1 risk-based leverage ratio, the Superintendent uses total equity capital without unrealized securities gains and the allowance for loan losses less any intangible assets. At December 31, 2010, the Tier 1 risk-based leverage ratio of the Bank was 9.66% and exceeded the ratio required by the Superintendent.
The actual amounts of risk-based capital and risk-based capital ratios as of December 31, 2010 and the minimum regulatory requirements for the Company and the Bank are presented below (amounts in thousands):
|
Actual
|
For Capital
Adequacy
Purposes
|
To Be Well
Capitalized
Under
Prompt Corrective A
ction Provisions
|
||||||||||||||
|
Amount
|
Ratio
|
Ratio
|
Ratio
|
|||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||
|
Company:
|
||||||||||||||||
|
Total risk-based capital
|
$ | 204,914 | 13.59 | % | 8.00 | % | 10.00 | % | ||||||||
|
Tier 1 risk-based capital
|
185,932 | 12.33 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
185,932 | 9.70 | 4.00 | 5.00 | ||||||||||||
|
Bank:
|
||||||||||||||||
|
Total risk-based capital
|
204,038 | 13.54 | 8.00 | 10.00 | ||||||||||||
|
Tier 1 risk-based capital
|
185,076 | 12.28 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
185,076 | 9.66 | 4.00 | 5.00 | ||||||||||||
The Bank is classified as "well capitalized" by FDIC capital guidelines.
On a consolidated basis, 2010 cash flows from operations provided $38,726,000 and net increases in deposits provided $133,314,000. These cash flows were invested in Net Loans of $69,049,000. In addition, $2,957,000 was used to purchase property and equipment and leasehold improvements. Cash flows of $2,183,000 were also used to invest in tax credit real estate properties.
At December 31, 2010, the Bank had total outstanding loan commitments and unused portions of lines of credit totaling $281,864,000 (see Note 14 to the Consolidated Financial Statements). Management believes that its liquidity levels are sufficient at this time, but the Bank may increase its liquidity by limiting the growth of its assets, by selling more loans in the secondary market or selling portions of loans to other banks through participation agreements. It may also obtain additional funds from the Federal Home Loan Bank (FHLB). As of December 31, 2010, the Bank can obtain an additional $248.3 million from the FHLB based on the current real estate mortgage loans held. In addition, the Bank has arranged $149.2 million of credit lines at three banks. The borrowings under these credit lines would be secured by the Bank’s investment securities.
While the Bank has off-balance sheet commitments to fund additional borrowings of customers, it does not use other off-balance-sheet financial instruments, including interest rate swaps, as part of its asset and liability management. Contractual commitments to fund loans are met from the proceeds of federal funds sold or investment securities and additional borrowings. Many of the contractual commitments to extend credit will not be funded because they represent the credit limits on credit cards and home equity lines of credits.
Contractual Obligations and Commitments
As disclosed in Note 14 to the Consolidated Financial Statements, the Company has certain obligations and commitments to make future payments under contracts. The following table summarizes significant contractual obligations and other commitments as of December 31, 2010:
|
Payments Due By Period
|
||||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||
|
Less Than
|
One -
|
Three -
|
More Than
|
|||||||||||||||||
|
Total
|
One Year
|
Three Years
|
Five Years
|
Five Years
|
||||||||||||||||
|
Contractual obligations:
|
||||||||||||||||||||
|
Long-term debt obligations
|
$ | 195,000 | $ | 10,000 | $ | - | $ | 60,000 | $ | 125,000 | ||||||||||
|
Operating lease obligations
|
1,460 | 316 | 523 | 286 | 335 | |||||||||||||||
|
Total contractual obligations:
|
$ | 196,460 | $ | 10,316 | $ | 523 | $ | 60,286 | $ | 125,335 | ||||||||||
|
Other commitments:
|
||||||||||||||||||||
|
Lines of credit
|
$ | 281,864 | $ | 196,163 | $ | 72,455 | $ | 10,650 | $ | 2,596 | ||||||||||
|
Standby letters of credit
|
11,936 | 11,936 | - | - | - | |||||||||||||||
|
Total other commitments
|
$ | 293,800 | $ | 208,099 | $ | 72,455 | $ | 10,650 | $ | 2,596 | ||||||||||
The Bank plans to add an additional office location in North Liberty, Iowa. It is expected that the Bank will provide retail and commercial banking services at this proposed office and that it also will serve as the new location of the Bank’s Trust and Wealth Management Department (the “Trust Department”). The Trust Department, which currently has 21 employees, was displaced by flooding in June of 2008 from the Iowa City South Gilbert Street office. Since that time, the Trust Department has occupied 6,600 square feet of leased office space one half mile south of the proposed new office. The new office location will enhance services available at the Trust Department, which will be housed with other traditional banking functions including deposit and loan services provided to the Bank’s retail and commercial customers. It is expected that the new office location will have approximately 18,580 square feet. Preliminary construction costs for the building are estimated at $3.9 million, with final bids due March 2011. The Bank will not incur any debt during the construction of the new office.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
Commitments and Trends
The Company and the Bank have no material commitments or plans that will materially affect liquidity or capital resources, other than the North Liberty branch building previously disclosed. Property and equipment may be acquired in cash purchases, or they may be financed if favorable terms are available.
Market Risk Exposures
The Company's primary market risk exposure is to changes in interest rates. The Company's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond the Company's control, such as market interest rates and competition, may also have an impact on the Company's interest income and interest expense. In the absence of other factors, the Company's overall yield on interest-earning assets will increase as will its cost of funds on its interest-bearing liabilities when market interest rates increase over an extended period of time. Inversely, the Company's yields and cost of funds will decrease when market rates decline. The Company is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time.
The Bank maintains an asset/liability committee, which meets at least quarterly to review the interest rate sensitivity position and to review various strategies as to interest rate risk management. In addition, the 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.
In order to minimize the potential effects of adverse material and prolonged increases or decreases in market interest rates on the Company's operations, management has implemented an asset/liability program designed to mitigate the Company's interest rate sensitivity. The program emphasizes the origination of adjustable rate loans, which are held in the portfolio, the investment of excess cash in short or intermediate term interest-earning assets, and the solicitation of transaction deposit accounts, which are less sensitive to changes in interest rates and can be re-priced rapidly.
Based on the data following, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's interest rate sensitive liabilities would re-price faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would tend to reduce net interest income because the resulting increase in the Company’s cost of funds would not be immediately offset by an increase in its yield on earning assets. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in re-pricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income.
The following table, which presents principal cash flows and related weighted average interest rates by expected maturity dates, provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates.
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
Total
|
Fair Value
|
|||||||||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||
|
Loans, fixed:
|
||||||||||||||||||||||||||||||||
|
Balance
|
$ | 138,387 | $ | 55,375 | $ | 140,869 | $ | 145,637 | $ | 204,508 | $ | 110,244 | $ | 795,020 | $ | 797,053 | ||||||||||||||||
|
Average i
nterest rate
|
5.73 | % | 6.26 | % | 5.85 | % | 5.80 | % | 5.30 | % | 5.17 | % | 5.61 | % | ||||||||||||||||||
|
Loans, variable:
|
||||||||||||||||||||||||||||||||
|
Balance
|
$ | 236,148 | $ | 33,224 | $ | 122,001 | $ | 117,818 | $ | 190,928 | $ | 95,521 | $ | 795,640 | $ | 781,019 | ||||||||||||||||
|
Average i
nterest rate
|
4.86 | % | 7.52 | % | 5.72 | % | 5.49 | % | 5.25 | % | 5.21 | % | 5.33 | % | ||||||||||||||||||
|
Investments (1):
|
||||||||||||||||||||||||||||||||
|
Balance
|
$ | 50,007 | $ | 40,677 | $ | 28,271 | $ | 30,333 | $ | 12,119 | $ | 55,196 | $ | 216,603 | $ | 216,603 | ||||||||||||||||
|
Average i
nterest rate
|
3.56 | % | 3.54 | % | 3.57 | % | 3.16 | % | 5.26 | % | 4.81 | % | 3.91 | % | ||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||||||||||
|
Liquid deposits (2):
|
||||||||||||||||||||||||||||||||
|
Balance
|
$ | 635,564 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 635,564 | $ | 635,564 | ||||||||||||||||
|
Average
interest rate
|
0.37 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.37 | % | ||||||||||||||||||
|
Deposits,
certificates:
|
||||||||||||||||||||||||||||||||
|
Balance
|
$ | 339,153 | $ | 161,723 | $ | 67,987 | $ | 31,474 | $ | 46,049 | $ | - | $ | 646,386 | $ | 648,761 | ||||||||||||||||
|
Average i
nterest rate
|
2.19 | % | 2.33 | % | 2.71 | % | 2.98 | % | 3.18 | % | 0.00 | % | 2.39 | % | ||||||||||||||||||
|
(1)
|
Includes all available-for-sale investments, federal funds and Federal Home Loan Bank stock.
|
|
(2)
|
Includes NOW and other demand, savings and money market funds.
|
The consolidated financial statements and supplementary data are included on pages 69 through 121.
KPMG LLP
2500 Ruan Center
666 Grand Avenue
Des Moines, IA 50309
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hills Bancorporation:
We have audited the accompanying consolidated balance sheets of Hills Bancorporation and subsidiary (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. We also have audited Hills Bancorporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Hills Bancorporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, Hills Bancorporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
March 10, 2011
|
HILLS BANCORPORATION
|
||||||||
|
|
||||||||
|
December 31, 2010 and 2009
|
||||||||
|
(Amounts In Thousands, Except Shares)
|
||||||||
|
ASSETS
|
2010
|
2009
|
||||||
|
Cash and cash equivalents (Note 10)
|
$ | 62,978 | $ | 24,095 | ||||
|
Investment securities available for sale at fair value
(amortized cost 2010 $200,995; 2009 $194,844) (Notes 1, 2 and 6)
|
205,498 | 201,645 | ||||||
|
Stock of Federal Home Loan Bank
|
11,105 | 12,453 | ||||||
|
Loans held for sale
|
10,390 | 7,976 | ||||||
|
Loans, net of allowance for loan losses (2010 $29,230; 2009 $29,160) (Notes 1, 3, 7, and 11)
|
1,561,430 | 1,503,981 | ||||||
|
Property and equipment, net (Note 4)
|
26,806 | 26,417 | ||||||
|
Tax credit real estate
|
20,960 | 18,777 | ||||||
|
Accrued interest receivable
|
8,686 | 9,677 | ||||||
|
Deferred income taxes, net (Note 9)
|
9,870 | 8,892 | ||||||
|
Other real estate
|
2,233 | 3,227 | ||||||
|
Goodwill
|
2,500 | 2,500 | ||||||
|
Prepaid FDIC insurance
|
5,038 | 6,947 | ||||||
|
Other assets
|
3,789 | 4,039 | ||||||
| $ | 1,931,283 | $ | 1,830,626 | |||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Noninterest-bearing deposits
|
$ | 198,791 | $ | 184,158 | ||||
|
Interest-bearing deposits (Note 5)
|
1,281,950 | 1,163,269 | ||||||
|
Total deposits
|
1,480,741 | 1,347,427 | ||||||
|
Short-term borrowings (Note 6)
|
46,928 | 68,534 | ||||||
|
Federal Home Loan Bank borrowings (Note 7)
|
195,000 | 225,000 | ||||||
|
Accrued interest payable
|
1,996 | 2,341 | ||||||
|
Other liabilities
|
15,404 | 12,649 | ||||||
| 1,740,069 | 1,655,951 | |||||||
|
Commitments and Contingencies (Notes 8 and 14)
|
||||||||
|
Redeemable Common Stock Held By Employee Stock
Ownership Plan (ESOP) (Note 8)
|
24,945 | 22,900 | ||||||
|
Stockholders' Equity (Note 10)
|
||||||||
|
Capital stock, no par value; authorized 10,000,000 shares;
issued 2010 4,624,519 shares; 2009 4,618,962 shares
|
- | - | ||||||
|
Paid in capital
|
14,875 | 14,582 | ||||||
|
Retained earnings
|
185,412 | 166,120 | ||||||
|
Accumulated other comprehensive income
|
2,781 | 4,200 | ||||||
|
Treasury stock at cost (2010 226,182 shares; 2009 196,688 shares)
|
(11,854 | ) | (10,227 | ) | ||||
| 191,214 | 174,675 | |||||||
|
Less maximum cash obligation related to ESOP shares (Note 8)
|
24,945 | 22,900 | ||||||
| 166,269 | 151,775 | |||||||
| $ | 1,931,283 | $ | 1,830,626 | |||||
|
See Notes to Consolidated Financial Statements.
