PINX:HBIA Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

PINX:HBIA (): Fair Value Estimate
Premium
PINX:HBIA (): Consider Buying
Premium
PINX:HBIA (): Consider Selling
Premium
PINX:HBIA (): Fair Value Uncertainty
Premium
PINX:HBIA (): Economic Moat
Premium
PINX:HBIA (): Stewardship
Premium
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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.

[ü] Yes  [ ] No

Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

[ü] Yes  [ ] No

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  _____
Accelerated Filer                     ü 
Non-accelerated filer    _____
Small Reporting Company     ___

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

[ ] Yes  [ü] 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
At April 30, 2012
   
Common Stock, no par value
 4,753,977




 
 
 

HILLS BANCORPORATION

   
Part I
 
   
FINANCIAL INFORMATION
 
       
     
Page
     
Number
       
Item 1.
 
Financial Statements
 
       
   
3
   
4
   
5
   
6
   
7
   
9
       
Item 2.
 
31
       
Item 3.
 
46
       
Item 4.
 
46
       
   
Part II
 
   
OTHER INFORMATION
 
       
Item 1.
 
47
       
Item 1A.
 
47
       
Item 2.
 
47
       
Item 3.
 
47
       
Item 4.
 
47
       
Item 5.
 
47
       
Item 6.
 
47
       
   
48
       
 
49





HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Shares)
     
     
ASSETS
March 31, 2012 (Unaudited)
December 31, 2011
     
Cash and cash equivalents
 $121,842
 $29,291
Investment securities available for sale at fair value (amortized cost March 31, 2012 $204,833; December 31, 2011 $203,312)
 211,850
 211,367
Stock of Federal Home Loan Bank
 10,671
 10,728
Loans held for sale
 17,595
 24,615
Loans, net of allowance for loan losses (March 31, 2012 $28,730; December 31, 2011 $30,150)
 1,660,363
 1,661,916
Property and equipment, net
 31,233
 30,321
Tax credit real estate
 19,658
 20,130
Accrued interest receivable
 9,052
 8,689
Deferred income taxes, net
 8,528
 8,531
Other real estate
 1,313
 1,327
Goodwill
 2,500
 2,500
Prepaid FDIC insurance
 3,641
 3,879
Other assets
 4,426
 5,003
 
 $2,102,672
 $2,018,297
     
LIABILITIES AND STOCKHOLDERS' EQUITY
   
     
Liabilities
   
Noninterest-bearing deposits
 $221,629
 $223,378
Interest-bearing deposits
 1,390,427
 1,302,099
Total deposits
 $1,612,056
 $1,525,477
Short-term borrowings
 47,010
 52,785
Federal Home Loan Bank borrowings
 185,000
 185,000
Accrued interest payable
 1,540
 1,625
Other liabilities
 19,018
 17,155
 
 $1,864,624
 $1,782,042
     
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)
 $28,650
 $27,826
     
STOCKHOLDERS' EQUITY
   
Capital stock, no par value; authorized 10,000,000 shares; issued March 31, 2012 5,055,021 shares; December 31, 2011 5,051,901 shares
 $-
 $-
Paid in capital
 41,609
 41,467
Retained earnings
 210,692
 207,790
Accumulated other comprehensive income
 4,333
 4,974
Unearned ESOP shares
 (2,017)
 (2,017)
Treasury stock at cost (March 31, 2012 301,403 shares; December 31, 2011 292,083 shares)
 (16,569)
 (15,959)
 
 $238,048
 $236,255
Less maximum cash obligation related to ESOP shares
 28,650
 27,826
 
 $209,398
 $208,429
 
 $2,102,672
 $2,018,297
     
See Notes to Consolidated Financial Statements.
   

 
Page 3





HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Amounts In Thousands, Except Per Share Amounts)
 
             
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Interest income:
           
Loans, including fees
  $ 21,395     $ 21,365  
Investment securities:
               
Taxable
    546       765  
Nontaxable
    850       859  
Federal funds sold
    16       32  
Total interest income
  $ 22,807     $ 23,021  
Interest expense:
               
Deposits
  $ 3,574     $ 4,308  
Short-term borrowings
    34       95  
FHLB borrowings
    1,990       1,981  
Total interest expense
  $ 5,598     $ 6,384  
Net interest income
  $ 17,209     $ 16,637  
Provision for loan losses
    (560 )     1,465  
Net interest income after provision for loan losses
  $ 17,769     $ 15,172  
Other income:
               
Net gain on sale of loans
  $ 705     $ 482  
Trust fees
    1,161       1,089  
Service charges and fees
    1,873       1,811  
Rental revenue on tax credit real estate
    394       283  
Net gain on sale of other real estate owned and other repossessed assets
    296       1  
Other noninterest income
    584       669  
    $ 5,013     $ 4,335  
Other expenses:
               
Salaries and employee benefits
  $ 5,819     $ 5,550  
Occupancy
    844       831  
Furniture and equipment
    1,111       965  
Office supplies and postage
    379       337  
Advertising and business development
    436       329  
Outside services
    1,702       1,726  
Rental expenses on tax credit real estate
    655       234  
FDIC insurance assessment
    268       700  
Other noninterest expense
    413       254  
    $ 11,627     $ 10,926  
Income before income taxes
  $ 11,155     $ 8,581  
Income taxes
    3,255       2,403  
Net income
  $ 7,900     $ 6,178  
                 
Earnings per share:
               
Basic
  $ 1.66     $ 1.40  
Diluted
    1.66       1.40  
                 
See Notes to Consolidated Financial Statements.
               


 
Page 4




HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts In Thousands)
 
             
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Net income
  $ 7,900     $ 6,178  
                 
Other comprehensive (loss) income, before tax:
               
   Unrealized holding (losses) gains arising during the period
    (1,034 )     602  
Less:  reclassification adjustments for gains included in net income
    (6 )     -  
                 
Other comprehensive (loss) income, before tax:
  $ (1,040 )   $ 602  
                 
Tax benefit (expense) related to other comprehensive income
    399       (231 )
                 
Other comprehensive (loss) income, net of tax
  $ (641 )   $ 371  
                 
Comprehensive income
  $ 7,259     $ 6,549  

 
Page 5


 
 
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, 2010
  $ 14,875     $ 185,412     $ 2,781     $ -     $ (11,854 )   $ (24,945 )   $ 166,269  
                                                         
Issuance of 1,071 shares of common stock
    33       -       -       -       -       -       33  
Forfeiture of 151 shares of common stock
    (8 )     -       -       -       -       -       (8 )
Share-based compensation
    4       -       -       -       -       -       4  
Income tax benefit related to share-based compensation
    14       -       -       -       -       -       14  
Change related to ESOP shares
    -       -       -       -       -       (1,066 )     (1,066 )
Net income
    -       6,178       -       -       -       -       6,178  
Cash dividends ($1.00 per share)
    -       (4,399 )     -       -       -       -       (4,399 )
Purchase of 3,346 shares of common stock
    -       -       -       -       (202 )     -       (202 )
Other comprehensive income
    -       -       371       -       -       -       371  
Balance, March 31, 2011
  $ 14,918     $ 187,191     $ 3,152     $ -     $ (12,056 )   $ (26,011 )   $ 167,194  
                                                         
                                                         
Balance, December 31, 2011
  $ 41,467     $ 207,790     $ 4,974     $ (2,017 )   $ (15,959 )   $ (27,826 )   $ 208,429  
                                                         
Issuance of 3,269 shares of common stock
    109       -       -       -       -       -       109  
Forfeiture of 149 shares of common stock
    (9 )     -       -       -       -       -       (9 )
Share-based compensation
    4       -       -       -       -       -       4  
Income tax benefit related to share-based compensation
    38       -       -       -       -       -       38  
Change related to ESOP shares
    -       -       -       -       -       (824 )     (824 )
Net income
    -       7,900       -       -       -       -       7,900  
Cash dividends ($1.05 per share)
    -       (4,998 )     -       -       -       -       (4,998 )
Purchase of 9,320 shares of common stock
    -       -       -       -       (610 )     -       (610 )
Other comprehensive loss
    -       -       (641 )     -       -       -       (641 )
Balance, March 31, 2012
  $ 41,609     $ 210,692     $ 4,333     $ (2,017 )   $ (16,569 )   $ (28,650 )   $ 209,398  
                                                         
See Notes to Consolidated Financial Statements.
                                                 
 
 

 
Page 6




HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands)
 
             
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 7,900     $ 6,178  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
               
Depreciation
    716       621  
Provision for loan losses
    (560 )     1,465  
Net gain on sale of investment securities
    (6 )     -  
Share-based compensation
    4       4  
Forfeiture of common stock
    (9 )     (8 )
Compensation expensed through issuance of common stock
    21       33  
Excess tax benefits from share-based compensation
    (38 )     14  
Provision for deferred income taxes
    400       (239 )
Net gain on sale of other real estate owned and other repossessed assets
    (296 )     (1 )
Increase in accrued interest receivable
    (363 )     (780 )
Amortization of discount on investment securities, net
    239       230  
Decrease in prepaid FDIC insurance
    238       603  
Decrease (increase) in other assets
    615       (77 )
Increase in accrued interest payable and other liabilities
    1,778       3,866  
Loans originated for sale
    (65,004 )     (27,964 )
Proceeds on sales of loans
    72,729       37,492  
Net gain on sales of loans
    (705 )     (482 )
Net cash and cash equivalents provided by operating activities
  $ 17,659     $ 20,955  
                 
Cash Flows from Investing Activities
               
Proceeds from maturities of investment securities available for sale
  $ 11,773     $ 9,840  
Proceeds from sales of investment securities available for sale
    246       -  
Purchases of investment securities available for sale
    (13,716 )     (17,841 )
Loans made to customers, net of collections
    1,635       (16,454 )
Proceeds on sale of other real estate owned and other repossessed assets
    788       416  
Purchases of property and equipment
    (1,628 )     (730 )
Investment in tax credit real estate, net
    472       321  
Net cash used in investing activities
  $ (430 )   $ (24,448 )
                 
Cash Flows from Financing Activities
               
Net increase in deposits
  $ 86,579     $ 69,909  
Net (decrease) increase in short-term borrowings
    (5,775 )     1,559  
Stock options exercised
    88       -  
Excess tax benefits related to share-based compensation
    38       14  
Payments on FHLB borrowings
    -       (10,000 )
Purchase of treasury stock
    (610 )     (202 )
Dividends paid
    (4,998 )     (4,399 )
Net cash provided by financing activities
  $ 75,322     $ 56,881  
                 
(Continued)
               

 
Page 7




HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)
 
             
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Increase in cash and cash equivalents
  $ 92,551     $ 53,388  
                 
Cash and cash equivalents:
               
Beginning of year
    29,291       62,978  
End of period
  $ 121,842     $ 116,366  
                 
Supplemental Disclosures
               
Cash payments for:
               
Interest paid to depositors
  $ 3,658     $ 4,446  
Interest paid on other obligations
    2,024       2,076  
Income taxes paid
    -       578  
                 
Noncash financing activities:
               
                 
Increase in maximum cash obligation related to ESOP shares
  $ 824     $ 1,066  
Transfers to other real estate owned
    478       609  
                 
See Notes to Consolidated Financial Statements.
               

 
Page 8


HILLS BANCORPORATION
(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 may be reclassified to conform to the current year presentation.  The Company considers that it operates as one business segment, a commercial bank.

Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.  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, 2011 filed with the Securities Exchange Commission on March 9, 2012.

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

Recently Adopted Accounting Standards:

In April 2011, the FASB issued new standards that revised the determination of when the restructuring of a receivable should be considered a troubled debt restructuring (“TDR”).  The standard provides additional guidance for determining whether the debtor is experiencing financial difficulty.  The new standard became effective for the Company beginning July 1, 2011.  The adoption did not have a material impact on the Company’s financial position.

Also in April 2011, the FASB issued a new standard that changes the assessment of effective control of a transferor when determining whether repurchase agreements are accounted for as a secured borrowing or sale.  The new standard became effective for the Company beginning January 1, 2012.  The adoption did not have a material impact on the Company’s financial position.

In May 2011, the FASB issued a new standard that provides guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP.  For U.S. GAAP, most of the changes were clarifications of existing guidance or wording changes to align with IFRS.  The new standard became effective for the Company beginning January 1, 2012.  The adoption did not have a material impact on the Company’s financial position.  The Company added additional disclosure requirements to Note 6: Fair Value Measurements.

In September 2011, the FASB issued a new standard the permits the Company to make a qualitative assessment of whether it is more likely than not that the fair value of the portion of the Company to which goodwill relates is less than its carrying amount before applying the two-step goodwill impairment test.  The new standard became effective for the Company beginning January 1, 2012.  The adoption did not have a material impact on the Company’s financial position.

In June 2011 and December 2011, the FASB issued standards regarding the presentation of comprehensive income in the consolidated financial statements.  The new standard became effective for the Company beginning January 1, 2012.  The adoption did not have a material impact on the Company’s financial position.  The Company now presents comprehensive income in a separate statement of comprehensive income.

Recently Issued Accounting Standards:

None.

 
Page 9



HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2.
Earnings Per Share

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

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

   
Three months ended March 31,
 
   
2012
   
2011
 
             
Common shares outstanding at the beginning of the period
    4,759,818       4,398,337  
Weighted average number of net shares issued (redeemed)
    (2,175 )     (819 )
Weighted average shares outstanding (basic)
    4,757,643       4,397,518  
Weighted average of potential dilutive shares
               
attributable to stock options granted, computed under
               
the treasury stock method
    7,130       11,345  
Weighted average number of shares (diluted)
    4,764,773       4,408,863  
                 
Net income (In Thousands)
  $ 7,900     $ 6,178  
                 
Earnings per share:
               
Basic
  $ 1.66     $ 1.40  
Diluted
  $ 1.66     $ 1.40  


 
Page 10


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

Note 3.
Other Comprehensive Income

The following table summarizes the changes in the balances of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2012 and 2011.


   
Three Months Ended March 31, 2012
 
   
Unrealized Gains (Losses) on Securities
   
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
             
Balance December 31, 2011
  $ 4,974     $ 4,974  
Current period, other comprehensive (loss) income
    (641 )     (641 )
Balance March 31, 2012
  $ 4,333     $ 4,333  


   
Three Months Ended March 31, 2011
 
   
Unrealized Gains (Losses) on Securities
   
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
             
Balance December 31, 2010
  $ 2,781     $ 2,781  
Current period, other comprehensive income (loss)
    371       371  
Balance March 31, 2011
  $ 3,152     $ 3,152  

The following tables show the tax effects allocated to each component of other comprehensive income (loss) for the three months ended March 31, 2012 and 2011.

   
Three Months Ended March 31, 2012
 
   
Before Tax Amount
   
Tax (Expense) Benefit
   
Net of Tax Amount
 
 
Unrealized gains on securities:
                 
  Unrealized holding (losses) gains arising during period
  $ (1,034 )   $ 397     $ (637 )
  Less: reclassification adjustment for gains realized in net income
    (6 )     2       (4 )
Other comprehensive (loss) income
  $ (1,040 )   $ 399     $ (641 )
                         
                         
   
Three Months Ended March 31, 2011
 
   
Before Tax Amount
   
Tax (Expense) Benefit
   
Net of Tax Amount
 
 
Unrealized gains on securities:
                       
  Unrealized holding gains (losses) arising during period
  $ 602     $ (231 )   $ 371  
  Less: reclassification adjustment for gains realized in net income
    -       -       -  
Other comprehensive income (loss)
  $ 602     $ (231 )   $ 371  


 
Page 11



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

Note 4.
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 1930s.  Generally, the Dodd-Frank Act was 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.

Note 5.
Loans

The composition of loans is as follows:

   
March 31, 2012
   
December 31, 2011
 
   
(Amounts In Thousands)
 
             
Agricultural
  $ 66,461     $ 68,556  
Commercial and financial
    143,860       143,174  
Real estate:
               
Construction, 1 to 4 family residential
    26,367       22,308  
Construction, land development and commercial
    81,517       84,508  
Mortgage, farmland
    101,017       99,799  
Mortgage, 1 to 4 family first liens
    585,146       577,881  
Mortgage, 1 to 4 family junior liens
    102,055       104,915  
Mortgage, multi-family
    218,354       222,851  
Mortgage, commercial
    312,735       316,329  
Loans to individuals
    19,543       20,598  
Obligations of state and political subdivisions
    32,038       31,147  
    $ 1,689,093     $ 1,692,066  
Less allowance for loan losses
    28,730       30,150  
    $ 1,660,363     $ 1,661,916  




 
Page 12


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

Note 5.
Loans (continued)

Changes in the allowance for loan losses, the allowance for loan losses applicable to impaired loans and the related loan balance of impaired loans for the three months ended March 31, 2012 were 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
 
   
(Amounts In Thousands)
 
                                                 
Allowance for loan losses:
                                               
Beginning balance
  $ 1,354     $ 6,429     $ 4,994     $ 1,411     $ 9,051     $ 6,150     $ 761     $ 30,150  
     Charge-offs
    -       (415 )     (601 )     -       (269 )     (211 )     (28 )     (1,524 )
     Recoveries
    22       360       1       -       125       83       73       664  
     Provision
    (94 )     (341 )     379       1       (335 )     (112 )     (58 )     (560 )
                                                                 
Ending balance
  $ 1,282     $ 6,033     $ 4,773     $ 1,412     $ 8,572     $ 5,910     $ 748     $ 28,730  
                                                                 
Ending balance, individually evaluated for impairment
  $ -     $ 39     $ 3     $ -     $ 78     $ 99     $ 1     $ 220  
                                                                 
Ending balance, collectively evaluated for impairment
  $ 1,282     $ 5,994     $ 4,770     $ 1,412     $ 8,494     $ 5,811     $ 747     $ 28,510  
                                                                 
Loans:
                                                               
                                                                 
Ending balance
  $ 66,461     $ 143,860     $ 107,884     $ 101,017     $ 687,201     $ 531,089     $ 51,581     $ 1,689,093  
                                                                 
Ending balance, individually evaluated for impairment
    -       3,115       2,051       556       4,114       20,581       3       30,420  
                                                                 
Ending balance, collectively evaluated for impairment
  $ 66,461     $ 140,745     $ 105,833     $ 100,461     $ 683,087     $ 510,508     $ 51,578     $ 1,658,673  

Changes in the allowance for loan losses for the three months ended March 31, 2011 were 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
 
   
(Amounts In Thousands)
 
                                                 
Allowance for loan losses:
                                           
Beginning balance
  $ 2,170     $ 6,742     $ 4,394     $ 1,482     $ 7,952     $ 5,657     $ 833     $ 29,230  
     Charge-offs
    -       (740 )     (20 )     -       (629 )     (50 )     (62 )     (1,501 )
     Recoveries
    22       259       1       -       240       51       53       626  
     Provision
    (433 )     511       33       (13 )     1,277       85       5       1,465  
                                                                 
Ending balance
  $ 1,759     $ 6,772     $ 4,408     $ 1,469     $ 8,840     $ 5,743     $ 829     $ 29,820  
                                                                 
Ending balance, individually evaluated for impairment
  $ -     $ 69     $ 17     $ 2     $ 89     $ 60     $ -     $ 237  
                                                                 
Ending balance, collectively evaluated for impairment
  $ 1,759     $ 6,703     $ 4,391     $ 1,467     $ 8,751     $ 5,683     $ 829     $ 29,583  
                                                                 
Loans:
                                                               
                                                                 
Ending balance
  $ 63,173     $ 141,213     $ 112,486     $ 94,045     $ 638,095     $ 506,089     $ 50,529     $ 1,605,630  
                                                                 
Ending balance, individually evaluated for impairment
    -       3,566       1,936       227       4,273       16,785       9       26,796  
                                                                 
Ending balance, collectively evaluated for impairment
  $ 63,173     $ 137,647     $ 110,550     $ 93,818     $ 633,822     $ 489,304     $ 50,520     $ 1,578,834  

 
Page 13


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

Note 5.
Loans (continued)

The following table presents the credit quality indicators by type of loans in each category as of March 31, 2012 and December 31, 2011, respectively (amounts in thousands):

   
Agricultural
   
Commercial and Financial
   
Real Estate: Construction, 1 to 4 family residential
   
Real Estate: Construction, land development and commercial
 
March 31, 2012
                       
Grade:
                       
     Pass
  $ 59,228     $ 115,901     $ 18,530     $ 60,737  
     Potential Watch
    678       3,886       1,809       1,322  
     Watch
    3,819       14,331       3,801       8,609  
     Substandard
    2,736       9,742       2,227       10,849  
Total
  $ 66,461     $ 143,860     $ 26,367     $ 81,517  
                                 
   
Real Estate: Mortgage, farmland
   
Real Estate: Mortgage, 1 to 4 family first liens
   
Real Estate: Mortgage, 1 to 4 family junior liens
   
Real Estate: Mortgage, multi-family
 
March 31, 2012
                               
Grade:
                               
     Pass
  $ 92,353     $ 516,744     $ 91,303     $ 177,866  
     Potential Watch
    1,201       19,904       2,840       12,508  
     Watch
    2,478       22,920       4,681       19,587  
     Substandard
    4,985       25,578       3,231       8,393  
Total
  $ 101,017     $ 585,146     $ 102,055     $ 218,354  
                                 
   
Real Estate: Mortgage, commercial
   
Loans to individuals
   
Obligations of state and political subdivisions
   
Total
 
March 31, 2012
                               
Grade:
                               
     Pass
  $ 257,732     $ 18,912     $ 31,976     $ 1,441,282  
     Potential Watch
    12,518       142       -       56,808  
     Watch
    31,499       279       62       112,066  
     Substandard
    10,986       210       -       78,937  
Total
  $ 312,735     $ 19,543     $ 32,038     $ 1,689,093  

 
Page 14


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

Note 5.
Loans (continued)

   
Agricultural
   
Commercial and Financial
   
Real Estate: Construction, 1 to 4 family residential
   
Real Estate: Construction, land development and commercial
 
December 31, 2011
                       
Grade:
                       
     Pass
  $ 60,745     $ 116,234     $ 18,726     $ 60,279  
     Potential Watch
    1,129       5,858       878       5,171  
     Watch
    4,074       11,104       2,374       5,182  
     Substandard
    2,608       9,978       330       13,876  
Total
  $ 68,556     $ 143,174     $ 22,308     $ 84,508  
                                 
   
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
 
December 31, 2011
                               
Grade:
                               
     Pass
  $ 93,447     $ 511,212     $ 93,761     $ 181,386  
     Potential Watch
    1,393       20,532       3,021       12,561  
     Watch
    2,490       20,706       4,667       19,317  
     Substandard
    2,469       25,431       3,466       9,587  
Total
  $ 99,799     $ 577,881     $ 104,915     $ 222,851  
                                 
   
Real Estate: Mortgage, commercial
   
Loans to individuals
   
Obligations of state and political subdivisions
   
Total
 
December 31, 2011
                               
Grade:
                               
     Pass
  $ 259,516     $ 19,914     $ 31,085     $ 1,446,305  
     Potential Watch
    14,401       180       -       65,124  
     Watch
    31,928       290       62       102,194  
     Substandard
    10,484       214       -       78,443  
Total
  $ 316,329     $ 20,598     $ 31,147     $ 1,692,066  

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.

 
Page 15



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

Note 5.
Loans (continued)

Watch – Watch rated loans are supported by a marginal payment capacity and may be 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 probable than not that the Company could sustain some loss if the deficiency(ies) is not corrected.

Past due loans as of March 31, 2012 and December 31, 2011 were as follows:


               
90 Days
               
Total
   
Accruing Loans
 
   
30 - 59 Days
   
60 - 89 Days
   
or More
   
Total Past
         
Loans
   
Past Due 90
 
   
Past Due
   
Past Due
   
Past Due
   
Due
   
Current
   
Receivable
   
Days or More
 
   
(Amounts In Thousands)
 
                                           
March 31, 2012
                                         
Agriculture
  $ 254     $ -     $ -     $ 254     $ 66,207     $ 66,461     $ -  
Commercial and financial
    617       299       574       1,490       142,370       143,860       90  
Real estate:
                                                       
Construction, 1 to 4 family residential
    696       -       -       696       25,671       26,367       -  
Construction, land development and commercial
    25       181       242       448       81,069       81,517       14  
Mortgage, farmland
    -       -       556       556       100,461       101,017       -  
Mortgage, 1 to 4 family first liens
    4,205       449       2,804       7,458       577,688       585,146       2,002  
Mortgage, 1 to 4 family junior liens
    311       31       307       649       101,406       102,055       30  
Mortgage, multi-family
    -       -       262       262       218,092       218,354       -  
Mortgage, commercial
    590       183       1,582       2,355       310,380       312,735       624  
Loans to individuals
    47       19       3       69       19,474       19,543       3  
Obligations of state and political subdivisions
    -       -       -       -       32,038       32,038       -  
    $ 6,745     $ 1,162     $ 6,330     $ 14,237     $ 1,674,856     $ 1,689,093     $ 2,763  
                                                         
December 31, 2011: