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HILLS BANCORPORATION 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

HILLS BANCORPORATION

Filing date:

03/14/2025

TLDR:

ELI5:

Hills Bancorporation, like many banks, takes in deposits and gives out loans. In 2024, they made a bit more money than last year, but they also found some problems with how they keep track of their finances, so it’s important to be a little careful.

Accession #:

0000732417-25-000015

Published on

Analyst Summary

  • Total assets increased by 5.68%, driven by growth in investment securities, while net loans decreased slightly.
  • Net income increased by 24.70% compared to 2023, driven by higher loan and investment balances and rates, offset by increased interest expense and decreased noninterest income due to a loss on the sale of investment securities.
  • The company completed a balance sheet repositioning related to its investment securities portfolio in December 2024, resulting in a pre-tax realized loss on the sale of $5.22 million.
  • Material weaknesses in internal controls over financial reporting were identified, which is a significant concern.
  • Short-term borrowings increased significantly, raising questions about the company’s funding strategy.
  • Key profitability ratios, such as ROAA (1.09%) and ROAE (10.00%), are within the typical range for community banks.
  • The Community Bank Leverage Ratio (CBLR) is well above the 9% minimum, indicating a strong capital position.
  • Operating Profit Margin decreased by 15.63% to 27.10% due to increased expenses relative to revenue.
  • Interest Coverage Ratio decreased by 8.65% to 1.69, indicating a reduced ability to cover interest expenses.

Opportunities and Risks

  • Opportunity: Potential for improved net interest margin through strategic balance sheet management.
  • Opportunity: Strong capital ratios provide a buffer against economic downturns.
  • Risk: Material weaknesses in internal control over financial reporting.
  • Risk: Increased short-term borrowings may indicate reliance on less stable funding sources.
  • Risk: Economic and market risks, including the impact of financial service industry events, inflation, and liquidity risks.
  • Risk: Credit and lending risks, particularly concentration in real estate and agricultural loans.
  • Risk: Competitive pressures and technological changes in the financial services industry.

Potential Implications

Company Performance

  • Remediation of material weaknesses in internal control is crucial for maintaining investor confidence and regulatory compliance.
  • Careful management of liquidity and funding sources is necessary to mitigate the impact of rising interest rates and deposit competition.
  • Monitoring the loan portfolio and adjusting the allowance for credit losses is essential for managing credit risk.
  • Adapting to technological changes and competitive pressures will be important for long-term growth and profitability.

Stock Price

  • The identification of material weaknesses in internal control could negatively impact the stock price.
  • Positive earnings growth and strong capital ratios may provide some support for the stock price.
  • Overall, the stock is likely to remain range-bound until the internal control issues are resolved and economic uncertainties subside.

Hills Bancorporation – 10-K Report Analysis

Executive Summary

This report analyzes Hills Bancorporation’s 10-K filing for the fiscal year ended December 31, 2024. Key findings include a slight increase in total assets, a decrease in net loans, and an increase in investment securities. Net income increased significantly compared to 2023, but was comparable to 2022. Material weaknesses in internal controls are noted. Overall, the company appears stable, but the internal control issues and economic uncertainties warrant a cautious approach. A “Hold” rating is recommended.

Company Overview

Hills Bancorporation is an Iowa-based bank holding company primarily operating through its subsidiary, Hills Bank and Trust Company. The bank provides a range of commercial banking services to individuals, businesses, and governmental entities in Eastern Iowa. The company’s business model focuses on traditional banking activities, including deposit taking, lending, and trust services.

Detailed Analysis

Financial Statement Analysis

Balance Sheet

Total assets increased by $246.58 million (5.68%) year-over-year, driven primarily by growth in investment securities. Net loans decreased slightly, indicating a potential slowdown in lending activity. Deposits increased modestly, with a shift towards time deposits. Short-term borrowings increased significantly, while FHLB borrowings decreased, suggesting a change in funding strategy.

Key Balance Sheet Items (in thousands):

Item 2024 2023 Change
Total Assets $4,588,242 $4,341,667 $246,575
Net Loans $3,387,521 $3,389,372 -$1,851
Investment Securities $972,160 $795,167 $176,993
Deposits $3,346,133 $3,282,780 $63,353
Short-Term Borrowings $546,636 $219,000 $327,636
FHLB Borrowings $127,050 $296,648 -$169,598
Stockholders’ Equity $492,687 $470,286 $22,401

Income Statement

Net income increased by 24.70% compared to 2023, but was similar to 2022 levels. Net interest income increased slightly, driven by higher loan and investment balances and rates, offset by increased interest expense. Noninterest income decreased due to a loss on the sale of investment securities, but increased excluding this loss. Credit loss expense decreased significantly.

Key Income Statement Items (in thousands):

Item 2024 2023 2022 Change (2024 vs 2023)
Net Interest Income $115,823 $113,886 $115,002 $1,937
Noninterest Income $26,821 $28,606 $27,780 -$1,785
Credit Loss Expense $2,208 $15,621 $6,340 -$13,413
Net Income $47,604 $38,176 $47,753 $9,428
Earnings Per Share (Diluted) $5.26 $4.16 $5.15 $1.10

Key Ratios

  • Return on Average Assets (ROAA): 1.09% (2024) vs. 0.92% (2023)
  • Return on Average Equity (ROAE): 10.00% (2024) vs. 8.63% (2023)
  • Community Bank Leverage Ratio (CBLR): 12.69% (Company), 12.71% (Bank) – Well above the 9% minimum.
  • Allowance for Credit Losses to Loans: 1.48% (2024) vs. 1.44% (2023)
  • Non-Performing Loans to Total Loans: 0.97% (2024) vs. 1.17% (2023)

Management’s Discussion and Analysis (MD&A) Insights

  • Management acknowledges the impact of recent events in the financial services industry, including bank failures, and the potential for adverse changes in laws and regulations.
  • The MD&A highlights the challenges of competition for loans and deposits and the potential for net interest margin compression.
  • Management expresses cautious optimism about the company’s position to manage economic risks, but acknowledges the potential need for additional credit loss provisions.
  • The company completed a balance sheet repositioning related to its investment securities portfolio in December 2024, resulting in a pre-tax realized loss on the sale of $5.22 million.

Risk Factors

The 10-K identifies several key risk factors, including:

  • Economic and Market Risks: Impact of financial service industry events, inflation, liquidity risks, and fraud.
  • Credit and Lending Risks: Concentration in real estate loans, commercial loan risks, and agricultural loan risks.
  • Capital and Liquidity Risks: Inability to attract deposits, access to funding, and credit quality deterioration.
  • Competitive and Strategic Risks: Intense competition, negative publicity, and technological changes.
  • Regulatory and Legal Risks: Litigation, regulatory compliance, and climate change.
  • Operational Risks: Loss of key personnel, labor shortages, business interruption, and cybersecurity threats.
  • Accounting and Tax Risks: Inadequate allowances for credit losses and changes in tax laws.
  • Risks Related to the Company’s Common Stock: Stock market volatility and thinly traded stock.

Red Flags & Uncommon Metrics

  • Material Weaknesses in Internal Control: The report identifies material weaknesses in internal controls over financial reporting, which is a significant concern.
  • Increased Short-Term Borrowings: The substantial increase in short-term borrowings raises questions about the company’s funding strategy and potential reliance on less stable funding sources.
  • Loss on Sale of Investment Securities: The realized loss on the sale of investment securities, while intended to improve future income, indicates a potential impact from rising interest rates.

Conclusion & Actionable Insights

Hills Bancorporation demonstrates a stable financial position with increased net income and strong capital ratios. However, the identified material weaknesses in internal control and the reliance on short-term borrowings are areas of concern. The company’s performance is also subject to economic uncertainties and competitive pressures. Given these factors, a “Hold” rating is appropriate.

Recommendations:

  • Prioritize remediation of the identified material weaknesses in internal control over financial reporting.
  • Carefully manage liquidity and funding sources, considering the potential for rising interest rates and deposit competition.
  • Monitor the performance of the loan portfolio, particularly in the real estate and agricultural sectors, and adjust the allowance for credit losses as needed.
  • Continue to evaluate and adapt to technological changes and competitive pressures in the financial services industry.

Hills Bancorporation’s financial performance in 2024 shows a mixed picture. The company experienced growth in net income and earnings per share, indicating improved profitability. However, net interest income saw a slight increase, while noninterest income decreased, suggesting potential challenges in diversifying revenue streams. The bank maintains a strong capital position, exceeding regulatory requirements.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin

    • Metric: Not applicable for banks.
  • Operating Profit Margin

    • Metric: Calculated as (Net Interest Income + Noninterest Income – Noninterest Expense) / Total Revenue = (115,823 + 26,821 – 80,233) / (203,440 + 26,821) = 62,411 / 230,261 = 27.10%
    • Trend: Previous year operating profit margin = (113,886 + 28,606 – 78,397) / (170,919 + 28,606) = 64,095 / 199,525 = 32.12%. Percentage change = (27.10 – 32.12) / 32.12 = -15.63%
    • Industry: Industry average operating profit margins for community banks typically range from 25% to 35%. HBIA is within this range, but below the previous year.
  • Net Profit Margin

    • Metric: Net Income / Total Revenue = 47,604 / 230,261 = 20.67%
    • Trend: Previous year net profit margin = 38,176 / 199,525 = 19.13%. Percentage change = (20.67 – 19.13) / 19.13 = 8.05%
    • Industry: A net profit margin of 15-25% is generally considered healthy for a community bank. HBIA is within this range.
  • Return on Assets (ROA)

    • Metric: 1.09% (provided in filing)
    • Trend: Previous year ROA = 0.92%. Percentage change = (1.09 – 0.92) / 0.92 = 18.48%
    • Industry: Community banks typically have ROAs between 0.8% and 1.2%. HBIA is within this range.
  • Return on Equity (ROE)

    • Metric: 10.00% (provided in filing)
    • Industry: A good ROE for a community bank is typically between 8% and 12%. HBIA is within this range.
  • Earnings Per Share (EPS) – Basic and Diluted

    • Metric: $5.26 (provided in filing)
    • Trend: Previous year EPS = $4.16. Percentage change = (5.26 – 4.16) / 4.16 = 26.44%
    • Industry: EPS varies widely, but the trend is positive.

Liquidity

  • Current Ratio

    • Metric: Total Current Assets / Total Current Liabilities. Approximating current assets as cash and cash equivalents + investment securities + loans held for sale = 123,399 + 944,136 + 3,971 = 1,071,506. Approximating current liabilities as noninterest-bearing deposits + interest-bearing deposits + other short-term borrowings = 581,043 + 2,765,090 + 546,636 = 3,892,769. Current Ratio = 1,071,506 / 3,892,769 = 0.27
    • Trend: Previous year current ratio = (59,482 + 779,421 + 2,023) / (600,398 + 2,682,382 + 219,000) = 840,926 / 3,501,780 = 0.24. Percentage change = (0.27 – 0.24) / 0.24 = 12.5%
    • Industry: A current ratio of less than 1 is typical for banks.
  • Quick Ratio (Acid-Test Ratio)

    • Metric: (Current Assets – Inventory) / Current Liabilities. Since banks don’t typically have inventory, this is the same as the current ratio = 0.27
    • Trend: Same as current ratio = 12.5%
    • Industry: Similar to the current ratio, a quick ratio of less than 1 is typical for banks.
  • Cash Ratio

    • Metric: Cash and Cash Equivalents / Current Liabilities = 123,399 / 3,892,769 = 0.03
    • Trend: Previous year cash ratio = 59,482 / 3,501,780 = 0.02. Percentage change = (0.03 – 0.02) / 0.02 = 50%
    • Industry: A very low cash ratio is typical for banks.

Solvency/Leverage

  • Debt-to-Equity Ratio

    • Metric: Total Liabilities / Total Stockholders’ Equity = 4,047,298 / 492,687 = 8.21
    • Trend: Previous year debt-to-equity ratio = 3,826,528 / 470,286 = 8.14. Percentage change = (8.21 – 8.14) / 8.14 = 0.86%
    • Industry: A debt-to-equity ratio between 5 and 10 is common for banks. HBIA is within this range.
  • Debt-to-Assets Ratio

    • Metric: Total Liabilities / Total Assets = 4,047,298 / 4,588,242 = 0.88
    • Trend: Previous year debt-to-assets ratio = 3,826,528 / 4,341,667 = 0.88. Percentage change = (0.88 – 0.88) / 0.88 = 0%
    • Industry: A debt-to-assets ratio of around 0.9 is typical for banks.
  • Interest Coverage Ratio (Times Interest Earned)

    • Metric: Earnings Before Interest and Taxes (EBIT) / Interest Expense = (Net Income + Income Taxes + Interest Expense) / Interest Expense = (47,604 + 12,599 + 87,617) / 87,617 = 147,820 / 87,617 = 1.69
    • Trend: Previous year interest coverage ratio = (38,176 + 10,298 + 57,033) / 57,033 = 105,507 / 57,033 = 1.85. Percentage change = (1.69 – 1.85) / 1.85 = -8.65%
    • Industry: A ratio of 2 or higher is generally considered healthy. HBIA is below this level.

Activity/Efficiency

  • Inventory Turnover

    • Metric: Not applicable for banks.
  • Days Sales Outstanding (DSO)

    • Metric: Not directly applicable to banks.
  • Days Payable Outstanding (DPO)

    • Metric: Not directly applicable to banks.
  • Asset Turnover

    • Metric: Total Revenue / Total Assets = (203,440 + 26,821) / 4,588,242 = 230,261 / 4,588,242 = 0.05
    • Trend: Previous year asset turnover = (170,919 + 28,606) / 4,341,667 = 199,525 / 4,341,667 = 0.05. Percentage change = (0.05 – 0.05) / 0.05 = 0%
    • Industry: Asset turnover for banks is typically low, reflecting the capital-intensive nature of the business.

Valuation

  • Price-to-Earnings Ratio (P/E)

    • Metric: Stock Price / EPS = 72.02 / 5.26 = 13.69
    • Industry: The average P/E ratio for banks is around 10-15. HBIA is within this range.
  • Price-to-Book Ratio (P/B)

    • Metric: Market Cap / Book Value of Equity. Market Cap = Shares Outstanding * Stock Price. Shares outstanding = 10,346,920 – 1,377,498 = 8,969,422. Market Cap = 8,969,422 * 72.02 = 645,979,068. Book Value of Equity = 492,687,000. P/B = 645,979,068 / 492,687,000 = 1.31
    • Industry: A P/B ratio of 1-2 is common for banks. HBIA is within this range.
  • Price-to-Sales Ratio (P/S)

    • Metric: Market Cap / Total Revenue = 645,979,068 / 230,261,000 = 2.81
    • Industry: A P/S ratio of 2-4 is common for banks. HBIA is within this range.
  • Enterprise Value to EBITDA (EV/EBITDA)

    • Metric: (Market Cap + Total Debt – Cash) / EBITDA. Total Debt = Other Short-Term Borrowings + Federal Home Loan Bank Borrowings = 546,636,000 + 127,050,000 = 673,686,000. Cash = 123,399,000. EBITDA = Net Income + Interest Expense + Taxes + Depreciation = 47,604,000 + 87,617,000 + 12,599,000 + 2,243,000 = 150,063,000. EV = (645,979,068 + 673,686,000 – 123,399,000) / 150,063,000 = 1,196,266,068 / 150,063,000 = 7.97
    • Industry: An EV/EBITDA ratio of 7-10 is common for banks. HBIA is within this range.

Growth Rates

  • Revenue Growth

    • Metric: (230,261 – 199,525) / 199,525 = 15.40%
    • Industry: Revenue growth varies, but HBIA is showing positive growth.
  • Net Income Growth

    • Metric: (47,604 – 38,176) / 38,176 = 24.70%
    • Industry: Net income growth varies, but HBIA is showing positive growth.
  • EPS Growth

    • Metric: (5.26 – 4.16) / 4.16 = 26.44%
    • Industry: EPS growth varies, but HBIA is showing positive growth.

Other Relevant Metrics

  • Community Bank Leverage Ratio
    • Metric: 12.69% (Company), 12.71% (Bank)
    • Trend: The filing indicates a Community Bank Leverage Ratio of 12.77% for the company and 12.82% for the bank in 2023. The company’s ratio decreased by 0.08% and the bank’s ratio decreased by 0.11%.
    • Significance: This ratio measures the bank’s capital adequacy. A ratio above 9% is considered well-capitalized. HBIA exceeds this requirement.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️