What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-05 compared with 2023-03-03 · 309 added, 273 removed, 1822 unchanged (24% of the section changed)

23 unchanged sentences

In addition, the Bank uses a simulation model to review various assumptions relating to interest rate movement.

The model attempts to limit rate risk even if it appears the Bank’s asset and liability maturities are perfectly matched and a favorable interest margin is present.

The Company engages a third party that utilizes a modeling program to measure the Company’s exposure to potential interest rate changes.

For various assumed hypothetical changes in market interest rates, this analysis measures the estimated change in net interest income.

The simulations allow for ongoing assessment of interest rate sensitivity and can include the impact of potential new business strategies.

The modeled scenarios begin with a base case in which rates are unchanged and include parallel and nonparallel rate shocks.

The results of these shocks are measured in two forms:

first, the impact on the net interest margin and earnings over one and two year time frames;

and second, the impact on the market value of equity.

The results of the simulation are compared against approved policy limits.

The model attempts to limit rate risk even if it appears the Bank’s asset and

liability maturities are perfectly matched and a favorable interest margin is present.

The Bank’s policy is to generally maintain a balance between profitability and interest rate risk.

20 unchanged sentences

FHLB borrowings — — — — 296,648 — 296,648

Federal funds and repurchase agreements 82,061 — — — — — 82,061

Short-term borrowings 219,000 — — — — — 219,000

309,806 112,105 225,705 195,187 570,289 1,784,938 3,198,030

38 unchanged sentences

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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, 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, 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

As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has changed its method of accounting for the allowance for credit losses in 2021 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

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, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2024, expressed an unqualified opinion thereon.

Basis for Opinion

13 unchanged sentences

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

Allowance for Credit Losses on Loans and Unfunded Commitments

Description of the Matter

The Company’s allowance for credit losses on loans was $49.4 million at December 31, 2023.

The Company’s allowance for credit losses on unfunded loan commitments was $5.1 million.

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

As more fully described in Notes 1 and 3 to the financial statements, the ACL is an estimate of lifetime expected credit losses.

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.

For each of these loan pools, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default.

these loan pools, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers when modeling lifetime probability of default and loss given default.

2 unchanged sentences

Loans that do not share risk characteristics are evaluated on an individual basis.

For loans individually evaluated, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

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 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.

For loans individually evaluated, an allowance is established when the discounted cash flows, collateral value or observable market price of the loan is lower than the carrying value of that loan.

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

We identified the valuation of ACL as a critical audit matter.

Auditing management’s estimate of these allowances for credit losses involved a high degree of subjectivity due to the complexities of the probability of default and loss given default models, evaluating management’s segmentation methodology, assessment of economic conditions, and the nature of the qualitative factor adjustments.

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

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the ACL and allowance for unfunded commitments included the following procedures, among others:

Our audit procedures related to the ACL included the following procedures, among others:

• Obtained an understanding of the Company’s process for establishing the ACL, including the implementation of models and assumptions and the qualitative factor adjustments of the ACL

4 unchanged sentences

◦ Approval of model assumptions selected,

◦ Establishment of qualitative factors

• Tested the mathematical accuracy of the calculation of the ACL

• Tested individual loan files to evaluate the reasonableness of loan credit risk ratings

◦ Establishment of qualitative factors, and

◦ Establishment of specific allowances associated with individually evaluated loans

• Tested the mathematical accuracy of the calculations of the ACL;

• Tested individual loan files to evaluate the reasonableness of loan credit risk ratings for disclosure;

• Tested the completeness and accuracy of inputs utilized in the calculation of the ACL;

3 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)

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

/s/ FORVIS, 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, 2023, based on criteria established in Internal Control – Integrated Framework:

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

(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 as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31, 2023, and our report dated March 5, 2024, expressed an unqualified opinion on those financial statements.

10 unchanged sentences

Definitions and Limitations of Internal Control over Financial Reporting

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 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 is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles.

