What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-05 compared with 2020-03-06 · 525 added, 245 removed, 1519 unchanged (34% of the section changed)

34 unchanged sentences

The FHLB borrowings are classified based on either their due date or if they are callable on their most likely call date based on the interest rate.

Maturities Days More Than

Immediately 2-30 31-90 91-180 181-365 One Year Total

(Amounts in Thousands)

Earning assets:

Excess Cash $ 540,364 $ — $ — $ — $ — $ — $ 540,364

Federal funds sold 140 — — — — — 140

Investment securities — 2,909 8,237 31,784 16,375 357,239 416,544

Loans 9,901 239,584 56,722 95,296 190,266 2,163,260 2,755,029

Total earning assets 550,405 242,493 64,959 127,080 206,641 2,520,499 3,712,077

4 unchanged sentences

Federal funds and repurchase agreements — — — — — — —

145,803 24,683 39,929 115,012 128,338 2,311,613 2,765,378

Other sources, primarily noninterest-bearing — — — — — 944,897 944,897

Total sources 145,803 24,683 39,929 115,012 128,338 3,256,510 3,710,275

Rate Gap $ 404,602 $ 217,810 $ 25,030 $ 12,068 $ 78,303 $ (736,011) $ 1,802

Cumulative Interest

Rate Gap at December 31, 2020 $ 404,602 $ 622,412 $ 647,442 $ 659,510 $ 737,813 $ 1,802

Gap Ratio 3.77 9.82 1.63 1.10 1.61 0.77

Cumulative Gap Ratio 3.77 4.65 4.08 3.03 2.63 1.00

4 unchanged sentences

The following table, which presents principal cash flows and related weighted average interest rates by expected maturity dates, provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates.

2021 2022 2023 2024 2025 Thereafter Total Fair Value

(Amounts In Thousands)

Loans, fixed:

Balance $ 357,894 $ 213,587 $ 122,220 $ 210,923 $ 628,736 $ 166,043 $ 1,699,403 $ 1,520,966

Average interest rate 4.10 % 3.02 % 4.62 % 4.54 % 3.92 % 3.25 % 3.91 %

Loans, variable:

Balance $ 172,642 $ 132,963 $ 128,135 $ 112,747 $ 328,420 $ 135,834 $ 1,010,741 $ 1,167,185

Average interest rate 3.87 % 4.12 % 4.22 % 4.41 % 3.82 % 4.02 % 4.01 %

Investments (1):

Balance $ 67,688 $ 54,405 $ 58,711 $ 70,737 $ 55,457 $ 109,546 $ 416,544 $ 416,544

Average interest rate 1.84 % 2.27 % 2.31 % 1.62 % 1.15 % 2.59 % 2.02 %

Liquid deposits (2):

Balance $ — $ — $ — $ — $ — $ — $ 1,962,874 $ 1,962,867

Average interest rate — % — % — % — % — % — % 0.24 %

Deposits, certificates:

Balance $ 307,962 $ 190,763 $ 150,275 $ 39,089 $ 9,415 $ — $ 697,504 $ 709,848

Average interest rate 1.49 % 1.71 % 2.87 % 1.47 % 0.91 % — % 1.84 %

21 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As more fully described in Notes 1 and 3 to the Company’s consolidated financial statements, the allowance for loan losses represents losses that are estimated to have occurred.

The allowance for loan losses is based on collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

The allowance consists of allocated and general components.

The allocated component relates to specific allowances on loans that are classified as impaired.

The general component relates to loans that are not classified as impaired and is based on historical charge-off experience and the expected loss, given default, derived from the Company’s internal risk rating process.

Other adjustments have been made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Management discloses that this evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

We identified the valuation of the allowance for loan losses as a critical audit matter.

Auditing the allowance for loan losses involves a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s assessment of economic conditions and other qualitative or environmental factors, evaluating the adequacy of specific allowances associated with impaired loans, and assessing the appropriateness of loan grades.

The primary procedures we performed to address this critical audit matter included:

• Testing the design and operating effectiveness of controls, including those related to technology, over the allowance for loan losses, including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of loss rates, the establishment of qualitative adjustments, grading and risk classification of loans and establishment of specific reserves on impaired loans, and management’s review and disclosure controls over the allowance for loan losses;

• Testing of completeness and accuracy of the information utilized in the calculation of the allowance for loan losses;

• Testing the allowance model for computational accuracy;

• Evaluating the qualitative adjustments to historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;

• Testing the internal loan review functions and evaluating the accuracy of loan grades, including utilizing our internal loan review professionals to assist us;

• Assessing the reasonableness of specific allowances on certain impaired loans;

• Evaluating the overall reasonableness of significant assumptions used by management, considering the past performance of the Company and evaluating trends identified within peer groups;

• Evaluating the accuracy and completeness of disclosures in the consolidated financial statements.

We have served as the Company’s auditor since 2012.

22 unchanged sentences

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America.

Because management's assessment and our audit also were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our examination of Hills Bancorporation's internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C).

Because management's assessment and our audit also were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our audit of Hills Bancorporation's internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C).

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

9 unchanged sentences

(Amounts In Thousands, Except Shares)

ASSETS 2020 2019

Cash and cash equivalents $ 574,310 $ 241,965

1 unchanged sentence

2019 $ 351,069 ) (Notes 1, 2 and 13)

408,372 355,303

Stock of Federal Home Loan Bank 8,172 11,065

2 unchanged sentences

2019 $ 33,760 ) (Notes 1, 3, and 12)

2,674,012 2,606,277

Property and equipment, net (Note 4) 35,878 37,146

2 unchanged sentences

Deferred income taxes, net (Note 10) 6,088 8,018

Goodwill 2,500 2,500

Other assets 7,882 9,491

Total Assets $ 3,780,611 $ 3,300,887

LIABILITIES AND STOCKHOLDERS' EQUITY

16 unchanged sentences

Retained earnings 439,831 409,509

Accumulated other comprehensive gain (loss) (Note 8)

Accumulated other comprehensive gain (Note 8) 8,782 1,415

Treasury stock at cost (2020 999,247 shares;

2019 975,962 shares)

( 45,441 ) ( 39,830 )

Total Stockholders' Equity 463,405 427,037

7 unchanged sentences

(Amounts In Thousands, Except Per Share Amounts)

2020 2019 2018

Interest income:

1 unchanged sentence

Investment securities:

Taxable 3,512 3,239 2,759

Nontaxable 3,876 3,844 3,511

Federal funds sold 945 3,980 1,939

1 unchanged sentence

Interest expense:

Other borrowings

Deposits 21,553 28,540 19,531

FHLB borrowings 5,399 6,333 6,792

5 unchanged sentences

Net gain on sale of loans 6,678 3,539 1,517

Trust fees 10,275 9,579 10,007

Service charges and fees 10,186 10,276 9,614

Other noninterest income 1,187 1,426 2,680

Loss on sale of investment securities

Gain (loss) on sale of investment securities 10 ( 28 ) —

28,336 24,792 23,818

Noninterest expenses:

Salaries and employee benefits 40,621 36,709 34,981

Occupancy 4,343 4,336 4,374

Furniture and equipment 7,357 6,795 5,741

4 unchanged sentences

Other noninterest expenses 7,504 4,434 1,804

75,631 67,264 62,123

Income before income taxes 49,924 57,867 45,672

Income taxes (Note 10) 11,277 12,549 8,905

Net income $ 38,647 $ 45,318 $ 36,767

Earnings per share:

Basic $ 4.12 $ 4.85 $ 3.93

Diluted 4.12 4.85 3.92

See Notes to Consolidated Financial Statements.

