What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-03 compared with 2022-03-04 · 276 added, 333 removed, 1819 unchanged (25% of the section changed)

27 unchanged sentences

The Bank is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments, but believe the risk of these losses has been minimized by entering into the contracts with large, stable financial institutions.

The estimated fair market value of these derivative instruments are presented in Note 17 to the Consolidated Financial Statements.

In order to minimize the potential effects of adverse material and prolonged increases or decreases in market interest rates on the Company's operations, management has implemented an asset/liability program designed to mitigate the Company's interest rate sensitivity.

55 unchanged sentences

Hills Bancorporation

Opinion on the Financial Statements

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Hills Bancorporation (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on Internal Control-Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2022, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 3, 2023, expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

1 unchanged sentence

Measurement of Credit Losses on Financial Instruments.

As discussed below, auditing the Company’s allowance for credit losses, including adoption of the new accounting guidance related to the estimate of allowance for credit losses, was a critical audit matter.

Basis for Opinion

9 unchanged sentences

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

Critical Audit Matter

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

(1) relates to an account or disclosure that is material to the financial statements and (2) involved especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the 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.

Critical Audit Matters

The critical audit matter communicated below are matters arising from the current-period audit of the financial statements that were 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 our especially challenging, subjective, or complex judgments.

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

Allowance for Credit Losses

As discussed in Notes 1 and 3 , the Company adopted Topic 326 effective January 1, 2021.

The Company’s allowance for credit losses on loans was $41.4 million at December 31, 2022.

The Company’s allowance for credit losses on unfunded loan commitments was $4.4 million.

Together these amounts represent the allowance for credit losses (ACL).

The Company uses the discounted cash flow (DCF) method to estimate expected losses for most of the Company’s loan pools that exhibit similar risk characteristics.

6 unchanged sentences

The Company applies expected funding percentages to the respective model loss rates to estimate the allowance related to unfunded commitments.

Auditing management’s estimate of the allowances for loan credit losses (ACL) and unfunded commitments involved a high degree of subjectivity due to the complexities of the probability of default and loss given default models and the nature of the qualitative factor adjustments.

Auditing management’s estimate of the allowances for credit losses involved a high degree of subjectivity due to the complexities of the probability of default and loss given default models and the nature of the qualitative factor adjustments.

Management’s qualitative factor adjustments are highly judgmental and had a significant effect on the ACL.

15 unchanged sentences

• Evaluated the qualitative adjustments, including assessing the reasonableness and basis for adjustments

• Evaluate the accuracy and completeness of Topic 326 disclosures in the consolidated financial statements

/s/ FORVIS, LLP (Formerly, BKD, LLP)

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

8 unchanged sentences

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 4, 2022, expressed an unqualified opinion.

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2022 and 2021, and for each of the three years in the period ended December 31, 2022, and our report dated March 3, 2023, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

14 unchanged sentences

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ FORVIS, LLP (Formerly, BKD, LLP)

Springfield, Missouri

25 unchanged sentences

Total deposits 3,357,367 3,533,994

Other borrowings, federal funds purchased 249 —

Other short-term borrowings, federal funds purchased (Note 7) 82,061 249

Federal Home Loan Bank borrowings (Note 8) 40,000 —

13 unchanged sentences

Retained earnings 512,841 474,392

Accumulated other comprehensive gain (Note 8) 1,477 8,782

Accumulated other comprehensive gain (loss) (Note 9) ( 41,060 ) 1,477

Treasury stock at cost (2022 1,122,639 shares;

20 unchanged sentences

Deposits 15,818 14,712 21,553

Other borrowings 173 — —

FHLB borrowings 94 2,915 5,399

8 unchanged sentences

Other noninterest income 1,333 581 1,187

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

Gain on sale of investment securities — — 10

27,780 33,464 28,336

24 unchanged sentences

Net change in unrealized (loss) gain on securities available for sale ( 56,166 ) ( 9,734 ) 7,478

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

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

Income taxes 13,629 2,429 ( 1,864 )

4 unchanged sentences

Income taxes — — ( 586 )

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

Other comprehensive income on cash flow hedges — — 1,763

Other comprehensive (loss) income, net of tax ( 42,537 ) ( 7,305 ) 7,367

27 unchanged sentences

Balance, December 31, 2020 $ 60,233 $ 439,831 $ 8,782 $ ( 45,441 ) $ ( 47,329 ) $ 416,076

Cumulative change in accounting principle (Note 1) ( 4,751 ) ( 4,751 )

Balance, January 1, 2021 (as adjusted for change in accounting principle) 60,233 435,080 8,782 ( 45,441 ) ( 47,329 ) 411,325

Issuance of 24,513 shares of common stock

14 unchanged sentences

Balance, December 31, 2021 $ 60,938 $ 474,392 $ 1,477 $ ( 48,344 ) $ ( 50,013 ) $ 438,450

Cumulative change in accounting principle (Note 1) — ( 4,751 ) — — — ( 4,751 )

Balance, January 1, 2021 (as adjusted for change in accounting principle) 60,233 435,080 8,782 ( 45,441 ) ( 47,329 ) 411,325

Issuance of 43,655 shares of common stock

25 unchanged sentences

Credit loss (benefit) expense 6,340 ( 5,507 ) 4,358

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

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

Share-based compensation 25 25 25

3 unchanged sentences

Net gain on sale of other real estate owned and other repossessed assets ( 86 ) ( 51 ) ( 120 )

Decrease (increase) in accrued interest receivable 740 265 ( 658 )

(Increase) decrease in accrued interest receivable ( 4,345 ) 740 265

Amortization of premium on investment securities, net 30 1,203 818

Decrease (increase) in other assets 392 1,228 ( 2,681 )

Decrease in other assets 984 392 1,228

Amortization of operating lease right of use assets 105 397 386

(Decrease) increase in accrued interest and other liabilities ( 3,627 ) ( 5,527 ) 650

Decrease in accrued interest and other liabilities ( 332 ) ( 3,627 ) ( 5,527 )

Loans originated for sale ( 112,391 ) ( 429,343 ) ( 475,187 )

20 unchanged sentences

Cash Flows from Financing Activities

Net increase in deposits 341,426 531,204 240,240

Net (decrease) increase in deposits ( 176,627 ) 341,426 531,204

Net increase in short-term borrowings 81,812 249 —

Net decrease in FHLB borrowings ( 105,000 ) ( 80,000 ) ( 30,000 )

Net increase (decrease) in FHLB borrowings 40,000 ( 105,000 ) ( 80,000 )

Borrowings from FRB 1 1 1

5 unchanged sentences

Dividends paid ( 9,304 ) ( 8,773 ) ( 8,325 )

Net cash and cash equivalents provided by financing activities 224,760 440,586 202,571

Increase in cash and cash equivalents 207,608 332,345 198,660

Net cash and cash equivalents (used in) provided by financing activities ( 70,128 ) 224,760 440,586

(Decrease) increase in cash and cash equivalents ( 745,277 ) 207,608 332,345

Cash and cash equivalents:

31 unchanged sentences

All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassification of prior year presentation :

Certain prior year amounts have been reclassified for consistency with the current year presentation.

These reclassifications had no effect on the reported results of operations.

Revenue recognition :

12 unchanged sentences

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset).

A contract liability balance is an

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer.

A contract liability balance is an entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer.

As of December 31, 2022 and 2021, the Company did not have any significant contract balances.

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 incremental costs of obtaining a contract are those costs that an

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

3 unchanged sentences

At December 31, 2022 and 2021, cash equivalents consisted primarily of deposits with other banks.

Investment securities :

The Company maintains amounts in due from banks which, at times, may exceed federally insured limits.

Management monitors these correspendent relationships, and the Company has not experienced any losses in such accounts.

Available-for-sale debt securities and the allowance for credit losses on available-for-sale debt securities :

Available-for-sale ("AFS") securities consist of debt securities not classified as trading or held to maturity.

16 unchanged sentences

If we intend to sell a debt security or more likely than not we will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental impairment reported in earnings.

Accrued interest receivable on AFS debt securities totaled $ 2.05 million at December 31, 2021 and is excluded from the estimate of credit losses.

Accrued interest receivable on AFS debt securities totaled $ 3.61 million and $ 2.05 million at December 31, 2022 and 2021, respectively, and is excluded from the estimate of credit losses.

Stock of the Federal Home Loan Bank is carried at cost.

3 unchanged sentences

Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan.

The Company has had very few experiences of repurchasing loans previously sold into the

The Company has had very few experiences of repurchasing loans previously sold into the secondary market.

A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

secondary market.

A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.

Loans held for investment :

Loans are stated at the amount of unpaid principal, net of deferred loan fees, and reduced by the allowance for credit losses ("ACL").

Accrued interest receivable on loans held for investment totaled $ 9.29 million at December 31, 2021 and is excluded from the estimate of credit losses.

Accrued interest receivable on loans held for investment totaled $ 12.17 million and $ 9.29 million at December 31, 2022 and 2021, respectively, and is excluded from the estimate of credit losses.

Interest income is accrued on the unpaid principal balance.

6 unchanged sentences

Once principal is recovered, any remaining payments received are applied to interest income.

As of December 31, 2021, none of the Company’s nonaccrual loans were earning interest on a cash basis.

As of December 31, 2022 and 2021, none of the Company’s nonaccrual loans were earning interest on a cash basis.

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

21 unchanged sentences

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real gross domestic product (GDP).

1 to 4 Family First and Junior Liens - The 1 to 4 family first and junior liens portfolio segment is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower's capacity to repay,

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

credit, and collateral.

Several factors are considered when assessing a borrower's capacity, including the borrower's employment, income, current debt, assets, and level of equity in the property.

33 unchanged sentences

(5) the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans;

(6) the quality of our loan review system and (7)

(6) the quality of our loan review system and (7) the value of underlying collateral for collateralized loans.

Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the value of underlying collateral for collateralized loans.

Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast.

27 unchanged sentences

Troubled debt restructurings (“TDR loans”) :

A loan is accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not

These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses to the Company.

A restructuring that results in only an insignificant delay in

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

otherwise consider.

These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses to the Company.

A restructuring that results in only an insignificant delay in payment is not considered a concession.

payment is not considered a concession.

A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt's original contractual maturity or original expected duration.

4 unchanged sentences

Management evaluates loans where there is a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower for purposes of estimating the allowance for credit losses.

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.

Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allowed 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.

Under Section 4013 of the CARES Act, loan modifications that qualify for such suspension are those where the borrower was not more than 30 days past due as of December 31, 2019.

In addition, the loan modification being made in response to the COVID-19 pandemic must include a deferral or delay in the payment of principal or interest, or change in the interest rate on the loan.

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.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

8 unchanged sentences

Tax credit real estate :

Tax credit real estate represents three multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi-family senior living rental property, all which are affordable housing projects as of December 31, 2021.

Tax credit real estate represents three multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi-family senior living rental property, all of which are affordable housing projects as of December 31, 2022.

The Bank has a 99 % or greater limited partnership interest in each limited partnership.

The investment in each was completed after the projects had been developed by the general partner.

The Company evaluates the recoverability of the carrying value on a regular basis.

If the recoverability was determined to be in doubt, a valuation allowance would be established by way of a charge to expense.

On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if an allowance for credit losses is necessary.

The allowance for credit losses is measured by a comparison of the carrying amount of the investments to the future undiscounted cash flows expected to be generated by the investment properties, including the low-income housing tax credits and any estimated proceeds from eventual disposition.

If there is an indication of impairment, the allowance for credit losses would be established with a charge to credit loss expense.

There were no indications of impairment based on management's evaluation and therefore no allowance for credit losses was determined necessary as of December 31, 2022 and 2021.

Depreciation expense is provided on a straight-line basis over the estimated useful life of the assets.

3 unchanged sentences

However, the properties do contribute in the form of income tax credits, which lowers the Company’s effective tax rate.

Once established, the credits on each property last for ten

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.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

years and are passed through from the limited partnerships to the Bank and reduces the consolidated federal tax liability of the Company.

In February 2021, the Company provided construction financing and contributed capital of $ 4.18 million to Del Ray Ridge LP, as limited partner, which owns and operates an affordable housing property in Iowa City, Iowa.

2 unchanged sentences

Substantially all of the projected benefits are from tax credits and other tax benefits due to the minimum buyout clause included in the partnership agreement.

On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if an allowance for credit losses is necessary.

If there is an indication of impairment, the allowance for credit losses would be established with a charge to credit loss expense.

There were no indications of impairment based on management's evaluation and therefore no allowance for credit losses was determined necessary as of December 31, 2021.

Property and equipment :

10 unchanged sentences

Interest and penalties on unrecognized tax benefits are classified as other noninterest expense.

As of December 31, 2021, the Company had no material unrecognized tax benefits.

As of December 31, 2022 and 2021, the Company had no material unrecognized tax benefits.

Goodwill represents the excess of cost over the fair value of the net assets acquired, and is not subject to amortization, but requires, at a minimum, annual impairment tests for intangibles that are determined to have an indefinite life.

6 unchanged sentences

Net capital expenditures incurred are capitalized to the property.

Derivative financial instruments :

The Bank uses interest rate swaps as part of its interest rate risk management.

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815 establishes accounting and reporting standards for derivative instruments and hedging activities.

The Bank records all interest rate swaps on the balance sheet at fair value.

Derivatives used to hedge the exposure to variability in expected future cash flows are considered cash flow hedges.

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, 2021 and 2020, the Bank did not have any outstanding interest rate swaps.

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bank assesses the effectiveness of each hedging relationship by comparing the cumulative changes in cash flows of the derivative hedging instruments with the cumulative changes in cash flows of the designated hedged item or transaction.

No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.

The Bank does not use derivatives for trading or speculative purposes.

Earnings per share:

2 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:

28 unchanged sentences

In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures.

2 unchanged sentences

The transition adjustment includes a $ 2.75 million increase to the Allowance for Credit Losses and the recording of a $ 3.58 million Allowance for Credit Losses on OBS Credit Exposures.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table illustrates the impact of ASC 326 (amounts in thousands).

3 unchanged sentences

Allowance for credit losses on off-balance sheet credit exposures $ 3,584 $ — $ 3,584

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.

The amendments in this ASU simplify the accounting for income taxes by removing specific exceptions included in Topic 740, introducing other simplifications and making technical corrections.

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 adoption of ASU 2019-12 by the Company on January 1, 2021 did not 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 did not 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 did not have a material impact on the financial statements.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting guidance pending adoption as of December 31, 2021

Accounting guidance adopted in 2022

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options .

4 unchanged sentences

An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

The adoption of the ASU by the Company on January 1, 2022 is not expected to have a material impact on the financial statements.

The adoption of the ASU by the Company on January 1, 2022 did not have a material impact on the financial statements.

Accounting guidance pending adoption as of December 31, 2022

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 815) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

5 unchanged sentences

The Company is in the process of evaluating the impact of this ASU on the financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures .

The FASB issued these amendments to eliminate accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty, and to require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost .

The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively, except as provided in the next sentence.

For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption is permitted if

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

an entity has adopted the amendments in Update 2016-03, including adoption in an interim period.

The Company is in the process of evaluating the impact of this ASU on the financial statements.

Investment Securities

14 unchanged sentences

The Company had no securities designated as trading or held to maturity in its portfolio at December 31, 2022 or 2021.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10 unchanged sentences

State and political subdivisions 260,266 4,420 ( 1,170 ) — 263,516

Mortgage-backed securities and collateralized mortgage obligations 9,575 — ( 129 ) — 9,446

Total $ 549,386 $ 6,431 $ ( 4,463 ) $ — $ 551,354

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at December 31, 2022, were as follows (Amounts in Thousands).

11 unchanged sentences

government and its agencies, in an amount greater than 10% of stockholders' equity.

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

December 31, 2021 December 31, 2020

Sales proceeds $ — $ 313

Gross realized gains — 10

Gross realized losses — —

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no sales of available-for-sale securities for the year ended December 31, 2022 and 2021.

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, 2022 and 2021 (Amounts in Thousands):

7 unchanged sentences

582 $ 474,089 ( 19,360 ) 4.08 % 415 $ 262,801 ( 35,077 ) 13.35 % 997 $ 736,890 $ ( 54,437 ) 7.39 %

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Less than 12 months 12 months or more Total

4 unchanged sentences

State and political subdivisions 231 70,542 ( 1,055 ) 1.50 % 14 9,248 ( 115 ) 1.24 % 245 79,790 ( 1,170 ) 1.47 %

Mortgage-backed securities and collateralized mortgage obligations 4 9,446 ( 129 ) 1.37 % — — — — % 4 9,446 ( 129 ) 1.37 %

295 $ 229,339 ( 3,690 ) 1.61 % 24 $ 33,648 $ ( 773 ) 2.30 % 319 $ 262,987 $ ( 4,463 ) 1.70 %

The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments.

The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are not attributable to credit losses.

None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.

1 unchanged sentence

The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table.

Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized

Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis.

The securities are of high credit quality (investment grade credit ratings) and principal and interest payments are made timely with no payments past due as of December 31, 2022.

24 unchanged sentences

3,108,421 2,660,532

Less allowance for credit losses (2021) and loan losses (2020) 35,470 37,070

Less allowance for credit losses 41,440 35,470

$ 3,066,981 $ 2,625,062

As of December 31, 2021 and 2020, the Company has outstanding balances of $ 5.34 million and $ 86.5 million of loans issued under the Paycheck Protection Program (PPP).

For the year ended December 31, 2021, the Company recognized $ 5.81 million of deferred PPP loan fees in interest income and received forgiveness payments totaling $ 140.1 million from the SBA.

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

For the years ended December 31, 2022 and 2021, the Company recognized none and $ 5.81 million of deferred PPP loan fees in interest income.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the allowance for credit losses, the allowance for credit losses applicable to individually evaluated loans and the related loan balances for the years ended December 31, 2021, 2020 and 2019 are as follows:

Changes in the allowance for credit losses for the years ended December 31, 2022, 2021 and 2020 are as follows:

Agricultural Commercial and Financial Real Estate:

6 unchanged sentences

Allowance for credit losses:

Beginning balance, prior to adoption of ASC 326 $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Impact of adopting ASC 326 ( 328 ) 298 327 763 522 1,396 ( 232 ) 2,746

Beginning balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470

Charge-offs ( 357 ) ( 447 ) — ( 40 ) ( 729 ) ( 51 ) ( 589 ) ( 2,213 )

2 unchanged sentences

Ending balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440

Ending balance, individually evaluated for credit losses $ 1 $ 189 $ 124 $ — $ 49 $ 1 $ 20 $ 384

Ending balance, collectively evaluated for credit losses $ 2,260 $ 4,080 $ 2,176 $ 3,433 $ 11,449 $ 10,497 $ 1,191 $ 35,086

Loan balances:

Ending balance $ 106,933 $ 222,002 $ 207,507 $ 232,744 $ 1,023,906 $ 784,169 $ 82,972 $ 2,660,233

Ending balance, individually evaluated for credit losses $ 788 $ 2,062 $ 603 $ 1,277 $ 6,187 $ 5,696 $ 20 $ 16,633

Ending balance, collectively evaluated for credit losses $ 106,145 $ 219,940 $ 206,904 $ 231,467 $ 1,017,719 $ 778,473 $ 82,952 $ 2,643,600

Agricultural Commercial and Financial Real Estate:

5 unchanged sentences

(Amounts In Thousands)

Allowance for loan losses:

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

Allowance for credit losses:

Beginning balance, prior to adoption of ASC 326 $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Impact of adopting ASC 326 ( 328 ) 298 327 763 522 1,396 ( 232 ) 2,746

Charge-offs ( 106 ) ( 136 ) ( 3 ) ( 1 ) ( 482 ) ( 265 ) ( 323 ) ( 1,316 )

Recoveries 142 1,103 94 25 964 263 152 2,743

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

Ending balance, individually evaluated for impairment $ 86 $ 411 $ 7 $ — $ 93 $ 14 $ 51 $ 662

Ending balance, collectively evaluated for impairment $ 2,422 $ 4,474 $ 2,312 $ 4,173 $ 12,275 $ 9,401 $ 1,351 $ 36,408

Loan balances:

Credit loss (benefit) expense 45 ( 1,881 ) ( 437 ) ( 1,527 ) ( 1,874 ) ( 311 ) 212 ( 5,773 )

Ending balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470

Ending balance, individually evaluated for impairment $ 1,543 $ 2,191 $ 1,266 $ 2,061 $ 7,417 $ 6,200 $ 51 $ 20,729

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

19 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

Changes in the allowance for credit losses for off-balance sheet credit exposures for the year ended December 31, 2021 were as follows:

Changes in the allowance for credit losses for off-balance sheet credit exposures for the years ended December 31, 2022 and 2021 were as follows:

Year Ended December 31, 2022

10 unchanged sentences

Allowance for credit losses for off-balance sheet credit exposures:

Beginning balance, prior to adoption of ASC 326 $ — $ — $ — $ — $ — $ — $ — $ —

Impact of adopting ASC 326 385 1,585 736 180 471 212 15 3,584

Beginning balance 383 1,118 849 113 794 559 34 3,850

Credit loss (benefit) expense 142 ( 19 ) 1,277 ( 58 ) ( 323 ) ( 437 ) ( 2 ) 580

1 unchanged sentence

Ending balance $ 525 $ 1,099 $ 2,126 $ 55 $ 471 $ 122 $ 32 $ 4,430

Credit loss (benefit) expense for off-balance sheet credit exposures is included in credit loss (benefit) expense on the consolidated statement of income for the year ended December 31, 2021.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year Ended December 31, 2021

Agricultural Commercial and

Financial Real Estate:

Construction and

land development Real Estate:

farmland Real Estate:

Mortgage, 1 to 4

family Real Estate:

Mortgage, multi-

commercial Other Total

(Amounts In Thousands)

Allowance for credit losses for off-balance sheet credit exposures:

Beginning balance, prior to adoption of ASC 326 $ — $ — $ — $ — $ — $ — $ —

Impact of adopting ASC 326 385 1,585 736 180 471 212 15 3,584

Credit loss (benefit) expense ( 2 ) ( 467 ) 113 ( 67 ) 323 347 19 266

(Charge-offs), net recoveries — — — — — — — —

Ending balance $ 383 $ 1,118 $ 849 $ 113 $ 794 $ 559 $ 34 $ 3,850

Credit loss (benefit) expense for off-balance sheet credit exposures is included in credit loss (benefit) expense on the consolidated statement of income for the years ended December 31, 2022 and 2021.

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations.

19 unchanged sentences

Satisfactory – Satisfactory rated loans are loans to borrowers of average financial means not especially vulnerable to changes in economic or other circumstances, where the major support for the extension is sufficient collateral of a marketable nature, and the primary source of repayment is seen to be clear and adequate.

The borrower's financial performance is consistent, ratios and trends are positive and the primary repayment source can clearly be identified and supported with acceptable financial information.

The borrower's financial performance is consistent, ratios and

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

trends are positive and the primary repayment source can clearly be identified and supported with acceptable financial information.

The loan relationship could be vulnerable to changes in economic or industry conditions but have the ability to absorb unexpected issues.

19 unchanged sentences

The ability to continue to make payments is in question;

there are “red flags” such as past due payments, non-

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

revolving credit lines, overdrafts, and the inability to sell assets.

there are “red flags” such as past due payments, non-revolving credit lines, overdrafts, and the inability to sell assets.

The borrower is experiencing delinquent taxes, legal issues, etc., obtaining financial information has become a challenge, collateral coverage is marginal at best, and the value and condition could be brought into question.

19 unchanged sentences

Problems may be the result of external issues such as economic or industry related issues.

The following tables present the credit quality indicators and origination years by type of loan in each category as of December 31, 2021 (amounts in thousands):

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the credit quality indicators and origination years by type of loan in each category as of December 31, 2022 and 2021 (amounts in thousands):

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

6 unchanged sentences

Total $ 35,920 $ 6,579 $ 5,909 $ 2,252 $ 1,714 $ 286 $ 60,045 $ 112,705

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial and Financial

7 unchanged sentences

Total $ 92,397 $ 39,962 $ 20,934 $ 6,321 $ 2,549 $ 1,807 $ 105,598 $ 269,568

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction, 1 to 4 Family Residential

16 unchanged sentences

Total $ 40,926 $ 13,159 $ 2,310 $ 317 $ 284 $ 1,247 $ 137,997 $ 196,240

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, Farmland

7 unchanged sentences

Total $ 105,804 $ 61,801 $ 34,262 $ 8,816 $ 7,298 $ 10,521 $ 28,068 $ 256,570

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, 1 to 4 Family First Liens

16 unchanged sentences

Total $ 16,543 $ 11,551 $ 9,312 $ 4,821 $ 5,177 $ 7,906 $ 69,641 $ 124,951

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, Multi-Family

7 unchanged sentences

Total $ 170,679 $ 138,682 $ 82,085 $ 2,524 $ 471 $ 24,326 $ 18,185 $ 436,952

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, Commercial

16 unchanged sentences

Total $ 14,510 $ 6,307 $ 2,704 $ 901 $ 363 $ 11,752 $ 138 $ 36,675

Obligations of State and Political Subdivisions

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ 4,816 $ — $ 4,816

Good — — 1,870 — — 8,342 — 10,212

Satisfactory 2,224 820 1,961 1,492 573 15,677 8,848 31,595

Monitor 344 — 830 181 99 136 — 1,590

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total $ 2,568 $ 820 $ 4,661 $ 1,673 $ 672 $ 28,971 $ 8,848 $ 48,213

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Obligations of State and Political Subdivisions

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

6 unchanged sentences

Total $ 23,275 $ 13,481 $ 3,395 $ 2,591 $ 626 $ 345 $ 63,220 $ 106,933

Commercial and Financial

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 965 $ 924 $ 4 $ 235 $ 31 $ — $ 3,391 $ 5,550

Good 13,722 5,570 1,105 1,086 276 1,494 20,709 43,962

Satisfactory 44,964 20,847 7,684 3,582 2,106 331 41,832 121,346

Monitor 18,337 8,019 3,591 1,123 297 416 13,368 45,151

Special Mention 603 525 353 70 102 4 174 1,831

Substandard 1,092 670 266 54 92 — 1,988 4,162

Total $ 79,683 $ 36,555 $ 13,003 $ 6,150 $ 2,904 $ 2,245 $ 81,462 $ 222,002

Construction, 1 to 4 Family Residential

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ — $ — $ —

Good 212 — — — — — 18,755 18,967

Satisfactory 7,457 94 — — — — 42,988 50,539

Monitor 1,307 — — — — — 9,187 10,494

Special Mention — — — — — — 374 374

Substandard 111 — — — — — 1 112

Total $ 9,087 $ 94 $ — $ — $ — $ — $ 71,305 $ 80,486

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Agricultural Commercial

and Financial Real Estate:

Construction, 1 to 4

family residential Real Estate:

Construction, land

development and commercial

(Amounts In Thousands)

Construction, Land Development and Commercial

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 5,079 $ — $ — $ — $ 143 $ 4 $ — $ 5,226

5 unchanged sentences

Total $ 44,489 $ 6,399 $ 2,556 $ 301 $ 1,451 $ 267 $ 71,558 $ 127,021

farmland Real Estate:

Mortgage, 1 to 4

family first liens Real Estate:

Mortgage, 1 to 4

family junior liens Real Estate:

Mortgage, Farmland

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ 3,568 $ 124 $ 60 $ 80 $ 41 $ 134 $ 4,007

Good 17,827 14,308 2,144 2,460 5,932 3,929 3,844 50,444

Satisfactory 51,639 35,616 4,689 8,358 6,745 8,339 8,242 123,628

Monitor 8,532 16,925 5,518 3,901 2,154 4,866 5,695 47,591

Special Mention 4,031 288 — — 298 190 — 4,807

Substandard 1,283 447 291 47 — 199 — 2,267

Total $ 83,312 $ 71,152 $ 12,766 $ 14,826 $ 15,209 $ 17,564 $ 17,915 $ 232,744

Mortgage, 1 to 4 Family First Liens

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 462 $ 914 $ 427 $ 19 $ 149 $ 404 $ 1 $ 2,376

Good 9,598 12,300 3,124 3,443 3,091 10,943 2,496 44,995

Satisfactory 233,412 189,247 69,037 65,201 60,906 118,608 8,443 744,854

Monitor 24,908 33,863 5,038 6,527 7,273 12,203 4,066 93,878

Special Mention 1,682 3,422 887 962 1,051 3,168 — 11,172

Substandard 1,571 1,261 1,129 1,609 576 6,142 1 12,289

Total $ 271,633 $ 241,007 $ 79,642 $ 77,761 $ 73,046 $ 151,468 $ 15,007 $ 909,564

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, 1 to 4 Family Junior Liens

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ 13 $ — $ — $ — $ — $ 6 $ 19

Good 193 611 96 — 108 482 1,374 2,864

Satisfactory 13,684 10,116 5,854 7,309 5,230 6,053 55,496 103,742

Monitor 326 1,233 70 365 140 281 2,801 5,216

Special Mention 103 489 35 56 42 110 142 977

Substandard 77 209 79 441 74 99 545 1,524

Total $ 14,383 $ 12,671 $ 6,134 $ 8,171 $ 5,594 $ 7,025 $ 60,364 $ 114,342

Mortgage, Multi-Family

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 2,539 $ 4,513 $ — $ — $ — $ 701 $ — $ 7,753

5 unchanged sentences

Total $ 165,576 $ 145,082 $ 16,186 $ 2,030 $ 1,692 $ 31,793 $ 20,433 $ 382,792

commercial Loans to

individuals Obligations of state

and political

subdivisions Total

Mortgage, Commercial

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 597 $ 16,781 $ — $ — $ 3,313 $ 350 $ 1 $ 21,042

7 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans to Individuals

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ — $ — $ —

Good — — 67 21 5 — 1 94

Satisfactory 12,162 5,606 2,212 967 141 10,867 57 32,012

Monitor 200 160 15 46 3 — 1 425

Special Mention 37 32 29 4 — — 1 103

Substandard 12 24 12 — 1 3 1 53

Total $ 12,411 $ 5,822 $ 2,335 $ 1,038 $ 150 $ 10,870 $ 61 $ 32,687

Obligations of State and Political Subdivisions

December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ 6,076 $ — $ 6,076

Good — 1,984 — — — 9,051 — 11,035

Satisfactory 1,009 2,034 1,551 706 11,557 3,634 9,400 29,891

Monitor — 933 203 249 — 1,898 — 3,283

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total $ 1,009 $ 4,951 $ 1,754 $ 955 $ 11,557 $ 20,659 $ 9,400 $ 50,285

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Past due loans as of December 31, 2022 and 2021 were as follows:

40 unchanged sentences

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.

Accruing loans past due 90 days or more decreased $ 0.86 million from December 31, 2020 to December 31, 2021.

Accruing loans past due 90 days or more increased $ 0.35 million from December 31, 2021 to December 31, 2022.

As of December 31, 2022 and 2021, accruing loans past due 90 days or more were 0.02 % and 0.01 % of total loans, respectively.

The average balance of the accruing loans past due 90 days or more decreased in 2021 as compared to 2020.

The average balance of the accruing loans past due 90 days or more increased in 2022 as compared to 2021.

The average 90 days or more past due accruing loan balance per loan was $ 0.14 million as of December 31, 2022 compared to $ 0.03 million as of December 31, 2021.

28 unchanged sentences

As of December 31, 2021, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the CARES Act and therefore were not considered TDRs was 16 loans, totaling $ 9.4 million.

As of December 31, 2022, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the CARES Act and therefore were not considered TDRs were 16 loans, totaling $ 7.3 million.

As of December 31, 2021, there were 16 loans, totaling $ 9.4 million that met the requirements and were not considered TDRs.

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

As of December 31, 2022 and 2021, COVID-19 related payment deferrals were approximately 0.03 % and 0.12 % of total loans, respectively.

73 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:

The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of December 31, 2022 and 2021:

Primary Type of Collateral

16 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pre-ASC 326 (CECL) adoption impaired loan information as of December 31, 2020 is as follows:

Investment Unpaid

Balance Related

Allowance Average

Investment Interest

Primary Type of Collateral

Real Estate Accounts Receivable Equipment Other Total ACL Allocation

(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

Construction, 1 to 4 family residential 315 337 — 475 —

Construction, land development and commercial 415 421 — 420 13

Mortgage, farmland 2,061 2,598 — 3,008 120

Mortgage, 1 to 4 family first liens 6,253 8,013 — 6,578 108

Mortgage, 1 to 4 family junior liens 108 350 — 134 —

Mortgage, multi-family 1,773 1,898 — 1,795 80

Mortgage, commercial 4,124 4,960 — 4,315 126

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

Construction, 1 to 4 family residential 536 536 7 486 24

Construction, land development and commercial — — — — —

Mortgage, farmland — — — — —

Mortgage, 1 to 4 family first liens 924 975 56 955 25

Mortgage, 1 to 4 family junior liens 132 158 37 149 2

Mortgage, multi-family — — — — —

Mortgage, commercial 303 304 14 306 3

Loans to individuals 51 51 51 53 3

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

December 31, 2021

Agricultural $ 734 $ — $ 54 $ — $ 788 $ 1

8 unchanged sentences

Loans to individuals 20 — — — 20 20

Obligations of state and political subdivisions — — — — — —

$ 16,468 $ — $ 165 $ — $ 16,633 $ 384

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Pre-ASC 326 (CECL) adoption impaired loan information as of December 31, 2020 is as follows:

Investment Unpaid

41 unchanged sentences

Post-ASC 326 CECL Adoption:

The changes in the ACL in 2021 compared to December 31, 2020 is the result of the following factors:

$ 2.75 million increase upon adoption of ASC 326 (CECL) on January 1, 2021;

changes after adoption for the year ended December 31, 2021 include improvements in the economic factor forecasts, primarily Iowa unemployment, used in the ACL calculation which resulted in a decrease of $ 2.46 million;

decrease in loan volume which resulted in a decrease of $ 0.37 million;

changes in prepayment and curtailment rates resulting in a decrease of $ 0.03 million;

decreases in historical loss rates along with net recoveries resulting in a decrease of $ 2.00 million;

The changes in the ACL in 2022 compared to 2021 is the result of the following factors:

improvements in the economic factor forecasts, primarily Iowa unemployment, used in the ACL calculation which resulted in a decrease of $ 1.09 million;

increase in loan volume which resulted in an increase of $ 4.72 million;

changes in prepayment and curtailment rates resulting in an increase of $ 1.00 million;

decreases in the individually analyzed loans reserve of $ 0.18 million;

and increases in qualitative factors determined necessary by management which resulted in an increase of $ 1.52 million.

The increase in the allowance for credit losses on off-balance sheet credit exposures is primarily a result of increased outstanding unfunded commitments and funding rates as of December 31, 2022.

The extent to which collateral secures collateral-dependent loans is provided in the previous individually analyzed loans table and changes in the extent to which collateral secures its collateral-dependent loans are described below.

3 unchanged sentences

Collateral-dependent loans were 0.44 % of loans held for investment as of December 31, 2022 and 0.63 % as of December 31, 2021.

The decrease in collateral-dependent loans is due to a decrease of $ 0.55 million in loans with a specific reserve, a decrease in nonaccrual loans of $ 0.36 million, a decrease in 90 days or more accruing loans of $ 0.86 million and a decrease in TDR loans of $ 2.33 million from December 31, 2020 to December 30, 2021.

The decrease in collateral-dependent loans is due to a decrease in nonaccrual loans of $ 1.68 million, a decrease in TDR loans of $ 2.02 million and is offset by an increase of $ 0.29 million in loans with a specific reserve and an increase in 90 days or more accruing loans of $ 0.35 million from December 31, 2021 to December 30, 2022.

There were no significant changes noted in the extent to which collateral secures collateral-dependent loans.

22 unchanged sentences

Any information utilized in addition to the appraisal is intended to identify additional charge-offs or provisions, not to override the appraised value.

Loans that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for credit losses.

When individual loans are reviewed for credit loss, the Company determines allowances based on management's estimate of the borrower's ability to repay the loan given the availability of the collateral, other sources of cash flow, as well as evaluation of legal options available.

The allowance for credit losses on individually evaluated loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

12 unchanged sentences

Included in this were $ 0.50 million and $ 0.51 million of operating lease costs, respectively, $ 0.03 million and $ 0.03 million of short term lease costs, respectively, and $ 0.05 million and $ 0.05 million of variable lease costs, respectively.

For the years ended December 31, 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.51 million and $ 0.47 million, respectively, and right-of-use assets obtained in exchange for lease obligations was none and $ 0.05 million, respectively.

For the years ended December 31, 2022 and 2021, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.50 million and $ 0.51 million, respectively, and right-of-use assets obtained in exchange for lease obligations was none and none , respectively.

As of December 31, 2022 and 2021, operating lease right-of-use assets included in other assets were $ 2.11 million and $ 2.47 million, respectively.

32 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Short-term Borrowings

The following table sets forth selected information for other borrowings each of which having a maturity of less than one year:

(Amounts In Thousands)

Federal funds purchased, 4.50 to 4.85

$ 82,061 $ 249

The Company has unsecured federal funds lines available totaling $ 77.94 million and $ 159.75 million from multiple correspondent banking relationships as of December 31, 2022 and 2021, respectively.

The weighted average interest rate on these borrowings outstanding as of December 31, 2022 and 2021 was 4.72 % and 0.00 %, respectively.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Federal Home Loan Bank Borrowings

1 unchanged sentence

(Effective interest rates as of December 31, 2022) (Amounts In Thousands)

Due 2025, 2.81 % to 2.94 %

Due 2026, 2.52 % to 2.86 %

Due 2027, 2.76 % to 2.95 %

$ — $ 105,000

On December 21, 2021 the Company paid the remaining $ 105.00 million in FHLB Borrowings due in 2025 through 2027.

Overnight borrowing, 4.60 %

On December 21, 2021 the Company paid $ 105.00 million in FHLB Borrowings due in 2025 through 2027.

Fees incurred with the 2021 prepayments were $ 7.69 million and were recorded in other noninterest expenses.

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.

To participate in the FHLB advance program, the Company is required to have an investment in FHLB stock.

The Company’s investment in FHLB stock was $ 6.46 million and $ 4.55 million at December 31, 2022 and 2021, respectively.

Collateral is provided by the Company’s 1 to 4 family mortgage loans totaling none at December 31, 2021 and $ 141.75 million at December 31, 2020.

The Company has the ability to borrow against agricultural real estate, commercial real estate and multi-family loans totaling $ 300.93 million as of December 31, 2021 and $ 315.86 million as of December 31, 2020 and there was $ 0 borrowed against this collateral as of December 31, 2021 or 2020.

Collateral is provided by the Company’s 1 to 4 family residential, commercial and agricultural real estate first mortgages equal to various percentages of the total outstanding notes.

The Company has the ability to borrow against 1-4 family first mortgages, agricultural real estate, commercial real estate and multi-family loans totaling $ 1,047.91 million as of December 31, 2022 and $ 865.06 million as of December 31, 2021 and there was $ 40.00 million and $ 0 borrowed against this collateral as of December 31, 2022 or 2021, respectively.

Accumulated Other Comprehensive Income

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(amounts in thousands)

Net unrealized gain on available-for-sale securities $ 1,968 $ 11,702

Net unrealized loss on derivatives used for cash flow hedges — —

Net unrealized (loss) gain on available-for-sale securities $ ( 54,198 ) $ 1,968

Tax effect 13,138 ( 491 )

7 unchanged sentences

7,334 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2021.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

5 unchanged sentences

As of December 31, 2022 and 2021, the shares held by the ESOP, fair value and maximum cash obligation were as follows:

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Shares held by the ESOP 708,488 735,482

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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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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

4 unchanged sentences

The intrinsic value of options exercised was $ 0.26 million, $ 0.00 million and $ 0.00 million for 2022, 2021 and 2020, respectively.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the stock options is as follows:

6 unchanged sentences

Balance, December 31, 2019 13,025 $ 45.92 5.41 248

Granted 5,805

Exercised ( 1,800 )

Balance, December 31, 2020 13,025 $ 45.92 4.47 216

Balance, December 31, 2021 13,025 $ 45.92 3.47 288

Exercised ( 7,220 )

Balance, December 31, 2022 5,805 $ 62.00 6.4 $ 58

2 unchanged sentences

62.00 5,805 77 months —

62.00 5,805 89 months —

As of December 31, 2022, the outstanding options have a weighted-average exercise price of $ 62.00 per share and a weighted average remaining contractual term of 6.40 years.

1 unchanged sentence

The cost is expected to be recognized over a weighted-average period of 1.40 years.

As of December 31, 2021, the vested options totaled 7,220 shares with a weighted-average exercise price of $ 33.00 per share.

As of December 31, 2022, there were zero vested option shares.

As of December 31, 2022, 197,245 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan).

3 unchanged sentences

A summary of the restricted stock option activity for the year ended December 31, 2022 is as follows:

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

7 unchanged sentences

The vesting period for these awards is five years and the Bank amortizes the expense on a straight line basis during the vesting period.

The expense relating to these awards for the years ended December 31, 2021, 2020 and 2019 was $ 0.92 million, $ 0.95 million and $ 0.96 million, respectively.

The expense relating to these awards for the years ended December 31, 2022, 2021 and 2020 was $ 0.88

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million, $ 0.92 million and $ 0.95 million, respectively.

6,800 , 12,800 and 10,800 shares of the restricted common stock shares awarded in December 31, 2022, 2021 and 2020, are subject to forfeiture upon termination of the employee's employment with the Company within eight years of the award.

7 unchanged sentences

$ 13,114 $ 14,007 $ 11,277

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.

6 unchanged sentences

Accrued expenses 848 611

Unrealized losses on investment securities 13,138 —

State net operating loss 1,187 1,094

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At December 31, 2022 and 2021, 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.

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of future operations will generate sufficient taxable income to realize the deferred tax assets.

The valuation allowance increased by $ 93,000 and $ 83,000 for the years ended December 31, 2022 and 2021, respectively.

6 unchanged sentences

$ ( 14,936 ) $ ( 3,037 ) $ 1,930

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense for the years ended December 31, 2022, 2021 and 2020 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:

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Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of capital.

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 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.

The Coronavirus Aid, Relief and Economic Security ("CARES") Act reduced

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2022 and 2021, the Company and the Bank met all capital adequacy requirements to which they are subject.

2 unchanged sentences

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The actual amounts and capital ratios as of December 31, 2022 and 2021, with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):

14 unchanged sentences

The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank.

Reserve balances totaled $ 752.99 million and $ 541.05 million as of December 31, 2021 and 2020, respectively.

Reserve balances totaled none as of December 31, 2022 and 2021.

Related Party Transactions

Certain directors of the Company and the Bank, companies with which the directors are affiliated, and certain principal officers are customers of, and have banking transactions with, the Bank in the ordinary course of business.

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

Such indebtedness has been

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2022 and 2021:

2 unchanged sentences

Balance, beginning $ 52,845 $ 54,053

Net increase due to change in related parties 735 —

Net (decrease) increase due to change in related parties ( 986 ) 735

Advances 39,155 23,671

73 unchanged sentences

Interest-bearing deposits 2,900,893 2,909,243 — 2,909,243 —

Other borrowings 249 249 — 249 —

Federal Home Loan Bank borrowings — — — — —

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(3) Considered Level 3 under ASC 820 and are based on valuation models that use significant assumptions that are not observable in an active market

Fair value of financial instruments :

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a single definition for fair value, a framework for measuring fair value and expanded disclosures concerning fair value.

Fair value is

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Fair value of financial instruments :

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a single definition for fair value, a framework for measuring fair value and expanded disclosures concerning fair value.

Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company determines the fair market value of its financial instruments based on the fair value hierarchy established in ASC 820.

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These loans are considered Level 3 as the instruments used to determine fair market value require significant management judgment and estimation.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreclosed assets :

2 unchanged sentences

Foreclosed assets are adjusted to the lower of carrying value or fair value less the costs of disposal.

Fair value is generally based upon independent

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

market prices or appraised values of the collateral, and may include a marketability discount as deemed necessary by management based on its experience with similar types of real estate.

Fair value is generally based upon independent market prices or appraised values of the collateral, and may include a marketability discount as deemed necessary by management based on its experience with similar types of real estate.

The value of foreclosed assets is evaluated periodically as a nonrecurring fair value adjustment.

25 unchanged sentences

State and political subdivisions — 263,516 — 263,516

Mortgage-backed securities and collateralized mortgage obligations — 9,446 — 9,446

Other securities (FHLB, FHLMC and FNMA) — 34,467 — 34,467

79 unchanged sentences

Retained earnings 512,841 474,392

Accumulated other comprehensive gain 1,477 8,782

Accumulated other comprehensive gain (loss) ( 41,060 ) 1,477

Treasury stock at cost ( 55,730 ) ( 48,344 )

27 unchanged sentences

Forfeiture of common stock ( 791 ) ( 455 ) ( 257 )

Increase in other assets ( 221 ) ( 515 ) ( 100 )

Decrease (increase) in other assets 771 ( 221 ) ( 515 )

Increase (decrease) in other liabilities 28 290 ( 3,554 )

8 unchanged sentences

Net cash and cash equivalents used by financing activities ( 15,313 ) ( 11,915 ) ( 15,618 )

Increase (decrease) in cash and cash equivalents 1,076 ( 4,014 ) 1,372

(Decrease) increase in cash and cash equivalents ( 1,576 ) 1,076 ( 4,014 )

Cash and cash equivalents:

14 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.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) continues 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.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Health Organization 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 customers to conduct banking and other financial transactions.

While significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction, if there is a resurgence in the virus, the Company could experience further adverse effects 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 :

27 unchanged sentences

At December 31, 2022 and 2021, 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 $ 0.41 million, $ 0.40 million and $ 0.38 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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

Quarter Ended

March June September December Year

Interest income $ 31,127 $ 30,794 $ 31,196 $ 28,972 $ 122,089

Interest expense 4,894 4,598 4,172 3,963 17,627

Net interest income $ 26,233 $ 26,196 $ 27,024 $ 25,009 $ 104,462

Credit loss (benefit) expense ( 2,984 ) ( 1,659 ) 82 ( 946 ) ( 5,507 )

Other income 9,038 7,982 8,244 8,200 33,464

Other expense 18,699 18,219 18,198 26,225 81,341

Income before income taxes $ 19,556 $ 17,618 $ 16,988 $ 7,930 $ 62,092

Income taxes 4,359 4,008 3,863 1,777 14,007

Net income $ 15,197 $ 13,610 $ 13,125 $ 6,153 $ 48,085

Basic earnings per share $ 1.63 $ 1.46 $ 1.41 $ 0.66 $ 5.16

Diluted earnings per share 1.63 1.46 1.41 0.66 5.16

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

Interest expense 7,862 6,645 6,465 5,980 26,952

Net interest income $ 24,590 $ 25,601 $ 25,210 $ 26,176 $ 101,577

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

Diluted earnings per share 0.75 1.25 1.22 0.90 4.12

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Financial Instruments

In the normal course of business, the Bank may use derivative financial instruments to manage its interest rate risk.

These instruments carry varying degrees of credit, interest rate and market or liquidity risks.

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.

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.

The Bank is exposed to credit risk in the event of nonperformance by counterparties to financial instruments.

The Bank minimizes this risk by entering into derivative contracts with large, stable financial institutions.

The Bank has not experienced any losses from nonperformance by counterparties.

The Bank monitors counterparty risk in accordance with the provisions of ASC 815.

In addition, the Bank’s interest rate-related derivative instruments contain language outlining collateral pledging requirements for each counterparty.

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

The Bank terminated one interest rate swap in December 2020 and the other matured in November 2020, therefore the Bank was no t required to pledge collateral as of December 31, 2021 and 2020.

Cash Flow Hedges:

The Bank executed two forward-starting interest rate swap transactions on November 7, 2013.

One of the interest rate swap transactions had an effective date of November 9, 2015, and an expiration date of November 9, 2020 , effectively converting $ 25.00 million of variable rate debt to fixed rate debt.

The other interest rate swap transaction had an effective date of November 7, 2016 and an expiration date of November 7, 2023 , effectively converting $ 25.00 million of variable rate debt to fixed rate debt.

For accounting purposes, these swap transactions were designated as a cash flow hedge of the changes in cash flows attributable to changes in three-month LIBOR , the benchmark interest rate being hedged, associated with the interest payments made on an amount of the Bank’s debt principal equal to the then-outstanding swap notional amount.

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 terminated 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 borrowings were paid off.

There were no remaining derivative instruments designated as cash flow hedges as of December 31, 2021 and 2020.

There were no gains or losses recognized on the Bank's derivative instruments designated as cash flow hedges for the year ended December 31, 2021.

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

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 $ 209 Interest Expense $ — Other Income $ —

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

Subsequent Events

2 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