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;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

1 unchanged sentence

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)

/s/ FORVIS, LLP

Springfield, Missouri

25 unchanged sentences

Total deposits 3,282,780 3,357,367

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

Other short-term borrowings, including Bank Term Funding Program and federal funds purchased (Note 7) 219,000 82,061

Federal Home Loan Bank borrowings (Note 8) 296,648 40,000

13 unchanged sentences

Retained earnings 541,329 512,841

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

Accumulated other comprehensive (loss) (Note 9) ( 27,176 ) ( 41,060 )

Treasury stock at cost (2023 1,210,112 shares;

20 unchanged sentences

Deposits 40,394 15,818 14,712

Other borrowings 173 — —

Other short-term borrowings 11,330 173 —

FHLB borrowings 5,309 94 2,915

1 unchanged sentence

Net interest income 113,886 115,002 104,462

Credit loss (benefit) expense (Note 3) 6,340 ( 5,507 ) 4,358

Net interest income after credit loss (benefit) expense 108,662 109,969 97,219

Credit loss expense (benefit) (Note 3) 15,621 6,340 ( 5,507 )

Net interest income after credit loss expense (benefit) 98,265 108,662 109,969

Noninterest income:

3 unchanged sentences

Other noninterest income 541 1,333 581

Gain on sale of investment securities — — 10

28,606 27,780 33,464

23 unchanged sentences

Other comprehensive income (loss)

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

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

Net change in unrealized gain (loss) on securities available for sale 18,780 ( 56,166 ) ( 9,734 )

Income taxes ( 4,719 ) 13,629 2,429

Other comprehensive (loss) income on securities available for sale ( 42,537 ) ( 7,305 ) 5,604

Other comprehensive income (loss) on securities available for sale 14,061 ( 42,537 ) ( 7,305 )

Derivatives used in cash flow hedging relationships:

Net change in unrealized loss on derivatives ( 233 ) — —

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

Income taxes 56 — —

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

Other comprehensive (loss) on cash flow hedges ( 177 ) — —

Other comprehensive (loss) income, net of tax 13,884 ( 42,537 ) ( 7,305 )

11 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

12 unchanged sentences

— — — ( 7,906 ) — ( 7,906 )

Other comprehensive income — — ( 7,305 ) — — ( 7,305 )

Other comprehensive (loss) — — ( 42,537 ) — — ( 42,537 )

Balance, December 31, 2022 $ 63,220 $ 512,841 $ ( 41,060 ) $ ( 55,730 ) $ ( 51,011 ) $ 428,260

13 unchanged sentences

— — — ( 7,710 ) — ( 7,710 )

Excise tax on shares repurchased — — — ( 66 ) — ( 66 )

Other comprehensive income — — 13,884 — — 13,884

10 unchanged sentences

Depreciation 2,315 2,683 3,052

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

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

Credit loss expense (benefit) 15,621 6,340 ( 5,507 )

Share-based compensation 25 25 25

4 unchanged sentences

(Increase) decrease in accrued interest receivable ( 4,004 ) ( 4,345 ) 740

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

Decrease in other assets 984 392 1,228

(Accretion of discount) amortization of premium on investment securities, net ( 480 ) 30 1,203

(Increase) decrease in other assets ( 2,596 ) 984 392

Amortization of operating lease right of use assets 292 105 397

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

Increase (decrease) in accrued interest and other liabilities 4,812 ( 332 ) ( 3,627 )

Loans originated for sale ( 151,980 ) ( 112,391 ) ( 429,343 )

6 unchanged sentences

Purchases of investment securities available for sale ( 100,649 ) ( 358,982 ) ( 245,378 )

Proceeds from sale of stock of FHLB 1 4,201 —

Purchases of stock of FHLB ( 1,916 ) ( 575 ) —

Proceeds from sale of stock of Federal Home Loan Bank 13,794 1 4,201

Purchases of stock of Federal Home Loan Bank ( 23,079 ) ( 1,916 ) ( 575 )

Loans made to customers, net of collections ( 337,687 ) ( 447,838 ) 52,018

11 unchanged sentences

Net (decrease) increase in deposits ( 74,587 ) ( 176,627 ) 341,426

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

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

Borrowings from FRB 1 1 1

Payments on FRB borrowings ( 1 ) ( 1 ) ( 1 )

Net increase in short-term borrowings, including Bank Term Funding Program and federal funds purchased 136,939 81,812 249

Net increase (decrease) in Federal Home Loan Bank borrowings 256,648 40,000 ( 105,000 )

Borrowings from Federal Reserve Bank 3,005 1 1

Payments on Federal Reserve Bank borrowings ( 3,005 ) ( 1 ) ( 1 )

Issuance of common stock, net of costs — 1,242 —

3 unchanged sentences

Dividends paid ( 9,688 ) ( 9,304 ) ( 8,773 )

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

Net cash and cash equivalents provided by (used in) financing activities 302,000 ( 70,128 ) 224,760

Increase (decrease) in cash and cash equivalents 22,841 ( 745,277 ) 207,608

Cash and cash equivalents:

7 unchanged sentences

Noncash financing activities:

Increase (decrease) in maximum cash obligation related to ESOP shares $ 998 $ 2,684 $ ( 4,497 )

(Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684

Transfers to other real estate owned 764 206 96

48 unchanged sentences

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.