3 unchanged sentences

(Amounts In Thousands)

2020 2019 2018

Net income $ 38,647 $ 45,318 $ 36,767

Other comprehensive income (loss)

Net change in unrealized gain (loss) on securities available for sale 7,478 6,940 ( 1,593 )

Reclassification adjustment for net losses realized in net income

Reclassification adjustment for net (gains) losses realized in net income ( 10 ) 28 —

Income taxes ( 1,864 ) ( 1,738 ) 397

Other comprehensive income (loss) on securities available for sale 5,604 5,230 ( 1,196 )

1 unchanged sentence

Net change in unrealized (loss) gain on derivatives ( 335 ) ( 753 ) 1,223

Other comprehensive (loss) income on cash flow hedges

Reclassification adjustment for losses realized in net income 2,684 — —

Income taxes ( 586 ) 188 ( 305 )

Other comprehensive income (loss) on cash flow hedges 1,763 ( 565 ) 918

Other comprehensive income (loss), net of tax 7,367 4,665 ( 278 )

5 unchanged sentences

(Amounts In Thousands, Except Share Data)

Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Income (Loss) Treasury

Stock Maximum

Balance, December 31, 2017 $ 48,930 $ 341,558 $ ( 2,446 ) $ ( 33,018 ) $ ( 43,308 ) $ 311,716

Issuance of 113,373 shares of common stock

3,386 — — 2,834 — 6,220

Issuance of 8,172 shares of common stock under the employee stock purchase plan

421 — — — — 421

Unearned restricted stock compensation ( 463 ) — — — — ( 463 )

Forfeiture of 3,296 shares of common stock

Share-based compensation

( 152 ) — — — — ( 152 )

Change related to ESOP shares — — — — ( 5,562 ) ( 5,562 )

Net income — 36,767 — — — 36,767

Cash dividends ($ 0.75 per share)

— ( 7,003 ) — — — ( 7,003 )

Reclassification of stranded tax effects due to the Tax Cuts and Jobs Act — 526 ( 526 ) — — —

Purchase of 116,962 shares of common stock

Other comprehensive income

— — — ( 6,784 ) — ( 6,784 )

Other comprehensive (loss) — — ( 278 ) — — ( 278 )

Balance, December 31, 2018 $ 52,122 $ 371,848 $ ( 3,250 ) $ ( 36,968 ) $ ( 48,870 ) $ 334,882

Issuance of 101,912 shares of common stock

3,549 — — 2,672 — 6,221

Issuance of 7,720 shares of common stock under the employee stock purchase plan

434 — — — — 434

Unearned restricted stock compensation 86 — — — — 86

Forfeiture of 5,255 shares of common stock

( 262 ) — — — — ( 262 )

Share-based compensation 14 — — — — 14

Change related to ESOP shares — — — — ( 2,956 ) ( 2,956 )

Net income — 45,318 — — — 45,318

Cash dividends ($ 0.82 per share)

Reclassification of stranded tax effects due to the Tax Cuts and Jobs Act

— ( 7,657 ) — — — ( 7,657 )

Purchase of 89,124 shares of common stock

Other comprehensive (loss)

— — — ( 5,534 ) — ( 5,534 )

Other comprehensive income — — 4,665 — — 4,665

Balance, December 31, 2019 $ 55,943 $ 409,509 $ 1,415 $ ( 39,830 ) $ ( 51,826 ) $ 375,211

Issuance of 110,337 shares of common stock

4,177 — — 2,939 — 7,116

Issuance of 7,449 shares of common stock under the employee stock purchase plan

413 — — — — 413

Unearned restricted stock compensation ( 68 ) — — — — ( 68 )

Forfeiture of 4,863 shares of common stock

( 257 ) — — — — ( 257 )

Share-based compensation 25 — — — — 25

Change related to ESOP shares — — — — 4,497 4,497

Net income — 38,647 — — — 38,647

Cash dividends ($ 0.89 per share)

— ( 8,325 ) — — — ( 8,325 )

Purchase of 133,622 shares of common stock

— — — ( 8,550 ) — ( 8,550 )

Other comprehensive income — — 7,367 — — 7,367

5 unchanged sentences

(Amounts In Thousands)

2020 2019 2018

Cash Flows from Operating Activities

Net income $ 38,647 $ 45,318 $ 36,767

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

Depreciation 3,128 3,072 3,012

Provision for loan losses 4,358 ( 2,880 ) 8,497

Net loss on sale of investment securities available for sale

Net (gain) loss on sale of investment securities available for sale ( 10 ) 28 —

Share-based compensation 25 14 —

3 unchanged sentences

Net gain on sale of other real estate owned and other repossessed assets ( 120 ) ( 94 ) ( 18 )

Increase in accrued interest receivable

Decrease (increase) in accrued interest receivable 265 ( 658 ) ( 1,012 )

Amortization of premium on investment securities, net 818 441 480

(Increase) decrease in other assets

Decrease (increase) in other assets 1,316 ( 2,681 ) ( 1,086 )

Amortization of operating lease right of use assets 386 354 —

Increase (decrease) in accrued interest and other liabilities

(Decrease) increase in accrued interest and other liabilities ( 5,615 ) 650 ( 1,423 )

Loans originated for sale ( 475,187 ) ( 299,223 ) ( 136,746 )

15 unchanged sentences

(Amounts In Thousands)

2020 2019 2018

Cash Flows from Financing Activities

1 unchanged sentence

Net decrease in short-term borrowings — — —

Net (decrease) increase in FHLB borrowings

Net decrease in FHLB borrowings ( 80,000 ) ( 30,000 ) ( 80,000 )

Borrowings from FRB 1 1 1

9 unchanged sentences

Beginning of year 241,965 43,305 154,353

End of year $ 574,310 $ 241,965 $ 43,305

Supplemental Disclosures

44 unchanged sentences

As of December 31, 2020 and 2019, the Company did not have any significant contract balances.

In connection with the adoption of ASC 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.

The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission).

The Company utilizes the practical expedient which allows entities

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.

The incremental costs of obtaining a contract are those costs that an

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission).

The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

The Company did not capitalize any contract acquisition costs for the years ending December 31, 2020 and 2019.

33 unchanged sentences

excellent, good, satisfactory, monitor, special mention and substandard.

The policy for charging off loans is consistent throughout all loan categories.

A loan is charged off based on criteria that includes but is not limited to:

delinquency status, financial condition of the entire customer credit line and underlying collateral coverage,

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company.

The policy for charging off loans is consistent throughout all loan categories.

A loan is charged off based on criteria that includes but is not limited to:

delinquency status, financial condition of the entire customer credit line and underlying collateral coverage, economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company.

Loans are considered impaired when, based on current information and events, it is probable the Bank will not be able to collect all amounts due.

19 unchanged sentences

TDR loans are returned to accrual status under the same criteria noted under loans above.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic.

In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs.

This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

See Note 3 for further discussion.

Transfers of financial assets :

4 unchanged sentences

Such financial instruments are recorded when they are funded.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax credit real estate :

6 unchanged sentences

Expenditures for normal repairs and maintenance are charged to expense as incurred.

In February 2019, the Company entered into a Letter of Intent to invest in a limited partnership, as limited partner, which will own and operate an affordable housing property in Iowa City, Iowa.

The Company provides construction financing for the project and will contribute capital of $ 4.18 million upon construction completion which is anticipated to be in April 2020.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2016, the Company adopted ASU 2015-02 and the investments in tax credit real estate are recorded for all years presented using the equity method of accounting.

2 unchanged sentences

Once established, the credits on each property last for ten years and are passed through from the limited partnerships to the Bank and reduces the consolidated federal tax liability of the Company.

In February 2019, the Company entered into a Letter of Intent to invest in a limited partnership, as limited partner, which will own and operate an affordable housing property in Iowa City, Iowa.

The Company provided construction financing for the project and contributed capital of $ 4.18 million in February 2021.

Property and equipment :

25 unchanged sentences

To qualify for hedge accounting, the Bank must comply with the detailed rules and documentation requirements at the inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of the hedging relationship.

As of December 31, 2020, the Bank did not have any outstanding interest rate swaps.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For derivatives designated as cash flow hedges, the changes in the fair value of the derivatives is initially reported in other comprehensive income and subsequently reclassified to interest income or expense when the hedged transaction affects earnings.

