Company Quick10K Filing
Quick10K
Hills Bancorporation
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-04-19 Shareholder Vote
8-K 2018-04-16 Earnings, Regulation FD, Exhibits
8-K 2018-01-12 Other Events
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HBIA 2018-09-30
Part I
Note 1. Summary of Significant Accounting Policies
Note 2. Earnings per Share
Note 3. Other Comprehensive Income (Loss)
Note 4. Securities
Note 5. Loans
Note 6. Fair Value Measurements
Note 7. Stock Repurchase Program
Note 8. Commitments and Contingencies
Note 9. Income Taxes
Note 10. Derivative Financial Instruments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31 exhibit3193018.htm
EX-32 exhibit3293018.htm

Hills Bancorporation Earnings 2018-09-30

HBIA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hbia201893010q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

Commission file number:  0-12668
Hills Bancorporation

Incorporated in Iowa
I.R.S. Employer Identification
 
No. 42-1208067

131 MAIN STREET, HILLS, IOWA 52235

Telephone number: (319) 679-2291

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes  o No

Indicate by checkmark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

þ Yes  o No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes  þ No




APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
 
SHARES OUTSTANDING
CLASS
October 31, 2018
 
 
Common Stock, no par value
9,341,956
 
 
 
 



HILLS BANCORPORATION
Index to Form 10-Q

Part I
FINANCIAL INFORMATION
 
 
 
Page
 
 
Number
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Part II
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 

Page 3




HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts) 
 
September 30, 2018
 
December 31, 2017
ASSETS
(Unaudited)
 
Cash and cash equivalents
$
192,723

 
$
154,353

Investment securities available for sale at fair value (amortized cost September 30, 2018 $297,292 December 31, 2017 $286,296)
292,302

 
285,155

Stock of Federal Home Loan Bank
12,172

 
15,005

Loans held for sale
3,403

 
5,162

Loans, net of allowance for loan losses (September 30, 2018 $31,010; December 31, 2017 $29,400)
2,525,720

 
2,431,165

Property and equipment, net
37,482

 
37,857

Tax credit real estate investment
9,164

 
10,076

Accrued interest receivable
12,710

 
10,772

Deferred income taxes, net
9,675

 
8,806

Goodwill
2,500

 
2,500

Other assets
4,632

 
2,509

Total Assets
$
3,102,483

 
$
2,963,360

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
 
 
Liabilities
 

 
 

Noninterest-bearing deposits
$
374,927

 
$
363,817

Interest-bearing deposits
2,113,825

 
1,924,748

Total deposits
$
2,488,752

 
$
2,288,565

Federal Home Loan Bank borrowings
215,000

 
295,000

Accrued interest payable
1,708

 
1,290

Other liabilities
19,446

 
23,481

Total Liabilities
$
2,724,906

 
$
2,608,336

 
 
 
 
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
$
47,593

 
$
43,308

 
 
 
 
STOCKHOLDERS' EQUITY
 

 
 

Common stock, no par value; authorized 20,000,000 shares; issued September 30, 2018 10,323,468 shares; December 31, 2017 10,320,315 shares
$

 
$

Paid in capital
52,223

 
48,930

Retained earnings
366,053

 
341,558

Accumulated other comprehensive loss
(4,444
)
 
(2,446
)
Treasury stock at cost (September 30, 2018 988,145 shares; December 31, 2017 985,161 shares)
(36,255
)
 
(33,018
)
Total Stockholders' Equity
$
377,577

 
$
355,024

Less maximum cash obligation related to ESOP shares
47,593

 
43,308

Total Stockholders' Equity Less Maximum Cash Obligation Related to ESOP Shares
$
329,984

 
$
311,716

Total Liabilities & Stockholders' Equity
$
3,102,483

 
$
2,963,360


See Notes to Consolidated Financial Statements.

Page 4


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2018
 
2017
2018
 
2017
Interest income:
 
 
 
 
 
 
Loans, including fees
$
28,280

 
$
25,643

$
81,276

 
$
74,378

Investment securities:
 

 
 

 
 
 
Taxable
758

 
437

2,003

 
1,237

Nontaxable
862

 
783

2,617

 
2,425

Federal funds sold
511

 
9

1,610

 
145

Total interest income
$
30,411

 
$
26,872

$
87,506

 
$
78,185

Interest expense:
 

 
 

 
 
 
Deposits
$
5,284

 
$
2,319

$
13,688

 
$
6,730

Short-term borrowings

 
100


 
149

FHLB borrowings
1,607

 
2,233

5,182

 
5,938

Total interest expense
$
6,891

 
$
4,652

$
18,870

 
$
12,817

Net interest income
$
23,520

 
$
22,220

$
68,636

 
$
65,368

Provision for loan losses
1,593

 
130

1,539

 
1,827

Net interest income after provision for loan losses
$
21,927

 
$
22,090

$
67,097

 
$
63,541

Noninterest income:
 

 
 

 
 
 
Net gain on sale of loans
$
453

 
$
423

$
1,227

 
$
1,119

Trust fees
2,105

 
1,980

7,753

 
5,883

Service charges and fees
2,839

 
2,197

7,475

 
6,557

Other noninterest income
1,271

 
405

2,075

 
1,688

 
$
6,668

 
$
5,005

$
18,530

 
$
15,247

 
 
 
 
 
 
 
Noninterest expenses:
 

 
 

 
 
 
Salaries and employee benefits
$
8,611

 
$
8,134

$
25,718

 
$
24,707

Occupancy
1,208

 
1,087

3,331

 
3,148

Furniture and equipment
1,693

 
1,491

4,657

 
4,356

Office supplies and postage
432

 
516

1,327

 
1,487

Advertising and business development
584

 
628

1,821

 
2,123

Outside services
2,767

 
2,077

7,692

 
5,943

FDIC insurance assessment
226

 
217

657

 
636

Other noninterest expense
434

 
671

1,688

 
2,033

 
$
15,955

 
$
14,821

$
46,891

 
$
44,433

Income before income taxes
$
12,640

 
$
12,274

$
38,736

 
$
34,355

Income taxes
2,590

 
3,722

7,765

 
10,472

Net income
$
10,050

 
$
8,552

$
30,971

 
$
23,883

 
 
 
 
 
 
 
Earnings per share:
 

 
 

 

 
 

Basic
$
1.07

 
$
0.92

$
3.30

 
$
2.56

Diluted
$
1.07

 
$
0.92

$
3.30

 
$
2.56

 
See Notes to Consolidated Financial Statements.

Page 5


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

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2018
 
2017
2018
 
2017
Net income
$
10,050

 
$
8,552

$
30,971

 
$
23,883

 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 
 
Securities:
 

 
 

 
 
 
Net change in unrealized (loss) income on securities available for sale
$
(1,321
)
 
$
(302
)
$
(3,849
)
 
$
2,797

Reclassification adjustment for net gains realized in net income

 


 

Income taxes
330

 
116

960

 
(1,070
)
Other comprehensive (loss) income on securities available for sale
$
(991
)
 
$
(186
)
$
(2,889
)
 
$
1,727

Derivatives used in cash flow hedging relationships:
 

 
 

 
 
 
Net change in unrealized income on derivatives
$
361

 
$
259

$
1,887

 
$
474

Income taxes
(90
)
 
(99
)
(470
)
 
(181
)
Other comprehensive income on cash flow hedges
$
271

 
$
160

$
1,417

 
$
293

 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
$
(720
)
 
$
(26
)
$
(1,472
)
 
$
2,020

 
 
 
 
 
 
 
Comprehensive income
$
9,330

 
$
8,526

$
29,499

 
$
25,903

 
See Notes to Consolidated Financial Statements.

Page 6


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Amounts In Thousands, Except Share Amounts)
 
Paid In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Unearned ESOP
Shares
 
Treasury Stock
 
Maximum Cash
Obligation Related
To ESOP Shares
 
Total
Balance, December 31, 2016
$
44,606

 
$
319,982

 
$
(3,359
)
 


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

Issuance of 92,621 shares of common stock
4,208

 

 

 

 
55

 

 
4,263

Issuance of 4,483 shares of common stock under the employee stock purchase plan
210

 

 

 

 

 

 
210

Unearned restricted stock compensation
277

 

 

 

 

 

 
277

Forfeiture of 2,934 shares of common stock
(118
)
 
 
 
 
 
 
 
 
 
 
 
(118
)
Share-based compensation
11

 

 

 

 

 

 
11

Income tax benefit related to share-based compensation

 

 

 

 

 

 

Change related to ESOP shares

 

 

 

 

 
(1,690
)
 
(1,690
)
Net income

 
23,883

 

 

 

 

 
23,883

Cash dividends ($0.70 per share)

 
(6,485
)
 

 

 

 

 
(6,485
)
Purchase of 40,265 shares of common stock

 

 

 

 
(2,075
)
 

 
(2,075
)
Other comprehensive income

 

 
2,020

 

 

 

 
2,020

Balance, September 30, 2017
$
49,194

 
$
337,380

 
$
(1,339
)
 
$

 
$
(33,198
)
 
$
(42,471
)
 
$
309,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
48,930

 
$
341,558

 
$
(2,446
)
 
$

 
$
(33,018
)
 
$
(43,308
)
 
$
311,716

Issuance of 94,097 shares of common stock
2,748

 

 

 

 
2,352

 

 
5,100

Issuance of 6,149 shares of common stock under the employee stock purchase plan
313

 

 

 

 

 

 
313

Unearned restricted stock compensation
372

 

 

 

 

 

 
372

Forfeiture of 2,996 shares of common stock
(140
)
 

 

 

 

 

 
(140
)
Change related to ESOP shares

 

 

 

 

 
(4,285
)
 
(4,285
)
Net income

 
30,971

 

 

 

 

 
30,971

Cash dividends ($0.75 per share)

 
(7,002
)
 

 

 

 

 
(7,002
)
Reclassification of stranded tax effects due to the Tax Cuts and Jobs Act

 
526

 
(526
)
 

 

 

 

Purchase of 97,081 shares of common stock

 

 

 

 
(5,589
)
 

 
(5,589
)
Other comprehensive loss

 

 
(1,472
)
 

 

 

 
(1,472
)
Balance, September 30, 2018
$
52,223

 
$
366,053

 
$
(4,444
)
 
$

 
$
(36,255
)
 
$
(47,593
)
 
$
329,984

 
See Notes to Consolidated Financial Statements.

Page 7


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

 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income
$
30,971

 
$
23,883

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

 
 

Depreciation
2,463

 
2,270

Provision for loan losses
1,539

 
1,827

Share-based compensation

 
11

Forfeiture of common stock
(140
)
 
(118
)
Compensation expensed through issuance of common stock
387

 
208

Provision for deferred income taxes
(379
)
 
(1,513
)
Net loss (gain) on sale of other real estate owned and other repossessed assets
3

 
(89
)
Increase in accrued interest receivable
(1,938
)
 
(2,363
)
Amortization of premium on investment securities, net
370

 
437

(Increase) decrease in other assets
(2,120
)
 
1,049

(Decrease) increase in accrued interest payable and other liabilities
(1,358
)
 
1,288

Loans originated for sale
(110,694
)
 
(109,522
)
Proceeds on sales of loans
113,680

 
113,730

Net gain on sales of loans
(1,227
)
 
(1,119
)
Net cash and cash equivalents provided by operating activities
$
31,557

 
$
29,979

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Proceeds from maturities of investment securities available for sale
$
51,224

 
$
48,937

Purchases of investment securities available for sale
(59,757
)
 
(37,735
)
Loans made to customers, net of collections
(96,159
)
 
(141,994
)
Proceeds on sale of other real estate owned and other repossessed assets
59

 
364

Purchases of property and equipment
(2,088
)
 
(2,210
)
Income from tax credit real estate, net
912

 
547

Net cash and cash equivalents used in investing activities
$
(105,809
)
 
$
(132,091
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Net increase in deposits
$
200,187

 
$
36,730

Net decrease in other borrowings

 
(19,728
)
Net (decrease) increase in FHLB borrowings
(80,000
)
 
88,000

Issuance of common stock, net of costs
4,713

 
3,817

Stock options exercised

 
238

Purchase of treasury stock
(5,589
)
 
(2,075
)
Proceeds from the issuance of common stock through the employee stock purchase plan
313

 
210

Dividends paid
(7,002
)
 
(6,485
)
Net cash and cash equivalents provided by financing activities
$
112,622

 
$
100,707

 
(Continued)


Page 8


HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
(Increase) decrease in cash and cash equivalents
$
38,370

 
$
(1,405
)
Cash and cash equivalents:
 

 
 

Beginning of period
154,353

 
38,197

End of period
$
192,723

 
$
36,792

 
 
 
 
Supplemental Disclosures
 

 
 

Cash payments for:
 

 
 

Interest paid to depositors
$
13,270

 
$
6,635

Interest paid on other obligations
5,182

 
6,087

Income taxes paid
7,188

 
10,530

 
 
 
 
Noncash activities:
 

 
 

Increase in maximum cash obligation related to ESOP shares
$
4,285

 
$
1,690

Transfers to other real estate owned
65

 
182

Sale and financing of other real estate owned

 
262

 
See Notes to Consolidated Financial Statements.



Page 9


HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X.  These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown.  Certain prior year amounts have been reclassified to conform to the current year presentation.  The Company considers that it operates as one business segment, a commercial bank.

Operating results for the nine month period ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the “Company”) for the year ended December 31, 2017 filed with the Securities Exchange Commission on March 5, 2018.  The consolidated balance sheet as of December 31, 2017, has been derived from the audited consolidated financial statements for that period.

The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC.

Revenue Recognition

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit and investment securities as these activities are not subject to the requirements of ASC 606. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts.

Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606 are the following: Service charges and fees on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue which includes interchange income, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received.

Effect of New Financial Accounting Standards:

In May 2014, The FASB and International Accounting Standards Board (IASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of ASU 2014-09 is that a company should recognize revenue to depict the transfer of promised good or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of ASU 2014-09 by the Company did not have a material impact on the recognition of revenue though did require additional disclosures on our material noninterest income streams discussed in revenue recognition above.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 created Subtopic 321-10, Investments-Equity Securities

Page 10

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

which is applicable to all entities except those in industries that account for substantially all investments at fair value through earnings or the change in net assets. Under this new subtopic, equity securities are generally required to be measured at fair value with unrealized holding gains and losses reflected in net income. ASU 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted ASU 2016-01 for the period ending March 31, 2018. There was no material impact on the financial statements however it required a change in disclosure and related methodology located in Note 6 Fair Value Measurements.

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

We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. We expect to elect the 'package of practical expedients', which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. We expect that this standard will not have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our equipment and real estate operating leases. We do not expect a significant change in our leasing activities between now and adoption. On adoption, we currently expect to recognize additional operating liabilities ranging from $3 million to $3.5 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. ASU 2016-04 applies to all entities that offer certain prepaid stored - value products. The ASU provides guidance for the derecognition of financial liabilities related to the issuance of these products and aligns the recognition of breakage to current authoritative guidance. For public companies, ASU 2016-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted ASU 2016-04 for the period ending March 31, 2018. There was no material impact on the financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (CECL). The ASU changes the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. For public companies, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, early adoption is permitted for the fiscal year beginning after December 15, 2018. The Company has implemented a software solution to assist in the analysis of historical loan data to determine the CECL model that will be implemented and is in the process of validating the historical loan data in the software solution. The Company anticipates running parallel calculations of the "incurred loss" and CECL models for the quarter ending March 31, 2019. We expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is adopted. The amount of the one-time cumulative-effect adjustment has not yet been determined.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September

Page 11

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

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

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

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. This ASU requires companies to change the recognition and presentation of the effects of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and requiring companies to present all of the elements of hedge accounting that affect earnings in the same income statement line as the hedged item. Furthermore, the standard eases the requirements for effectiveness testing, hedge documentation and applying the critical terms match method and introduces new alternatives that will permit companies to reduce the risk of material error corrections if they misapply the shortcut method. For public companies, ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. The adoption of ASU 2017-12 by the Company is not expected to have a material impact.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted ASU 2018-02 for the period ending March 31, 2018 and elected the specific identification method accounting policy. There was a $0.53 million reclassification recorded in stockholders' equity.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018-07 by the Company is not expected to have a material impact.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including removal of the requirement to disclose the valuation processes for Level 3 fair value measurements and the additional requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The adoption of ASU 2018-13 by the Company is not expected to have a material impact.


Page 12

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

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangements That Is a Service Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is in the process of evaluating the impact of this ASU on the financial statements.


Note 2.
Earnings Per Share

Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding.  ESOP shares are considered outstanding for this calculation unless unearned.

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

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2018
 
2017
2018
 
2017
Common shares outstanding at the beginning of the period
9,373,666

 
9,329,514

9,335,154

 
9,264,227

Weighted average number of net shares (redeemed) issued
(22,223
)
 
(4,596
)
40,123

 
64,144

Weighted average shares outstanding (basic)
9,351,443

 
9,324,918

9,375,277

 
9,328,371

Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method
4,245

 
3,559

4,067

 
4,874

Weighted average number of shares (diluted)
9,355,688

 
9,328,477

9,379,344

 
9,333,245

Net income (In thousands)
$
10,050

 
$
8,552

$
30,971

 
$
23,883

Earnings per share:
 

 
 

 

 
 

Basic
$
1.07

 
$
0.92

$
3.30

 
$
2.56

Diluted
$
1.07

 
$
0.92

$
3.30

 
$
2.56



Page 13

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

Note 3.
Other Comprehensive Income (Loss)

The following table summarizes the balances of each component of accumulated other comprehensive income (AOCI), included in stockholders’ equity, at September 30, 2018 and December 31, 2017:

 
September 30,
2018

December 31, 2017
 
(amounts in thousands)
Net unrealized loss on available-for-sale securities
$
(4,990
)
 
$
(1,141
)
Net unrealized loss on derivatives used for cash flow hedges
(932
)
 
(2,819
)
Tax effect
$
1,478

 
$
1,514

Net-of-tax amount
$
(4,444
)
 
$
(2,446
)
 
Note 4.
Securities

The carrying values of investment securities at September 30, 2018 and December 31, 2017 are summarized in the following table (dollars in thousands):

 
September 30, 2018
 
December 31, 2017
 
Amount
 
Percent
 
Amount
 
Percent
Securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
82,353

 
28.18
%
 
$
54,318

 
19.05
%
Other securities (FHLB, FHLMC and FNMA)
34,733

 
11.88

 
43,959

 
15.42

State and political subdivisions
175,216

 
59.94

 
186,878

 
65.53

Total securities available for sale
$
292,302

 
100.00
%
 
$
285,155

 
100.00
%

Investment securities have been classified in the consolidated balance sheets according to management’s intent.  Available-for-sale securities consist of debt securities not classified as trading or held to maturity.  Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity.  There were no trading or held to maturity securities as of September 30, 2018 or December 31, 2017. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of September 30, 2018 and December 31, 2017 (in thousands):

 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Estimated Fair
Value
September 30, 2018:
 
 
 
 
 
 
 
U.S. Treasury
$
83,949

 
$

 
$
(1,596
)
 
$
82,353

Other securities (FHLB, FHLMC and FNMA)
35,398

 
1

 
(666
)
 
34,733

State and political subdivisions
177,945

 
129

 
(2,858
)
 
175,216

Total
$
297,292

 
$
130

 
$
(5,120
)
 
$
292,302

December 31, 2017:
 

 
 

 
 

 
 

U.S. Treasury
$
54,696

 
$

 
$
(378
)
 
$
54,318

Other securities (FHLB, FHLMC and FNMA)
44,470

 
1

 
(512
)
 
43,959

State and political subdivisions
187,130

 
722

 
(974
)
 
186,878

Total
$
286,296

 
$
723

 
$
(1,864
)
 
$
285,155






Page 14

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

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at September 30, 2018, were as follows (in thousands):
 
 
Amortized
Cost
 
Fair Value
Due in one year or less
$
41,457

 
$
41,340

Due after one year through five years
180,463

 
177,642

Due after five years through ten years
74,811

 
72,759

Due over ten years
561

 
561

Total
$
297,292

 
$
292,302


As of September 30, 2018 investment securities with a carrying value of $12.19 million were pledged to collateralize repurchase agreements, derivative financial instruments, and other borrowings.

The following table shows the fair value, gross unrealized losses and the percentage of fair value represented by gross unrealized losses of applicable investment securities owned by the Company, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017 (in thousands):

 
Less than 12 months
 
12 months or more
 
Total
September 30, 2018
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
24

 
$
58,023

 
$
(987
)
 
1.70
%
 
10

 
$
24,330

 
$
(609
)
 
2.50
%
 
34

 
$
82,353

 
$
(1,596
)
 
1.94
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
1

 
2,494

 
(9
)
 
0.36

 
13

 
32,239

 
(657
)
 
2.04

 
14

 
34,733

 
(666
)
 
1.92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
377

 
94,638

 
(1,490
)
 
1.57

 
142

 
33,670

 
(1,368
)
 
4.06

 
519

 
128,308

 
(2,858
)
 
2.23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
402

 
$
155,155

 
$
(2,486
)
 
1.60
%
 
165

 
$
90,239

 
$
(2,634
)
 
2.92
%
 
567

 
$
245,394

 
$
(5,120
)
 
2.09
%

 
Less than 12 months
 
12 months or more
 
Total
December 31, 2017
Description of Securities
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
 
#
 
Fair Value
 
Unrealized
Loss
 
%
U.S. Treasury
22

 
$
54,318

 
$
(378
)
 
0.70
%
 

 
$

 
$

 
%
 
22

 
$
54,318

 
$
(378
)
 
0.70
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (FHLB, FHLMC and FNMA)
9

 
21,411

 
(83
)
 
0.39

 
9

 
22,547

 
(429
)
 
1.90

 
18

 
43,958

 
(512
)
 
1.16

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
241

 
58,803

 
(573
)
 
0.97

 
65

 
14,944

 
(401
)
 
2.68

 
306

 
73,747

 
(974
)
 
1.32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
272

 
$
134,532

 
$
(1,034
)
 
0.77
%
 
74

 
$
37,491

 
$
(830
)
 
2.21
%
 
346

 
$
172,023

 
$
(1,864
)
 
1.08
%

The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments.  None of the unrealized losses in the above table was due to the

Page 15

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

deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.  The unrealized losses are due to changes in interest rates.  The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table.  Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis.

Note 5.
Loans

Classes of loans are as follows:

 
September 30,
2018
 
December 31,
2017
 
(Amounts In Thousands)
Agricultural
$
79,155

 
$
88,580

Commercial and financial
214,681

 
218,632

Real estate:
 
 
 
Construction, 1 to 4 family residential
65,932

 
69,738

Construction, land development and commercial
106,012

 
109,595

Mortgage, farmland
230,032

 
215,286

Mortgage, 1 to 4 family first liens
899,937

 
831,591

Mortgage, 1 to 4 family junior liens
149,312

 
144,200

Mortgage, multi-family
347,660

 
336,810

Mortgage, commercial
381,966

 
361,196

Loans to individuals
27,946

 
26,417

Obligations of state and political subdivisions
53,149

 
57,626

 
$
2,555,782

 
$
2,459,671

Net unamortized fees and costs
948

 
894

 
$
2,556,730

 
$
2,460,565

Less allowance for loan losses
31,010

 
29,400

 
$
2,525,720

 
$
2,431,165



Page 16

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

Changes in the allowance for loan losses, the allowance for loan losses applicable to impaired loans and the related loan balance of impaired loans for the three and nine months ended September 30, 2018 were as follows:

 
Three Months Ended September 30, 2018
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage, 1 to 4
family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,071

 
$
5,040

 
$
3,054

 
$
3,475

 
$
8,902

 
$
5,697

 
$
1,271

 
$
29,510

Charge-offs
(68
)
 
(241
)
 

 

 
(280
)
 
(107
)
 
(197
)
 
(893
)
Recoveries
74

 
415

 
2

 
10

 
187

 
80

 
32

 
800

Provision
(47
)
 
(133
)
 
(188
)
 
50

 
1,756

 
193

 
(38
)
 
1,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,030

 
$
5,081

 
$
2,868

 
$
3,535

 
$
10,565

 
$
5,863

 
$
1,068

 
$
31,010



Nine Months Ended September 30, 2018
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage, 1 to 4
family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,294

 
$
4,837

 
$
2,989

 
$
3,669

 
$
8,668

 
$
5,700

 
$
1,243

 
$
29,400

Charge-offs
(72
)
 
(447
)
 

 

 
(607
)
 
(161
)
 
(420
)
 
(1,707
)
Recoveries
102

 
856

 
147

 
29

 
433

 
97

 
114

 
1,778

Provision
(294
)
 
(165
)
 
(268
)
 
(163
)
 
2,071

 
227

 
131

 
1,539

 


 


 


 


 


 


 


 


Ending balance
$
2,030

 
$
5,081

 
$
2,868

 
$
3,535

 
$
10,565

 
$
5,863

 
$
1,068

 
$
31,010

 

 

 

 

 

 

 

 

Ending balance, individually evaluated for impairment
$
118

 
$
1,165

 
$
3

 
$

 
$
91

 
$
40

 
$
48

 
$
1,465

 

 

 

 

 

 

 

 

Ending balance, collectively evaluated for impairment
$
1,912

 
$
3,916

 
$
2,865

 
$
3,535

 
$
10,474

 
$
5,823

 
$
1,020

 
$
29,545

 


 


 


 


 


 


 


 


Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
79,155

 
$
214,681

 
$
171,944

 
$
230,032

 
$
1,049,249

 
$
729,626

 
$
81,095

 
$
2,555,782

 


 


 


 


 


 


 


 


Ending balance, individually evaluated for impairment
$
2,342

 
$
3,288

 
$
927

 
$
3,729

 
$
6,728

 
$
8,217

 
$
48

 
$
25,279

 

 

 

 

 

 

 

 

Ending balance, collectively evaluated for impairment
$
76,813

 
$
211,393

 
$
171,017

 
$
226,303

 
$
1,042,521

 
$
721,409

 
$
81,047

 
$
2,530,503


Page 17

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

Changes in the allowance for loan losses for the three and nine months ended September 30, 2017 were as follows:

 
Three Months Ended September 30, 2017
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage,
1 to 4 family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,341

 
$
4,586

 
$
3,165

 
$
4,009

 
$
8,340

 
$
5,414

 
$
1,095

 
$
28,950

Charge-offs
(27
)
 
(21
)
 

 
(3
)
 
(55
)
 
(86
)
 
(113
)
 
(305
)
Recoveries
56

 
219

 
33

 

 
203

 
7

 
57

 
575

Provision
92

 
(43
)
 
(182
)
 
2

 
98

 
107

 
56

 
130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
2,462

 
$
4,741

 
$
3,016

 
$
4,008

 
$
8,586

 
$
5,442

 
$
1,095

 
$
29,350


 
Nine Months Ended September 30, 2017
 
Agricultural
 
Commercial and
Financial
 
Real Estate:
Construction and
land development
 
Real Estate:
Mortgage,
farmland
 
Real Estate:
Mortgage,
1 to 4 family
 
Real Estate:
Mortgage, multi-
family and
commercial
 
Other
 
Total
 
(Amounts In Thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,947

 
$
4,531

 
$
2,890

 
$
3,417

 
$
7,677

 
$
4,045

 
$
1,023

 
$
26,530

Charge-offs
(66
)
 
(478
)
 
(114
)
 
(3
)
 
(263
)
 
(130
)
 
(410
)
 
(1,464
)
Recoveries
123

 
882

 
443

 

 
570

 
236