Management monitors these correspondent 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 :

121 unchanged sentences

The Company’s estimate of the ACL reflects losses expected over the contractual life of the assets, adjusted for estimated prepayments or curtailments.

The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructure (TDR).

A loan that has been modified or renewed is considered a TDR when two conditions are met:

The contractual term does not consider extensions, renewals or modifications unless the Company has identified a modification including a concession to a borrower experiencing financial difficulties.

A modification of a loan to a borrower experiencing financial difficulties occurs when two conditions are met:

1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.

The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR.

The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default.

Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL.

TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments:

5 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 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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Prior to January 1, 2023, a loan was accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, the Company granted a concession to a borrower experiencing financial difficulty that the Company would not otherwise consider.

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

A restructuring that resulted in only an insignificant delay in payment was not considered a concession.

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status.

TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months.

TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.

However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan is no longer classified as a TDR in the quarter following the modification.

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,” 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.

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.

The relief related to TDRs expired on January 1, 2022.

See Note 3 for further discussion.

TDRs with temporary below-

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.

Transfers of financial assets :

18 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.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

15 unchanged sentences

As of December 31, 2023 and 2022, the Company had no material unrecognized tax benefits.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

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:

4 unchanged sentences

Common shares outstanding at the beginning of the year 9,225,484 9,299,640 9,330,995

Weighted average number of net shares (redeemed) issued ( 31,792 ) ( 23,793 ) 17,571

Weighted average number of net shares (redeemed) ( 48,763 ) ( 31,792 ) ( 23,793 )

Weighted average shares outstanding (basic) 9,176,721 9,267,848 9,307,202

8 unchanged sentences

Under this method, compensation expense is measured and recognized for all stock-based awards made to employees and directors based on the fair value of each award as of the date of the grant.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common stock held by ESOP :

16 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).

4 unchanged sentences

Accounting guidance adopted in 2023

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 .

The amendments in this ASU affect entities that issue freestanding written call options that are classified in equity.

Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange.

An entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate for goods or services in accordance with the guidance in Topic 718, Compensation-Stock Compensation.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

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 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 .

1 unchanged sentence

At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts.

To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts.

To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

record for the acquired revenue contracts.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

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

The adoption of the ASU by the Company on January 1, 2023 did not have a material impact 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 .

2 unchanged sentences

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

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

The adoption of the ASU on a prospective basis by the Company on January 1, 2023 did not have a material impact on the financial statements, however it resulted in new disclosures.

Accounting guidance pending adoption as of December 31, 2023

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using Proportional Amortization Method .

The FASB is issuing this ASU to allow reporting entities to consistently account for equity investments made primarily for the purposes of receiving income tax credits and other income tax benefits.

The ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

Early adoption is permitted for all entities in any interim period.

If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures .

The FASB is issuing this ASU to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

A public entity should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements.

Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.

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

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures .

The FASB is issuing this ASU to enhance the transparency and decision usefulness of income tax disclosures.

The amendments in this ASU require that public business entities on an annual basis disclose specific categories in the rate reconciliation, provide additional information for reconciling items that meet a quantitative threshold, disclose the amount of income taxes paid disaggregated by federal, state and foreign taxes and other disclosures.

For public business entities, the amendments are effective for annual periods beginning after December 15, 2024.

Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.

The amendments in this ASU should be applied on a prospective basis.

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

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

30 unchanged sentences

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).

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at December 31, 2023, were as follows (in thousands) below.

Due in one year or less $ 241,023 $ 238,097

10 unchanged sentences

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

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

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

December 31, 2023 December 31, 2022

Sale proceeds $ 509 $ —

Gross realized gains — —

Gross realized losses — —

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, 2023 and 2022 (Amounts in Thousands):

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Less than 12 months 12 months or more Total

6 unchanged sentences

116 $ 36,900 ( 316 ) 0.86 % 786 $ 611,806 ( 38,016 ) 6.21 % 902 $ 648,706 $ ( 38,332 ) 5.91 %

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Less than 12 months 12 months or more Total

39 unchanged sentences

$ 3,389,372 $ 3,066,981

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 for the years ended December 31, 2022, 2021 and 2020 are as follows:

Changes in the allowance for credit losses (ACL) on loans for the years ended December 31, 2023, 2022 and 2021 are as follows:

Agricultural Commercial and Financial Real Estate:

5 unchanged sentences

(Amounts In Thousands)

Allowance for credit losses:

ACL on loans:

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

10 unchanged sentences

(Amounts In Thousands)

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

ACL on loans:

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

ACL on loans:

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 )

2 unchanged sentences

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

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:

Ending balance $ 94,842 $ 286,242 $ 183,030 $ 247,142 $ 1,019,922 $ 791,153 $ 87,813 $ 2,710,144

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

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:

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the ACL for off-balance sheet credit exposures for the years ended December 31, 2023, 2022 and 2021 were as follows:

Year Ended December 31, 2023

9 unchanged sentences

(Amounts In Thousands)

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

ACL for off-balance sheet credit exposures:

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

15 unchanged sentences

(Amounts In Thousands)

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

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

ACL for off-balance sheet credit exposures:

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

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

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

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)

ACL for off-balance sheet credit exposures:

Beginning balance $ — $ — $ — $ — $ — $ — $ — $ —

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

2 unchanged sentences

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.

Credit loss expense (benefit) for off-balance sheet credit exposures is included in credit loss expense (benefit) on the consolidated statement of income for the years ended December 31, 2023, 2022 and 2021.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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.

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.

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, 2023 and 2022 (amounts in thousands):

7 unchanged sentences

Total $ 19,426 $ 15,963 $ 4,082 $ 2,759 $ 1,456 $ 913 $ 71,187 $ 115,786

Current period gross write-offs $ 56 $ 416 $ — $ — $ — $ — 309 $ 781

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial and Financial

7 unchanged sentences

Total $ 86,734 $ 60,207 $ 28,510 $ 12,709 $ 3,525 $ 1,532 $ 113,973 $ 307,190

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Current period gross write-offs $ 1,878 $ 261 $ 181 $ 136 $ 122 $ 10 626 $ 3,214

Construction, 1 to 4 Family Residential

7 unchanged sentences

Total $ 8,096 $ 6,602 $ — $ — $ — $ — $ 65,557 $ 80,255

Current period gross write-offs $ 149 $ 1,019 $ — $ — $ — $ — 234 $ 1,402

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction, Land Development and Commercial

7 unchanged sentences

Total $ 42,101 $ 16,223 $ 9,045 $ 2,582 $ 274 $ 1,420 $ 242,233 $ 313,878

Current period gross write-offs $ 456 $ 187 $ — $ 9 $ — $ — 12 $ 664

Mortgage, Farmland

7 unchanged sentences

Total $ 58,747 $ 96,287 $ 55,048 $ 28,480 $ 4,521 $ 10,597 $ 27,484 $ 281,164

Current period gross write-offs $ 21 $ — $ — $ — $ — $ — — $ 21

HILLS BANCORPORATION

9 unchanged sentences

Total $ 228,682 $ 385,758 $ 207,996 $ 150,708 $ 51,717 $ 166,508 $ 29,927 $ 1,221,296

Current period gross write-offs $ — $ 120 $ 25 $ 46 $ 14 $ 31 1 $ 237

Mortgage, 1 to 4 Family Junior Liens

7 unchanged sentences

Total $ 11,636 $ 14,371 $ 9,938 $ 7,954 $ 4,085 $ 9,087 $ 87,453 $ 144,524

Current period gross write-offs $ 24 $ 34 $ 77 $ 25 $ 15 $ 44 11 $ 230

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, Multi-Family

7 unchanged sentences

Total $ 85,913 $ 163,303 $ 99,667 $ 70,128 $ 1,418 $ 23,180 $ 27,400 $ 471,009

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Current period gross write-offs $ — $ 83 $ 18 $ — $ — $ — — $ 101

Mortgage, Commercial

7 unchanged sentences

Total $ 51,929 $ 92,034 $ 85,024 $ 87,724 $ 12,064 $ 27,253 $ 60,642 $ 416,670

Current period gross write-offs $ 7 $ — $ 761 $ — $ — $ — — $ 768

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans to Individuals

7 unchanged sentences

Total $ 28,167 $ 7,032 $ 3,150 $ 1,158 $ 277 $ 157 $ 264 $ 40,205

Current period gross write-offs $ 1,064 $ 101 $ 33 $ 11 $ 7 $ — 3 $ 1,219

Obligations of State and Political Subdivisions

7 unchanged sentences

Total $ 1,381 $ 2,744 $ 787 $ 4,396 $ 1,590 $ 27,202 $ 8,346 $ 46,446

Current period gross write-offs $ — $ — $ — $ — $ — $ — — $ —

HILLS BANCORPORATION

148 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 increased $ 0.35 million from December 31, 2021 to December 31, 2022.

Accruing loans past due 90 days or more decreased $ 0.01 million from December 31, 2022 to December 31, 2023.

As of December 31, 2023 and 2022, accruing loans past due 90 days or more were 0.02 % and 0.02 % of total loans, respectively.

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

The average balance of the accruing loans past due 90 days or more decreased in 2023 as compared to 2022.

The average 90 days or more past due accruing loan balance per loan was $ 0.08 million as of December 31, 2023 compared to $ 0.14 million as of December 31, 2022.

6 unchanged sentences

loans (1) Interest income recognized on non-accrual Accruing loans

days or more TDR

loans Nonaccrual

loans (1) Accruing loans

days or more Nonaccrual

loans (1) Interest income recognized on non-accrual Accruing loans

days or more TDR

11 unchanged sentences

$ 30,888 $ — $ 545 $ 6,815 $ — $ 553 $ 5,905

(1) There were $ 1.75 million and $ 2.28 million of TDR loans included within nonaccrual loans as of December 31, 2022 and 2021, respectively.

(1) There were $ 1.75 million of TDR loans included within nonaccrual loans as of December 31, 2022.

The increase in nonaccrual loans as of December 31, 2023 compared to December 31, 2022 is primarily due to two significant relationships accounting for approximately 94 % of the increase.

As of December 31, 2023, nonaccrual loans had no ACL allocation recorded except for $0.10 million recorded for 1 to 4 family first lien mortgages.

As of December 31, 2022, nonaccrual loans had ACL allocations as follows:

$0.04 million for 1 to 4 family first lien mortgages and $0.06 for 1 to 4 family construction loans.

The Company may modify the terms of a loan to maximize the collection of amounts due.

Such a modification was considered a troubled debt restructuring (“TDR”) prior to adoption of ASU 2022-02 on January 1, 2023.

In most cases, the modification is a reduction in interest rate, conversion to interest only payments or an extension of the maturity date.

1 unchanged sentence

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.

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.

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.

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below is a summary of information for TDR loans as of December 31, 2022 and 2021:

December 31, 2022

contracts Recorded

investment Commitments

(Dollar Amounts In Thousands)

Agricultural 1 $ 20 $ 100

Commercial and financial 11 1,379 49

Construction, 1 to 4 family residential 1 105 —

Construction, land development and commercial 1 191 —

Mortgage, farmland 4 1,578 —

Mortgage, 1 to 4 family first liens 8 1,156 —

Mortgage, 1 to 4 family junior liens 1 19 —

Mortgage, multi-family 1 620 —

Mortgage, commercial 9 2,584 —

Loans to individuals — — —

37 $ 7,652 $ 149

Below is a summary of information for TDR loans as of December 31, 2022:

December 31, 2022

13 unchanged sentences

37 $ 7,652 $ 149

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of TDR loans that were modified during the year ended December 31, 2022 and 2021 was as follows:

December 31, 2022

Contracts Pre-modification

investment Post-modification

( Dollar Amounts In Thousands)

Agricultural — $ — $ —

Commercial and financial 2 1,032 1,032

Construction, 1 to 4 family residential 1 105 105

Construction, land development and commercial 1 191 191

Mortgage, farmland 2 1,021 1,021

Mortgage, 1 to 4 family first liens — — —

Mortgage, 1 to 4 family junior liens — — —

Mortgage, multi-family — — —

Mortgage, commercial 1 274 274

Loans to individuals — — —

7 $ 2,623 $ 2,623

A summary of TDR loans that were modified during the year ended December 31, 2022 was as follows:

December 31, 2022

13 unchanged sentences

7 $ 2,623 $ 2,623

The Company has allocated $ 0.06 million of allowance for TDR loans and the Company had commitments to lend $ 0.15 million in additional borrowings to restructured loan customers as of December 30, 2022.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company allocated $ 0.06 million of allowance for TDR loans and had commitments to lend $ 0.15 million in additional borrowings to restructured loan customers as of December 31, 2022.

1 unchanged sentence

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

The modifications of the terms of loans performed during the years ended December 31, 2022 and 2021 included extensions of the maturity date.

There were no TDR loans modified that were in payment default (defined as past due 90 days or more) during the years ended December 31, 2022 and 2021.

The modifications of the terms of loans performed during the year ended December 31, 2022 included extensions of the maturity date.

There were no TDR loans modified that were in payment default (defined as past due 90 days or more) during the year ended December 31, 2022.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.

The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

In some cases, the Company will modify a certain loan by providing multiple types of concessions.

Typically, one type of concession, such as a term extension, is granted initially.

If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (numbers in thousands):

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

Term Extension

Amortized Cost Basis at December 31, 2023 % of Total Class of Financing Receivable

Mortgage, Farmland $ 1,219 0.43 %

Agricultural 2,556 2.21 %

Mortgage, commercial 312 0.07 %

Total $ 4,087

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

Term Extension

Loan Type Financial Effect

Mortgage, Farmland Added a weighted-average 5.3 years to the life of loans, which reduced monthly payment amounts for the borrowers.

Agricultural Added a weighted-average 0.08 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Mortgage, commercial Added a weighted-average 5.1 year to the life of loans, which reduced monthly payment amounts for the borrowers.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

There were no financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the last 12 months (numbers in thousands):

Payment Status (Amortized Cost Basis)

Current 30-89 Days Past Due 90+ Days Past Due

Mortgage, Farmland $ 1,219 $ — $ —

Agricultural 2,556 — —

Commercial and financial 312 — —

$ 4,087 $ — $ —

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, 2023 and 2022:

33 unchanged sentences

$ 13,325 $ — $ 254 $ — $ 13,579 $ 184

HILLS BANCORPORATION

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

(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

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

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

Construction, 1 to 4 family residential 851 873 7 961 24

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 7,177 8,988 56 7,533 133

Mortgage, 1 to 4 family junior liens 240 508 37 283 2

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

Mortgage, commercial 4,427 5,264 14 4,621 129

Loans to individuals 51 98 51 53 3

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Post-ASC 326 CECL Adoption:

The changes in the ACL in 2023 compared to 2022 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;

slight increase in forecasted Iowa unemployment used in the ACL calculation which resulted in an increase of $ 0.27 million;

increase in loan volume which resulted in an increase of $ 1.81 million;

changes in prepayment and curtailment rates resulting in an increase of $ 1.74 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.

increases in the individually analyzed loans reserve of $ 0.55 million;

increases in qualitative factors determined necessary by management which resulted in a decrease of $ 0.97 million and an increase of $ 4.57 million due to increased charge-offs and therefore higher loss rates.

The increase in the allowance for credit losses on off-balance sheet credit exposures is primarily a result of a significant outstanding unfunded commitment and increased loss rates as of December 31, 2023.

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.

Collateral-dependent loans decreased $ 3.05 million from December 31, 2021 to December 31, 2022.

Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans.

Collateral-dependent loans increased $ 26.77 million from December 31, 2022 to December 31, 2023.

Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and loans made to borrowers with financial difficulties.

Collateral-dependent loans also include loans that, based on management’s evaluation of current information and events, the Company expects to be unable to collect in full according to the contractual terms of the original loan agreement.

Collateral-dependent loans were 1.17 % of loans held for investment as of December 31, 2023 and 0.44 % as of December 31, 2022.

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.

The increase in collateral-dependent loans is due to an increase in loans modified due to financial difficulties of $ 4.09 million, an increase in nonaccrual loans of $ 24.07 million, an increase of $ 1.36 million in loans with a specific reserve and is offset by a decrease in 90 days or more accruing loans of $ 0.01 million and former individually analyzed loans totaling $ 2.44 million being classified as pooled loans as of December 31, 2023 for purposes of the ACL calculation due to having similar risk characteristics as pooled loans.

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

The Company regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans share common risk characteristics for which expected credit loss is measured on a pool basis or if the loans do not share common risk characteristics and therefore expected credit loss is measured on an individual loan basis.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

characteristics and therefore expected credit loss is measured on an individual loan basis.

If the loans are assessed for credit losses on an individual basis, the Company determines if a specific allowance is appropriate.

In addition, the Company's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured or where a TDR is reasonably possible.

Loans that are determined not to be collateral-dependent and for which there are no specific allowances are classified into one or more risk categories and expected credit loss is measured on a pool basis.

See Note 1 Effect of New Financial Accounting Standards for further discussion of the allowance for credit losses for loans held for investment.

See Note 1 for further discussion of the allowance for credit losses for loans held for investment.

Specific allowances for credit losses on loans assessed individually are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral based on updated appraisals and/or updated collateral analysis for the properties if the loan is collateral dependent.

11 unchanged sentences

When an updated appraisal value has been obtained, the Company has used the appraisal amount in helping to determine the appropriate charge-off or required reserve.

The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Company’s loss experience with the type of property in question.

The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company’s loss experience with the type of property in question.

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

9 unchanged sentences

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

The leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.

The leases have remaining lease terms of 1 year to 10.5 years, some of which include options to extend the leases for up to 10 years, and some of which

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

include options to terminate the leases within 1 year.

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

1 unchanged sentence

Included in this were $ 0.43 million and $ 0.50 million of operating lease costs, respectively, $ 0.03 million and $ 0.03 million of short term lease costs, respectively, and $ 0.04 million and $ 0.05 million of variable lease costs, 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.

For the years ended December 31, 2023 and 2022, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.42 million and $ 0.50 million, respectively, and right-of-use assets obtained in exchange for lease obligations was $ 0.31 million and none , respectively.

As of December 31, 2023 and 2022, operating lease right-of-use assets included in other assets were $ 2.13 million and $ 2.11 million, respectively.

2 unchanged sentences

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2023, maturities of lease liabilities were as follows:

16 unchanged sentences

At December 31, 2022, brokered deposits of $ 31.74 million were included in savings deposits .

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Time deposits have a maturity as follows:

11 unchanged sentences

(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.

Federal funds purchased, interest rates 4.50 % to 4.85 %

Bank Term Funding Program, interest rates 4.83 %

The Company has federal funds lines available totaling $ 175.00 million and $ 77.94 million from multiple correspondent banking relationships as of December 31, 2023 and 2022, respectively, that is secured by available for sale securities.

The weighted average interest rate on these borrowings outstanding as of December 31, 2023 and 2022 was 5.31 % and 4.72 %, respectively.

The Company has a bank term funding program line available totaling $ 81.33 million as of December 31, 2023 that is secured by available for sale securities.

The weighted average interest rate on these borrowings outstanding as of December 31, 2023 was 4.68 %.

The Company also has availability to borrow from the Federal Reserve Bank Discount Window of $ 100 million as of December 31, 2023 that is secured by available for sale securities.

HILLS BANCORPORATION

4 unchanged sentences

Overnight borrowing, 4.60 %

Due 2024, 5.49 to 5.66

$ 296,648 $ 40,000

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

3 unchanged sentences

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

The Company has the ability to borrow against 1-4 family first mortgages, agricultural real estate, commercial real estate and multi-family loans totaling $ 1,078.91 million as of December 31, 2023 and $ 1,047.91 million as of December 31, 2022 and there was $ 296.65 million and $ 40.00 million borrowed against this collateral as of December 31, 2023 and 2022, respectively.

Accumulated Other Comprehensive (Loss)

The components of accumulated other comprehensive income (AOCI), included in stockholders’ equity, are as follows:

(amounts in thousands)

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

Net unrealized (loss) on available-for-sale securities $ ( 35,418 ) $ ( 54,198 )

Net unrealized (loss) on derivatives used for cash flow hedges ( 233 ) —

Tax effect 8,475 13,138

12 unchanged sentences

To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity.

The Company obtains a quarterly independent appraisal of the shares of stock.

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

The Company obtains a quarterly independent

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

appraisal of the shares of stock.

As of December 31, 2023 and 2022, the shares held by the ESOP, fair value and maximum cash obligation were as follows:

Shares held by the ESOP 679,592 708,488

15 unchanged sentences

The deferred compensation liability is recorded in other liabilities and totals $ 0.09 million and $ 0.15 million at December 31, 2023 and 2022, respectively.

Expense related to the deferred compensation plan was $ 0.06 million for 2022, $ 0.25 million for 2021 and $( 0.02 ) million for 2020 and is included in salaries and employee benefits expense.

Expense (income) related to the deferred compensation plan was $( 0.01 ) million for 2023, $ 0.06 million for 2022 and $ 0.25 million for 2021 and is included in salaries and employee benefits expense.

The Company also provides a deferred compensation program for its Board of Directors.

4 unchanged sentences

The deferred compensation liability for the directors’ plan is recorded in other liabilities and totaled $ 3.58 million and $ 4.10 million at December 31, 2023 and 2022, respectively.

Expense related to the directors’ deferred compensation plan was $ 0.29 million for 2022, $ 0.38 million for 2021 and $( 0.09 ) million for 2020 and is included in other noninterest expense.

Expense (income) related to the directors’ deferred compensation plan was $( 0.26 ) million for 2023, $ 0.29 million for 2022 and $ 0.38 million for 2021 and is included in other noninterest expense.

The Company has a Stock Option and Incentive Plan for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or restricted stock awards.

9 unchanged sentences

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 %.

There were no stock options granted in 2022 and 2021 and 5,805 in 2019.

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

There were no stock options granted in 2023 and 2022.

The intrinsic value of options exercised was $ 0.00 million , $ 0.26 million and $ 0.00 million for 2023, 2022 and 2021, respectively.

10 unchanged sentences

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

Exercised ( 7,220 )

Balance, December 31, 2022 5,805 $ 62.00 6.40 58

Balance, December 31, 2023 5,805 $ 62.00 5.40 $ 23

Other pertinent information related to the options outstanding at December 31, 2023 is as follows:

18 unchanged sentences

The Company authorized the issuance of 24,393 shares in 2022, 18,935 shares in 2022, and 24,513 shares in 2021 to certain employees.

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, 2022, 2021 and 2020 was $ 0.88

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

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

the vesting period.

The expense relating to these awards for the years ended December 31, 2023, 2022 and 2021 was $ 0.85 million, $ 0.88 million and $ 0.92 million, respectively.

10,800 , 6,800 and 12,800 shares of the restricted common stock shares awarded in December 31, 2023, 2022 and 2021, are subject to forfeiture upon termination of the employee's employment with the Company within eight years of the award.

22 unchanged sentences

Property and equipment 1,647 1,680

Unrealized gains on investment securities — 491

Goodwill 388 395

47 unchanged sentences

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

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 Bank uses 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

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.

greater than 9%.

Management believes that, as of December 31, 2023 and 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2022 and 2021, 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, 2023 and 2022, with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):

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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

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

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, 2023 and 2022:

40 unchanged sentences

Federal Home Loan Bank borrowings 296,648 297,148 — 297,148 —

Interest rate swaps 233 233 — 233 —

Accrued interest payable 6,102 6,102 — 6,102 —

96 unchanged sentences

Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding (Level 2).

Interest Rate Swap Agreements :

The fair value is estimated using forward-looking interest rate curves and is calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2).

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

37 unchanged sentences

Prices(3) Total at

Fair Value Total

Fair Value Total (Gains) Losses

(Amounts in Thousands)

61 unchanged sentences

Retained earnings 541,329 512,841

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

Accumulated other comprehensive (loss) ( 27,176 ) ( 41,060 )

Treasury stock at cost ( 62,841 ) ( 55,730 )

27 unchanged sentences

Forfeiture of common stock ( 564 ) ( 791 ) ( 455 )

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

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

(Increase) decrease in other assets ( 52 ) 771 ( 221 )

(Decrease) increase in other liabilities ( 529 ) 28 290

Net cash and cash equivalents provided by operating activities 17,052 13,737 12,991

7 unchanged sentences

Net cash and cash equivalents used by financing activities ( 17,000 ) ( 15,313 ) ( 11,915 )

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

Increase (decrease) in cash and cash equivalents 52 ( 1,576 ) 1,076

Cash and cash equivalents:

3 unchanged sentences

Noncash financing activities:

Increase (decrease) in maximum cash obligation related to ESOP shares $ 998 $ 2,684 $ ( 4,497 )

(Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684

Commitments and Contingencies

47 unchanged sentences

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 entered into one interest rate swap agreement in November 2023 and was required to pledge a US Treasury in the amount of approximately $ 500 thousand of collateral as of December 31, 2023.

The Bank did not have any derivative financial instruments as of December 31, 2022.

Cash Flow Hedges:

The Bank executed one forward-starting interest rate swap transaction on November 28, 2023.

The interest rate swap transaction had an effective date of December 15, 2023, and an expiration date of May 15, 2025 , effectively converting $ 2.10 million of variable rate debt to fixed rate debt.

For accounting purposes, this swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in the effective federal funds rate, 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.

The underlying principal balance will be matched to future planned advances related to a large customer construction project, however, the FHLB advances will remain equal to the notional amount of the swap making it probable that sufficient effective federal funds rate based interest payments would exist through the maturity date of the swap.

The table below identifies the balance sheet category and fair value of the Bank’s derivative instrument designated as a cash flow hedge as of December 31, 2023:

Value Balance

Category Maturity

(Amounts in Thousands)

December 31, 2023

Interest rate swap $ 2,100 $ ( 233 ) Other Liabilities 5/15/2025

The table below identifies the losses recognized on the Bank’s derivative instrument designated as cash flow hedges for the year ended December 31, 2023:

Recognized in Other Comprehensive Loss Reclassified from AOCI into Income Recognized in Income on Derivatives

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

(Amounts in Thousands)

December 31, 2023

Interest rate swap $ ( 177 ) Interest Expense $ — 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