6 unchanged sentences

ESOP shares are considered outstanding for this calculation unless unearned.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents calculations of earnings per share:

Year Ended December 31,

2020 2019 2018

(Amounts In Thousands, except share and per share data)

1 unchanged sentence

Common shares outstanding at the beginning of the year 9,351,694 9,336,441 9,335,154

Weighted average number of net shares issued (redeemed)

Weighted average number of net shares issued 17,571 19,304 31,160

Weighted average shares outstanding (basic) 9,369,265 9,355,745 9,366,314

1 unchanged sentence

Weighted average number of shares (diluted) 9,372,905 9,359,780 9,370,341

Net income $ 38,647 $ 45,318 $ 36,767

Earnings per share:

Basic $ 4.12 $ 4.85 $ 3.93

Diluted $ 4.12 $ 4.85 $ 3.92

Stock awards and options :

8 unchanged sentences

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 goods 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 Company has evaluated all of its noninterest income streams and contracts to determine potential impact.

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 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 the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminated the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

The revised disclosures are in Note 13 Fair Value Measurements.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2016, the FASB issued ASU No.

5 unchanged sentences

The Company adopted the ASU on January 1, 2019 and used the effective date as the 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.

Consequently, financial information will not be updated and

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

4 unchanged sentences

Upon adoption, we recognized additional operating liabilities of $ 3.58 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.

7 unchanged sentences

For public companies, ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) , the option to delay CECL was provided until the earlier of the national health emergency being declared over or December 31, 2020.

In December 2020, further legislation was passed titled the Coronavirus Response and Relief Supplemental Appropriations Act 2021 which extends the CECL delay until the earlier of 1) the first day of the fiscal year that begins after the national emergency termination date or 2) January 1, 2022.

The Company elected to delay implementing CECL and continued to use the incurred loss method to calculate the allowance for loan losses as of and for the period ending December 31, 2020.

The Company anticipates adopting CECL effective January 1, 2021 for the first quarter of 2021 based on the options provided under the December 2020 legislation passed.

The Company has implemented a software solution provided by a third party vendor to assist in the determination of the CECL model.

The CECL model is being finalized and we completed the validation process for the CECL model using an independent outside party in January 2020.

Our current planned approach for estimating expected life-time credit losses for loans upon adoption includes the following key components:

5 unchanged sentences

The DCF methods obtain estimated life-time credit losses using the conceptual components described above.

Based on our portfolio composition upon adoption and the current economic environment, we anticipate an increase in our Allowance for Credit Losses (ACL) for loans of approximately $ 3 million to $ 4 million .

We also anticipate an unfunded commitments liability of approximately $ 1 million to $ 2 million .

We will continue to evaluate and refine the results of our loss estimates throughout the first quarter of 2020.

The adjustment upon adoption at January 1, 2021 will be an overall increase in our Allowance for Credit Losses (ACL) for loans of $ 2.00 million to $ 4.00 million.

We will also record an unfunded commitments liability of $ 3.00 million to $ 4.00 million upon adoption.

The future effects of CECL on our ACL will depend on the size and composition of our portfolio, the portfolio’s credit quality and economic conditions, as well as any refinements to our model, methodology and other key assumptions.

1 unchanged sentence

The increase in the ACL will result in a decrease to our regulatory capital amounts and ratios.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We estimate the ACL as of December 31, 2020 to be approximately $ 39 million to $ 42 million and the unfunded commitments liability to be approximately $ 2 million to $ 4 million.

In January 2017, the FASB issued ASU No.

3 unchanged sentences

2014-09, Revenue from Contracts with Customers (Topic 606);

2016-02, Leases (Topic 842);

2016-02, Leases

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2016-13, Financial Instruments - Credit Losses (Topic 326):

35 unchanged sentences

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to all periods presented upon their effective date.

All other amendments should be applied retrospectively to all periods presented upon their effective date.

Early adoption is permitted upon issuance of this ASU.

1 unchanged sentence

The adoption of ASU 2018-13 by the Company on January 1, 2020 did not have a material impact on the financial statements.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2018, the FASB issued ASU No.

35 unchanged sentences

For public companies, ASU 2019-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and will be adopted concurrently with ASU 2016-13.

As noted above, we have elected to delay the adoption of ASU 2016-13 as permitted by the CARES Act and related extension.

In December 2019, the FASB issued ASU No.

2 unchanged sentences

For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted.

The Company is currently evaluating the impact the adoption of this ASU will have on the financial statements.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

adoption is permitted.

The adoption of the ASU by the Company on January 1, 2021 is not expected to have a material impact on the financial statements.

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs .

The amendments in this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period.

For each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (that is, the premium) shall be amortized to the next call date, unless the guidance in paragraph 310-20-35-26 is applied to consider estimated prepayments.

For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early application is not permitted.

The adoption of the ASU by the Company on January 1, 2021 is not expected to have a material impact on the financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which consists of two sections.

The first applicable section contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate disclosure section and provide the option to give certain information either on the face of the financial statements or in the notes to the financial statements.

The second section contains Codification improvements that vary in nature.

The amendments in this Update do not change GAAP and, therefore, are not expected to result in a significant change in practice.

For public business entities, these amendments are effective for annual periods beginning after December 15, 2020.

The adoption of the ASU by the Company on January 1, 2021 is not expected to have a material impact on the financial statements.

Investment Securities

The carrying values of investment securities at December 31, 2020 and December 31, 2019 are summarized in the following table (Amounts in Thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Amount Percent Amount Percent

Securities available for sale

Treasury $ 148,646 36.40 % $ 128,585 36.19 %

Other securities (FHLB, FHLMC and FNMA) 35,160 8.61 % 15,229 4.29 %

1 unchanged sentence

Total securities available for sale $ 408,372 100.00 % $ 355,303 100.00 %

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment securities have been classified in the consolidated balance sheets according to management’s intent.

3 unchanged sentences

The carrying amount of available-for-sale securities and their approximate fair values were as follows (Amounts in Thousands):

(Losses) Estimated

December 31, 2020:

Treasury $ 143,467 $ 5,179 $ — $ 148,646

Other securities (FHLB, FHLMC and FNMA) 35,195 35 ( 70 ) 35,160

State and political subdivisions 218,008 6,674 ( 116 ) 224,566

Total $ 396,670 $ 11,888 $ ( 186 ) $ 408,372

December 31, 2019:

Treasury $ 127,096 $ 1,626 $ ( 137 ) $ 128,585

Other securities (FHLB, FHLMC and FNMA) 15,287 — ( 58 ) 15,229

State and political subdivisions 208,686 2,938 ( 135 ) 211,489

Total $ 351,069 $ 4,564 $ ( 330 ) $ 355,303

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at December 31, 2020, were as follows (Amounts in Thousands):

3 unchanged sentences

Due over ten years 26,488 26,920

Total $ 396,670 $ 408,372

As of December 31, 2020, investment securities with a carrying value of $ 10.23 million were pledged to collateralize derivative financial instruments and other borrowings.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales proceeds and gross realized gains and losses on available-for-sale securities were as follows (in thousands):

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Sales proceeds $ 313 $ 12,467

1 unchanged sentence

Gross realized losses — 52

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019 (Amounts in Thousands):

Less than 12 months

12 months or more

Unrealized Loss

Less than 12 months 12 months or more Total

Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss %

of Securities

Treasury — $ — $ — — % — $ — $ — — % — $ — $ — — %

Other securities (FHLB, FHLMC and FNMA) 8 20,019 ( 70 ) 0.35 % — — — — % 8 20,019 ( 70 ) 0.35 %

1 unchanged sentence

Total temporarily impaired securities 43 $ 34,187 $ ( 180 ) 0.53 % 4 $ 370 $ ( 6 ) 1.62 % 47 $ 34,557 $ ( 186 ) 0.54 %

Less than 12 months

12 months or more

Unrealized Loss

Less than 12 months 12 months or more Total

Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss %

of Securities

Treasury 11 $ 27,932 $ ( 136 ) 0.49 % 1 $ 2,495 $ ( 1 ) 0.04 % 12 $ 30,427 $ ( 137 ) 0.45 %

Other securities (FHLB, FHLMC and FNMA) — — — — % 6 15,229 ( 58 ) 0.38 % 6 15,229 ( 58 ) 0.38 %

10 unchanged sentences

(Amounts In Thousands)

Agricultural $ 94,842 $ 91,317

Commercial and financial 286,242 221,323

8 unchanged sentences

Obligations of state and political subdivisions 56,488 49,896

2,710,144 2,639,104

Net unamortized fees and costs 938 933

2,711,082 2,640,037

Less allowance for loan losses 37,070 33,760

$ 2,674,012 $ 2,606,277

As of December 31, 2020, the Company has outstanding balances of $ 86.5 million of loans issued under the Paycheck Protection Program (PPP) and $ 2.12 million of deferred PPP loan fees recorded with commercial and financial loans.