|
||||||||
|
HILLS BANCORPORATION
|
||||||||||||
|
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands, Except Per Share Amounts)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Interest income:
|
||||||||||||
|
Loans, including fees
|
$ | 88,239 | $ | 88,982 | $ | 89,341 | ||||||
|
Investment securities:
|
||||||||||||
|
Taxable
|
3,380 | 3,786 | 4,734 | |||||||||
|
Nontaxable
|
3,294 | 3,372 | 3,382 | |||||||||
|
Federal funds sold
|
74 | 55 | 18 | |||||||||
|
Total interest income
|
94,987 | 96,195 | 97,475 | |||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
19,200 | 25,269 | 28,865 | |||||||||
|
Short-term borrowings
|
523 | 631 | 1,818 | |||||||||
|
FHLB borrowings
|
8,116 | 11,241 | 12,860 | |||||||||
|
Total interest expense
|
27,839 | 37,141 | 43,543 | |||||||||
|
Net interest income
|
67,148 | 59,054 | 53,932 | |||||||||
|
Provision for loan losses (Note 3)
|
8,925 | 11,947 | 11,507 | |||||||||
|
Net interest income after provision for loan losses
|
58,223 | 47,107 | 42,425 | |||||||||
|
Other income:
|
||||||||||||
|
Net gain on sale of loans
|
3,602 | 3,874 | 1,274 | |||||||||
|
Trust fees
|
4,026 | 3,517 | 3,917 | |||||||||
|
Service charges and fees
|
7,971 | 7,970 | 7,907 | |||||||||
|
Rental revenue on tax credit real estate
|
1,672 | 1,193 | 1,043 | |||||||||
|
Other noninterest income
|
2,828 | 2,355 | 2,529 | |||||||||
| 20,099 | 18,909 | 16,670 | ||||||||||
|
Other expenses:
|
||||||||||||
|
Salaries and employee benefits
|
22,480 | 21,693 | 20,287 | |||||||||
|
Occupancy
|
3,163 | 2,898 | 2,363 | |||||||||
|
Furniture and equipment
|
4,100 | 3,729 | 3,527 | |||||||||
|
Office supplies and postage
|
1,368 | 1,366 | 1,319 | |||||||||
|
Advertising and business development
|
2,058 | 1,703 | 1,788 | |||||||||
|
Outside services
|
6,506 | 5,956 | 5,469 | |||||||||
|
Rental expenses on tax credit real estate
|
2,517 | 1,849 | 1,558 | |||||||||
|
FDIC insurance assessment
|
2,074 | 2,778 | 865 | |||||||||
|
Loss on extinguishment of debt - Federal Home Loan Bank borrowings
|
- | 584 | - | |||||||||
|
Net loss on sale of other real estate owned and other repossessed assets
|
6 | 1,054 | 96 | |||||||||
|
Flood-related expenses
|
- | 40 | 852 | |||||||||
|
Other noninterest expenses
|
1,476 | 1,163 | 1,275 | |||||||||
| 45,748 | 44,813 | 39,399 | ||||||||||
|
Income before income taxes
|
32,574 | 21,203 | 19,696 | |||||||||
|
Income taxes (Note 9)
|
9,258 | 5,218 | 5,556 | |||||||||
|
Net income
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$ | 5.29 | $ | 3.61 | $ | 3.16 | ||||||
|
Diluted
|
5.28 | 3.60 | 3.15 | |||||||||
|
See Notes to Consolidated Financial Statements.
|
||||||||||||
|
HILLS BANCORPORATION
|
||||||||||||
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net income
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
|
Other comprehensive (loss) income,
|
||||||||||||
|
Unrealized holding (losses) gains arising during the period
|
$ | (2,342 | ) | $ | 891 | $ | 4,862 | |||||
|
Income tax effect of unrealized losses (gains)
|
879 | (340 | ) | (1,860 | ) | |||||||
| $ | (1,463 | ) | $ | 551 | $ | 3,002 | ||||||
|
Less: reclassification adjustment for gains included in net income, net of income tax
|
44 | - | - | |||||||||
|
Other comprehensive (loss) income
|
$ | (1,419 | ) | $ | 551 | $ | 3,002 | |||||
|
Comprehensive income
|
$ | 21,897 | $ | 16,536 | $ | 17,142 | ||||||
|
See Notes to Consolidated Financial Statements.
|
||||||||||||
|
HILLS BANCORPORATION
|
||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||||||||||||||
|
(Amounts In Thousands, Except Share Amounts)
|
||||||||||||||||||||||||
|
Maximum
|
||||||||||||||||||||||||
|
Cash
|
||||||||||||||||||||||||
|
Accumulated
|
Obligation
|
|||||||||||||||||||||||
|
Other
|
Related
|
|||||||||||||||||||||||
|
Paid In
|
Retained
|
Comprehensive
|
To ESOP
|
Treasury
|
||||||||||||||||||||
|
Capital
|
Earnings
|
Income (Loss)
|
Shares
|
Stock
|
Total
|
|||||||||||||||||||
|
Balance, December 31, 2007
|
$ | 12,823 | $ | 144,122 | $ | 647 | $ | (22,205 | ) | $ | (4,697 | ) | $ | 130,690 | ||||||||||
|
Issuance of 15,093 shares of common stock
|
527 | - | - | - | - | 527 | ||||||||||||||||||
|
Forfeiture of 1,186 shares
of common stock
|
(51 | ) | - | - | - | - | (51 | ) | ||||||||||||||||
|
Share-based compensation
|
21 | - | - | - | - | 21 | ||||||||||||||||||
| Income tax benefit related to share-based | ||||||||||||||||||||||||
|
compensation
|
127 | - | - | - | - | 127 | ||||||||||||||||||
|
Change related to ESOP shares
|
- | - | - | (1,610 | ) | - | (1,610 | ) | ||||||||||||||||
|
Net income
|
- | 14,140 | - | - | - | 14,140 | ||||||||||||||||||
|
Cash dividends ($.91 per share)
|
- | (4,086 | ) | - | - | - | (4,086 | ) | ||||||||||||||||
|
Purchase of 63,469 shares
of common stock
|
- | - | - | - | (3,398 | ) | (3,398 | ) | ||||||||||||||||
|
Other comprehensive income
|
- | - | 3,002 | - | - | 3,002 | ||||||||||||||||||
|
Balance, December 31, 2008
|
$ | 13,447 | $ | 154,176 | $ | 3,649 | $ | (23,815 | ) | $ | (8,095 | ) | $ | 139,362 | ||||||||||
|
Issuance of 22,371 shares of
common stock
|
1,070 | - | - | - | - | 1,070 | ||||||||||||||||||
|
Forfeiture of 836 shares
of common stock
|
(41 | ) | - | - | - | - | (41 | ) | ||||||||||||||||
|
Share-based compensation
|
62 | - | - | - | - | 62 | ||||||||||||||||||
| Income tax benefit related to share-based | ||||||||||||||||||||||||
|
compensation
|
44 | - | - | - | - | 44 | ||||||||||||||||||
|
Change related to ESOP shares
|
- | - | - | 915 | - | 915 | ||||||||||||||||||
|
Net income
|
- | 15,985 | - | - | - | 15,985 | ||||||||||||||||||
|
Cash dividends ($.91 per share)
|
- | (4,041 | ) | - | - | - | (4,041 | ) | ||||||||||||||||
|
Purchase of 39,806 shares
of common stock
|
- | - | - | - | (2,132 | ) | (2,132 | ) | ||||||||||||||||
|
Other comprehensive income
|
- | - | 551 | - | - | 551 | ||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 14,582 | $ | 166,120 | $ | 4,200 | $ | (22,900 | ) | $ | (10,227 | ) | $ | 151,775 | ||||||||||
|
Issuance of 6,236 shares of
common stock
|
197 | - | - | - | - | 197 | ||||||||||||||||||
|
Forfeiture of 679 shares
of common stock
|
(32 | ) | - | - | - | - | (32 | ) | ||||||||||||||||
|
Share-based compensation
|
15 | - | - | - | - | 15 | ||||||||||||||||||
|
Income tax benefit related to share-based
|
||||||||||||||||||||||||
|
compensation
|
113 | - | - | - | - | 113 | ||||||||||||||||||
|
Change related to ESOP shares
|
- | - | - | (2,045 | ) | - | (2,045 | ) | ||||||||||||||||
|
Net income
|
- | 23,316 | - | - | - | 23,316 | ||||||||||||||||||
|
Cash dividends ($.91 per share)
|
- | (4,024 | ) | - | - | - | (4,024 | ) | ||||||||||||||||
|
Purchase of 29,494 shares
of common stock
|
- | - | - | - | (1,627 | ) | (1,627 | ) | ||||||||||||||||
|
Other comprehensive loss
|
- | - | (1,419 | ) | - | - | (1,419 | ) | ||||||||||||||||
|
Balance, December 31, 2010
|
$ | 14,875 | $ | 185,412 | $ | 2,781 | $ | (24,945 | ) | $ | (11,854 | ) | $ | 166,269 | ||||||||||
|
See Notes to Consolidated Financial Statements.
|
||||||||||||||||||||||||
|
HILLS BANCORPORATION
|
||||||||||||
|
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash Flows from Operating Activities
|
||||||||||||
|
Net income
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
|
Adjustments to reconcile net income to net cash and cash equivalents
provided by operating activities:
|
||||||||||||
|
Depreciation
|
2,568 | 2,414 | 2,237 | |||||||||
|
Provision for loan losses
|
8,925 | 11,947 | 11,507 | |||||||||
|
Net gain on sale of invesment securities
|
(71 | ) | - | - | ||||||||
|
Share-based compensation
|
15 | 62 | 21 | |||||||||
|
Compensation expensed through issuance of common stock
|
46 | 111 | 234 | |||||||||
|
Excess tax benefits related to share-based compensation
|
(113 | ) | (44 | ) | (127 | ) | ||||||
|
Forfeiture of common stock
|
(32 | ) | (41 | ) | (51 | ) | ||||||
|
Provision for deferred income taxes
|
(99 | ) | (273 | ) | (3,088 | ) | ||||||
|
Flood-related loss on disposal of property and equipment
|
- | - | 345 | |||||||||
|
Net loss on sale of other real estate owned and other repossessed assets
|
6 | 1,054 | 96 | |||||||||
|
Decrease in accrued interest receivable
|
991 | 760 | 954 | |||||||||
|
Amortization of discount on investment securities, net
|
906 | 768 | 424 | |||||||||
|
Decrease (increase) in prepaid FDIC insurance
|
1,909 | (6,947 | ) | - | ||||||||
|
Decrease (increase) in other assets
|
363 | (1,388 | ) | (3,724 | ) | |||||||
|
Increase in accrued interest and other liabilities
|
2,410 | 197 | 2,940 | |||||||||
|
Loans originated for sale
|
(264,188 | ) | (291,169 | ) | (131,577 | ) | ||||||
|
Proceeds on sales of loans
|
265,376 | 295,557 | 131,153 | |||||||||
|
Net gain on sales of loans
|
(3,602 | ) | (3,874 | ) | (1,274 | ) | ||||||
|
Net cash and cash equivalents provided by operating activities
|
38,726 | 25,119 | 24,210 | |||||||||
|
Cash Flows from Investing Activities
|
||||||||||||
|
Proceeds from maturities of investment securities available for sale
|
43,658 | 48,428 | 47,473 | |||||||||
|
Proceeds from sales of investment securities available for sale
|
4,892 | - | - | |||||||||
|
Purchases of investment securities available for sale
|
(54,188 | ) | (47,844 | ) | (43,826 | ) | ||||||
|
Loans made to customers, net of collections
|
(69,049 | ) | (51,771 | ) | (129,869 | ) | ||||||
|
Proceeds on sale of other real estate owned and other repossessed assets
|
3,663 | 6,557 | 1,025 | |||||||||
|
Purchases of property and equipment
|
(2,957 | ) | (5,225 | ) | (4,968 | ) | ||||||
|
Investment in tax credit real estate, net
|
(2,183 | ) | (6,712 | ) | (3,262 | ) | ||||||
|
Net cash used in investing activities
|
(76,164 | ) | (56,567 | ) | (133,427 | ) | ||||||
|
(Continued)
|
||||||||||||
|
HILLS BANCORPORATION
|
||||||||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash Flows from Financing Activities
|
||||||||||||
|
Net increase in deposits
|
133,314 | 109,541 | 93,960 | |||||||||
|
Net (decrease) increase in short-term borrowings
|
(21,606 | ) | (31,403 | ) | 12,861 | |||||||
|
Borrowings from FHLB
|
10,000 | - | 20,000 | |||||||||
|
Payments on FHLB borrowings
|
(40,000 | ) | (40,000 | ) | (20,348 | ) | ||||||
|
Borrowings from FRB
|
100 | - | 1,650 | |||||||||
|
Payments on FRB borrowings
|
(100 | ) | - | (1,650 | ) | |||||||
|
Stock options exercised
|
151 | 959 | 293 | |||||||||
|
Excess tax benefits related to share-based compensation
|
113 | 44 | 127 | |||||||||
|
Purchase of treasury stock
|
(1,627 | ) | (2,132 | ) | (3,398 | ) | ||||||
|
Dividends paid
|
(4,024 | ) | (4,041 | ) | (4,086 | ) | ||||||
|
Net cash provided by financing activities
|
76,321 | 32,968 | 99,409 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
$ | 38,883 | $ | 1,520 | $ | (9,808 | ) | |||||
|
Cash and cash equivalents:
|
||||||||||||
|
Beginning of year
|
24,095 | 22,575 | 32,383 | |||||||||
|
End of year
|
$ | 62,978 | $ | 24,095 | $ | 22,575 | ||||||
|
Supplemental Disclosures
|
||||||||||||
|
Cash payments for:
|
||||||||||||
|
Interest paid to depositors
|
$ | 19,545 | $ | 25,842 | $ | 29,178 | ||||||
|
Interest paid on other obligations
|
8,567 | 11,872 | 14,616 | |||||||||
|
Income taxes paid
|
8,007 | 7,854 | 7,592 | |||||||||
|
Noncash financing activities:
|
||||||||||||
|
Increase (decrease) in maximum cash obligationrelated to ESOP shares
|
$ | 2,045 | $ | (915 | ) | $ | 1,610 | |||||
|
Transfers to other real estate owned
|
2,675 | 5,074 | 5,756 | |||||||||
|
See Notes to Consolidated Financial Statements.
|
||||||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of activities
: Hills Bancorporation (the "Company") is a holding company engaged in the business of commercial banking. The Company's subsidiary is Hills Bank and Trust Company, Hills, Iowa (the “Bank”), which is wholly-owned. 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, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids and Marion, Iowa.
The Bank competes with other financial institutions and non-financial institutions providing similar 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. All of the Company’s operations are considered to be one reportable operating segment.
Accounting estimates
: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain significant estimates
: The allowance for loan losses, fair values of securities and other financial instruments, and share-based compensation expense involves certain significant estimates made by management. These estimates are reviewed by management routinely and it is reasonably possible that circumstances that exist at December 31, 2010 may change in the near-term future and that the effect could be material to the consolidated financial statements.
Subsequent Events
: The Company evaluates events that occur after the balance sheet date for disclosure but before financial statements are issued or are available to be issued.
Principles of consolidation
: The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue recognition
: Interest income on loans and investment securities is recognized on the accrual method. Loan origination fees are recognized when the loans are sold. Trust fees, deposit account service charges and other fees are recognized when the services are provided or when customers use the services.
Investment securities
: Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading or held to maturity securities as of December 31, 2010 and 2009.
Stock of the Federal Home Loan Bank is carried at cost. The Company has evaluated the stock and determined there is no impairment.
Premiums on debt securities are amortized over the earliest of the call date or the maturity date and discounts on debt securities are accreted over the period to maturity of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Realized gains and losses on investment securities are included in income, determined on the basis of the cost of the specific securities sold.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Investment securities (continued)
: Declines in the fair value of investment securities available for sale (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, the Company considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the Company has the intent to sell a security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell the security or it is not more likely than not that the Company will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. Realized securities gains or losses on securities sales (using specific identification method) and declines in value judged to be other-than-temporary are included in investment securities gains (losses), net, in the consolidated statements of income.
Loans
: Loans are stated at the amount of unpaid principal, reduced by the allowance for loan losses. Interest income is accrued on the unpaid balances as earned.
Loans held for sale are stated at the lower of aggregate cost or estimated fair value. Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan.
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 collectability of principal is unlikely. The allowance for loan losses is maintained at a level considered adequate to provide for probable losses that can be reasonably 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. Management classifies loans within the following industry standard categories: watch, substandard and loss.
The policy for charging off loans is consistent throughout all loan categories. A loan is charged off based on criteria that includes but is not limited to: delinquency status, financial condition of the entire customer credit line and underlying collateral coverage, economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company.
Loans are considered impaired when, based on current information and events, it is probable the Bank will not be able to collect all amounts due. An impaired loan includes any loan that has been placed on nonaccrual status, loans greater than 90 days past due and still accruing and restructured loans. They also include loans, based on current information and events, that it is likely the Bank will be unable to collect all amounts due according to the contractual terms of the original loan agreement. 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 provision expense in the same manner in which impairment initially was recognized or as a reduction in the amount of provision expense that otherwise would be reported. Interest income on nonaccrual loans is recognized once principal has been recovered.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Loans (continued)
: The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due. Loans are returned to an accrual status when all of the principal and interest amounts contractually due are brought current and repayment of the remaining contractual principal and interest is expected. A loan may also return to accrual status if additional collateral is received from the borrower and, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the collection of the amount contractually due. Payment received on nonaccrual loans are applied first to principal. Once principal is recovered, any remaining payments received are applied to interest income.
Nonrefundable loan fees and origination costs are deferred and recognized as a yield adjustment over the life of the related loan.
Transfers of financial assets
: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Credit related financial instruments
: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Tax credit real estate
: Tax credit real estate represents two multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi family senior living rental property all which are affordable housing projects as of December 31, 2010. The Bank has a 99% limited partnership interest in each limited partnership. The investment in each was completed after the projects had been developed by the general partner. The properties are recorded at cost less accumulated depreciation. The Company evaluates the recoverability of the carrying value on a regular basis. If the recoverability was determined to be in doubt, a valuation allowance would be established by way of a charge to expense. Depreciation expense is provided on a straight-line basis over the estimated useful life of the assets. Expenditures for normal repairs and maintenance are charged to expense as incurred.
The financial condition, results of operations and cash flows of each limited partnership is consolidated in the Company’s consolidated financial statements. The operations of the properties are not expected to contribute significantly to the Company’s income before income taxes. However, the properties do contribute in the form of income tax credits, which lowers the Company’s effective tax rate. Once established, the credits on each property last for ten years and are passed through from the limited partnerships to the Bank and reduces the consolidated federal tax liability of the Company.
Property and equipment
: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using primarily declining-balance methods over the estimated useful lives of 7-40 years for buildings and improvements and 3-10 years for furniture and equipment.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Deferred income taxes
: Deferred income taxes are provided under the asset and 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. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties on unrecognized tax benefits are classified as other noninterest expense. As of December 31, 2010, the Company had no material unrecognized tax benefits.
Goodwill:
Goodwill represents the excess of cost over the fair value of the net assets acquired, and is not subject to amortization, but requires, at a minimum, annual impairment tests for intangibles that are determined to have an indefinite life.
Prepaid FDIC insurance:
Prepaid FDIC insurance as of December 31, 2010 represents the FDIC premiums paid by the Bank for the years of 2011 and 2012. The expense for the FDIC insurance will be recorded on a quarterly basis as premiums are assessed.
Other real estate:
Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The Bank will obtain updated appraisals to determine the estimated fair value of the property based on the type of collateral securing the loan and the date of the latest appraisal. Subsequent write downs estimated on the basis of later valuations are charged to net loss on sale of other real estate owned and other repossessed assets. Net expenses incurred in maintaining such properties are charged to other non-interest expense.
Earning per share:
Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding. The following table presents calculations of earnings per share:
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Computation of weighted average number of basic and diluted shares:
|
||||||||||||
|
Common shares outstanding at the beginning of the year
|
4,422,274 | 4,440,545 | 4,490,107 | |||||||||
|
Weighted average number of net shares issued (redeemed)
|
(14,984 | ) | (17,843 | ) | (22,122 | ) | ||||||
|
Weighted average shares outstanding (basic)
|
4,407,290 | 4,422,702 | 4,467,985 | |||||||||
| Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury | ||||||||||||
|
stock method
|
10,968 | 12,812 | 15,202 | |||||||||
|
Weighted average number of shares (diluted)
|
4,418,258 | 4,435,514 | 4,483,187 | |||||||||
|
Net income (In Thousands)
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$ | 5.29 | $ | 3.61 | $ | 3.16 | ||||||
|
Diluted
|
$ | 5.28 | $ | 3.60 | $ | 3.15 | ||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Stock awards and options
: Compensation expense for stock issued through the stock award plan is accounted for using the fair value method prescribed by FASB ASC 718, “Share-Based Payment” (“ASC 718”). Under this method, compensation expense is measured and recognized for all stock-based awards made to employees and directors based on the fair value of each option as of the date of the grant.
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.
Fair value of financial instruments
: The Company adopted FASB ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), in its entirety on January 1, 2008. ASC 820 provides a single definition for fair value, a framework for measuring fair value and expanded disclosures concerning fair value. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company determines the fair market value of its financial instruments based on the fair value hierarchy established in ASC 820. There are three levels of inputs that may be used to measure fair value as follows:
|
|
Level 1
|
Valuations for assets and liabilities traded in active markets for identical assets or liabilities. Level 1 includes securities purchased from the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
|
|
|
Level 2
|
Valuations for assets and liabilities traded in less active dealer or broker markets. Level 2 includes securities issued by state and political subdivisions. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
|
|
|
Level 3
|
Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Company does not have any Level 3 assets or liabilities.
|
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Recent market conditions have led to diminished, and in some cases, non-existent trading in certain of the financial asset classes. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. Despite the Company’s best efforts to maximize the use of relevant observable inputs, the current market environment has diminished the observability of trades and assumptions that have historically been available.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for assets or liabilities not recorded at fair value.
ASSETS
Cash and cash equivalents
: The carrying amounts reported in the consolidated balance sheets for cash and short-term instruments approximate their fair values.
Investment securities available for sale
: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities. Level 1 securities include securities from the FHLB, FHLMC and FNMA. Level 2 securities include securities issued by state or political subdivisions.
Loans held for sale
: Loans held for sale are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the short time between origination of the loan and its sale on the secondary market.
Loans
: The Company does not record loans at fair value on a recurring basis. 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 utilizing an entrance price concept. The Company does record nonrecurring fair value adjustments to loans to reflect (1) partial write-downs that are based on the observable market price or appraised value of the collateral or (2) the full charge-off of the loan carrying value.
Foreclosed assets
: Foreclosed assets consist mainly of other real estate owned but may include other types of assets repossessed by the Company. Foreclosed assets are adjusted to the lower of carrying value or fair value less the cost of disposal upon transfer of the loans to foreclosed assets. Fair value is generally based upon independent market prices or appraised values of the collateral. The value of foreclosed assets is evaluated periodically. Foreclosed assets are classified as Level 2.
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 significant. Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding.
Accrued interest receivable
: The fair value of accrued interest receivable equals the amount receivable due to the current nature of the amounts receivable.
Non-marketable equity investments
: Non-marketable equity investments are recorded under the cost or equity method of accounting. There are generally restrictions on the sale and/or liquidation of these investments, including stock of the Federal Home Loan Bank. The carrying value of stock of the Federal Home Loan Bank approximates fair value.
LIABILITIES
Deposit liabilities
: Deposit liabilities are carried at historical cost. The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Short-term borrowings
: Short-term borrowings are carried at historical cost and include federal funds purchased and securities sold under agreements to repurchase. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the liability and its expected realization.
Long-term borrowings
: Long-term borrowings are recorded at historical cost. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest payable
: The fair value of accrued interest payable equals the amount payable due to the current nature of the amounts payable.
The Company considered all accounting guidance in its valuation methodologies. Assets and liabilities measured at fair value on a nonrecurring basis are not material to the Company’s consolidated financial statements.
The pricing for investment securities is obtained from an independent source. The Company’s investment securities are low risk and are measured at fair value as either level 1 or level 2 assets. There are no level 3 investment securities owned by the Company. Due to these factors, the Company reviews prices provided by the independent source on a monthly basis for unusual fluctuations. Due to the nature of our investment portfolio, we do not expect significant and unusual fluctuations as fair value changes primarily relate to interest rate changes. No unusual fluctuations were identified during the year ended December 31, 2010. If a fluctuation requiring investigation was identified, the Company would research the change with the independent source or other available information.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below represents the balances of assets and liabilities measured at fair value on a recurring basis:
|
December 31, 2010
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
(Amounts in Thousands)
|
||||||||||||||||
|
Investment securities available for sale
|
$ | 97,836 | $ | 107,662 | $ | - | $ | 205,498 | ||||||||
|
Total
|
$ | 97,836 | $ | 107,662 | $ | - | $ | 205,498 | ||||||||
|
December 31, 2009
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
|
(Amounts in Thousands)
|
||||||||||||||||
|
Investment securities available for sale
|
$ | 99,090 | $ | 102,555 | $ | - | $ | 201,645 | ||||||||
|
Total
|
$ | 99,090 | $ | 102,555 | $ | - | $ | 201,645 | ||||||||
All securities from the FHLB, FHLMC and FNMA are included in Level 1.
There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2010 and 2009, respectively.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Activities and Significant Accounting Policies (Continued)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. For assets measured at fair value on a nonrecurring basis in 2010 that were still held on the balance sheet at December 31, 2010, the following table provides the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets at year end.
|
Year Ended
|
||||||||||||||||||||
|
December 31, 2010
|
December 31, 2010
|
|||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Total Losses
|
||||||||||||||||
|
(Amounts in Thousands)
|
||||||||||||||||||||
|
Loans (1)
|
$ | - | $ | 13,639 | $ | - | $ | 13,639 | $ | 4,826 | ||||||||||
|
Foreclosed assets (2)
|
- | 762 | - | 762 | 505 | |||||||||||||||
|
Total
|
$ | - | $ | 14,401 | $ | - | $ | 14,401 | $ | 5,331 | ||||||||||
|
Year Ended
|
||||||||||||||||||||
|
December 31, 2009
|
December 31, 2009
|
|||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Total Losses
|
||||||||||||||||
|
(Amounts in Thousands)
|
||||||||||||||||||||
|
Loans (1)
|
$ | - | $ | 9,905 | $ | - | $ | 9,905 | $ | 3,040 | ||||||||||
|
Foreclosed assets (2)
|
- | 1,396 | - | 1,396 | 608 | |||||||||||||||
|
Total
|
$ | - | $ | 11,301 | $ | - | $ | 11,301 | $ | 3,648 | ||||||||||
|
(1)
|
Represents carrying value and related write-downs of loans for which adjustments are based on the value of the collateral. The carrying value of loans fully-charged off is zero.
|
|||||||||||||||||||
|
(2)
|
Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.
|
|||||||||||||||||||
As of December 31, 2010, the $13.6 million of loans recorded at fair value on a nonrecurring basis consisted of the following loan types: $5.9 million of 1 – 4 family residential loans, $3.9 million of commercial and industrial loans and $1.6 million of commercial mortgage loans. The remaining $2.2 million was spread over the following categories of loans: agricultural, real estate construction, mortgage – farmland, mortgage – multi-family, and loans to individuals. The total $13.6 million of loans represents the carrying value of loans partially charged off as it was determined that the fair value of the loan collateral was less than the carrying value. Of the total $13.6 million, $4.2 million was included in the nonaccrual loan total. The remaining $9.4 million is accruing interest based on the fact loan payments have been made as contractually agreed.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis (continued)
As of December 31, 2009, the $9.9 million of loans recorded at fair value on a nonrecurring basis consisted of the following loan types: $3.8 million of commercial mortgage loans, $3.2 million of 1 – 4 family residential loans and $1.3 million of commercial and industrial loans. The remaining $1.6 million was spread over the following categories of loans: agricultural, real estate construction, mortgage – farmland, mortgage – multi-family, and loans to individuals. The total $9.9 million of loans represents the carrying value of loans partially charged off as it was determined that the fair value of the loan collateral was less than the carrying value. Of the total $9.9 million, $1.7 million was included in the nonaccrual loan total. The remaining $8.2 million is accruing interest based on the fact loan payments have been made as contractually agreed.
Reclassifications
: Certain prior year amounts may be reclassified to conform to the current year presentation.
Investment Securities Available For Sale:
Investment securities have been classified in the consolidated balance sheets according to management’s intent. The Company had no securities designated as trading in its portfolio at December 31, 2010 or 2009. The carrying amount of available-for-sale securities and their approximate fair values were as follows December 31 (in thousands):
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
(Losses)
|
Value
|
|||||||||||||
|
December 31, 2010:
|
||||||||||||||||
|
Other securities (FHLB, FHLMC and FNMA)
|
$ | 95,583 | $ | 2,383 | $ | (130 | ) | $ | 97,836 | |||||||
|
State and political subdivisions
|
105,412 | 3,041 | (791 | ) | 107,662 | |||||||||||
|
Total
|
$ | 200,995 | $ | 5,424 | $ | (921 | ) | $ | 205,498 | |||||||
|
December 31, 2009:
|
||||||||||||||||
|
Other securities (FHLB, FHLMC and FNMA)
|
$ | 95,745 | $ | 3,355 | $ | (10 | ) | $ | 99,090 | |||||||
|
State and political subdivisions
|
99,099 | 3,562 | (106 | ) | 102,555 | |||||||||||
|
Total
|
$ | 194,844 | $ | 6,917 | $ | (116 | ) | $ | 201,645 | |||||||
The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at December 31, 2010, were as follows (in thousands):
|
Amortized
|
Fair
|
|||||||
|
Cost
|
Value
|
|||||||
|
Due in one year or less
|
$ | 38,353 | $ | 38,903 | ||||
|
Due after one year through five years
|
108,036 | 111,399 | ||||||
|
Due after five years through ten years
|
53,962 | 54,551 | ||||||
|
Due over ten years
|
644 | 645 | ||||||
|
Total
|
$ | 200,995 | $ | 205,498 | ||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010, investment securities with a carrying value of $46,928,000 were pledged to collateralize public deposits, short-term borrowings and for other purposes, as required or permitted by law.
Sales proceeds and gross realized gains and losses on available-for-sale securities were as follows:
|
2010
|
2009
|
2008
|
||||||||||
|
Sales proceeds
|
$ | 4,892 | $ | - | $ | - | ||||||
|
Gross realized gains
|
99 | - | - | |||||||||
|
Gross realized losses
|
(28 | ) | - | - | ||||||||
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010 and 2009 (in thousands):
|
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||
|
2010
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Description
of Securities
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
||||||||||||||||||||||||||||||||||||
|
Other securities
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
(FHLB, FHLMC and FNMA)
|
4 | $ | 11,137 | $ | (130 | ) | 1.17 | % | - | $ | - | $ | - | - | 4 | $ | 11,137 | $ | (130 | ) | 1.17 | % | ||||||||||||||||||||||||||
|
State and political subdivisions
|
103 | 23,374 | (787 | ) | 3.37 | % | 1 | 121 | (4 | ) | 3.31 | % | 104 | 23,495 | (791 | ) | 3.37 | % | ||||||||||||||||||||||||||||||
|
Total temporarily impaired
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
securities
|
107 | $ | 34,511 | $ | (917 | ) | 2.66 | % | 1 | $ | 121 | $ | (4 | ) | 3.31 | % | 108 | $ | 34,632 | $ | (921 | ) | 2.66 | % | ||||||||||||||||||||||||
|
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Description
of Securities
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
# |
Fair Value
|
Unrealized
Loss
|
%
|
||||||||||||||||||||||||||||||||||||
|
Other securities
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
(FHLB, FHLMC and FNMA)
|
1 | $ | 996 | $ | (10 | ) | 1.00 | % | - | $ | - | $ | - | - | 1 | $ | 996 | $ | (10 | ) | 1.00 | % | ||||||||||||||||||||||||||
|
State and political subdivisions
|
35 | 7,929 | (106 | ) | 1.34 | % | - | $ | - | $ | - | - | 35 | 7,929 | (106 | ) | 1.34 | % | ||||||||||||||||||||||||||||||
|
Total temporarily impaired
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
securities
|
36 | $ | 8,925 | $ | (116 | ) | 1.30 | % | - | $ | - | $ | - | - | 36 | $ | 8,925 | $ | (116 | ) | 1.30 | % | ||||||||||||||||||||||||||
The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments. The state and political subdivision securities with gross unrealized losses as of December 31, 2010 included one issue which was rated A3. Two municipal bonds are rated B1. Bonds with a B1 rating are less than investment grade. The aggregate fair value of these B1 rated bonds is $425,000 while their amortized cost is $505,000, representing an unrealized loss of $80,000. None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest. The unrealized losses are due to changes in interest rates. The Company has not recognized any unrealized loss in income because management has the intent and ability to hold the securities until a recovery of fair value or maturity.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of loans is as follows:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Agricultural
|
$ | 65,004 | $ | 64,598 | ||||
|
Commercial and financial
|
141,619 | 153,997 | ||||||
|
Real estate:
|
||||||||
|
Construction, 1 to 4 family residential
|
25,232 | 25,821 | ||||||
|
Construction, land development and commercial
|
86,552 | 95,955 | ||||||
|
Mortgage, farmland
|
90,448 | 87,300 | ||||||
|
Mortgage, 1 to 4 family first liens
|
519,533 | 470,328 | ||||||
|
Mortgage, 1 to 4 family junior liens
|
109,036 | 114,742 | ||||||
|
Mortgage, multi-family
|
202,630 | 190,180 | ||||||
|
Mortgage, commercial
|
302,020 | 295,070 | ||||||
|
Loans to individuals
|
23,627 | 25,405 | ||||||
|
Obligations of state and political subdivisions
|
24,959 | 9,745 | ||||||
| $ | 1,590,660 | $ | 1,533,141 | |||||
|
Less allowance for loan losses
|
29,230 | 29,160 | ||||||
| $ | 1,561,430 | $ | 1,503,981 | |||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
Changes in the allowance for loan losses and the allowance for loan loss balance applicable to impaired loans and the related loan balance of impaired loans for the year ended December 31, 2010 are as follows:
|
Agricultural
|
Commercial and Financial
|
Real Estate:
Construction and land development
|
Real estate:
Mortgage, farmland
|
Real estate:
Mortgage, 1 to 4 family
|
Real estate:
Mortgage, multi-family and commercial
|
Other
|
Total
|
|||||||||||||||||||||||||
|
2010
|
||||||||||||||||||||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$ | 2,967 | $ | 7,090 | $ | 4,811 | $ | 1,417 | $ | 7,484 | $ | 4,742 | $ | 649 | $ | 29,160 | ||||||||||||||||
|
Charge-offs
|
(18 | ) | (3,647 | ) | (1,202 | ) | (52 | ) | (4,343 | ) | (1,507 | ) | (423 | ) | (11,192 | ) | ||||||||||||||||
|
Recoveries
|
248 | 946 | 81 | 44 | 583 | 152 | 283 | 2,337 | ||||||||||||||||||||||||
|
Provision
|
(1,027 | ) | 2,353 | 704 | 73 | 4,228 | 2,270 | 324 | 8,925 | |||||||||||||||||||||||
|
Ending balance
|
$ | 2,170 | $ | 6,742 | $ | 4,394 | $ | 1,482 | $ | 7,952 | $ | 5,657 | $ | 833 | $ | 29,230 | ||||||||||||||||
|
Ending balance, individually evaluated for impairment
|
21 | 170 | 373 | 32 | 168 | 43 | 3 | 810 | ||||||||||||||||||||||||
|
Ending balance, collectively evaluated for impairment
|
2,149 | 6,572 | 4,021 | 1,450 | 7,784 | 5,614 | 830 | 28,420 | ||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||
|
Ending balance
|
65,004 | 141,619 | 111,784 | 90,448 | 628,569 | 504,650 | 48,586 | 1,590,660 | ||||||||||||||||||||||||
|
Ending balance, individually evaluated for impairment
|
104 | 3,692 | 4,079 | 147 | 7,088 | 16,423 | 15 | 31,548 | ||||||||||||||||||||||||
|
Ending balance, collectively evaluated for impairment
|
64,900 | 137,927 | 107,705 | 90,301 | 621,481 | 488,227 | 48,571 | 1,559,112 | ||||||||||||||||||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
Changes in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||
|
Balance, beginning
|
$ | 27,660 | $ | 19,710 | ||||
|
Charge-offs:
|
||||||||
|
Agricultural
|
82 | 99 | ||||||
|
Commercial and financial
|
5,161 | 1,359 | ||||||
|
Real estate:
|
||||||||
|
Construction and land development
|
436 | 62 | ||||||
|
Mortgage, farmland
|
22 | - | ||||||
|
Mortgage, 1 to 4 family
|
3,064 | 2,169 | ||||||
|
Mortgage, multi-family and commercial
|
2,172 | 196 | ||||||
|
Other
|
515 | 604 | ||||||
| 11,452 | 4,489 | |||||||
|
Recoveries:
|
||||||||
|
Agricultural
|
20 | 61 | ||||||
|
Commercial and financial
|
415 | 340 | ||||||
|
Real estate:
|
||||||||
|
Construction and land development
|
49 | - | ||||||
|
Mortgage, farmland
|
1 | 4 | ||||||
|
Mortgage, 1 to 4 family
|
236 | 104 | ||||||
|
Mortgage, multi-family and commercial
|
7 | 128 | ||||||
|
Other
|
277 | 295 | ||||||
| 1,005 | 932 | |||||||
|
Net charge-offs
|
10,447 | 3,557 | ||||||
|
Provision charged to expense
|
11,947 | 11,507 | ||||||
|
Balance, ending
|
$ | 29,160 | $ | 27,660 | ||||
The Company evaluates the following loans to determine impairment: 1) all nonaccrual and restructured loans, 2) all non consumer and non 1 – 4 family residential loans with prior charge-offs, and 3) all non consumer and non 1-4 family loan relationships classified as substandard.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
The following table presents the credit quality indicators by type of loans in each category as of December 31, 2010:
|
Agricultural
|
Commercial and Financial
|
Real Estate:
Construction, 1 to 4
family residential
|
Real estate: Construction, land development and commercial
|
|||||||||||||
|
2010
|
||||||||||||||||
|
Grade:
|
||||||||||||||||
|
Pass
|
$ | 53,240 | $ | 109,345 | $ | 20,448 | $ | 65,494 | ||||||||
|
Potential Watch
|
465 | 2,818 | - | 3,620 | ||||||||||||
|
Watch
|
5,325 | 16,411 | 3,967 | 6,621 | ||||||||||||
|
Substandard
|
5,974 | 13,045 | 817 | 10,817 | ||||||||||||
|
Total
|
$ | 65,004 | $ | 141,619 | $ | 25,232 | $ | 86,552 | ||||||||
|
Real estate:
Mortgage, farmland
|
Real estate:
Mortgage, 1 to 4
family first liens
|
Real estate:
Mortgage, 1 to 4
family junior liens
|
Real estate:
Mortgage, multi-family
|
|||||||||||||
|
2010
|
||||||||||||||||
|
Grade:
|
||||||||||||||||
|
Pass
|
$ | 80,860 | $ | 459,651 | $ | 97,831 | $ | 167,254 | ||||||||
|
Potential Watch
|
3,453 | 12,658 | 3,071 | 8,808 | ||||||||||||
|
Watch
|
2,317 | 21,330 | 4,244 | 14,614 | ||||||||||||
|
Substandard
|
3,818 | 25,894 | 3,890 | 11,954 | ||||||||||||
|
Total
|
$ | 90,448 | $ | 519,533 | $ | 109,036 | $ | 202,630 | ||||||||
|
Real estate:
Mortgage, commercial
|
Loans to individuals
|
Obligations of state
and political subdivisions
|
Total
|
|||||||||||||
|
2010
|
||||||||||||||||
|
Grade:
|
||||||||||||||||
|
Pass
|
$ | 248,805 | $ | 22,669 | $ | 24,887 | $ | 1,350,484 | ||||||||
|
Potential Watch
|
8,893 | 261 | - | 44,047 | ||||||||||||
|
Watch
|
36,002 | 404 | 72 | 111,307 | ||||||||||||
|
Substandard
|
8,320 | 293 | - | 84,822 | ||||||||||||
|
Total
|
$ | 302,020 | $ | 23,627 | $ | 24,959 | $ | 1,590,660 | ||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
The below are descriptions of the credit quality indicators:
Pass – Pass rated loans are supported by sound payment capacity, are adequately collateralized and have no apparent weaknesses that would affect the full repayment of the loan under the established terms and conditions.
Potential Watch – Potential watch rated loans are supported by adequate payment capacity, are adequately collateralized and are performing according to the established terms and conditions. However, the loan requires more than average monitoring due to a potential weakness. The potential watch indicator assists the Company in identifying and monitoring loans for which credit quality could deteriorate.
Watch – Watch rated loans are supported by a marginal payment capacity and are marginally collateralized. There are identified weaknesses that if not monitored and corrected may adversely affect the Company’s credit position. A watch credit would typically have a weakness in one of the general categories (cash flow, collateral position or payment history) but not in all categories.
Substandard – Substandard loans are not adequately supported by the paying capacity of the borrower and may be inadequately collateralized. These loans have a well defined weakness or weaknesses. For these loans, it is more probably than not that the Company could sustain some loss if the deficiency(ies) is not corrected.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
Information regarding impaired loans as of and for the year ended December 31, 2010 is as follows:
|
Recorded Investment
|
Unpaid Principal Balance
|
Related Allowance
|
Average Recorded Investment
|
Interest Income Recognized
|
||||||||||||||||
|
2010
|
||||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||
|
Agriculture
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Commercial and financial
|
2,301 | 3,234 | - | 2,717 | - | |||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
- | - | - | - | - | |||||||||||||||
|
Construction, land development and commercial
|
2,118 | 2,118 | - | 2,246 | 98 | |||||||||||||||
|
Mortgage, farmland
|
- | - | - | - | - | |||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
181 | 190 | - | 222 | 13 | |||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
- | 224 | - | - | - | |||||||||||||||
|
Mortgage, multi-family
|
1,837 | 1,883 | - | 1,860 | - | |||||||||||||||
|
Mortgage, commercial
|
485 | 2,419 | - | 525 | 31 | |||||||||||||||
|
Loans to individuals
|
- | - | - | - | - | |||||||||||||||
| $ | 6,922 | $ | 10,068 | $ | - | $ | 7,570 | $ | 142 | |||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||
|
Agriculture
|
$ | 104 | $ | 104 | $ | 21 | $ | 164 | $ | 8 | ||||||||||
|
Commercial and financial
|
1,391 | 1,573 | 172 | 1,261 | 58 | |||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
270 | 346 | 54 | 308 | 17 | |||||||||||||||
|
Construction, land development and commercial
|
1,691 | 2,174 | 319 | 1,920 | 10 | |||||||||||||||
|
Mortgage, farmland
|
147 | 161 | 32 | 156 | - | |||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
5,435 | 6,274 | 136 | 5,773 | 190 | |||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1,472 | 1,482 | 34 | 1,492 | 59 | |||||||||||||||
|
Mortgage, multi-family
|
2,938 | 2,938 | 2 | 2,961 | 155 | |||||||||||||||
|
Mortgage, commercial
|
11,163 | 11,243 | 39 | 11,273 | 657 | |||||||||||||||
|
Loans to individuals
|
15 | 47 | 1 | 33 | 2 | |||||||||||||||
| $ | 24,626 | $ | 26,342 | $ | 810 | $ | 25,341 | $ | 1,156 | |||||||||||
|
Total:
|
||||||||||||||||||||
|
Agriculture
|
$ | 104 | $ | 104 | $ | 21 | $ | 164 | $ | 8 | ||||||||||
|
Commercial and financial
|
3,692 | 4,807 | 172 | 3,978 | 58 | |||||||||||||||
|
Real estate:
|
||||||||||||||||||||
|
Construction, 1 to 4 family residential
|
270 | 346 | 54 | 308 | 17 | |||||||||||||||
|
Construction, land development and commercial
|
3,809 | 4,292 | 319 | 4,166 | 108 | |||||||||||||||
|
Mortgage, farmland
|
147 | 161 | 32 | 156 | - | |||||||||||||||
|
Mortgage, 1 to 4 family first liens
|
5,616 | 6,464 | 136 | 5,995 | 203 | |||||||||||||||
|
Mortgage, 1 to 4 family junior liens
|
1,472 | 1,706 | 34 | 1,492 | 59 | |||||||||||||||
|
Mortgage, multi-family
|
4,775 | 4,821 | 2 | 4,821 | 155 | |||||||||||||||
|
Mortgage, commercial
|
11,648 | 13,662 | 39 | 11,798 | 688 | |||||||||||||||
|
Loans to individuals
|
15 | 47 | 1 | 33 | 2 | |||||||||||||||
| $ | 31,548 | $ | 36,410 | $ | 810 | $ | 32,911 | $ | 1,298 | |||||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans (Continued)
Information about impaired loans as of and for the years ended December 31, 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Impaired loans receivable for which there is a related allowance for loan losses
|
$ | 5,720 | $ | 7,842 | ||||
|
Impaired loans receivable for which there is no related allowance for loan losses
|
21,784 | 3,012 | ||||||
|
Total (1)
|
$ | 27,504 | $ | 10,854 | ||||
|
Related allowance for credit losses on impaired loans
|
$ | 1,336 | $ | 3,551 | ||||
|
Average balance of impaired loans
|
19,783 | 11,515 | ||||||
|
Nonaccrual loans
|
5,360 | 2,535 | ||||||
|
Loans past due ninety days or more and still accruing
|
7,009 | 5,049 | ||||||
|
Restructured loans
|
15,135 | 4,478 | ||||||
|
Interest income recognized on impaired loans
|
3,979 | 2,582 | ||||||
|
Interest income forfeited on non-accrual loans
|
293 | 93 | ||||||
|
(1)
|
The Company has revised the total of impaired loans from previous filings. The revised total has decreased by $47,761,000 and $41,332,000 as of December 31, 2009 and 2008, respectively. The revision was made to align with the regulatory definition of impaired loans. In previous filings, the Company included all loans that were evaluated for potential impairment as part of our quarterly allowance for loan loss calculation in the non-performing loan total. The Company revised the presentation of impaired loans to include only nonaccrual loans, accruing loans greater than 90 days past due and restructured loans. The resulting change in the presentation of impaired loan total does not have any impact on the allowance for loan loss policy, allowance for loan loss calculation or the provision for loan loss for any periods presented. The loans that were removed from the presentation were evaluated for potential impairment. As these loans were not considered impaired, the appropriate allocation was calculated using historical loss rates, as adjusted for qualitative factors. The revised impaired loan presentation allows the Company to better compare itself to its appropriate peer group as the revised impaired loan presentation corresponds with the regulatory definition.
|
Impaired loans increased by $4.0 million from December 31, 2009 to December 31, 2010. Impaired loans include any loan that has been placed on nonaccrual status, loans past 90 days or more and still accruing interest and restructured loans. Impaired loans also include loans that, based on management’s evaluation of current information and events, the Bank expects to be unable to collect in full according to the contractual terms of the original loan agreement. The increase in non-performing loans is due mainly to the restructuring of one large commercial mortgage borrower with an aggregate loan balance of $8.8 million during the year ended December 31, 2010. This increase is offset by pay downs of $0.8 million from two unrelated first mortgage borrowers, pay downs of $0.5 million from two unrelated construction and land development borrowers and $0.8 million of recognized loss from two unrelated commercial borrowers, which the Bank had adequately reserved for in previous quarters. The losses were determined after further review of the real estate values and collateral position for the customer’s properties. The increase of impaired loans from 2009 to 2010 is further offset by a decrease in loans greater than 90 days past due and still accruing interest of $1.7 million. Most of the impaired loans are secured by real estate and are believed to be adequately collateralized.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible. In general, this is the amount that the carrying value of the loan exceeds the related appraised value. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the impairment is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variable affecting its value may have changed since the appraisal was performed, consistent with the December 2006 joint interagency guidance on the allowance for loan losses. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide additional charge off or loss allocations based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a loss allocation may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional loss allocation may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value.
For flood-related properties located in Linn County, Iowa, the Company has not used external appraisals to determine the fair market value of collateral. Due to the wide-spread flooding in June 2008, there was a lack of appropriate arms-length transactions to support useful appraisals especially for 1-to-4 family residences. Instead, the Company has utilized assessed values and independent realtor market evaluations on individual properties. The Company believes these tools have been an appropriate measure in estimating the fair market value of such properties in this situation.
Loans 90 days past due that are still accruing interest decreased $1.7 million from December 31, 2009 to December 31, 2010. The average balance of the past due loans also decreased in 2010 as compared to 2009. The average past due loan balance was $73,000 as of December 31, 2010 compared to $95,000 as of December 31, 2009. The loans 90 days past due and still accruing are believed to be adequately collateralized. Loans are placed on non-accrual status when management believes the collection of future principal and interest is not reasonably assured.
The Bank regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans are impaired in accordance with ASC 310. If the loans are impaired, the Bank determines if a specific allowance is appropriate. In addition, the Bank's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured. Loans that are determined not to be impaired and for which there are no specific allowances are classified into one or more risk categories. Based upon the risk category assigned, the Bank allocates a percentage, as determined by management, for a required allowance needed. The determination concerning the appropriate percentage begins with historical loss experience factors, which are then adjusted for levels and trends in past due loans, levels and trends in charged-off and recovered loans, trends in volume growth, trends in problem and watch loans, trends in restructured loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The major classes of property and equipment and the total accumulated depreciation are as follows:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Land
|
$ | 6,975 | $ | 5,598 | ||||
|
Buildings and improvements
|
23,829 | 23,650 | ||||||
|
Furniture and equipment
|
21,061 | 20,030 | ||||||
| 51,865 | 49,278 | |||||||
|
Less accumulated depreciation
|
25,059 | 22,861 | ||||||
|
Net
|
$ | 26,806 | $ | 26,417 | ||||
A summary of these deposits is as follows:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
NOW and other demand
|
$ | 253,253 | $ | 209,440 | ||||
|
Savings
|
382,311 | 334,802 | ||||||
|
Time, $100,000 and over
|
182,156 | 174,909 | ||||||
|
Other time
|
464,230 | 444,118 | ||||||
| $ | 1,281,950 | $ | 1,163,269 | |||||
Brokered deposits totaled $28.8 million and $13.0 million as of December 31, 2010 and 2009, respectively with an average interest rate of 0.81% and 2.04% as of December 31, 2010 and 2009, respectively. As of December 31, 2010, brokered deposits of $21.5 million are included in savings deposits and $7.3 million are included in time deposits. At December 31, 2009, brokered deposits of $2.0 million were included in savings deposits and $11.0 million were included in time deposits. Brokered time deposits in increments greater than $100,000 as of December 31, 2010 and 2009 were $4.7 million and $5.0 million, respectively.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Time deposits have a maturity as follows:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Due in one year or less
|
$ | 339,153 | $ | 336,874 | ||||
|
Due after one year through two years
|
161,723 | 162,990 | ||||||
|
Due after two years through three years
|
67,987 | 95,908 | ||||||
|
Due after three years through four years
|
31,474 | 12,650 | ||||||
|
Due over four years
|
46,049 | 10,605 | ||||||
| $ | 646,386 | $ | 619,027 | |||||
The following table sets forth selected information for short-term borrowings (borrowings with a maturity of less than one year):
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Federal funds purchased, secured by other securities (FHLB, FHLMC and FNMA)
|
$ | - | $ | 33,066 | ||||
|
Repurchase agreements with customers, renewable daily, interest payable monthly, secured by other securities (FHLB, FHLMC and FNMA)
|
44,968 | 33,505 | ||||||
| Repurchase agreements with customers, interest fixed, maturities of less than one year, secured by other securities (FHLB, FHLMC and FNMA) | 1,960 | 1,963 | ||||||
| $ | 46,928 | $ | 68,534 | |||||
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2010 and 2009 was 0.84% and 0.76%, respectively.
Customer repurchase agreements are used by the Bank to acquire funds from customers where the customer is required or desires to have their funds supported by collateral consisting of investment securities. The repurchase agreement is a commitment to sell these securities to a customer at a certain price and repurchase them at a future date at that same price plus interest accrued at an agreed upon rate. The Bank uses customer repurchase agreements in its liquidity plan as well as an accommodation to customers. At December 31, 2010, $46.9 million of securities sold under repurchase agreements with a weighted average interest rate of 0.84%, maturing in 2011, were collateralized by investment securities having an amortized cost of $46.9 million.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010 and 2009, the borrowings were as follows:
|
2010
|
2009
|
|||||||
|
(Effective interest rates as of December 31, 2010)
|
(Amounts In Thousands)
|
|||||||
|
Due 2010
|
$ | - | $ | 40,000 | ||||
|
Due 2011, 0.59%
|
10,000 | - | ||||||
|
Due 2015, 3.70% to 4.56%
|
60,000 | 60,000 | ||||||
|
Due 2016, 4.46% to 4.69%
|
45,000 | 45,000 | ||||||
|
Due 2017, 4.09% to 4.89%
|
60,000 | 60,000 | ||||||
|
Due 2018, 3.65%
|
20,000 | 20,000 | ||||||
| $ | 195,000 | $ | 225,000 | |||||
All of the borrowings except the $10 million due in 2011 are callable by the FHLB with call dates ranging from 2011 through 2013. $10,000,000 of the borrowings are due March 2011. The advances are unlikely to be called unless rates would increase significantly.
To participate in the FHLB advance program, the Company is required to have an investment in FHLB stock. The Company’s investment in FHLB stock was $11,105,000 and $12,453,000 at December 31, 2010 and 2009, respectively. Collateral is provided by the Company’s 1-4 family mortgage loans totaling $263,250,000 at December 31, 2010 and $303,750,000 at December 31, 2009. The Company also has the ability to borrow against commercial real estate and multi-family loans totaling $129,917,000 as of December 31, 2010 and $148,294,000 as of December 31, 2009 and there was $0 borrowed against this collateral as of December 31, 2010 or 2009.
The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes discretionary cash contributions. The Company's contribution to the ESOP totaled $1,559,000, $1,030,000 and $137,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in 2010 was due to a 10% discretionary contribution compared to a discretionary contribution of 6.5% in 2009 and 1% in 2008.
In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value. To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. Effective June 30, 2005, as a result of the Company’s program to repurchase up to a total of 750,000 shares of the Company’s common stock, the Company began obtaining a quarterly independent appraisal of the shares of stock. Previously, the Company was obtaining an independent appraisal of the shares of stock on an annual basis for the Company’s ESOP. As of December 31, 2010 and 2009, the shares held by the ESOP, fair value and maximum cash obligation were as follows:
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Employee Benefit Plans (Continued)
|
2010
|
2009
|
|||||||
|
Shares held by the ESOP
|
426,402 | 432,043 | ||||||
|
Fair value per share
|
$ | 58.50 | $ | 53.00 | ||||
|
Maximum cash obligation
|
$ | 24,945,000 | $ | 22,900,000 | ||||
The Company has a profit-sharing plan with a 401(k) feature, which provides for discretionary annual contributions in amounts to be determined by the Board of Directors. The profit-sharing contribution totaled $0, $0, and $1,124,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company made matching contributions under its 401(k) plan of $132,000 in 2010, $134,000 in 2009 and $118,000 in 2008 and each such amount is included in salaries and employee benefits.
The Company provides a deferred compensation program for executive officers. This program allows executive officers to elect to defer a portion of their salaried compensation for payment by the Company at a subsequent date. The executive officers can defer up to 30% of their base compensation and up to 100% of any bonus into the deferral plan. Any amount so deferred is credited to the executive officer’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The executive officer’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferrals and earnings grow tax deferred until withdrawn from the plan. Earnings credited to the individual’s accounts are recorded as compensation expense when earned. The deferred compensation liability is recorded in other liabilities and totals $3.4 million and $3.0 million at December 31, 2010 and 2009, respectively. Expense related to the deferred compensation plan was $363,000 for 2010 and $177,000 for 2008 and is included in salaries and employee benefits expense. The reduction of expense of $129,000 for 2009 was due to the decrease in value of the Company’s stock and is included in salaries and employee benefits expense. Expenses related to the deferred compensation plan increased from 2009 which is primarily the result of the change in the appraised value of the Company’s common stock during 2010.
The Company also provides a deferred compensation program for its Board of Directors. Under the plan, each director may elect to defer up to 50% of such director’s cash compensation from retainers and meeting fees for payment by the Company at a subsequent date. Any amount so deferred is credited to the director’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The director’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferred compensation liability for the directors’ plan is recorded in other liabilities and totals $1.5 million and $1.3 million at December 31, 2010 and 2009, respectively. Expense related to the directors’ deferred compensation plan was $160,000 for 2010 and $61,000 for 2008 and is included in other noninterest expenses. The reduction of expense of $26,000 for 2009 was due to the decrease in the value of the Company’s stock and is included in other noninterest expenses.
The Company has a Stock Option and Incentive Plan for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or restricted stock awards. Under the plan, the aggregate number of options and shares granted cannot exceed 198,000 shares. A Stock Option Committee may grant options at prices equal to the fair value of the stock at the date of the grant. Options expire 10 years from the date of the grant. Director options granted on or before December 31, 2006 may be exercised immediately. Director options granted on or after January 1, 2007, and officers' rights under the plan vest over a five-year period from the date of the grant.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Employee Benefit Plans (Continued)
A summary of the stock options is as follows:
|
Number of Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Balance, December 31, 2007
|
48,365 | $ | 31.02 | |||||||||||||
|
Granted
|
- | |||||||||||||||
|
Exercised
|
(10,705 | ) | ||||||||||||||
|
Balance, December 31, 2008
|
37,660 | 32.05 | 4.36 | $ | 1,207 | |||||||||||
|
Granted
|
20,000 | |||||||||||||||
|
Exercised
|
(20,300 | ) | ||||||||||||||
|
Forfeited
|
(4,000 | ) | ||||||||||||||
|
Balance, December 31, 2009
|
33,360 | 32.88 | 3.60 | 1,097 | ||||||||||||
|
Granted
|
- | |||||||||||||||
|
Exercised
|
(5,405 | ) | ||||||||||||||
|
Balance, December 31, 2010
|
27,955 | 33.83 | 2.84 | 946 | ||||||||||||
The weighted-average fair value of options granted in 2009 was $2.90 per share. There were no stock options granted in 2010 or 2008. The intrinsic value of options exercised in 2010 was $151,000. The intrinsic value of options exercised was $958,000 for 2009.
The fair value of each option is estimated as of the date of grant using a Black Scholes option pricing model. The expected lives of options granted incorporate historical employee exercise behavior. The risk-free rate for periods that coincide with the expected life of the options is based on the one month treasury interest rate swap rate as published by the Federal Reserve Bank for 2009. Expected volatility is based on volatility levels of the Company’s peer’s common stock as the Company’s stock has limited trading activity. Expected dividend yield was based on historical dividend rates. Significant assumptions include:
|
2010
|
2009
|
2008
|
||||||||||
|
Risk-free interest rate
|
n/a | 0.06 | % | n/a | ||||||||
|
Expected option life
|
n/a |
21 days
|
n/a | |||||||||
|
Expected volatility
|
n/a | 57.70 | % | n/a | ||||||||
|
Expected dividends
|
n/a | 1.65 | % | n/a | ||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other pertinent information related to the options outstanding at December 31, 2010 is as follows:
|
Exercise Price
|
Number Outstanding
|
Remaining Contractual Life
|
Number Exercisable
|
||||||||
| $ | 25.67 | 3,100 |
5 Months
|
3,100 | |||||||
| 29.33 | 13,615 |
24 Months
|
13,615 | ||||||||
| 33.67 | 3,000 |
36 Months
|
3,000 | ||||||||
| 34.50 | 2,940 |
40 Months
|
2,940 | ||||||||
| 36.25 | 720 |
45 Months
|
720 | ||||||||
| 52.00 | 4,580 |
77 Months
|
- | ||||||||
| 27,955 | 23,375 | ||||||||||
As of December 31, 2010, the outstanding options have a weighted-average exercise price of $33.83 per share and a weighted average remaining contractual term of 2.84 years. The intrinsic value of all options outstanding was $946,000 as of December 31, 2010.
As of December 31, 2010, there was $21,000 in unrecognized compensation cost for stock options granted under the plan. This cost is expected to be recognized over a weighted-average period of 1.33 years.
As of December 31, 2010, the vested options totaled 23,375 shares with a weighted-average exercise price of $30.27 per share and a weighted-average remaining contractual term of 2.15 years. The intrinsic value for the vested options was $707,000. There were no shares that vested in 2010. There were 20,000 shares with a fair value of $1,060,000 that vested in 2009. The fair value of the 3,000 options vested during 2008 was $101,000.
As of December 31, 2010, 93,900 shares were available for stock options and awards. The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock, and it authorized the issuance of 831 shares of common stock in 2010, 2,071 in 2009 and 4,388 in 2008 to certain employees. The vesting period for these awards is five years and the Bank amortizes the expense on a straight line basis during the vesting period. The expense relating to these awards for the years ended December 31, 2010, 2009 and 2008 was $170,000, $187,000 and $179,000, respectively.
Income taxes for the years ended December 31, 2010, 2009 and 2008 are summarized as follows:
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 7,694 | $ | 4,480 | $ | 7,242 | ||||||
|
State
|
1,663 | 1,011 | 1,402 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(86 | ) | (237 | ) | (2,684 | ) | ||||||
|
State
|
(13 | ) | (36 | ) | (404 | ) | ||||||
| $ | 9,258 | $ | 5,218 | $ | 5,556 | |||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes (Continued)
Temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2010 and 2009 were as follows:
|
December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Deferred income tax assets:
|
||||||||
|
Allowance for loan losses
|
$ | 11,180 | $ | 11,154 | ||||
|
Deferred compensation
|
2,029 | 1,940 | ||||||
|
Accrued expenses
|
723 | 687 | ||||||
|
State net operating loss
|
442 | 396 | ||||||
|
Gross deferred tax assets
|
14,374 | 14,177 | ||||||
|
Valuation allowance
|
(442 | ) | (396 | ) | ||||
|
Deferred tax asset, net of valuation allowance
|
13,932 | 13,781 | ||||||
|
Deferred income tax liabilities:
|
||||||||
|
Property and equipment
|
1,229 | 1,375 | ||||||
|
Unrealized gains on investment securities
|
1,722 | 2,601 | ||||||
|
Goodwill
|
575 | 511 | ||||||
|
Other
|
536 | 402 | ||||||
|
Gross deferred tax liabilities
|
4,062 | 4,889 | ||||||
|
Net deferred income tax assets
|
$ | 9,870 | $ | 8,892 | ||||
The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carry-forwards. The net operating loss carry-forwards are generated by the Company largely from its investment in tax credit real estate properties. The Company is required to file a separate Iowa tax return and cannot be consolidated with the Bank. The net operating loss carry-forwards will expire, if not utilized, between 2011 and 2026. The Company has recorded a valuation allowance to reduce the deferred tax asset attributable to the net operating loss carry-forwards. At December 31, 2010 and 2009, the Company believes it is more likely than not that the Iowa net operating loss carry-forwards will not be realized. The increase in net operating loss carry-forward in 2010 compared to 2009 reflects the additional Iowa income tax net operating loss generated during 2010 less any expiring carry-forward. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
The valuation allowance increased by $46,000 and $38,000 for the years ended December 31, 2010 and 2009, respectively.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net change in the deferred income taxes for the years ended December 31, 2010, 2009 and 2008 is reflected in the consolidated financial statements as follows:
|
Year Ended December 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
Consolidated statements of income
|
$ | 99 | $ | 273 | $ | 3,088 | ||||||
|
Consolidated statements of stockholders' equity
|
879 | (340 | ) | (1,860 | ) | |||||||
| $ | 978 | $ | (67 | ) | $ | 1,228 | ||||||
Income tax expense for the years ended December 31, 2010, 2009 and 2008 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:
|
2010
|
2009
|
2008
|
||||||||||||||||||||||
|
% Of
|
% Of
|
% Of
|
||||||||||||||||||||||
|
Pretax
|
Pretax
|
Pretax
|
||||||||||||||||||||||
|
Amount
|
Income
|
Amount
|
Income
|
Amount
|
Income
|
|||||||||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||||||||||
|
Expected tax expense
|
$ | 11,401 | 35.0 | % | $ | 7,421 | 35.0 | % | $ | 6,893 | 35.0 | % | ||||||||||||
|
Tax-exempt interest
|
(1,319 | ) | (4.1 | ) | (1,312 | ) | (6.2 | ) | (1,300 | ) | (6.6 | ) | ||||||||||||
|
Interest expense
|
||||||||||||||||||||||||
|
limitation
|
119 | 0.4 | 150 | 0.7 | 180 | 0.9 | ||||||||||||||||||
|
State income taxes,
|
||||||||||||||||||||||||
|
net of federal income tax benefit
|
1,073 | 3.3 | 634 | 3.0 | 649 | 3.3 | ||||||||||||||||||
|
Income tax credits
|
(1,909 | ) | (5.9 | ) | (1,637 | ) | (7.7 | ) | (711 | ) | (3.6 | ) | ||||||||||||
|
Other
|
(107 | ) | (0.3 | ) | (38 | ) | (0.2 | ) | (155 | ) | (0.8 | ) | ||||||||||||
| $ | 9,258 | 28.4 | % | $ | 5,218 | 24.6 | % | $ | 5,556 | 28.2 | % | |||||||||||||
Federal income tax expense for the years ended December 31, 2010, 2009 and 2008 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank. On January 1, 2007, the Company adopted ASC 740. The evaluation was performed for those tax years which remain open to audit. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes. The tax years ended December 31, 2010 and 2009, remain subject to examination by the Internal Revenue Service. For state tax purposes, the tax years ended December 31, 2010, 2009 and 2008, remain open for examination. As a result of the implementation of ASC 740, the Company did not recognize any increase or decrease for unrecognized tax benefits. There were no material unrecognized tax benefits at December 31, 2010 and December 31, 2009. No interest or penalties on these unrecognized tax benefits has been recorded. As of December 31, 2010, the Company does not anticipate any significant increase or decrease in unrecognized tax benefits during the twelve month period ending December 31, 2011.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial results. Under capital adequacy guidelines and the regulatory frameworks for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables that follow) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2010 and 2009, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2010, the most recent notifications from the Federal Reserve System categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table that follows. There are no conditions or events since that notification that management believes have changed the institution’s category.
The actual amounts and capital ratios as of December 31, 2010 and 2009, with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):
|
Actual
|
For Capital
Adequacy
Purposes
|
To Be Well
Capitalized Under
|
||||||||||||||
|
Amount
|
Ratio
|
Ratio
|
Ratio
|
|||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||
|
Company:
|
||||||||||||||||
|
Total risk-based capital
|
$ | 204,914 | 13.59 | % | 8.00 | % | 10.00 | % | ||||||||
|
Tier 1 risk-based capital
|
185,932 | 12.33 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
185,932 | 9.70 | 4.00 | 5.00 | ||||||||||||
|
Bank:
|
||||||||||||||||
|
Total risk-based capital
|
204,038 | 13.54 | 8.00 | 10.00 | ||||||||||||
|
Tier 1 risk-based capital
|
185,076 | 12.28 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
185,076 | 9.66 | 4.00 | 5.00 | ||||||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Actual
|
For Capital
Adequacy
Purposes
|
To Be Well
Capitalized
Under
Prompt Corrective
Action Provisions
|
||||||||||||||
|
Amount
|
Ratio
|
Ratio
|
Ratio
|
|||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||
|
Company:
|
||||||||||||||||
|
Total risk-based capital
|
$ | 186,095 | 12.94 | % | 8.00 | % | 10.00 | % | ||||||||
|
Tier 1 risk-based capital
|
167,976 | 11.68 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
167,976 | 9.20 | 4.00 | 5.00 | ||||||||||||
|
Bank:
|
||||||||||||||||
|
Total risk-based capital
|
184,992 | 12.87 | 8.00 | 10.00 | ||||||||||||
|
Tier 1 risk-based capital
|
166,890 | 11.61 | 4.00 | 6.00 | ||||||||||||
|
Leverage ratio
|
166,890 | 9.14 | 4.00 | 5.00 | ||||||||||||
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 of $49,864,000 as of December 31, 2010 are available for the payment of dividends to the Company.
The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $4,400,000 and $3,966,000 as of December 31, 2010 and 2009, respectively.
Certain directors of the Company and the Bank and companies with which the directors 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.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2010 and 2009:
|
Year Ended December 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Balance, beginning
|
$ | 30,852 | $ | 41,210 | ||||
|
Net decrease due to change in related parties
|
- | (5,174 | ) | |||||
|
Advances
|
61,245 | 64,637 | ||||||
|
Collections
|
(57,864 | ) | (69,821 | ) | ||||
|
Balance, ending
|
$ | 34,233 | $ | 30,852 | ||||
Deposits from these related parties totaled $7,385,000 and $6,740,000 as of December 31, 2010 and 2009, respectively. Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.
The carrying value and estimated fair values of the Company's financial instruments as of December 31, 2010 and 2009 are as follows:
|
2010
|
2009
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||||
|
(Amounts In Thousands)
|
||||||||||||||||
|
Cash and due from banks
|
$ | 62,978 | $ | 62,978 | $ | 24,095 | $ | 24,095 | ||||||||
|
Investment securities
|
216,603 | 216,603 | 214,098 | 214,098 | ||||||||||||
|
Loans
|
1,571,820 | 1,578,072 | 1,511,957 | 1,515,351 | ||||||||||||
|
Accrued interest receivable
|
8,686 | 8,686 | 9,677 | 9,677 | ||||||||||||
|
Deposits
|
1,480,741 | 1,483,116 | 1,347,427 | 1,350,881 | ||||||||||||
|
Federal funds purchased and securities
sold under agreements to repurchase
|
46,928 | 46,928 | 68,534 | 68,534 | ||||||||||||
|
Borrowings from Federal Home Loan
Bank
|
195,000 | 210,093 | 225,000 | 242,562 | ||||||||||||
|
Accrued interest payable
|
1,996 | 1,996 | 2,341 | 2,341 | ||||||||||||
|
Face Amount
|
Face Amount
|
|||||||||||||||
|
Off-balance sheet instruments:
|
||||||||||||||||
|
Loan commitments
|
$ | 281,864 | $ | - | $ | 289,927 | $ | - | ||||||||
|
Letters of credit
|
11,936 | - | 9,724 | - | ||||||||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is condensed financial information of the Company (parent company only):
|
CONDENSED BALANCE SHEETS
|
||||||||
|
December 31, 2010 and 2009
|
||||||||
|
(Amounts In Thousands)
|
||||||||
|
ASSETS
|
2010
|
2009
|
||||||
|
Cash at subsidiary bank
|
$ | 757 | $ | 1,013 | ||||
|
Investment in subsidiary bank
|
190,358 | 173,590 | ||||||
|
Other assets
|
1,611 | 1,366 | ||||||
|
Total assets
|
$ | 192,726 | $ | 175,969 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Liabilities
|
$ | 1,512 | $ | 1,294 | ||||
|
Redeemable common stock held by ESOP
|
24,945 | 22,900 | ||||||
|
Stockholders' equity:
|
||||||||
|
Capital stock
|
14,875 | 14,582 | ||||||
|
Retained earnings
|
185,412 | 166,120 | ||||||
|
Accumulated other comprehensive income
|
2,781 | 4,200 | ||||||
|
Treasury stock at cost
|
(11,854 | ) | (10,227 | ) | ||||
| 191,214 | 174,675 | |||||||
|
Less maximum cash obligation related to ESOP shares
|
24,945 | 22,900 | ||||||
|
Total stockholders' equity
|
166,269 | 151,775 | ||||||
|
Total liabilities and stockholders' equity
|
$ | 192,726 | $ | 175,969 | ||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Parent Company Only Financial Information (Continued)
|
CONDENSED STATEMENTS OF INCOME
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Dividends received from subsidiary
|
$ | 5,375 | $ | 6,042 | $ | 7,042 | ||||||
|
Other expenses
|
(377 | ) | (234 | ) | (255 | ) | ||||||
|
Income before income tax benefit and
equity in undistributed income of subsidiary
|
4,998 | 5,808 | 6,787 | |||||||||
|
Income tax benefit
|
132 | 82 | 89 | |||||||||
| 5,130 | 5,890 | 6,876 | ||||||||||
|
Equity in undistributed income of subsidiary
|
18,186 | 10,095 | 7,264 | |||||||||
|
Net income
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED STATEMENTS OF CASH FLOWS
|
||||||||||||
|
Years Ended December 31, 2010, 2009 and 2008
|
||||||||||||
|
(Amounts In Thousands)
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 23,316 | $ | 15,985 | $ | 14,140 | ||||||
|
Noncash items included in net income:
|
||||||||||||
|
Equity in undistributed income of subsidiary
|
(18,186 | ) | (10,095 | ) | (7,264 | ) | ||||||
|
Share-based compensation
|
15 | 62 | 21 | |||||||||
|
Compensation expensed through issuance of common stock
|
46 | 111 | 234 | |||||||||
|
Excess tax benefits related to share-based compensation
|
(113 | ) | (44 | ) | (127 | ) | ||||||
|
Forfeiture of common stock
|
(32 | ) | (41 | ) | (51 | ) | ||||||
|
Increase in other assets
|
(133 | ) | (72 | ) | (92 | ) | ||||||
|
Increase in liabilities
|
218 | 65 | 158 | |||||||||
|
Net cash provided by operating activities
|
5,131 | 5,971 | 7,019 | |||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Stock options exercised
|
151 | 959 | 293 | |||||||||
|
Excess tax benefits related to share-based
compensation
|
113 | 44 | 127 | |||||||||
|
Purchase of treasury stock
|
(1,627 | ) | (2,132 | ) | (3,398 | ) | ||||||
|
Dividends paid
|
(4,024 | ) | (4,041 | ) | (4,086 | ) | ||||||
|
Net cash used in financing activities
|
(5,387 | ) | (5,170 | ) | (7,064 | ) | ||||||
|
(Decrease) increase in cash
|
(256 | ) | 801 | (45 | ) | |||||||
|
Cash balance:
|
||||||||||||
|
Beginning of year
|
1,013 | 212 | 257 | |||||||||
|
Ending of year
|
$ | 757 | $ | 1,013 | $ | 212 | ||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of credit risk
: 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 $46,007,000. The concentrations of credit by type of loan are set forth in Note 3 to the Consolidated Financial Statements. 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, Linn and Washington Counties, Iowa.
Contingencies
: In the normal course of business, the Company and Bank are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the accompanying consolidated financial statements.
Financial instruments with off-balance sheet risk
: The Bank is a 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 consolidated 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, 2010 and 2009 is as follows:
|
2010
|
2009
|
|||||||
|
(Amounts In Thousands)
|
||||||||
|
Firm loan commitments and unused portion of lines of credit:
|
||||||||
|
Home equity loans
|
$ | 35,932 | $ | 37,705 | ||||
|
Credit cards
|
42,369 | 43,658 | ||||||
|
Commercial, real estate and home construction
|
65,035 | 78,783 | ||||||
|
Commercial lines and real estate purchase loans
|
138,528 | 129,781 | ||||||
|
Outstanding letters of credit
|
11,936 | 9,724 | ||||||
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2010 and 2009, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
Lease commitments:
The Company leases certain facilities under operating leases. The minimum future rental commitments as of December 31, 2010 for all non-cancelable leases relating to Bank premises were as follows:
|
Year ending December 31:
|
(Amounts In Thousands)
|
|||
|
2011
|
316
|
|||
|
2012
|
266
|
|||
|
2013
|
257
|
|||
|
2014
|
174
|
|||
|
2015
|
112
|
|||
|
Thereafter
|
335
|
|||
| $ |
1,460
|
|||
Rent expense was $283,000, $308,000 and $186,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Quarter Ended
|
||||||||||||||||||||
|
March
|
June
|
September
|
December
|
Year
|
||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Interest income
|
$ | 23,500 | $ | 23,897 | $ | 23,911 | $ | 23,679 | $ | 94,987 | ||||||||||
|
Interest expense
|
7,304 | 7,007 | 6,725 | 6,803 | 27,839 | |||||||||||||||
|
Net interest income
|
$ | 16,196 | $ | 16,890 | $ | 17,186 | $ | 16,876 | $ | 67,148 | ||||||||||
|
Provision for loan losses
|
2,065 | 853 | 2,870 | 3,137 | 8,925 | |||||||||||||||
|
Other income
|
4,968 | 4,588 | 5,085 | 5,458 | 20,099 | |||||||||||||||
|
Other expense
|
11,556 | 11,093 | 10,928 | 12,171 | 45,748 | |||||||||||||||
|
Income before income taxes
|
$ | 7,543 | $ | 9,532 | $ | 8,473 | $ | 7,026 | 32,574 | |||||||||||
|
Income taxes
|
2,158 | 2,811 | 2,440 | 1,849 | 9,258 | |||||||||||||||
|
Net income
|
$ | 5,385 | $ | 6,721 | $ | 6,033 | $ | 5,177 | $ | 23,316 | ||||||||||
|
Basic earnings per share
|
$ | 1.22 | $ | 1.52 | $ | 1.37 | $ | 1.18 | $ | 5.29 | ||||||||||
|
Diluted earnings per share
|
1.21 | 1.52 | 1.37 | 1.18 | 5.28 | |||||||||||||||
|
2009
|
||||||||||||||||||||
|
Interest income
|
$ | 23,868 | $ | 24,075 | $ | 24,040 | $ | 24,212 | $ | 96,195 | ||||||||||
|
Interest expense
|
9,958 | 9,746 | 9,069 | 8,368 | 37,141 | |||||||||||||||
|
Net interest income
|
$ | 13,910 | $ | 14,329 | $ | 14,971 | $ | 15,844 | $ | 59,054 | ||||||||||
|
Provision for loan losses
|
2,436 | 3,481 | 2,357 | 3,673 | 11,947 | |||||||||||||||
|
Other income
|
4,726 | 5,049 | 4,681 | 4,453 | 18,909 | |||||||||||||||
|
Other expense
|
10,844 | 11,859 | 11,126 | 10,984 | 44,813 | |||||||||||||||
|
Income before income taxes
|
$ | 5,356 | $ | 4,038 | $ | 6,169 | $ | 5,640 | 21,203 | |||||||||||
|
Income taxes
|
1,367 | 1,108 | 1,436 | 1,307 | 5,218 | |||||||||||||||
|
Net income
|
$ | 3,989 | $ | 2,930 | $ | 4,733 | $ | 4,333 | $ | 15,985 | ||||||||||
|
Basic earnings per share
|
$ | 0.90 | $ | 0.66 | $ | 1.07 | $ | 0.98 | $ | 3.61 | ||||||||||
|
Diluted earnings per share
|
0.90 | 0.66 | 1.06 | 0.98 | 3.60 | |||||||||||||||
None.
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting of the Company includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. Important features of the Company’s system of internal control over financial reporting include the adoption and implementation of written policies and procedures, careful selection and training of financial management personnel, a continuing management commitment to the integrity of the system and through examinations by an internal audit function that coordinates its activities with the Company’s Independent Registered Public Accounting Firm.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The Company’s management conducted an evaluation of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2010. Management’s assessment is based on the criteria described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2010.
There was no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s independent registered public accounting firm, that audited the consolidated financial statements included in this annual report, has issued a report on the Company’s internal control over financial reporting as of December 31, 2010. Reference is made to the Report of Independent Registered Public Accounting Firm included in this Annual Report.
Not applicable
The information required by Item 10 of Part III is presented under the items entitled “Certain Information Regarding Directors and Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Definitive Proxy Statement dated March 18, 2011 for the Annual Meeting of Stockholders on April 18, 2011. Such information is incorporated herein by reference.
The Company has a Code of Ethics in place for the Chief Executive Officer and Chief Financial Officer. A copy of the Company’s Code of Ethics will be provided free of charge, upon written request to:
James G. Pratt
Treasurer
Hills Bancorporation
131 Main Street
Hills, Iowa 52235
The information required by Item 11 of Part III is presented under the item entitled “Executive Compensation and Benefits” in the Company’s Definitive Proxy Statement dated March 18, 2011 for the Annual Meeting of Stockholders on April 18, 2011. Such information is incorporated herein by reference.
The information required by Item 12 of Part III is presented under the item entitled “Security Ownership of Principal Stockholders and Management” and “Report on Executive Compensation,” in the Company’s Definitive Proxy Statement dated March 18, 2011 for the Annual Meeting of Stockholders on April 18, 2011. Such information is incorporated herein by reference.
The information required by Item 13 of Part III is presented under the item entitled “Loans to and Certain Other Transactions with Executive Officers and Directors” in the Company’s Definitive Proxy Statement dated March 18, 2011 for the Annual Meeting of Stockholders on April 18, 2011. Such information is incorporated herein by reference.
Information required by this item is contained in the Company’s Definitive Proxy Statement dated March 18, 2011 for the Annual Meeting of Shareholders on April 18, 2011, under the heading “Independent Registered Public Accounting Firm – Audit and Other Fees,” which section is incorporated herein by this reference.
|
(a)
|
1.
|
Financial Statements
|
Form 10-K
Reference
|
|
Independent registered public accounting firm's report on the financial statements
|
69
|
||
|
Consolidated balance sheets as of December 31, 2010 and 2009
|
70
|
||
|
Consolidated statements of income for the years ended December 31, 2010, 2009, and 2008
|
71
|
||
|
Consolidated statements of comprehensive income for the years ended
|
|||
|
December 31, 2010, 2009 and 2008
|
72
|
||
|
Consolidated statements of stockholders' equity for the years ended
|
|||
|
December 31, 2010, 2009 and 2008
|
73
|
||
|
Consolidated statements of cash flows for the years ended December 31, 2010,
|
|||
|
2009 and 2008
|
74
|
||
|
Notes to consolidated financial statements
|
76
|
||
|
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
|
|
|
3.1
|
Articles of Incorporation filed as Exhibit 3 of Form 10-K for the year ended December 31, 1993
|
||
|
are incorporated by reference.
|
|||
|
3.2
|
By-Laws filed as Exhibit 3 of Form 10-K for the year ended December 31, 1993 are incorporated
|
||
|
by reference.
|
|||
|
10.1
|
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.
|
|||
|
10.2
|
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.
|
|||
|
10.3
|
Material Contract (1995 Deferred Compensation Plans) filed as Exhibit 10(c) in Form 10-K for the
|
||
|
year ended December 31, 1995 is incorporated by reference.
|
|||
|
10.4
|
Material Contract (2000 Stock Option and Incentive Plan) filed as Exhibit A to the Hills
|
||
|
Bancorporation Proxy Statement dated March 23, 2001 is incorporated by reference.
|
|||
|
11
|
Statement Regarding Computation of Basic and Diluted Earnings Per Share on Page 116.
|
||
|
21
|
Subsidiary of the Registrant is Attached on Page 117.
|
||
|
23
|
Consent of Independent Registered Public Accounting Firm is Attached on Page 118.
|
||
|
KPMG LLP
|
|||
|
31
|
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 on Pages 119 - 120.
|
||
|
32
|
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 on Page 121.
|
||
|
(b)
|
Reports on Form 8-K:
|
||
|
The Registrant filed no reports on Form 8-K for the three months ended December 31, 2010.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
HILLS BANCORPORATION
|
||||
|
Date: March 10, 2011
|
By: /s/Dwight O. Seegmiller
|
|||
|
Dwight O. Seegmiller, Director, President and Chief Executive Officer
|
||||
|
Date: March 10, 2011
|
By: /s/James G. Pratt
|
|||
|
James G. Pratt, Secretary, 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.
|
||||
|
DIRECTORS OF THE REGISTRANT
|
||||
|
Date: March 10, 2011
|
By: /s/Willis M. Bywater
|
|||
|
Willis M. Bywater, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Michael S. Donovan
|
|||
|
Michael S. Donovan, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Thomas J. Gill
|
|||
|
Thomas J. Gill, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Michael E. Hodge
|
|||
|
Michael E. Hodge, Director
|
||||
|
Date: March 10, 2011
|
By: /s/James A. Nowak
|
|||
|
James A. Nowak, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Theodore H. Pacha
|
|||
|
Theodore H. Pacha, Director
|
||||
|
Date: March 10, 2011
|
By: /s/John W. Phelan
|
|||
|
John W. Phelan, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Ann M. Rhodes
|
|||
|
Ann M. Rhodes, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Ronald E. Stutsman
|
|||
|
Ronald E. Stutsman, Director
|
||||
|
Date: March 10, 2011
|
By: /s/Sheldon E. Yoder
|
|||
|
Sheldon E. Yoder, Director
|
||||
HILLS BANCORPORATION
ANNUAL REPORT OF FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2010
|
Page Number
|
||
|
In The Sequential
|
||
|
Exhibit
|
Numbering System
|
|
|
Number
|
Description
|
For 2010 Form 10-K
|
|
Statement Re Computation of Basic and Diluted Earnings Per Share
|
116
|
|
|
Subsidiary of the Registrant
|
117
|
|
|
Consent of Independent Registered Public Accounting Firm, KPMG LLP
|
118
|
|
|
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
|
119 - 120
|
|
|
Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
|
121
|
115
TABLE OF CONTENTS
Part IItem 1. B UsinessItem 1. Business (continued)Item 1A. Risk FactorsItem 1A. Risk Factors (continued)Item 1B. Unresolved Staff CommentsItem 2. PropertiesItem 2. Properties (continued)Item 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For The Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For The Registrant's Common Equity, Related Stockholder Matters and Issuer PurchasesItem 5. Market For The Registrant's Common Equity, Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition A Nd Results Of OperationItem 7. Management's Discussion and Analysis Of Financial Condition AItem 7. Management's Discussion and Analysis Of Financial Condition A Nd Results Of Operation (continued)Item 7. Management's Discussion and Analysis Of Financial Condition and Results Of Operation (continued)Item 7. Management's Discussion and Analysis Of Financial ConditionItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of Operations (continued)Item 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Consolidated Financial Statements and Supplementary DataNote 1. Nature Of Activities and Significant Accounting PoliciesNote 1. Nature Of Activities and Significant Accounting Policies (continued)Note 2. Investment SecuritiesNote 2. Investment Securities (continued)Note 3. LoansNote 3. Loans (continued)Note 4. Property and EquipmentNote 5. Interest-bearing DepositsNote 5. Interest-bearing Deposits (continued)Note 6. Short-term BorrowingsNote 7. Federal Home Loan Bank BorrowingsNote 8. Employee Benefit PlansNote 8. Employee Benefit Plans (continued)Note 9. Income TaxesNote 9. Income Taxes (continued)Note 10. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash RestrictionsNote 10. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash Restrictions (continued)Note 11. Related Party TransactionsNote 11. Related Party Transactions (continued)Note 12. Fair Value Of Financial InstrumentsNote 13. Parent Company Only Financial InformationNote 13. Parent Company Only Financial Information (continued)Note 14. Commitments and ContingenciesNote 14. Commitments and Contingencies (continued)Note 15. Quarterly Results Of Operations (unaudited, Amounts in Thousands, Except Per Share Amounts)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits , Consolidated Financial Statement Schedules