For the year ended December 31, 2020, the Company has recognized $ 2.88 million of deferred PPP loan fees in interest income and has received forgiveness payments totaling $ 40.4 million from the SBA.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the allowance for loan losses and the allowance for loan loss balance applicable to impaired loans and the related loan balance of impaired loans for the years ended December 31, 2020, 2019 and 2018 are as follows:

Commercial and Financial

Mortgage, 1 to 4 family

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to 4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760

Charge-offs ( 43 ) ( 1,425 ) ( 43 ) ( 1 ) ( 738 ) ( 291 ) ( 381 ) ( 2,922 )

Recoveries 63 670 118 10 784 49 180 1,874

Provision 88 652 ( 355 ) 214 1,684 1,798 277 4,358

Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

5 unchanged sentences

Ending balance, collectively evaluated for impairment $ 93,299 $ 284,051 $ 181,764 $ 245,081 $ 1,012,505 $ 784,953 $ 87,762 $ 2,689,415

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial and Financial

Mortgage, 1 to 4 family

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to 4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810

Charge-offs ( 266 ) ( 981 ) ( 45 ) ( 6 ) ( 896 ) ( 341 ) ( 434 ) ( 2,969 )

Recoveries 95 646 8 5 700 180 165 1,799

Provision ( 218 ) ( 503 ) ( 656 ) ( 21 ) ( 1,682 ) ( 145 ) 345 ( 2,880 )

Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760

5 unchanged sentences

Ending balance, collectively evaluated for impairment $ 89,587 $ 218,581 $ 188,198 $ 238,649 $ 1,051,299 $ 749,754 $ 82,111 $ 2,618,179

Commercial and Financial

Mortgage, 1 to

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Agricultural Commercial and Financial Real Estate:

development Real Estate:

farmland Real Estate:

Mortgage, 1 to 4 family Real Estate:

Mortgage, multi-family and

commercial Other Total

(Amounts In Thousands)

1 unchanged sentence

Beginning balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400

Charge-offs ( 95 ) ( 585 ) — — ( 830 ) ( 251 ) ( 561 ) ( 2,322 )

Recoveries 119 1,057 148 30 612 107 162 2,235

Provision 471 517 155 273 4,066 2,609 406 8,497

Ending balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810

10 unchanged sentences

The following table presents the credit quality indicators by type of loans in each category as of December 31, 2020:

and Financial

Agricultural Commercial

and Financial Real Estate:

Construction, 1 to 4

family residential

family residential Real Estate:

Construction, land

1 unchanged sentence

(Amounts In Thousands)

Excellent $ 3,761 $ 9,024 $ — $ 227

Good 12,369 62,310 13,675 15,187

Satisfactory 42,015 144,999 41,616 64,301

Monitor 29,381 56,439 13,654 23,368

Special Mention 5,143 8,258 1,857 7,137

Substandard 2,173 5,212 315 1,693

Total $ 94,842 $ 286,242 $ 71,117 $ 111,913

farmland Real Estate:

Mortgage, 1 to 4

family first liens

family first liens Real Estate:

Mortgage, 1 to 4

family junior liens

family junior liens Real Estate:

Mortgage, multi-

Excellent $ 5,706 $ 2,303 $ 204 $ 14,650

Good 41,878 47,233 3,707 57,281

Satisfactory 129,210 701,273 115,731 197,493

Monitor 61,298 114,207 5,153 70,885

Special Mention 6,074 12,890 1,307 15,374

Obligations of state

Substandard 2,976 14,183 1,731 18,331

Total $ 247,142 $ 892,089 $ 127,833 $ 374,014

commercial Loans to

individuals Obligations of state

and political

subdivisions Total

Excellent $ 26,940 $ 1 $ 6,752 $ 69,568

Good 92,699 145 13,094 359,578

Satisfactory 196,310 30,487 26,571 1,690,006

Monitor 77,125 479 9,924 461,913

Special Mention 19,731 127 147 78,045

Substandard 4,334 86 — 51,034

Total $ 417,139 $ 31,325 $ 56,488 $ 2,710,144

HILLS BANCORPORATION

1 unchanged sentence

The following table presents the credit quality indicators by type of loans in each category as of December 31, 2019:

and Financial

Agricultural Commercial

and Financial Real Estate:

Construction, 1 to 4

family residential

family residential Real Estate:

Construction, land

1 unchanged sentence

(Amounts In Thousands)

Excellent $ 3,594 $ 3,461 $ 260 $ 190

Good 12,380 47,843 8,868 23,217

Satisfactory 43,308 117,114 51,093 47,987

Monitor 24,857 44,543 17,505 29,009

Special Mention 3,110 5,157 2,483 7,428

Substandard 4,068 3,205 — 579

Total $ 91,317 $ 221,323 $ 80,209 $ 108,410

farmland Real Estate:

Mortgage, 1 to 4

family first liens

family first liens Real Estate:

Mortgage, 1 to 4

family junior liens

family junior liens Real Estate:

Mortgage, multi-family

Excellent $ 3,630 $ 3,209 $ 261 $ 18,955

Good 40,118 32,474 4,233 47,871

Satisfactory 134,738 751,215 136,079 189,391

Monitor 53,147 96,353 5,473 60,965

Special Mention 3,033 11,167 1,469 27,559

Obligations of state

Substandard 8,064 16,324 1,712 6,020

Total $ 242,730 $ 910,742 $ 149,227 $ 350,761

commercial Loans to

individuals Obligations of state

and political

subdivisions Total

Excellent $ 27,017 $ — $ 7,444 $ 68,021

Good 79,467 221 14,465 311,157

Satisfactory 206,196 31,385 20,274 1,728,780

Monitor 81,381 437 7,323 420,993

Special Mention 4,802 212 390 66,810

Substandard 3,318 53 — 43,343

Total $ 402,181 $ 32,308 $ 49,896 $ 2,639,104

HILLS BANCORPORATION

17 unchanged sentences

Past due loans as of December 31, 2020 and 2019 were as follows:

Accruing Loans

Past Due 60 - 89 Days

Past Due 90 Days

Past Due Total Past

Due Current Total

Receivable Accruing Loans

(Amounts In Thousands)

December 31, 2020

Agricultural $ 438 $ — $ 629 $ 1,067 $ 93,775 $ 94,842 $ 111

Commercial and financial 867 195 140 1,202 285,040 286,242 20

8 unchanged sentences

Obligations of state and political subdivisions — — — — 56,488 56,488 —

$ 8,180 $ 1,645 $ 4,411 $ 14,236 $ 2,695,908 $ 2,710,144 $ 1,056

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accruing Loans

Past Due 60 - 89 Days

Past Due 90 Days

Past Due Total Past

Due Current Total

Receivable Accruing Loans

(Amounts In Thousands)

December 31, 2019

Agricultural $ 163 $ 275 $ 122 $ 560 $ 90,757 $ 91,317 $ 48

Commercial and financial 1,076 229 101 1,406 219,917 221,323 65

8 unchanged sentences

Obligations of state and political subdivisions — — — — 49,896 49,896 —

$ 9,211 $ 4,472 $ 5,230 $ 18,913 $ 2,620,191 $ 2,639,104 $ 606

The Company does not have a significant amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.

1 unchanged sentence

As of December 31, 2020 and 2019, accruing loans past due 90 days or more were 0.04 % and 0.02 % of total loans, respectively.

The average balance of the accruing loans past due 90 days or more decreased in 2019 as compared to 2018 .

The average balance of the accruing loans past due 90 days or more increased in 2020 as compared to 2019.

The average 90 days or more past due accruing loan balance per loan was $ 0.09 million as of December 31, 2020 compared to $ 0.08 million as of December 31, 2019.

4 unchanged sentences

Certain impaired loan information by loan type at December 31, 2020 and 2019 was as follows:

December 31, 2019

December 31, 2018

Accruing loans

(Amounts In Thousands)

December 31, 2020 December 31, 2019

loans (1) Accruing loans

days or more TDR

loans Nonaccrual

loans (1) Accruing loans

days or more TDR

(Amounts In Thousands) (Amounts In Thousands)

Agricultural $ 1,252 $ 111 $ 85 $ 1,192 $ 48 $ 404

Commercial and financial 479 20 1,263 679 65 1,934

7 unchanged sentences

Loans to individuals — — — — — —

$ 8,849 $ 1,056 $ 10,251 $ 10,768 $ 606 $ 9,308

(1) There were $ 2.97 million and $ 4.34 million of TDR loans included within nonaccrual loans as of December 31, 2020 and 2019, respectively.

3 unchanged sentences

TDR loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles.

This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

As of December 31, 2020, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the interagency statement and therefore were not considered TDRs was 13 loans, totaling $ 9.4 million.

Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82 % of total loans.

As of December 31, 2020, COVID-19 related payment deferrals were approximately 1.20 % of total loans.

HILLS BANCORPORATION

2 unchanged sentences

December 31, 2020

contracts Recorded

investment Commitments

(Dollar Amounts In Thousands)

Agricultural 6 $ 1,028 $ —

Commercial and financial 17 1,743 35

7 unchanged sentences

Loans to individuals — — —

63 $ 13,225 $ 39

December 31, 2019

contracts Recorded

investment Commitments

(Dollar Amounts In Thousands)

Agricultural 9 $ 1,552 $ 3

Commercial and financial 16 2,641 95

7 unchanged sentences

Loans to individuals — — —

60 $ 13,709 $ 98

HILLS BANCORPORATION

2 unchanged sentences

December 31, 2020

Pre-modification

Post-modification

Contracts Pre-modification

investment Post-modification

( Dollar Amounts In Thousands)

Agricultural 2 $ 93 $ 93

Commercial and financial 7 623 623

7 unchanged sentences

Loans to individuals — — —

23 $ 4,654 $ 4,654

December 31, 2019

Pre-modification

Post-modification

Contracts Pre-modification

investment Post-modification

( Dollar Amounts In Thousands)

Agricultural 4 $ 574 $ 574

Commercial and financial 5 503 503

7 unchanged sentences

Loans to individuals — — —

15 $ 4,121 $ 4,121

The Bank has commitments to lend additional borrowings to TDR loan customers.

1 unchanged sentence

The additional borrowings are not used to facilitate payments on these loans.

There was one TDR loan totaling $ 0.065 million modified during the year that was in payment default (defined as past due 90 days or more) as of December 31, 2019 and no ne as of December 31, 2018 .

There were no TDR loans modified during the year that were in payment default (defined as past due 90 days or more) as of December 31, 2020 and one as of December 31, 2019 totaling $ 0.065 million.

HILLS BANCORPORATION

1 unchanged sentence

Information regarding impaired loans as of and for the year ended December 31, 2020 is as follows:

Investment Unpaid

Balance Related

Allowance Average

Investment Interest

(Amounts in Thousands)

With no related allowance recorded:

Agricultural $ 1,337 $ 1,928 $ — $ 1,518 $ 24

Commercial and financial 1,520 2,907 — 2,054 85

7 unchanged sentences

Loans to individuals — 47 — — —

$ 17,906 $ 23,459 $ — $ 20,297 $ 556

With an allowance recorded:

Agricultural $ 206 $ 206 $ 86 $ 141 $ 14

Commercial and financial 671 724 411 755 27

7 unchanged sentences

Loans to individuals 51 51 51 53 3

$ 2,823 $ 2,954 $ 662 $ 2,845 $ 98

Agricultural $ 1,543 $ 2,134 $ 86 $ 1,659 $ 38

Commercial and financial 2,191 3,631 411 2,809 112

7 unchanged sentences

Loans to individuals 51 98 51 53 3

$ 20,729 $ 26,413 $ 662 $ 23,142 $ 654

HILLS BANCORPORATION

1 unchanged sentence

Information regarding impaired loans as of and for the year ended December 31, 2019 is as follows:

Investment Unpaid

Balance Related

Allowance Average

Investment Interest

(Amounts in Thousands)

With no related allowance recorded:

Agricultural $ 1,596 $ 2,157 $ — $ 1,785 $ 37

Commercial and financial 1,340 2,220 — 1,617 64

7 unchanged sentences

Loans to individuals — 14 — — —

$ 17,713 $ 22,527 $ — $ 18,035 $ 436

With an allowance recorded:

Agricultural $ 134 $ 134 $ 87 $ 287 $ 17

Commercial and financial 1,402 1,539 792 1,510 83

7 unchanged sentences

Loans to individuals 93 93 93 62 2

$ 3,212 $ 3,570 $ 1,084 $ 3,489 $ 141

Agricultural $ 1,730 $ 2,291 $ 87 $ 2,072 $ 54

Commercial and financial 2,742 3,759 792 3,127 147

7 unchanged sentences

Loans to individuals 93 107 93 62 2

$ 20,925 $ 26,097 $ 1,084 $ 21,524 $ 577

HILLS BANCORPORATION

1 unchanged sentence

Information regarding impaired loans as of and for the year ended December 31, 2018 is as follows:

Investment Unpaid

Balance Related

Allowance Average

Investment Interest

(Amounts in Thousands)

With no related allowance recorded:

Agricultural $ 1,395 $ 1,663 $ — $ 1,071 $ 23

Commercial and financial 1,650 2,503 — 1,977 58

7 unchanged sentences

Loans to individuals — 14 — — —

$ 15,201 $ 19,515 $ — $ 15,090 $ 266

With an allowance recorded:

Agricultural $ 1,065 $ 1,229 $ 479 $ 980 $ 7

Commercial and financial 2,512 2,512 1,189 2,793 107

7 unchanged sentences

Loans to individuals 64 64 64 77 9

$ 12,784 $ 13,023 $ 2,114 $ 13,005 $ 527

Agricultural $ 2,460 $ 2,892 $ 479 $ 2,051 $ 30

Commercial and financial 4,162 5,015 1,189 4,770 165

7 unchanged sentences

Loans to individuals 64 78 64 77 9

$ 27,985 $ 32,538 $ 2,114 $ 28,095 $ 793

HILLS BANCORPORATION

4 unchanged sentences

Impaired loans were 0.76 % and 0.79 % of loans held for investment as of December 31, 2020 and 2019, respectively.

The decrease in impaired loans is due mainly to a decrease of $ 8.07 million in specific reserve loans and a decrease in nonaccrual loans of $ 0.06 million and offset by an increase of accruing loans past due 90 days or more of $ 0.24 million , and an increase in TDR loans of $ 0.77 million from December 31, 2018 to December 31, 2019 .

The decrease in impaired loans is due mainly to a decrease in nonaccrual loans of $ 1.92 million and offset by an increase of accruing loans past due 90 days or more of $ 0.45 million, an increase of $ 0.43 million in specific reserve loans and an increase in TDR loans of $ 0.94 million from December 31, 2019 to December 31, 2020.

For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral that can be identified as uncollectible.

40 unchanged sentences

(Amounts In Thousands)

Land $ 11,266 $ 11,261

Buildings and improvements 37,512 37,261

Furniture and equipment 40,053 38,449

88,831 86,971

Less accumulated depreciation 52,953 49,825

Net $ 35,878 $ 37,146

The Bank leases branch offices, parking facilities and certain equipment under operating leases.

1 unchanged sentence

As the options are reasonably certain to be exercised, they are recognized as part of the right-of-use assets and lease liabilities.

For the year ended December 31, 2019, total operating lease expense was $ 0.62 million included in occupancy expenses in the consolidated statement of income.

Included in this were $ 0.53 million of operating lease costs, $ 0.03 million of short term lease costs, and $ 0.06 million of variable lease costs.

For the year ended December 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.53 million and right-of-use assets obtained in exchange for lease obligations was $ 3.58 million .

As of December 31, 2019, operating lease right-of-use assets included in other assets was $ 3.20 million and liabilities was $ 3.23 million .

The weighted average remaining lease term for operating leases was 10.86 years and the weighted average discount rate for operating leases was 3.46 % .

For the years ended December 31, 2020 and 2019, total operating lease expense was $ 0.56 million and $ 0.62 million, respectively, and is included in occupancy expenses in the consolidated statement of income.

Included in this were $ 0.47 million and $ 0.53 million of operating lease costs, respectively, $ 0.03 million and $ 0.03 million of short term lease costs, respectively, and $ 0.06 million and $ 0.06 million of variable lease costs, respectively.

For the years ended December 31, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.47 million and $ 0.53 million, respectively, and right-of-use assets obtained in exchange for lease obligations was $ 0.05 million and $ 3.58 million, respectively.

As of December 31, 2020 and 2019, operating lease right-of-use assets included in other assets was $ 2.86 million and $ 3.20 million, respectively.

Operating lease liabilities was $ 2.91 million and $ 3.23 million, respectively.

The weighted average remaining lease term for operating leases was 10.27 years and 10.86 years, respectively, and the weighted average discount rate for operating leases was 3.45 % and 3.46 %, respectively.

Discount rates used were determined from FHLB borrowing rates for comparable terms.

4 unchanged sentences

(Amounts In Thousands)

Thereafter 1,756

Total lease payments 3,512

5 unchanged sentences

NOW and other demand $ 801,550 $ 610,271

Savings 1,161,324 981,827

Time, $100,000 and over 327,861 292,982

Other time 369,643 388,672

$ 2,660,378 $ 2,273,752

Brokered deposits totaled $ 74.08 million and $ 109.29 million as of December 31, 2020 and 2019, respectively, with an average interest rate of 0.34 % and 1.65 % as of December 31, 2020 and 2019, respectively.

8 unchanged sentences

Due over four years 9,415 12,312

$ 697,504 $ 681,654

HILLS BANCORPORATION

2 unchanged sentences

As of December 31, 2020 and 2019, the borrowings were as follows:

(Effective interest rates as of December 31, 2019)

(Amounts In Thousands)

(Effective interest rates as of December 31, 2020) (Amounts In Thousands)

Due 2020, 3.05 %

2 unchanged sentences

Due 2025, 2.81 % to 2.94 %

45,000 60,000

Due 2026, 2.52 % to 2.86 %

30,000 30,000

Due 2027, 2.76 % to 2.95 %

On December 13, 2019 the Company paid $ 30.00 million in FHLB Borrowings due in 2025.

On January 17, 2018 the Company paid $ 15.00 million in FHLB Borrowings due in 2019 and $ 15.00 million due in 2021.

On February 6, 2018 the Company paid $ 15.00 million in FHLB Borrowings due in 2021.

On February 28, 2018 the Company paid $ 15.00 million in FHLB Borrowings due in 2022.

There were no prepayment fees incurred with these prepayments.

Fees incurred with the 2019 prepayments were $ 2.09 million .

30,000 30,000

$ 105,000 $ 185,000

On November 9, 2020 the Company paid $ 25.00 million in FHLB Borrowings due in 2020.

On December 30, 2020 the Company paid $ 25.00 million in FHLB Borrowings that were due in 2023, $ 15.00 million in FHLB Borrowings due in 2024 and $ 15.00 million in FHLB Borrowings due in 2025.

Fees incurred with the 2020 prepayments were $ 2.53 million and recorded in other noninterest expenses.

On December 13, 2019 the Company paid $ 30.00 million in FHLB Borrowings due in 2025 and incurred prepayment fees of $ 2.09 million which were recorded in other noninterest expenses.

The remaining borrowings with the FHLB may have prepayment fees based on the current FHLB borrowing rate.

6 unchanged sentences

(amounts in thousands)

Net unrealized gain (loss) on available-for-sale securities

Net unrealized gain on available-for-sale securities $ 11,702 $ 4,234

Net unrealized loss on derivatives used for cash flow hedges — ( 2,349 )

Tax effect ( 2,920 ) ( 470 )

Net-of-tax amount $ 8,782 $ 1,415

6 unchanged sentences

7,720 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2019.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes discretionary cash contributions.

1 unchanged sentence

The 2020, 2019 and 2018 discretionary contribution rate was 4.5 % of qualified salaries.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value.

34 unchanged sentences

The expected lives of options granted incorporate historical employee exercise behavior.

The risk-free rate for periods that coincide with the expected life of the options is based on the ten year interest rate swap rate as published by the Federal Reserve Bank on the date of issuance.

The risk-free rate for periods that coincide with the expected life of the options is based on the ten year interest rate swap rate as published by the Federal Reserve Bank on the date

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expected volatility is based on volatility levels of the Company’s peers’ common stock as the Company’s stock has limited trading activity.

1 unchanged sentence

Significant assumptions at the date of grant on May 14, 2019 include the risk-free interest rate of 2.39 %, expected option life of 7.5 years, expected volatility of 33 % and expected dividends of 1.23 %.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were 5,805 stock options granted in 2019 and no ne in 2018 and 2017.

There were no stock options granted in 2020, 5,805 in 2019 and no ne in 2018.

The weighted-average fair value of options granted in 2019 was $ 21.31 per share.

1 unchanged sentence

A summary of the stock options is as follows:

Number of Shares

Exercise Price

Weighted-Average

Number of Shares Weighted-

Exercise Price Weighted-Average

Contractual Term

(Years) Aggregate

Intrinsic Value

1 unchanged sentence

Balance, December 31, 2017 10,220 $ 33.44 4.45 $ 342

Exercised ( 1,200 )

Balance, December 31, 2018 9,020 $ 33.30 3.41 250

Granted 5,805

Exercised ( 1,800 )

Balance, December 31, 2019 13,025 $ 45.92 5.47 248

1 unchanged sentence

Other pertinent information related to the options outstanding at December 31, 2020 is as follows:

Exercise Price

Number Outstanding

Remaining Contractual Life

Number Exercisable

Exercise Price Number Outstanding Remaining Contractual Life Number Exercisable

33.00 7,220 16 months 7,220

62.00 5,805 101 months —

As of December 31, 2020, the outstanding options have a weighted-average exercise price of $ 45.92 per share and a weighted average remaining contractual term of 4.47 years.

2 unchanged sentences

As of December 31, 2020, the vested options totaled 7,220 shares with a weighted-average exercise price of $ 33.00 per share.

As of December 31, 2019 , 19,853 shares were available for stock options and awards.

As of December 31, 2020, 231,425 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan).

The 2010 Stock Option and Incentive Plan (2010 Plan) was discontinued upon the approval of the 2020 Plan in April 2020.

No stock options or stock awards will be issued from the 2010 Plan after April 2020.

The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock.

A summary of the restricted stock option activity for the year ended December 31, 2020 is as follows:

Number of Shares

Weighted Average Grant Date Fair Value

Balance, December 31, 2018

Balance, December 31, 2019

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2020 Stock Option and Incentive Plan 2010 Stock Option and Incentive Plan

Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value

Balance, December 31, 2019 — 19,853

Authorization of shares 250,000 —

Granted 19,063 $ 62.26 1,364 $ 62.26

Forfeited 488 $ 52.93 4,375 $ 52.93

Balance, December 31, 2020 231,425 22,864

The Company authorized the issuance of 20,427 shares in 2020, 23,527 shares in 2019, and 24,899 shares in 2018 to certain employees.

3 unchanged sentences

Income taxes for the years ended December 31, 2020, 2019 and 2018 are summarized as follows:

2020 2019 2018

(Amounts In Thousands)

Federal $ 9,124 $ 8,857 $ 7,783

State 2,673 2,391 3,093

Federal ( 417 ) 1,068 ( 1,560 )

State ( 103 ) 233 ( 411 )

$ 11,277 $ 12,549 $ 8,905

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in deferred taxes.

7 unchanged sentences

State net operating loss 1,011 929

Unrealized losses on investment securities

Gross deferred tax assets $ 12,468 $ 12,701

4 unchanged sentences

Unrealized gains on investment securities 2,920 1,056

Goodwill 407 407

Other 101 336

Gross deferred tax liabilities $ 5,369 $ 3,754

5 unchanged sentences

The Company has recorded a valuation allowance to reduce the deferred tax asset attributable to the net operating loss carry-forwards.

At December 31, 2019 and 2018 , the Company believes

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

it is more likely than not that the Iowa net operating loss carry-forwards will not be realized.

At December 31, 2020 and 2019, the Company believes it is more likely than not that the Iowa net operating loss carry-forwards will not be realized.

A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

The valuation allowance increased (decreased) by $ 134,000 and ( $ 41,000 ) for the years ended December 31, 2019 and 2018 , respectively.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”).

The Tax Act made broad and complex changes to the U.S.

tax code that affected 2017, including, but not limited to, accelerated depreciation that allows for full expensing of qualified property.

The Tax Act also established new tax laws that affects 2018 and after, including a reduction in the U.S.

federal corporate income tax rate from 35% to 21% .

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No.

118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act.

SAB 118 provided that a measurement period should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes.

In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax asset, excluding after tax credits, as of December 22, 2017.

Based on this revaluation, we recorded a net tax expense of $ 4.71 million to reduce the net deferred tax asset balance, which was recorded as additional income tax expense for the year ended December 31, 2017.

Our effective tax rate increased by 30.99 % to 41.0 % primarily as a result of the revaluation of our net deferred tax asset for the year ended December 31, 2017.

The valuation allowance increased by $ 82,000 and $ 134,000 for the years ended December 31, 2020 and 2019, respectively.

The net change in the deferred income taxes for the years ended December 31, 2020, 2019 and 2018 is reflected in the consolidated financial statements as follows:

Year Ended December 31,

2020 2019 2018

(Amounts In Thousands)

1 unchanged sentence

Consolidated statements of stockholders' equity 2,450 1,550 92

$ 1,930 $ 2,851 $ 2,063

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense for the years ended December 31, 2020, 2019 and 2018 are less than the amounts computed by applying the maximum effective federal income tax rate to the income before income taxes because of the following items:

2020 2019 2018

Income Amount % Of

(Amounts In Thousands)

4 unchanged sentences

Income tax credits ( 51 ) ( 0.1 ) ( 531 ) ( 0.9 ) ( 1,292 ) ( 2.8 )

Deferred tax asset revaluation

Other ( 46 ) ( 0.1 ) ( 53 ) 0.1 ( 478 ) ( 1.0 )

$ 11,277 22.6 % $ 12,549 21.7 % $ 8,905 19.5 %

Federal income tax expense for the years ended December 31, 2020, 2019 and 2018 was computed using the consolidated effective federal tax rate.

The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

subsidiary bank.

The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank.

The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes.

10 unchanged sentences

Under the BASEL III rules, the minimum capital ratios are 4% for Tier 1 Leverage Capital Ratio, 4.5% for the Common Equity Tier 1 Capital Ratio, 6% for the Tier 1 Risk-Based Capital Ratio and 8% for the Total Risk-Based Capital Ratio.

A capital conservation buffer was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching 2.5% on January 1, 2019.

A capital conservation buffer of 2.5% of risk-weighted assets was completely phased in beginning January 1, 2019.

As of March 31, 2020, the Bank elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act.

Under the CBLR framework, the Bank is required to maintain a CBLR of greater than 9%.

The Coronavirus Aid, Relief and Economic Security ("CARES") Act reduced the minimum ratio to 8% beginning in the 2nd quarter of 2020 through December 31, 2020, increasing to 8.5% for 2021 and returning to 9% beginning January 1, 2022.

Management believes that, as of December 31, 2020 and 2019, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2019 , the most recent notifications from the Federal Reserve System categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

As of December 31, 2020 and 2019, the most recent notifications from the Federal Reserve System categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action.

To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 common equity and Tier 1 leverage ratios as set forth in the table that follows.

There are no conditions or events since that notification that management believes have changed the Bank's category.

The actual amounts and capital ratios as of December 31, 2019 and 2018 , with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):

For Capital Adequacy Purposes

To Be Well-Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2019:

Total risk-based capital

Tier 1 risk-based capital

Tier 1 common equity

Leverage ratio

Total risk-based capital

Tier 1 risk-based capital

Tier 1 common equity

Leverage ratio

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For Capital Adequacy Purposes

To Be Well-Capitalized Under Prompt Corrective Action Provisions

The actual amounts and capital ratios as of December 31, 2020 and 2019, with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):

Actual For Capital Adequacy Purposes

Amount Ratio Ratio

As of December 31, 2020:

Community Bank Leverage Ratio $ 452,123 11.91 % 8.00 %

Community Bank Leverage Ratio 453,073 11.94 8.00

Actual For Capital Adequacy Purposes To Be Well-Capitalized Under Prompt Corrective Action Provisions

Amount Ratio Ratio Ratio

As of December 31, 2019:

Total risk-based capital $ 454,452 18.15 % 8.00 % 10.00 %

15 unchanged sentences

Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2020 and 2019:

3 unchanged sentences

Net increase (decrease) due to change in related parties — 2,481

Advances 14,406 17,243

Collections ( 16,070 ) ( 15,223 )

Balance, ending $ 54,053 $ 55,717

6 unchanged sentences

December 31, 2020

Amount Estimated

Fair Value Readily

Prices(1) Observable

Prices(2) Company

(Amounts In Thousands)

3 unchanged sentences

Loans held for sale 43,947 43,947 — 43,947 —

Agricultural 92,334 92,922 — — 92,922

Commercial and financial 281,357 282,015 — — 282,015

28 unchanged sentences

December 31, 2019

Amount Estimated

Fair Value Readily

Prices(1) Observable

Prices(2) Company

(Amounts In Thousands)

3 unchanged sentences

Loans held for sale 8,400 8,400 — 8,400 —

Agricultural 88,917 90,118 — — 90,118

Commercial and financial 216,335 217,640 — — 217,640

31 unchanged sentences

There are three levels of inputs that may be used to measure fair value as follows:

Quoted prices in active markets for identical assets or liabilities.

Observable inputs other than quoted prices included within Level 1.

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than quoted prices included within Level 1.

Observable inputs include the quoted prices for similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability.

Unobservable inputs supported by little or no market activity for financial instruments.

Level 3 Unobservable inputs supported by little or no market activity for financial instruments.

Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

28 unchanged sentences

These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability.

Inputs to these valuation techniques are subjective in nature, involve uncertainties and

Inputs to these valuation techniques are subjective in nature,

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

require significant judgment and therefore cannot be determined with precision.

involve uncertainties and require significant judgment and therefore cannot be determined with precision.

Accordingly, the fair value estimates presented are not necessarily indicative of the amounts to be realized in a current market exchange.

34 unchanged sentences

Readily Available

Market Prices(1)

Market Prices(2)

Securities available for sale

(Amounts in Thousands)

Market Prices(1) Observable

Market Prices(2) Company

Prices(3) Total at

Securities available for sale (Amounts in Thousands)

Treasury $ 148,646 $ — $ — $ 148,646

State and political subdivisions — 224,566 — 224,566

2 unchanged sentences

Interest rate swaps — — — —

Total $ 148,646 $ 259,726 $ — $ 408,372

December 31, 2019

Readily Available

Market Prices(1)

Market Prices(2)

Securities available for sale

(Amounts in Thousands)

Market Prices(1) Observable

Market Prices(2) Company

Prices(3) Total at

Securities available for sale (Amounts in Thousands)

Treasury $ 128,585 $ — $ — $ 128,585

State and political subdivisions — 211,489 — 211,489

2 unchanged sentences

Interest rate swaps — ( 2,349 ) — ( 2,349 )

Total $ 128,585 $ 224,369 $ — $ 352,954

(1) Considered Level 1 under ASC 820.

9 unchanged sentences

For assets measured at fair value on a nonrecurring basis that were still held on the balance sheet at December 31, 2020 and 2019, the following tables provide the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets at year end.

December 31, 2019

Year Ended December 31, 2019

December 31, 2020 Year Ended December 31, 2020

Prices(1) Observable

Prices(2) Company

Prices(3) Total at

Fair Value Total

(Amounts in Thousands)

Agricultural $ — $ — $ 1,081 $ 1,081 $ —

Commercial and financial — — 1,692 1,692 385

8 unchanged sentences

Foreclosed assets (5) — — — — —

Total $ — $ — $ 18,157 $ 18,157 $ 906

(1) Considered Level 1 under ASC 820.

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

Year Ended December 31, 2018

December 31, 2019 Year Ended December 31, 2019

Prices(1) Observable

Prices(2) Company

Prices(3) Total at

Fair Value Total

(Amounts in Thousands)

Agricultural $ — $ — $ 1,272 $ 1,272 $ 36

Commercial and financial — — 1,803 1,803 499

8 unchanged sentences

Foreclosed assets (5) — — — — —

Total $ — $ — $ 17,954 $ 17,954 $ 1,038

(1) Considered Level 1 under ASC 820.

11 unchanged sentences

(Amounts In Thousands)

ASSETS 2020 2019

Cash and cash equivalents at subsidiary bank $ 1,100 $ 5,114

Investment in subsidiary bank 464,355 428,042

Other assets 1,846 1,331

Total assets $ 467,301 $ 434,487

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities $ 3,896 $ 7,450

Redeemable common stock held by ESOP 47,329 51,826

2 unchanged sentences

Retained earnings 439,831 409,509

Accumulated other comprehensive gain (loss)

Accumulated other comprehensive gain 8,782 1,415

Treasury stock at cost ( 45,441 ) ( 39,830 )

463,405 427,037

Less maximum cash obligation related to ESOP shares 47,329 51,826

4 unchanged sentences

(Amounts In Thousands)

2020 2019 2018

Dividends received from subsidiary $ 14,822 $ 7,657 $ 11,502

2 unchanged sentences

Income tax benefit 173 271 273

14,633 7,220 10,989

Equity in undistributed income of subsidiary 24,014 38,098 25,778

Net income $ 38,647 $ 45,318 $ 36,767

HILLS BANCORPORATION

3 unchanged sentences

(Amounts In Thousands)

2020 2019 2018

Cash flows from operating activities:

Net income $ 38,647 $ 45,318 $ 36,767

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

4 unchanged sentences

(Increase) decrease in other assets ( 515 ) ( 100 ) 162

Increase in other liabilities

(Decrease) increase in other liabilities ( 3,554 ) 1,036 574

Net cash and cash equivalents provided by operating activities 11,604 9,041 13,039

7 unchanged sentences

Net cash and cash equivalents used by financing activities ( 15,618 ) ( 7,669 ) ( 13,312 )

Increase (decrease) in cash and cash equivalents

(Decrease) increase in cash and cash equivalents ( 4,014 ) 1,372 ( 273 )

Cash and cash equivalents:

11 unchanged sentences

While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management believes at this time that the outcome of such litigation will not have a material adverse effect on the Company’s business, financial conditions, or results of operations.

On April 10, 2019, Hills Bank was sued in a class action lawsuit in the Iowa District Court for Johnson County.

The lawsuit seeks class action status for customers who had paid overdraft fees on debit card transactions that were authorized into a positive account, but settled into a negative account.

Plaintiff contends that these overdraft fees breached the terms of Hills Bank’s account documents.

Plaintiff seeks compensatory and punitive damages for breach of contract.

The Bank disputes the merits of Plaintiff’s claims and filed a motion to dismiss the case, which the Court denied.

At this stage of the proceedings, it is not possible for management of the Bank to determine the probability of an adverse outcome or reasonably estimate the amount of any potential loss.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has and will continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company.

The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

The spread of the outbreak has caused significant disruptions in the U.S.

economy and is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could also potentially create widespread business continuity issues for the Company.

The Company’s business is dependent upon the willingness and ability of its employees and

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

customers to conduct banking and other financial transactions.

If the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

See Note 3 for further discussion regarding the financial impact of COVID-19.

Financial instruments with off-balance sheet risk :

8 unchanged sentences

Home equity loans $ 69,974 $ 65,203

Credit cards 60,535 57,421

Commercial, real estate and home construction 118,186 94,490

16 unchanged sentences

At December 31, 2020 and 2019, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Lease commitments:

4 unchanged sentences

Rent expense was $ 0.38 million, $ 0.40 million and $ 0.36 million for the years ended December 31, 2020, 2019 and 2018, respectively.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Quarterly Results of Operations (unaudited, amounts in thousands, except per share amounts)

Quarter Ended

March June September December Year

Interest income $ 32,452 $ 32,246 $ 31,675 $ 32,156 $ 128,529

2 unchanged sentences

Provision for loan losses 4,649 8 ( 157 ) ( 142 ) 4,358

Other income 6,167 6,531 7,510 8,128 28,336

Other expense 17,227 16,872 18,055 23,477 75,631

Income before income taxes $ 8,881 $ 15,252 $ 14,822 $ 10,969 $ 49,924

Income taxes 1,806 3,541 3,392 2,538 11,277

Net income $ 7,075 $ 11,711 $ 11,430 $ 8,431 $ 38,647

Basic earnings per share $ 0.75 $ 1.25 $ 1.22 $ 0.90 $ 4.12

4 unchanged sentences

Provision for loan losses ( 1,246 ) ( 540 ) 144 ( 1,238 ) ( 2,880 )

Other income 5,250 5,851 6,638 7,053 24,792

Other expense 16,049 16,360 16,604 18,251 67,264

Income before income taxes $ 14,220 $ 14,419 $ 14,585 $ 14,643 $ 57,867

Income taxes 3,017 3,199 3,303 3,030 12,549

Net income $ 11,203 $ 11,220 $ 11,282 $ 11,613 $ 45,318

Basic earnings per share $ 1.20 $ 1.20 $ 1.21 $ 1.24 $ 4.85

4 unchanged sentences

Derivative instruments are recognized as either assets or liabilities in the accompanying consolidated financial statements and are measured at fair value.

The Bank’s objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates.

The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amount to be exchanged between the counterparties.

5 unchanged sentences

Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty.

The Bank was required to pledge $ 2.35 million of collateral as of December 31, 2019 .

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bank determined to terminate one interest rate swap in December 2020 and the other matured in November 2020, therefore the Bank was required to pledge no collateral as of December 31, 2020.

Cash Flow Hedges:

4 unchanged sentences

At inception, the Bank asserted that the underlying principal balance would remain outstanding throughout the hedge transaction making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps.

The Bank determined to terminate the remaining interest rate swap in December 2020 and in connection with the termination paid $ 2.684 million to the counterparty.

The losses realized on the interest rate swap were reclassified into the income statement from other comprehensive income.

In connection with the termination of the swap, the related FHLB borrowing was paid off as described in Note 7.

The table below identifies the balance sheet category and fair values of the Bank’s derivative instruments designated as cash flow hedges as of December 31, 2020 and 2019:

Amount Fair Value Balance

Category Maturity

(Amounts in Thousands)

December 31, 2020

Interest rate swap

Other Liabilities

Interest rate swap

Other Liabilities

Interest rate swap $ — $ — Other Liabilities

Interest rate swap — — Other Liabilities

December 31, 2019

Interest rate swap

Other Liabilities

Interest rate swap

Other Liabilities

Interest rate swap $ 25,000 $ ( 279 ) Other Liabilities 11/9/2020

Interest rate swap 25,000 ( 2,070 ) Other Liabilities 11/7/2023

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below identifies the gains and losses recognized on the Bank’s derivative instruments designated as cash flow hedges for the years ended December 31, 2020 and 2019:

Recognized in OCI

Reclassified from AOCI into Income

Recognized in Income on Derivatives

Amount of Gain (Loss)

Recognized in OCI Reclassified from AOCI into Income Recognized in Income on Derivatives

Amount of Gain (Loss) Category Amount of Gain (Loss) Category Amount of Gain (Loss)

(Amounts in Thousands)

December 31, 2020

Interest rate swap

Interest Expense

Interest rate swap

Interest Expense

Interest rate swap $ 209 Interest Expense $ — Other Income $ —

Interest rate swap ( 438 ) Interest Expense ( 1,992 ) Other Income —

December 31, 2019

Interest rate swap

Interest Expense

Interest rate swap

Interest Expense

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest rate swap $ ( 119 ) Interest Expense $ — Other Income $ —

Interest rate swap ( 446 ) Interest Expense — Other Income —

Subsequent Events

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk