HILLS BANCORPORATION 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk exposure is to changes in interest rates. Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in interest rates. Interest rate risk arises from repricing risk, basis risk, yield curve risk and options risk. Repricing risk is the difference between the timing of rate changes and the timing of cash flows. Basis risk is the difference from changing rate relationships among different yield curve affecting Bank activities. Yield curve risk is the difference from changing rate relationships across the spectrum of maturities. Option risk is the difference resulting from interest-related options imbedded in Bank products. The Bank’s primary source of interest rate risk exposure arises from repricing risk. To measure this risk the Bank uses a static gap measurement system that identifies the repricing gaps across the full maturity spectrum of the Bank’s assets and liabilities and an earnings simulation approach. The gap schedule is known as the interest rate sensitivity report. The report reflects the repricing characteristics of the Bank’s assets and liabilities. The report details the calculation of the gap ratio. This ratio indicated the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period, and a ratio greater than 1.0 indicates that more assets reprice than liabilities. The Company's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond the Company's control, such as market interest rates and competition, may also have an impact on the Company's interest income and interest expense. In the absence of other factors, the Company's overall yield on interest-earning assets will increase as will its cost of funds on its interest-bearing liabilities when market interest rates increase over an extended period of time. Inversely, the Company's yields and cost of funds will decrease when market rates decline. The Company is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time. The Bank maintains an Asset/Liability Committee, which meets at least quarterly to review the interest rate sensitivity position and to review and develop various strategies for managing interest rate risk within the context of the following factors: 1) capital adequacy, 2) asset/liability mix, 3) economic outlook, 4) market characteristics and 5) the interest rate forecast. In addition, the Bank uses a simulation model to review various assumptions relating to interest rate movement. 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 Page 52 Table of Contents 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. The Bank uses derivative financial instruments, when needed, to manage the impact of changes in interest rates on future interest income or interest expense. 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. 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. The program emphasizes the origination of adjustable rate loans, which are held in the portfolio, the investment of excess cash in short or intermediate term interest-earning assets, and the solicitation of transaction deposit accounts, which are less sensitive to changes in interest rates and can be re-priced rapidly. The table set forth below includes the portion of the balances in interest-bearing checking, savings and money market accounts that management has estimated to mature within one year. The classifications are used because the Bank’s historical data indicates that these have been very stable deposits without much interest rate fluctuation. Historically, these accounts would not need to be adjusted upward as quickly in a period of rate increases so the interest risk exposure would be less than the re-pricing schedule indicates. The FHLB borrowings are classified based on either their due date or if they are callable on their most likely call date based on the interest rate. Repricing Maturities Days More Than Immediately 2-30 31-90 91-180 181-365 One Year Total (Amounts in Thousands) Earning assets: Excess Cash $ 21,135 $ — $ — $ — $ — $ — $ 21,135 Federal funds sold 114 — — — — — 114 Investment securities — 31,202 31,288 71,749 106,784 554,144 795,167 Loans 12,585 276,718 69,330 130,241 221,224 2,728,325 3,438,423 Total earning assets 33,834 307,920 100,618 201,990 328,008 3,282,469 4,254,839 Sources of funds: Interest-bearing checking and savings accounts 90,806 — — — — 1,713,657 1,804,463 Certificates of deposit — 112,105 225,705 195,187 273,641 71,281 877,919 FHLB borrowings — — — — 296,648 — 296,648 Short-term borrowings 219,000 — — — — — 219,000 309,806 112,105 225,705 195,187 570,289 1,784,938 3,198,030 Other sources, primarily noninterest-bearing — — — — — 1,057,796 1,057,796 Total sources 309,806 112,105 225,705 195,187 570,289 2,842,734 4,255,826 Interest Rate Gap $ (275,972) $ 195,815 $ (125,087) $ 6,803 $ (242,281) $ 439,735 $ (987) Cumulative Interest Rate Gap at December 31, 2023 $ (275,972) $ (80,157) $ (205,244) $ (198,441) $ (440,722) $ (987) Gap Ratio 0.11 2.75 0.45 1.03 0.58 1.15 Cumulative Gap Ratio 0.11 0.81 0.68 0.76 0.69 1.00 Page 53 Table of Contents Based on the data following, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's interest rate sensitive liabilities would re-price faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would tend to reduce net interest income because the resulting increase in the Company’s cost of funds would not be immediately offset by an increase in its yield on earning assets. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in re-pricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income. The following table, which presents principal cash flows and related weighted average interest rates by expected maturity dates, provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates. 2024 2025 2026 2027 2028 Thereafter Total Fair Value (Amounts In Thousands) Assets: Loans, fixed: Balance $ 504,457 $ 337,171 $ 354,856 $ 388,806 $ 271,259 $ 394,983 $ 2,251,532 $ 1,917,771 Average interest rate 6.72 % 4.31 % 4.40 % 4.51 % 6.51 % 4.50 % 5.20 % Loans, variable: Balance $ 152,045 $ 183,341 $ 150,278 $ 180,226 $ 194,332 $ 326,669 $ 1,186,891 $ 1,281,200 Average interest rate 5.68 % 3.90 % 3.50 % 4.05 % 5.53 % 3.79 % 4.19 % Investments (1): Balance $ 253,844 $ 145,586 $ 101,351 $ 63,987 $ 23,649 $ 206,750 $ 795,167 $ 795,167 Average interest rate 2.60 % 1.70 % 1.65 % 2.84 % 3.78 % 2.84 % 2.34 % Liabilities: Liquid deposits (2): Balance $ — $ — $ — $ — $ — $ — $ 1,804,463 $ 1,804,306 Average interest rate — % — % — % — % — % — % 0.97 % Deposits, certificates: Balance $ 806,638 $ 45,890 $ 13,237 $ 11,095 $ 1,059 $ — $ 877,919 $ 873,840 Average interest rate 3.89 % 2.40 % 0.80 % 0.76 % 0.78 % — % 3.72 % (1) Includes all available-for-sale investments, federal funds and Federal Home Loan Bank stock. (2) Includes NOW and other demand, savings and money market funds. Item 8. Consolidated Financial Statements and Supplementary Data The consolidated financial statements and supplementary data are included on pages 55 through 119. Page 54 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee Hills Bancorporation Hills, Iowa Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Hills Bancorporation (the “Company”) as of December 31, 2023 and 2022, 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, 2023, 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, 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, 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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 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. 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 Page 55 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. The Company’s analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. Additional qualitative adjustments are applied for risk factors that are not considered within the modeling process but are relevant in assessing the expected credit losses within the loan pools. 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 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 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 • Obtained an understanding, evaluated the design, and tested the operating effectiveness of controls, including information technology, over the reliability and accuracy of data used to calculate and estimate the various components of the ACL including: ◦ Loan data completeness and accuracy, ◦ Grouping of loans by segment, ◦ Model inputs utilized, ◦ Approval of model assumptions selected, ◦ 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; • Evaluated the reasonableness of selected loss drivers utilized and loss driver forecasts for each loan segment; • Tested the reasonableness of specific reserves on individually evaluated loans; • Tested estimated funding rate of unfunded loan commitments; • Evaluated the qualitative adjustments, including assessing the reasonableness and basis for adjustments; • 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. Springfield, Missouri March 5, 2024 Page 56 Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee Hills Bancorporation Hills, Iowa Opinion on the Internal Control over Financial Reporting We have audited Hills Bancorporation’s (the “Company”) 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). 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 (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. 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 the Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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 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 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. Page 57 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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 Springfield, Missouri March 5, 2024 Page 58 Table of Contents HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2023 and 2022 (Amounts In Thousands, Except Shares) ASSETS 2023 2022 Cash and cash equivalents $ 59,482 $ 36,641 Investment securities available for sale at fair value (amortized cost 2023 $ 814,839 ; 2022 $ 830,302 ) (Notes 1, 2 and 14) 779,421 776,104 Stock of Federal Home Loan Bank 15,746 6,461 Loans held for sale 2,023 1,663 Loans, net of allowance for credit losses (2023 $ 49,410 ; 2022 $ 41,440 ) (Notes 1, 3, and 13) 3,389,372 3,066,981 Property and equipment, net (Note 4) 34,230 33,518 Tax credit real estate 7,910 9,152 Accrued interest receivable 19,786 15,782 Deferred income taxes, net (Notes 1 and 11) 21,271 24,061 Goodwill 2,500 2,500 Other assets 9,926 7,618 Total Assets $ 4,341,667 $ 3,980,481 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 600,398 $ 647,450 Interest-bearing deposits (Note 6) 2,682,382 2,709,917 Total deposits 3,282,780 3,357,367 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 Accrued interest payable 6,102 1,394 Allowance for credit losses on off-balance sheet credit exposures 5,110 4,430 Other liabilities 16,888 15,958 Total Liabilities 3,826,528 3,501,210 Commitments and Contingencies (Notes 10 and 16) Redeemable Common Stock Held By Employee Stock Ownership Plan (ESOP) (Note 10) 44,853 51,011 Stockholders' Equity (Note 12) Common stock, no par value; authorized 20,000,000 shares; issued 2023 10,345,832 shares; 2022 10,348,123 shares — — Paid in capital 63,827 63,220 Retained earnings 541,329 512,841 Accumulated other comprehensive (loss) (Note 9) ( 27,176 ) ( 41,060 ) Treasury stock at cost (2023 1,210,112 shares; 2022 1,122,639 shares) ( 62,841 ) ( 55,730 ) Total Stockholders' Equity 515,139 479,271 Less maximum cash obligation related to ESOP shares (Note 10) 44,853 51,011 Total Stockholders' Equity Less Maximum Cash Obligations Related To ESOP Shares 470,286 428,260 Total Liabilities & Stockholders' Equity $ 4,341,667 $ 3,980,481 See Notes to Consolidated Financial Statements. Page 59 Table of Contents HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands, Except Per Share Amounts) 2023 2022 2021 Interest income: Loans, including fees $ 154,675 $ 115,396 $ 113,648 Investment securities: Taxable 10,674 8,662 3,604 Nontaxable 4,741 4,140 3,854 Federal funds sold 829 2,889 983 Total interest income 170,919 131,087 122,089 Interest expense: Deposits 40,394 15,818 14,712 Other short-term borrowings 11,330 173 — FHLB borrowings 5,309 94 2,915 Total interest expense 57,033 16,085 17,627 Net interest income 113,886 115,002 104,462 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: Net gain on sale of loans 1,541 1,517 7,588 Trust fees 13,578 12,284 13,521 Service charges and fees 12,946 12,646 11,774 Other noninterest income 541 1,333 581 28,606 27,780 33,464 Noninterest expenses: Salaries and employee benefits 44,897 43,468 42,458 Occupancy 4,408 4,549 4,152 Furniture and equipment 6,835 6,937 7,276 Office supplies and postage 1,879 1,837 1,739 Advertising and business development 2,851 2,576 2,132 Outside services 13,791 12,766 12,592 FDIC insurance assessment 1,807 1,079 1,043 Other noninterest expenses 1,929 2,363 9,949 78,397 75,575 81,341 Income before income taxes 48,474 60,867 62,092 Income taxes (Note 11) 10,298 13,114 14,007 Net income $ 38,176 $ 47,753 $ 48,085 Earnings per share: Basic $ 4.16 $ 5.15 $ 5.16 Diluted 4.16 5.15 5.16 See Notes to Consolidated Financial Statements. Page 60 Table of Contents HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands) 2023 2022 2021 Net income $ 38,176 $ 47,753 $ 48,085 Other comprehensive income (loss) Securities: 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 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 ) — — Income taxes 56 — — Other comprehensive (loss) on cash flow hedges ( 177 ) — — Other comprehensive (loss) income, net of tax 13,884 ( 42,537 ) ( 7,305 ) Comprehensive income $ 52,060 $ 5,216 $ 40,780 See Notes to Consolidated Financial Statements. Page 61 Table of Contents HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands, Except Share Data) Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Maximum Cash Obligation Related To ESOP Shares Total 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 952 — — 666 — 1,618 Issuance of 7,334 shares of common stock under the employee stock purchase plan 427 — — — — 427 Unearned restricted stock compensation ( 244 ) — — — — ( 244 ) Forfeiture of 8,083 shares of common stock ( 455 ) — — — — ( 455 ) Share-based compensation 25 — — — — 25 Change related to ESOP shares — — — — ( 2,684 ) ( 2,684 ) Net income — 48,085 — — — 48,085 Cash dividends ($ 0.94 per share) — ( 8,773 ) — — — ( 8,773 ) Purchase of 55,119 shares of common stock — — — ( 3,569 ) — ( 3,569 ) Other comprehensive (loss) — — ( 7,305 ) — — ( 7,305 ) Balance, December 31, 2021 $ 60,938 $ 474,392 $ 1,477 $ ( 48,344 ) $ ( 50,013 ) $ 438,450 Issuance of 43,655 shares of common stock 2,309 — — 520 — 2,829 Issuance of 6,637 shares of common stock under the employee stock purchase plan 417 — — — — 417 Unearned restricted stock compensation 322 — — — — 322 Forfeiture of 12,727 shares of common stock ( 791 ) — — — — ( 791 ) Share-based compensation 25 — — — — 25 Change related to ESOP shares — — — — ( 998 ) ( 998 ) Net income — 47,753 — — — 47,753 Cash dividends ($ 1.00 per share) — ( 9,304 ) — — — ( 9,304 ) Purchase of 111,721 shares of common stock — — — ( 7,906 ) — ( 7,906 ) Other comprehensive (loss) — — ( 42,537 ) — — ( 42,537 ) Balance, December 31, 2022 $ 63,220 $ 512,841 $ ( 41,060 ) $ ( 55,730 ) $ ( 51,011 ) $ 428,260 Issuance of 24,393 shares of common stock 965 — — 665 — 1,630 Issuance of 6,550 shares of common stock under the employee stock purchase plan 398 — — — — 398 Unearned restricted stock compensation ( 217 ) — — — — ( 217 ) Forfeiture of 8,841 shares of common stock ( 564 ) — — — — ( 564 ) Share-based compensation 25 — — — — 25 Change related to ESOP shares — — — — 6,158 6,158 Net income — 38,176 — — — 38,176 Cash dividends ($ 1.05 per share) — ( 9,688 ) — — — ( 9,688 ) Purchase of 111,866 shares of common stock — — — ( 7,710 ) — ( 7,710 ) Excise tax on shares repurchased — — — ( 66 ) — ( 66 ) Other comprehensive income — — 13,884 — — 13,884 Balance, December 31, 2023 $ 63,827 $ 541,329 $ ( 27,176 ) $ ( 62,841 ) $ ( 44,853 ) $ 470,286 See Notes to Consolidated Financial Statements. Page 62 Table of Contents HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands) 2023 2022 2021 Cash Flows from Operating Activities Net income $ 38,176 $ 47,753 $ 48,085 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation 2,315 2,683 3,052 Credit loss expense (benefit) 15,621 6,340 ( 5,507 ) Share-based compensation 25 25 25 Compensation expensed through issuance of common stock 1,630 1,349 1,618 Forfeiture of common stock ( 564 ) ( 791 ) ( 455 ) Provision for deferred income taxes ( 1,873 ) ( 1,307 ) 971 Net gain on sale of other real estate owned and other repossessed assets ( 154 ) ( 86 ) ( 51 ) (Increase) decrease in accrued interest receivable ( 4,004 ) ( 4,345 ) 740 (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 Increase (decrease) in accrued interest and other liabilities 4,812 ( 332 ) ( 3,627 ) Loans originated for sale ( 151,980 ) ( 112,391 ) ( 429,343 ) Proceeds on sales of loans 153,161 117,961 475,162 Net gain on sales of loans ( 1,541 ) ( 1,517 ) ( 7,588 ) Net cash and cash equivalents provided by operating activities 52,840 56,461 85,074 Cash Flows from Investing Activities Proceeds from maturities of investment securities available for sale 116,083 78,036 91,459 Proceeds from sale of investment securities available for sale 509 — — Purchases of investment securities available for sale ( 100,649 ) ( 358,982 ) ( 245,378 ) 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 Proceeds on sale of other real estate owned and other repossessed assets 815 337 55 Purchases of property and equipment ( 3,027 ) ( 1,911 ) ( 1,464 ) Investment in tax credit real estate — — ( 4,183 ) Net changes from tax credit real estate investment 1,242 663 1,641 Net cash and cash equivalents used in investing activities ( 331,999 ) ( 731,610 ) ( 102,226 ) (Continued) Page 63 Table of Contents HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands) 2023 2022 2021 Cash Flows from Financing Activities Net (decrease) increase in deposits ( 74,587 ) ( 176,627 ) 341,426 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 — Stock options exercised — 238 — Purchase of treasury stock ( 7,710 ) ( 7,906 ) ( 3,569 ) Proceeds from the issuance of common stock through the employee stock purchase plan 398 417 427 Dividends paid ( 9,688 ) ( 9,304 ) ( 8,773 ) 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: Beginning of year 36,641 781,918 574,310 End of year $ 59,482 $ 36,641 $ 781,918 Supplemental Disclosures Cash payments for: Interest paid to depositors $ 37,917 $ 15,589 $ 15,280 Interest paid on other obligations 14,408 267 2,915 Income taxes paid 12,054 12,529 9,565 Noncash financing activities: (Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684 Transfers to other real estate owned 764 206 96 Sale and financing of other real estate owned 409 47 137 Right of use assets obtained in exchange for operating lease obligations 310 — — See Notes to Consolidated Financial Statements. Page 64 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Activities and Significant Accounting Policies Nature of activities : Hills Bancorporation (the "Company") is a holding company engaged in the business of commercial banking. The Company's subsidiary is Hills Bank and Trust Company, Hills, Iowa (the “Bank”), which is wholly-owned. The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion and Washington, Iowa. The Bank competes with other financial institutions and non-financial institutions providing similar financial products. Although the loan activity of the Bank is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, the Bank's credit is concentrated in real estate loans. All of the Company’s operations are considered to be one reportable operating segment. Accounting estimates : The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain significant estimates : The allowance for credit losses, fair values of securities and other financial instruments, and share-based compensation expense involve certain significant estimates made by management. These estimates are reviewed by management routinely and it is reasonably possible that circumstances that exist at December 31, 2023 may change in the near-term and the effect could be material to the consolidated financial statements. Principles of consolidation : The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue recognition : Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit and investment securities as these activities are not subject to the requirements of ASC 606. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts. Loan origination fees of mortgage loans originated for sale are recognized when the loans are sold. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606 are the following: Service charges and fees on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue which includes interchange income, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received. 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 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, 2023 and 2022, 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 Page 65 Table of Contents 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. The Company did not capitalize any contract acquisition costs for the years ending December 31, 2023 and 2022. Cash and cash equivalents : The Company considers all investments with original maturities of three months or less to be cash equivalents. At December 31, 2023 and 2022, cash equivalents consisted primarily of deposits with other banks. The Company maintains amounts in due from banks which, at times, may exceed federally insured limits. 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 : Available-for-sale ("AFS") securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading or held to maturity securities as of December 31, 2023 or 2022. Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from earnings and reported, net of tax, in other comprehensive income ("OCI"). Premiums on debt securities are amortized to the earliest call date and discounts on debt securities are accreted over the period to maturity of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the individual security level. For asset-backed securities performance indicators considered related to the underlying assets include default rates, delinquency rates, percentage of nonperforming assets, debt-to-collateral ratios, third-party guarantees, current levels of subordination, vintage, geographic concentration, analyst reports and forecasts, credit ratings and other market data. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. 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 $ 3.97 million and $ 3.61 million at December 31, 2023 and 2022, respectively, and is excluded from the estimate of credit losses. Stock of the Federal Home Loan Bank is carried at cost. The Company has evaluated the stock and determined there is no impairment. Loans held for sale : Loans held for sale are stated at the lower of aggregate cost or estimated fair value. 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 secondary market. A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity. Page 66 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 15.82 million and $ 12.17 million at December 31, 2023 and 2022, respectively, and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Nonrefundable loan fees and origination costs are deferred and recognized as a yield adjustment over the life of the related loan. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due, which is generally when a loan is 90 days or more past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Loans are returned to an accrual status when all of the principal and interest amounts contractually due are brought current and repayment of the remaining contractual principal and interest is expected. A loan may also return to accrual status if additional collateral is received from the borrower and, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the collection of the amount contractually due. Payment received on nonaccrual loans are applied first to principal. Once principal is recovered, any remaining payments received are applied to interest income. As of December 31, 2023 and 2022, 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. A loan is charged off based on criteria that includes but is not limited to: delinquency status, financial condition of the entire customer credit line and underlying collateral coverage, economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company. Allowance for credit losses for loans held for investment : The allowance for credit losses is an estimate of expected losses inherent within the Company's existing loans held for investment portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments which consist of agricultural, 1 to 4 family first and junior liens, commercial, and consumer lending. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The following provides the credit quality indicators and risk elements that are most relevant and most carefully considered and monitored for each loan portfolio segment. Agricultural - Agricultural operating loans include loans made to finance agricultural production and other loans to farmers and farming operations. Agricultural loans also include mortgage loans secured by farmland. Agricultural operating loans, most of which are secured by crops and machinery, are provided to finance capital improvement and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural operating loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural operating loans generally have a term of one year and may have a fixed or variable rate. Mortgage loans secured by farmland are made to individuals and businesses within the Company's trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for real estate loans secured by farmland range from one to ten years with an amortization period of 25 years or less. Generally, interest rates are fixed for mortgage loans secured by farmland. 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, Page 67 Table of Contents 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. Credit refers to how well a borrower manages their current and prior debts as documented by a credit report that provides credit scores and the borrower's current and past information about their credit history. Collateral refers to the type and use of property, occupancy, and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the all-transactions house price index for Iowa. Commercial - The commercial loan portfolio segment is comprised of the commercial real estate mortgage, multifamily residential mortgage, construction/land development and commercial and financial loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party's financial position. These other factors include assessing liquidity, the level and composition of net worth, leverage, considering all other lender amounts and position, an analysis of cash expected to flow through the obligors including the outflow to other lenders, vacancies and prior experience with the borrower. This information is used to assess adequate financial capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate, the all-transactions house price index for Iowa and the Iowa real GDP. Consumer Lending - The Bank offers consumer loans to individuals including personal loans and automobile loans. These consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loans collections are dependent on the borrower's continuing financial stability and are more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real GDP. The allowance level is influenced by loan volumes, loan credit quality indicator migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow method or remaining life method to estimate expected credit losses. Discounted cash flow method : In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and purpose. This model calculates an expected loss percentage for each loan class by considering the probability of default, using life-of-loan analysis periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending management and other relevant staff; (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) 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 Page 68 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables. For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve quarters on a straight-line basis. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics. Remaining life method: Expected credit losses for credit cards and overdrafts are determined through use of the remaining life method. The remaining life method utilizes average annual charge-off rates and remaining life to estimate the allowance for credit losses. This is done by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period and applying those principal payments against the balance outstanding as of the reporting period along with the average annual charge-off rate until the expected payments have been fully allocated. Collateral dependent financial assets : For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. 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 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. Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments: The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, including unfunded loan commitments, which is disclosed on the balance sheet. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet (OBS) credit exposures that are unconditionally cancellable by the Company, such as credit card receivables, or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. The allowance for credit losses on OBS credit exposures is adjusted as credit loss expense. Categories of OBS credit exposures correspond to the loan portfolio segments described previously. Troubled debt restructurings (“TDR loans”) : 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- Page 69 Table of Contents 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 : Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Credit related financial instruments : In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded. 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 of which are affordable housing projects as of December 31, 2023. 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. 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, 2023 and 2022. Depreciation expense is provided on a straight-line basis over the estimated useful life of the assets. Expenditures for normal repairs and maintenance are charged to expense as incurred. The investments in tax credit real estate are recorded for all years presented using the equity method of accounting, with the exception of the investment in the affordable housing project described below. The operations of the properties are not expected to contribute significantly to the Company’s income before income taxes. 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 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. The Company accounts for the investment in this tax credit real estate using the proportional amortization method as provided for under Accounting Standards Codification (ASC) 323-740. The investment qualifies for the proportional amortization method as it meets all of the criteria under ASC 323-740-25-1. 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. Property and equipment : Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using primarily declining-balance methods over the estimated useful lives of 7 - 40 years for buildings and improvements and 3 - 10 years for furniture and equipment. Deferred income taxes : Deferred income taxes are provided under the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 % likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties on unrecognized tax benefits are classified as other noninterest expense. As of December 31, 2023 and 2022, the Company had no material unrecognized tax benefits. Page 70 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill : 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. Other real estate : Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The Bank will obtain updated appraisals to determine the estimated fair value of the property based on the type of collateral securing the loan and the date of the latest appraisal. Subsequent write downs estimated on the basis of later valuations are charged to net loss on sale of other real estate owned and other repossessed assets. Net operating expenses incurred in maintaining such properties are charged to other non-interest expense. 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: Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding. ESOP shares are considered outstanding for this calculation unless unearned. The following table presents calculations of earnings per share: Year Ended December 31, 2023 2022 2021 (Amounts In Thousands, except share and per share data) Computation of weighted average number of basic and diluted shares: 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) ( 48,763 ) ( 31,792 ) ( 23,793 ) Weighted average shares outstanding (basic) 9,176,721 9,267,848 9,307,202 Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method 654 1,693 3,660 Weighted average number of shares (diluted) 9,177,375 9,269,541 9,310,862 Net income $ 38,176 $ 47,753 $ 48,085 Earnings per share: Basic $ 4.16 $ 5.15 $ 5.16 Diluted $ 4.16 $ 5.15 $ 5.16 Stock awards and options : Compensation expense for stock issued through the stock award plan is accounted for using the fair value method prescribed by FASB ASC 718, “Share-Based Payment” (“ASC 718”). 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. Page 71 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common stock held by ESOP : The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash. Treasury stock : Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. Trust department assets : Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Company. Effect of New Financial Accounting Standards Accounting guidance adopted in 2021 On January 1, 2021, the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires the recognition of the allowance for credit losses be estimated using the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet (OBS) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. 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 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. Results for reporting periods beginning January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $ 4.75 million as of January 1, 2021 for the cumulative effect of adopting ASC 326, which includes deferred taxes of $ 1.58 million. 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. The following table illustrates the impact of ASC 326 (amounts in thousands). January 1, 2021 As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption Assets: Loans Allowance for credit losses on loans $ 39,816 $ 37,070 $ 2,746 Liabilities: Allowance for credit losses on off-balance sheet credit exposures $ 3,584 $ — $ 3,584 Accounting guidance adopted in 2023 In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 815) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. 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 Page 72 Table of Contents 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 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 . 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 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. Page 73 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Investment Securities The carrying values of investment securities at December 31, 2023 and December 31, 2022 are summarized in the following table (Amounts in Thousands): December 31, 2023 December 31, 2022 Amount Percent Amount Percent Securities available for sale U.S. Treasury $ 422,490 54.20 % $ 445,392 57.39 % Other securities (FHLB, FHLMC and FNMA) 33,049 4.24 % 31,934 4.11 % State and political subdivisions 262,953 33.74 % 248,582 32.03 % Mortgage-backed securities and collateralized mortgage obligations 60,929 7.82 % 50,196 6.47 % Total securities available for sale $ 779,421 100.00 % $ 776,104 100.00 % Investment securities have been classified in the consolidated balance sheets according to management’s intent. Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity. Municipal bonds are comprised of general obligation bonds and revenue bonds issued by various municipal corporations. As of December 31, 2023 and 2022, all securities held were rated investment grade based upon external ratings where available and, where not available, based upon management knowledge of the local issuers and their financial situations. The Company had no securities designated as trading or held to maturity in its portfolio at December 31, 2023 or 2022. The carrying amount of available-for-sale securities and their approximate fair values were as follows (Amounts in Thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Allowance for Credit Losses Estimated Fair Value December 31, 2023: U.S. Treasury $ 436,457 $ 703 $ ( 14,670 ) $ — $ 422,490 Other securities (FHLB, FHLMC and FNMA) 35,156 — ( 2,107 ) — 33,049 State and political subdivisions 276,694 1,970 ( 15,711 ) — 262,953 Mortgage-backed securities and collateralized mortgage obligations 66,532 241 ( 5,844 ) — 60,929 Total $ 814,839 $ 2,914 $ ( 38,332 ) $ — $ 779,421 December 31, 2022: U.S. Treasury $ 470,581 $ — $ ( 25,189 ) $ — $ 445,392 Other securities (FHLB, FHLMC and FNMA) 35,255 — ( 3,321 ) — 31,934 State and political subdivisions 267,351 239 ( 19,008 ) — 248,582 Mortgage-backed securities and collateralized mortgage obligations 57,115 — ( 6,919 ) — 50,196 Total $ 830,302 $ 239 $ ( 54,437 ) $ — $ 776,104 Page 74 Table of Contents 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, 2023, were as follows (in thousands) below. Amortized Cost Fair Value Due in one year or less $ 241,023 $ 238,097 Due after one year through five years 340,544 325,538 Due after five years through ten years 120,775 110,264 Due over ten years 45,965 44,593 $ 748,307 $ 718,492 Mortgage-backed securities and collateralized mortgage obligations 66,532 60,929 $ 814,839 $ 779,421 Expected maturities of MBS may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the above summary. As of December 31, 2023, investment securities with a carrying value of $ 427.68 million were pledged to collateralize other borrowings. As of December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. 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, 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): Page 75 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Less than 12 months 12 months or more Total 2023 Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % of Securities U.S. Treasury 1 $ 2,390 $ ( 2 ) 0.08 % 122 $ 370,660 $ ( 14,668 ) 3.96 % 123 $ 373,050 $ ( 14,670 ) 3.93 % Other securities (FHLB, FHLMC and FNMA) — — — — % 14 33,049 ( 2,107 ) 6.38 % 14 33,049 ( 2,107 ) 6.38 % State and political subdivisions 115 34,510 ( 314 ) 0.91 % 632 161,614 ( 15,397 ) 9.53 % 747 196,124 ( 15,711 ) 8.01 % Mortgage-backed securities and collateralized mortgage obligations — — — — 18 46,483 ( 5,844 ) 12.57 % 18 46,483 ( 5,844 ) 12.57 % 116 $ 36,900 ( 316 ) 0.86 % 786 $ 611,806 ( 38,016 ) 6.21 % 902 $ 648,706 $ ( 38,332 ) 5.91 % Less than 12 months 12 months or more Total 2022 Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % of Securities U.S. Treasury 89 $ 306,407 $ ( 10,695 ) 3.49 % 60 $ 136,486 $ ( 14,494 ) 10.62 % 149 $ 442,893 $ ( 25,189 ) 5.69 % Other securities (FHLB, FHLMC and FNMA) — — — — % 14 31,934 ( 3,321 ) 10.40 % 14 31,934 ( 3,321 ) 10.40 % State and political subdivisions 479 124,647 ( 3,351 ) 2.69 % 337 87,221 ( 15,657 ) 17.95 % 816 211,868 ( 19,008 ) 8.97 % Mortgage-backed securities and collateralized mortgage obligations 14 43,035 ( 5,314 ) 12.35 % 4 7,160 ( 1,605 ) 22.42 % 18 50,195 ( 6,919 ) 13.78 % 582 $ 474,089 ( 19,360 ) 4.08 % 415 $ 262,801 ( 35,077 ) 13.35 % 997 $ 736,890 $ ( 54,437 ) 7.39 % 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. The unrealized losses are due to changes in interest rates. 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 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, 2023. The fair value is expected to recover as the securities approach maturity. The U.S. Treasury and other securities are issued and guaranteed by U.S. government-sponsored entities and agencies. The mortgage-backed securities and collateralized mortgage obligations have implied U.S. government guarantees of the agency securities. The Company evaluates if a credit loss exists by monitoring to ensure it has adequate credit support considering the nature of the investment, number and significance of investments in an unrealized loss position, collectability or delinquency issues, the underlying financial statements of the issuers, credit ratings and subsequent changes thereto, and other available relevant information. Considering the above factors, management has determined that no allowance for credit losses is necessary for the securities portfolio as of December 31, 2023 Page 76 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Loans Classes of loans are as follows: December 31, 2023 2022 (Amounts In Thousands) Agricultural $ 115,786 $ 112,705 Commercial and financial 307,190 269,568 Real estate: Construction, 1 to 4 family residential 80,255 92,408 Construction, land development and commercial 313,878 196,240 Mortgage, farmland 281,164 256,570 Mortgage, 1 to 4 family first liens 1,221,296 1,130,989 Mortgage, 1 to 4 family junior liens 144,524 124,951 Mortgage, multi-family 471,009 436,952 Mortgage, commercial 416,670 402,842 Loans to individuals 40,205 36,675 Obligations of state and political subdivisions 46,446 48,213 3,438,423 3,108,113 Net unamortized fees and costs 359 308 3,438,782 3,108,421 Less allowance for credit losses 49,410 41,440 $ 3,389,372 $ 3,066,981 Page 77 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2023 ACL on loans: Beginning balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440 Charge-offs ( 781 ) ( 3,214 ) ( 2,066 ) ( 21 ) ( 467 ) ( 869 ) ( 1,219 ) ( 8,637 ) Recoveries 72 556 13 56 446 256 267 1,666 Credit loss (benefit) expense 683 5,149 4,346 405 4,365 ( 647 ) 640 14,941 Ending balance $ 2,516 $ 8,750 $ 6,482 $ 3,429 $ 18,552 $ 8,156 $ 1,525 $ 49,410 Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2022 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 ) Recoveries 83 584 48 296 898 361 153 2,423 Credit loss (benefit) expense 555 1,853 1,841 ( 700 ) 2,541 ( 1,392 ) 1,062 5,760 Ending balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440 Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi-family and commercial Other Total (Amounts In Thousands) 2021 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 ) Recoveries 142 1,103 94 25 964 263 152 2,743 Provision 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 Page 78 Table of Contents 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 Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi- family and commercial Other Total (Amounts In Thousands) ACL for off-balance sheet credit exposures: Beginning balance $ 525 $ 1,099 $ 2,126 $ 55 $ 471 $ 122 $ 32 $ 4,430 Credit loss (benefit) expense ( 242 ) 308 715 18 ( 108 ) ( 34 ) 23 680 (Charge-offs), net recoveries — — — — — — — — Ending balance $ 283 $ 1,407 $ 2,841 $ 73 $ 363 $ 88 $ 55 $ 5,110 Page 79 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2022 Agricultural Commercial and Financial Real Estate: Construction and land development Real Estate: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi- family and commercial Other Total (Amounts In Thousands) 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: Mortgage, farmland Real Estate: Mortgage, 1 to 4 family Real Estate: Mortgage, multi- family and 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 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 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. Page 80 Table of Contents 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. The Company's risk rating methodology assigns risk ratings ranging from 1 to 6, where a higher rating represents higher risk. The Company differentiates its lending portfolios into loans sharing common risk characteristics for which expected credit loss is measured on a pool basis and loans not sharing common risk characteristics for which credit loss is measured individually. The below are descriptions of the credit quality indicators: Excellent – Excellent rated loans are prime quality loans covered by highly liquid collateral with generous margins or supported by superior current financial conditions reflecting substantial net worth, relative to total credit extended, and based on assets of a stable and non-speculative nature whose values can be readily verified. Identified repayment source or cash flow is abundant and assured. Loans are secured with cash, cash equivalents, or collateral with very low loan to values. The borrower would qualify for unsecured debt and guarantors provide excellent secondary support to the relationship. The borrower has a long-term relationship with Hills Bank, maintains high deposit balances and has an established payment history with Hills Bank and an established business in an established industry. Good – Good rated loans are adequately secured by readily marketable collateral or good financial condition characterized by liquidity, flexibility and sound net worth. Loans are supported by sound primary and secondary payment sources and timely and accurate financial information. The relationship is not quite as strong as a borrower that is assigned an excellent rating but still has a very strong liquidity position, low leverage, and track record of strong performance. These loans have a strong collateral position with limited risk to bank capital. The collateral will not materially lose value in a distressed liquidation. Guarantors provide additional secondary support to mitigate possible bank losses. The borrower has a long-term relationship with Hills Bank with an established track record of payments; loans with shorter remaining loan amortization; deposit balances are consistent; loan payments could be made from cash reserves in the interim period; and source of income is coming from a stable industry. 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 loan relationship could be vulnerable to changes in economic or industry conditions but have the ability to absorb unexpected issues. The loan collateral coverage is considered acceptable and guarantors can provide financial support but net worth might not be as liquid as a 1 or 2 rated relationship. The borrower has an established relationship with Hills Bank. The relationship is making timely loan payments, any operating line is revolving and deposit balances are positive with limited to no overdrafts. Management and industry is considered stable. Monitor – Monitor rated loans are identified by management as warranting special attention for a variety of reasons that may bear on ultimate collectability. This may be due to adverse trends, a particular industry, loan structure, or repayment that is dependent on projections, or a one-time occurrence . The relationship l iquidity levels are minimal and the borrower’s leverage position is brought into question. The primary repayment source is showing signs of being stressed or is not proven. If the borrower performs as planned, the loan will be repaid. The collateral coverage is still considered acceptable but there might be some concern with the type of real estate securing the debt or highly dependent on chattel assets. Some loans may be better secured than others. Guarantors still provide some support but there is not an abundance of financial strength supporting the guaranty. A monitor credit may be appropriate when the borrower is experiencing rapid growth which is impacting liquidity levels and increasing debt levels. Other attributes to consider would include if the business is a start-up or newly acquired, if the relationship has significant financing relationships with other financial institutions, the quality of financial information being received, management depth of the company, and changes to the business model. The track history with Hills Bank has some deficiencies such as slow payments or some overdrafts. Special Mention – Special mention rated loans are supported by a marginal payment capacity and are marginally protected by collateral. There are identified weaknesses that if not monitored and corrected may adversely affect the Company’s credit position. A special mention credit would typically have a weakness in one of the general categories (cash flow, collateral position or payment history) but not in all categories. Potential indicators of a special mention would include past due payments, overdrafts, management issues, poor financial performance, industry issues, or the need for additional short-term borrowing. The ability to continue to make payments is in question; there are “red flags” such as past due payments, non- Page 81 Table of Contents 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. Collateral document deficiencies have been noted and if not addressed, could become material. Guarantors provide minimal support for this relationship. The credit may include an action plan or follow up established in the asset quality process. There is a change in the borrower’s communication pattern. Industry issues may be impacting the relationship. Adverse credit scores or history of payment deficiencies could be noted. Substandard – Substandard loans are not adequately supported by the paying capacity of the borrower and may be inadequately collateralized. These loans have a well-defined weakness or weaknesses. Full repayment of the loan(s) according to the original terms and conditions is in question or not expected. For these loans, it is more probable than not that the Company could sustain some loss if the deficiency(ies) is not corrected. There are identified shortfalls in the primary repayment source such as carry over debt, past due payments, and overdrafts. Obtaining quality and timely financial information is a weakness. The loan is under secured with exposure that could impact bank capital. It appears the liquidation of collateral has become the repayment source. The collateral may be difficult to foreclose or have little to no value. Collateral documentation deficiencies have been noted during the review process. Guarantor(s) provide minimal to no support of the relationship. The borrower’s communication with the Bank continues to decrease and the borrower is not addressing the situation. There is some concern about the borrower’s ability and willingness to repay the loans. 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, 2023 and 2022 (amounts in thousands): Agricultural December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 292 $ 749 $ — $ 94 $ 10 $ — $ 6,067 $ 7,212 Good 3,555 2,318 359 562 377 2 10,479 17,652 Satisfactory 8,412 8,787 2,706 1,644 430 153 32,552 54,684 Monitor 4,624 2,630 687 425 252 758 15,510 24,886 Special Mention 1,275 1,148 171 34 10 — 1,846 4,484 Substandard 1,268 331 159 — 377 — 4,733 6,868 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 Page 82 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commercial and Financial December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 3,163 $ 445 $ 411 $ 474 $ — $ — $ 3,003 $ 7,496 Good 8,655 11,491 5,304 1,654 189 103 19,385 46,781 Satisfactory 52,177 31,977 16,571 6,168 2,485 1,009 66,021 176,408 Monitor 14,711 14,008 5,152 3,957 477 44 23,418 61,767 Special Mention 6,355 1,775 429 247 57 6 1,425 10,294 Substandard 1,673 511 643 209 317 370 721 4,444 Total $ 86,734 $ 60,207 $ 28,510 $ 12,709 $ 3,525 $ 1,532 $ 113,973 $ 307,190 Current period gross write-offs $ 1,878 $ 261 $ 181 $ 136 $ 122 $ 10 626 $ 3,214 Real Estate: Construction, 1 to 4 Family Residential December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ — $ — $ — $ — $ — $ 4 $ 4 Good 497 1,347 — — — — 12,548 14,392 Satisfactory 3,043 404 — — — — 31,228 34,675 Monitor 3,490 — — — — — 18,308 21,798 Special Mention 506 — — — — — 2,967 3,473 Substandard 560 4,851 — — — — 502 5,913 Total $ 8,096 $ 6,602 $ — $ — $ — $ — $ 65,557 $ 80,255 Current period gross write-offs $ 149 $ 1,019 $ — $ — $ — $ — 234 $ 1,402 Page 83 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate: Construction, Land Development and Commercial December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ 250 $ — $ — $ — $ 106 $ 1,292 $ 1,648 Good 3,704 651 305 947 — 199 10,321 16,127 Satisfactory 17,198 9,379 7,540 517 274 1,104 176,540 212,552 Monitor 16,786 1,946 1,083 162 — — 51,842 71,819 Special Mention 1,713 223 117 — — — 2,177 4,230 Substandard 2,700 3,774 — 956 — 11 61 7,502 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 Real Estate: Mortgage, Farmland December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 1,966 $ 4,469 $ 1,928 $ 177 $ — $ — $ 100 $ 8,640 Good 7,244 21,882 11,016 7,206 964 977 7,006 56,295 Satisfactory 37,415 52,580 37,032 16,537 3,063 8,213 15,985 170,825 Monitor 6,256 14,840 3,353 4,452 270 1,242 1,586 31,999 Special Mention 2,073 835 1,719 108 224 — 2,807 7,766 Substandard 3,793 1,681 — — — 165 — 5,639 Total $ 58,747 $ 96,287 $ 55,048 $ 28,480 $ 4,521 $ 10,597 $ 27,484 $ 281,164 Current period gross write-offs $ 21 $ — $ — $ — $ — $ — — $ 21 Page 84 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate: Mortgage, 1 to 4 Family First Liens December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 446 $ 1,405 $ 1,165 $ 338 $ — $ 661 $ — $ 4,015 Good 11,907 20,471 4,704 7,481 1,656 11,012 5,499 62,730 Satisfactory 196,885 312,473 178,678 121,112 44,683 134,698 14,328 1,002,857 Monitor 15,328 43,289 15,338 17,706 2,993 11,122 9,115 114,891 Special Mention 2,585 5,752 4,145 1,515 993 4,533 794 20,317 Substandard 1,531 2,368 3,966 2,556 1,392 4,482 191 16,486 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 Real Estate: Mortgage, 1 to 4 Family Junior Liens December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ — $ — $ 2 $ — $ — $ — $ 2 Good 86 259 185 430 86 461 4,031 5,538 Satisfactory 10,921 13,280 9,008 6,818 3,563 8,224 78,798 130,612 Monitor 466 582 303 482 406 92 3,120 5,451 Special Mention 77 199 257 169 14 155 771 1,642 Substandard 86 51 185 53 16 155 733 1,279 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 Page 85 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate: Mortgage, Multi-Family December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ 5,806 $ 2,992 $ 3,093 $ — $ 113 $ — $ 12,004 Good 29,175 49,599 14,879 22,335 — 8,110 2,119 126,217 Satisfactory 30,113 71,890 60,229 22,233 1,256 13,816 17,688 217,225 Monitor 26,456 26,082 20,583 22,276 162 1,141 1,032 97,732 Special Mention — 1,927 906 191 — — 5,525 8,549 Substandard 169 7,999 78 — — — 1,036 9,282 Total $ 85,913 $ 163,303 $ 99,667 $ 70,128 $ 1,418 $ 23,180 $ 27,400 $ 471,009 Current period gross write-offs $ — $ 83 $ 18 $ — $ — $ — — $ 101 Real Estate: Mortgage, Commercial December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 1,469 $ 1,519 $ 555 $ 16,733 $ — $ 570 $ — $ 20,846 Good 7,293 19,233 17,928 16,978 2,332 3,467 12,937 80,168 Satisfactory 31,567 39,024 48,551 38,915 8,830 13,642 40,044 220,573 Monitor 10,862 30,376 14,892 12,059 297 8,480 5,698 82,664 Special Mention 494 1,127 828 544 — 1,006 993 4,992 Substandard 244 755 2,270 2,495 605 88 970 7,427 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 Page 86 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans to Individuals December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ — $ — $ — $ — $ — $ — $ — Good 150 6 — — 5 — 2 163 Satisfactory 27,480 6,715 3,064 1,154 272 97 257 39,039 Monitor 358 178 34 4 — — 2 576 Special Mention 62 115 46 — — — 1 224 Substandard 117 18 6 — — 60 2 203 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 December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ — $ — $ — $ — $ 4,543 $ — $ 4,543 Good — — — 1,752 — 7,064 — 8,816 Satisfactory 1,381 2,306 787 2,355 1,141 12,959 5,311 26,240 Monitor — 331 — — 290 606 — 1,227 Special Mention — — — 289 159 — — 448 Substandard — 107 — — — 2,030 3,035 5,172 Total $ 1,381 $ 2,744 $ 787 $ 4,396 $ 1,590 $ 27,202 $ 8,346 $ 46,446 Current period gross write-offs $ — $ — $ — $ — $ — $ — — $ — Page 87 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Agricultural December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 395 $ — $ 199 $ 20 $ 3 $ — $ 4,196 $ 4,813 Good 3,823 550 1,003 427 23 13 9,671 15,510 Satisfactory 17,417 4,144 2,659 855 1,250 48 24,233 50,606 Monitor 12,835 1,885 1,770 891 272 225 19,623 37,501 Special Mention — — — — — — 62 62 Substandard 1,450 — 278 59 166 — 2,260 4,213 Total $ 35,920 $ 6,579 $ 5,909 $ 2,252 $ 1,714 $ 286 $ 60,045 $ 112,705 Commercial and Financial December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 1,644 $ 690 $ 691 $ — $ 176 $ — $ 8,404 $ 11,605 Good 14,733 6,854 2,504 546 105 1,059 15,836 41,637 Satisfactory 57,920 24,028 11,139 4,339 1,979 356 53,618 153,379 Monitor 16,153 7,570 6,031 1,172 260 1 24,434 55,621 Special Mention 1,201 343 278 196 29 391 668 3,106 Substandard 746 477 291 68 — — 2,638 4,220 Total $ 92,397 $ 39,962 $ 20,934 $ 6,321 $ 2,549 $ 1,807 $ 105,598 $ 269,568 Real Estate: Construction, 1 to 4 Family Residential December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ — $ — $ — $ — $ — $ — $ — $ — Good 322 — — — — — 21,467 21,789 Satisfactory 1,962 328 — — — — 47,229 49,519 Monitor 775 182 — — — — 19,886 20,843 Special Mention — — — — — — 38 38 Substandard — 105 — — — — 114 219 Total $ 3,059 $ 615 $ — $ — $ — $ — $ 88,734 $ 92,408 Page 88 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate: Construction, Land Development and Commercial December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 375 $ — $ — $ — $ — $ 127 $ 1,424 $ 1,926 Good 2,383 958 947 — — 221 18,349 22,858 Satisfactory 23,004 7,222 1,191 311 251 828 90,511 123,318 Monitor 8,121 4,788 119 6 33 71 27,551 40,689 Special Mention — — — — — — — — Substandard 7,043 191 53 — — — 162 7,449 Total $ 40,926 $ 13,159 $ 2,310 $ 317 $ 284 $ 1,247 $ 137,997 $ 196,240 Real Estate: Mortgage, Farmland December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 4,058 $ 58 $ 261 $ 68 $ — $ 4 $ 115 $ 4,564 Good 24,552 13,966 7,541 1,582 846 917 7,034 56,438 Satisfactory 47,617 41,878 20,908 3,628 5,258 8,184 11,927 139,400 Monitor 24,754 5,803 5,440 3,478 887 1,221 8,992 50,575 Special Mention 4,284 96 112 — — 15 — 4,507 Substandard 539 — — 60 307 180 — 1,086 Total $ 105,804 $ 61,801 $ 34,262 $ 8,816 $ 7,298 $ 10,521 $ 28,068 $ 256,570 Real Estate: Mortgage, 1 to 4 Family First Liens December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 1,507 $ 450 $ 352 $ — $ 6 $ 360 $ — $ 2,675 Good 23,270 5,522 8,346 1,342 2,391 10,401 4,688 55,960 Satisfactory 369,706 201,488 142,417 52,727 47,736 124,754 14,992 953,820 Monitor 29,274 20,868 19,766 3,624 4,546 10,638 6,823 95,539 Special Mention 903 1,216 2,058 1,048 952 2,844 463 9,484 Substandard 1,756 2,086 2,419 833 1,690 3,980 747 13,511 Total $ 426,416 $ 231,630 $ 175,358 $ 59,574 $ 57,321 $ 152,977 $ 27,713 $ 1,130,989 Page 89 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate: Mortgage, 1 to 4 Family Junior Liens December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 23 $ — $ 7 $ — $ — $ — $ 32 $ 62 Good 493 189 465 91 — 527 2,023 3,788 Satisfactory 15,543 10,915 7,921 4,523 4,822 7,024 64,649 115,397 Monitor 248 244 507 83 286 188 2,442 3,998 Special Mention 114 134 214 37 12 120 72 703 Substandard 122 69 198 87 57 47 423 1,003 Total $ 16,543 $ 11,551 $ 9,312 $ 4,821 $ 5,177 $ 7,906 $ 69,641 $ 124,951 Real Estate: Mortgage, Multi-Family December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 6,162 $ 3,123 $ 3,018 $ — $ — $ 292 $ — $ 12,595 Good 14,175 23,485 26,302 — — 8,538 1,362 73,862 Satisfactory 97,449 85,441 26,513 2,355 471 14,295 10,604 237,128 Monitor 44,719 26,633 26,252 169 — 1,201 6,219 105,193 Special Mention 8,174 — — — — — — 8,174 Substandard — — — — — — — — Total $ 170,679 $ 138,682 $ 82,085 $ 2,524 $ 471 $ 24,326 $ 18,185 $ 436,952 Real Estate: Mortgage, Commercial December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 1,946 $ 576 $ 21,269 $ — $ — $ 1,145 $ — $ 24,936 Good 19,682 23,000 14,286 2,026 1,271 4,413 11,689 76,367 Satisfactory 61,055 61,844 38,772 10,590 8,255 14,568 21,933 217,017 Monitor 22,542 13,111 21,909 3,318 1,515 8,212 7,089 77,696 Special Mention — 3,298 779 — — — 689 4,766 Substandard 259 513 927 75 190 96 — 2,060 Total $ 105,484 $ 102,342 $ 97,942 $ 16,009 $ 11,231 $ 28,434 $ 41,400 $ 402,842 Page 90 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans to Individuals December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total Grade: Excellent $ 24 $ — $ — $ — $ — $ — $ — $ 24 Good 47 — — 16 — — 2 65 Satisfactory 14,053 6,091 2,647 869 335 11,722 133 35,850 Monitor 253 146 49 5 24 — 1 478 Special Mention 88 34 5 9 — — — 136 Substandard 45 36 3 2 4 30 2 122 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 Grade: 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 Page 91 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Past due loans as of December 31, 2023 and 2022 were as follows: 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Receivable Accruing Loans Past Due 90 Days or More (Amounts In Thousands) December 31, 2023 Agricultural $ 801 $ — $ — $ 801 $ 114,985 $ 115,786 $ — Commercial and financial 1,345 1,752 384 3,481 303,709 307,190 — Real estate: Construction, 1 to 4 family residential 433 — 5,411 5,844 74,411 80,255 — Construction, land development and commercial 730 — 7,953 8,683 305,195 313,878 30 Mortgage, farmland — 183 — 183 280,981 281,164 — Mortgage, 1 to 4 family first liens 13,344 3,047 2,720 19,111 1,202,185 1,221,296 515 Mortgage, 1 to 4 family junior liens 519 20 5 544 143,980 144,524 — Mortgage, multi-family 1,869 — 7,685 9,554 461,455 471,009 — Mortgage, commercial 875 416 — 1,291 415,379 416,670 — Loans to individuals 341 31 — 372 39,833 40,205 — Obligations of state and political subdivisions — — — — 46,446 46,446 — $ 20,257 $ 5,449 $ 24,158 $ 49,864 $ 3,388,559 $ 3,438,423 $ 545 Page 92 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Receivable Accruing Loans Past Due 90 Days or More (Amounts In Thousands) December 31, 2022 Agricultural $ 314 $ — $ — $ 314 $ 112,391 $ 112,705 $ — Commercial and financial 421 132 6 559 269,009 269,568 — Real estate: Construction, 1 to 4 family residential — — 105 105 92,303 92,408 — Construction, land development and commercial — 1,183 191 1,374 194,866 196,240 — Mortgage, farmland 24 162 60 246 256,324 256,570 — Mortgage, 1 to 4 family first liens 3,421 45 3,029 6,495 1,124,494 1,130,989 553 Mortgage, 1 to 4 family junior liens 473 19 8 500 124,451 124,951 — Mortgage, multi-family — — — — 436,952 436,952 — Mortgage, commercial 247 — 75 322 402,520 402,842 — Loans to individuals 314 53 — 367 36,308 36,675 — Obligations of state and political subdivisions — — — — 48,213 48,213 — $ 5,214 $ 1,594 $ 3,474 $ 10,282 $ 3,097,831 $ 3,108,113 $ 553 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 $ 0.01 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 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. The loans 90 days or more past due and still accruing are believed to be adequately collateralized. Loans are placed on nonaccrual status when management believes the collection of future principal and interest is not reasonably assured. Page 93 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain nonaccrual and TDR loan information by loan type at December 31, 2023 and 2022 was as follows: December 31, 2023 December 31, 2022 Nonaccrual loans (1) Interest income recognized on non-accrual Accruing loans past due 90 days or more Nonaccrual loans (1) Interest income recognized on non-accrual Accruing loans past due 90 days or more TDR loans (Amounts In Thousands) (Amounts In Thousands) Agricultural $ — $ — $ — $ — $ — $ — $ 20 Commercial and financial 524 — — 265 — — 1,124 Real estate: Construction, 1 to 4 family residential 5,505 — — 105 — — — Construction, land development and commercial 8,049 — 30 191 — — — Mortgage, farmland — — — 623 — — 1,039 Mortgage, 1 to 4 family first liens 5,805 — 515 4,550 — 553 1,156 Mortgage, 1 to 4 family junior liens 221 — — 175 — — 19 Mortgage, multi-family 7,685 — — — — — 620 Mortgage, commercial 3,099 — — 906 — — 1,927 Loans to individuals — — — — — — — $ 30,888 $ — $ 545 $ 6,815 $ — $ 553 $ 5,905 (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. The borrower is experiencing financial difficulties or is expected to experience financial difficulties in the near-term, so a concessionary modification is granted to the borrower that would otherwise not be considered. 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. Page 94 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Below is a summary of information for TDR loans as of December 31, 2022: December 31, 2022 Number of contracts Recorded investment Commitments outstanding (Dollar Amounts In Thousands) Agricultural 1 $ 20 $ 100 Commercial and financial 11 1,379 49 Real estate: 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 A summary of TDR loans that were modified during the year ended December 31, 2022 was as follows: December 31, 2022 Number of Contracts Pre-modification recorded investment Post-modification recorded investment ( Dollar Amounts In Thousands) Agricultural — $ — $ — Commercial and financial 2 1,032 1,032 Real estate: 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 . Page 95 Table of Contents 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. These commitments were in the normal course of business. The additional borrowings were not used to facilitate payments on these loans. 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 Loan Type 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. Page 96 Table of Contents 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 Loan Type 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: Primary Type of Collateral Real Estate Accounts Receivable Equipment Other Total ACL Allocation (Amounts In Thousands) December 31, 2023 Agricultural $ 2,557 $ — $ — $ — $ 2,557 $ — Commercial and financial 2,233 — 10 — 2,243 560 Real estate: Construction, 1 to 4 family residential 5,504 — — — 5,504 — Construction, land development and commercial 8,080 — — — 8,080 — Mortgage, farmland 2,077 — 169 — 2,246 — Mortgage, 1 to 4 family first liens 6,593 — — — 6,593 104 Mortgage, 1 to 4 family junior liens 239 — — — 239 — Mortgage, multi-family 7,685 — — — 7,685 — Mortgage, commercial 5,139 — — — 5,139 — Loans to individuals 60 — — — 60 60 Obligations of state and political subdivisions — — — — — — $ 40,167 $ — $ 179 $ — $ 40,346 $ 724 Page 97 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Primary Type of Collateral Real Estate Accounts Receivable Equipment Other Total ACL Allocation (Amounts In Thousands) December 31, 2022 Agricultural $ 197 $ — $ — $ — $ 197 $ — Commercial and financial 1,385 — 74 — 1,459 4 Real estate: Construction, 1 to 4 family residential 382 — — — 382 105 Construction, land development and commercial 191 — — — 191 — Mortgage, farmland 1,482 — 180 — 1,662 — Mortgage, 1 to 4 family first liens 6,012 — — — 6,012 44 Mortgage, 1 to 4 family junior liens 193 — — — 193 1 Mortgage, multi-family 620 — — — 620 — Mortgage, commercial 2,833 — — — 2,833 1 Loans to individuals 30 — — — 30 29 Obligations of state and political subdivisions — — — — — — $ 13,325 $ — $ 254 $ — $ 13,579 $ 184 The changes in the ACL in 2023 compared to 2022 is the result of the following factors: 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; 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 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 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 Page 98 Table of Contents 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 modified to a borrower experiencing financial difficulties. 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 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. The Company may recognize a charge off or record a specific allowance related to an individually analyzed loan if there is a collateral shortfall or it is unlikely the borrower can make all principal and interest payments as contractually due. For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral. In general, this is the amount that the carrying value of the loan exceeds the related appraised value less estimated costs to sell the collateral. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the credit loss is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variables affecting its value may have changed since the appraisal was performed. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide an additional charge off or specific reserve based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a specific reserve may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional specific reserve may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order. The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge-offs. 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 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. Note 4. Property and Equipment The major classes of property and equipment and the total accumulated depreciation are as follows: December 31, 2023 2022 (Amounts In Thousands) Land $ 11,266 $ 11,266 Buildings and improvements 41,223 38,923 Furniture and equipment 42,694 41,999 95,183 92,188 Less accumulated depreciation 60,953 58,670 Net $ 34,230 $ 33,518 Note 5. Leases The Bank leases branch offices, parking facilities and certain equipment under operating leases. 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 Page 99 Table of Contents 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. For the years ended December 31, 2023 and 2022, total operating lease expense was $ 0.50 million and $ 0.58 million, respectively, and is included in occupancy expenses in the consolidated statement of income. 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, 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. Operating lease liabilities included in other liabilities were $ 2.22 million and $ 2.19 million, respectively. The weighted average remaining lease term for operating leases was 8.56 years and 9.72 years, respectively, and the weighted average discount rate for operating leases was 3.69 % and 3.54 %, respectively. Discount rates used were determined from FHLB borrowing rates for comparable terms. As of December 31, 2023, maturities of lease liabilities were as follows: Year ending December 31: (Amounts In Thousands) 2024 329 2025 332 2026 335 2027 333 2028 295 Thereafter 984 Total lease payments 2,608 Less imputed interest ( 385 ) Total operating lease liabilities $ 2,223 Note 6. Interest - Bearing Deposits A summary of these deposits is as follows: December 31, 2023 2022 (Amounts In Thousands) NOW and other demand $ 783,337 $ 948,322 Savings 1,021,126 1,196,686 Time, $250,000 and over 200,377 88,808 Other time 677,542 476,101 $ 2,682,382 $ 2,709,917 Brokered deposits totaled $ 24.22 million and $ 31.74 million as of December 31, 2023 and 2022, respectively, with an average interest rate of 5.35 % and 2.60 % as of December 31, 2023 and 2022, respectively. As of December 31, 2023, brokered deposits of $ 24.22 million are included in savings deposits. At December 31, 2022, brokered deposits of $ 31.74 million were included in savings deposits . Page 100 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Time deposits have a maturity as follows: December 31, 2023 2022 (Amounts In Thousands) Due in one year or less $ 806,638 $ 257,239 Due after one year through two years 45,890 246,763 Due after two years through three years 13,237 40,144 Due after three years through four years 11,095 14,933 Due over four years 1,059 5,830 $ 877,919 $ 564,909 Page 101 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Short-term Borrowings The following table sets forth selected information for other borrowings each of which having a maturity of less than one year: December 31, 2023 2022 (Amounts In Thousands) Federal funds purchased, interest rates 4.50 % to 4.85 % $ — $ 82,061 Bank Term Funding Program, interest rates 4.83 % 219,000 — 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. Page 102 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Federal Home Loan Bank Borrowings As of December 31, 2023 and 2022, the borrowings were as follows: 2023 2022 (Effective interest rates as of December 31, 2023) (Amounts In Thousands) Overnight borrowing, 4.60 % $ — $ 40,000 Due 2024, 5.49 to 5.66 296,648 — $ 296,648 $ 40,000 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. 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 $ 15.75 million and $ 6.46 million at December 31, 2023 and 2022, respectively . 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 $ 1,078.91 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. Note 9. Accumulated Other Comprehensive (Loss) The components of accumulated other comprehensive income (AOCI), included in stockholders’ equity, are as follows: December 31, 2023 2022 (amounts in thousands) 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 Net-of-tax amount $ ( 27,176 ) $ ( 41,060 ) Note 10. Employee Benefit Plans The Company has an Employee Stock Purchase Plan (the “ESPP”). For each quarterly offering period, eligible employees can elect to contribute from 1 % to 15 % of his or her compensation. The purchase price is the lesser of 90 % of the fair market value on the first day of the offering period or the last day of the offering period. The maximum dollar amount any one employee can elect to contribute in a year is $ 9,000 . During the year ended December 31, 2023, 6,550 shares of stock were purchased by employees of the Bank through the ESPP. 6,637 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2022. The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes discretionary cash contributions. The Company's contribution to the ESOP totaled $ 1.40 million, $ 1.28 million and $ 1.27 million for the years ended December 31, 2023, 2022 and 2021, respectively. The 2023, 2022 and 2021 discretionary contribution rate was 4.5 % of qualified salaries. In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value. 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 Page 103 Table of Contents 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: 2023 2022 Shares held by the ESOP 679,592 708,488 Fair value per share $ 66.00 $ 72.00 Maximum cash obligation $ 44,853,000 $ 51,011,000 The Company has a profit-sharing plan with a 401(k) feature, which provides for discretionary annual contributions in amounts to be determined by the Board of Directors. The Company made a 4.50 % or $ 1.40 million contribution to the profit sharing plan for the year ended December 31, 2023. The Company made a 4.50 % or $ 1.28 million contribution to the profit sharing plan for the year ended December 31, 2022. The Company made a 4.50 % or $ 1.27 million contribution to the profit sharing plan for the year ended December 31, 2021. The Company made matching contributions under its 401(k) plan of $ 0.28 million in 2023, $ 0.27 million in 2022, and $ 0.26 million in 2021 and each such amount is included in salaries and employee benefits expense. The Company provides a deferred compensation program for executive officers. This program allows executive officers to elect to defer a portion of their salaried compensation for payment by the Company at a subsequent date. The executive officers can defer up to 30 % of their base compensation and up to 100 % of any bonus into the deferral plan. Any amount so deferred is credited to the executive officer’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The executive officer’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferrals and earnings grow tax deferred until withdrawn from the plan. Earnings credited to the individual’s accounts are recorded as compensation expense when earned. 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 (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. Under the plan, each director may elect to defer up to 50 % of such director’s cash compensation from retainers and meeting fees for payment by the Company at a subsequent date. Any amount so deferred is credited to the director’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The director’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. 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 (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. Under the plan, the aggregate number of options and shares granted cannot exceed 250,000 shares. A Stock Option Committee may grant options at prices equal to the fair value of the stock at the date of the grant. Options expire 10 years from the date of the grant. Director options and officers' rights under the plan vest over a five-year period from the date of the grant. The fair value of each option is estimated as of the date of grant using a Black Scholes option pricing model. The expected lives of options granted incorporate historical employee exercise behavior. The risk-free rate for periods that coincide with the expected life of the options is based on the ten year interest rate swap rate as published by the Federal Reserve Bank on the date of issuance. Expected volatility is based on volatility levels of the Company’s peers’ common stock as the Company’s stock has limited trading activity. Expected dividend yield was based on historical dividend rates. 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 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. Page 104 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the stock options is as follows: Number of Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In Thousands) Balance, December 31, 2020 13,025 $ 45.92 4.47 216 Granted — Exercised — Balance, December 31, 2021 13,025 $ 45.92 3.47 288 Granted — Exercised ( 7,220 ) Balance, December 31, 2022 5,805 $ 62.00 6.40 58 Granted — Exercised — 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: Exercise Price Number Outstanding Remaining Contractual Life Number Exercisable 62.00 5,805 65 months — 5,805 — As of December 31, 2023, the outstanding options have a weighted-average exercise price of $ 62.00 per share and a weighted average remaining contractual term of 5.40 years. There was $ 0.01 million in unrecognized compensation cost for stock options granted under the plan as of December 31, 2023. The cost is expected to be recognized over a weighted-average period of 0.40 years. As of December 31, 2023, there were zero vested option shares. As of December 31, 2023, 178,073 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan). The 2010 Stock Option and Incentive Plan (2010 Plan) was discontinued upon the approval of the 2020 Plan in April 2020. No stock options or stock awards will be issued from the 2010 Plan after April 2020. The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock. A summary of the restricted stock option activity for the year ended December 31, 2023 is as follows: 2020 Stock Option and Incentive Plan 2010 Stock Option and Incentive Plan Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Balance, December 31, 2022 197,245 34,406 Authorization of shares — — Granted 24,393 $ 67.40 — $ 0.00 Forfeited 5,221 $ 67.42 3,620 $ 62.21 Balance, December 31, 2023 178,073 38,026 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 Page 105 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Note 11. Income Taxes Income taxes for the years ended December 31, 2023, 2022 and 2021 are summarized as follows: 2023 2022 2021 (Amounts In Thousands) Current: Federal $ 9,575 $ 11,190 $ 10,383 State 2,596 3,231 2,653 Deferred: Federal ( 2,215 ) ( 1,035 ) 757 State 342 ( 272 ) 214 $ 10,298 $ 13,114 $ 14,007 Temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2023 and 2022 were as follows: December 31, 2023 2022 (Amounts In Thousands) Deferred income tax assets: Allowance for credit losses $ 11,745 $ 10,045 Deferred compensation and unearned restricted stock 1,671 1,785 Allowance for credit losses on off-balance sheet credit exposures 1,212 1,074 Accrued expenses 932 848 Unrealized losses on investment securities 8,419 13,138 State net operating loss 1,286 1,187 Gross deferred tax assets $ 25,265 $ 28,077 Valuation allowance ( 1,286 ) ( 1,187 ) Deferred tax asset, net of valuation allowance $ 23,979 $ 26,890 Deferred income tax liabilities: Property and equipment 1,647 1,680 Goodwill 388 395 Prepaid expenses 495 400 Other 178 354 Gross deferred tax liabilities $ 2,708 $ 2,829 Net deferred tax assets $ 21,271 $ 24,061 The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carry-forwards. The net operating loss carry-forwards are generated by the Company largely from its investment in tax credit real estate properties. The Company is required to file a separate Iowa tax return and cannot be consolidated with the Bank. The net operating loss carry-forwards will expire, if not utilized, between 2024 and 2042. The Company has recorded a valuation allowance to reduce the deferred tax asset attributable to the net operating loss carry-forwards. At December 31, 2023 and 2022, 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 Page 106 Table of Contents 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 $ 99,000 and $ 93,000 for the years ended December 31, 2023 and 2022, respectively. The net change in the deferred income taxes for the years ended December 31, 2023, 2022 and 2021 is reflected in the consolidated financial statements as follows: Year Ended December 31, 2023 2022 2021 (Amounts In Thousands) Consolidated statements of income $ ( 1,873 ) $ ( 1,307 ) $ 971 Consolidated statements of stockholders' equity 4,663 ( 13,629 ) ( 4,008 ) $ 2,790 $ ( 14,936 ) $ ( 3,037 ) Income tax expense for the years ended December 31, 2023, 2022 and 2021 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: 2023 2022 2021 Amount % Of Pretax Income Amount % Of Pretax Income Amount % Of Pretax Income (Amounts In Thousands) Expected tax expense $ 10,180 21.0 % $ 12,782 21.0 % $ 13,039 21.0 % Tax-exempt interest ( 1,349 ) ( 2.8 ) ( 1,216 ) ( 2.0 ) ( 1,176 ) ( 1.9 ) Interest expense limitation 187 0.4 47 0.1 50 0.1 State income taxes, net of federal income tax benefit 2,321 4.8 2,337 3.8 2,265 3.7 Income tax credits ( 475 ) ( 1.0 ) ( 475 ) ( 0.8 ) ( 475 ) ( 0.8 ) Other ( 566 ) ( 1.2 ) ( 361 ) ( 0.6 ) 304 0.5 $ 10,298 21.2 % $ 13,114 21.5 % $ 14,007 22.6 % Federal income tax expense for the years ended December 31, 2023, 2022 and 2021 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes. The tax years ended December 31, 2023, 2022, 2021 and 2020 , remain subject to examination by the Internal Revenue Service. For state tax purposes, the tax years ended December 31, 2023, 2022, 2021 and 2020 , remain open for examination. There were no material unrecognized tax benefits at December 31, 2023 and December 31, 2022. No interest or penalties on these unrecognized tax benefits has been recorded. As of December 31, 2023, the Company does no t anticipate any significant increase or decrease in unrecognized tax benefits during the twelve month period ending December 31, 2024. Note 12. Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash Restrictions The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial results. Under capital adequacy guidelines and the regulatory frameworks for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of capital. 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 Page 107 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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): Actual For Capital Adequacy Purposes Amount Ratio Ratio As of December 31, 2023: Company: Community Bank Leverage Ratio $ 539,815 12.77 % 9.00 % Bank: Community Bank Leverage Ratio 541,566 12.82 9.00 Actual For Capital Adequacy Purposes Amount Ratio Ratio As of December 31, 2022: Company: Community Bank Leverage Ratio $ 517,831 13.27 % 9.00 % Bank: Community Bank Leverage Ratio 520,149 13.33 9.00 The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios in the Bank, certain of its retained earnings are not available for the payment of dividends. To maintain a ratio of capital to assets of 9.0 %, retained earnings of $ 161.36 million as of December 31, 2023 are available for the payment of dividends to the Company. The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled none as of December 31, 2023 and 2022. Note 13. 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. Page 108 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 (Amounts In Thousands) Balance, beginning $ 73,039 $ 52,845 Net (decrease) increase due to change in related parties 714 ( 986 ) Advances 27,689 39,155 Collections ( 28,105 ) ( 17,975 ) Balance, ending $ 73,337 $ 73,039 Deposits from these related parties totaled $ 14.66 million and $ 22.86 million as of December 31, 2023 and 2022, respectively. Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties. Page 109 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Fair Value Measurements The carrying value and estimated fair values of the Company’s financial instruments as of December 31, 2023 are as follows: December 31, 2023 Carrying Amount Estimated Fair Value Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) (Amounts In Thousands) Financial instrument assets: Cash and cash equivalents $ 59,482 $ 59,482 $ 59,482 $ — $ — Investment securities 795,167 795,167 422,490 372,677 — Loans held for sale 2,023 2,023 — 2,023 — Loans Agricultural 113,270 112,421 — — 112,421 Commercial and financial 298,440 294,021 — — 294,021 Real estate: Construction, 1 to 4 family residential 79,142 79,238 — — 79,238 Construction, land development and commercial 308,509 299,846 — — 299,846 Mortgage, farmland 277,735 259,969 — — 259,969 Mortgage, 1 to 4 family first liens 1,206,991 1,114,737 — — 1,114,737 Mortgage, 1 to 4 family junior liens 140,636 135,529 — — 135,529 Mortgage, multi-family 466,754 435,222 — — 435,222 Mortgage, commercial 412,769 386,712 — — 386,712 Loans to individuals 38,958 37,600 — — 37,600 Obligations of state and political subdivisions 46,168 43,676 — — 43,676 Accrued interest receivable 19,786 19,786 — 19,786 — Total financial instrument assets $ 4,265,830 $ 4,075,429 $ 481,972 $ 394,486 $ 3,198,971 Financial instrument liabilities: Deposits Noninterest-bearing deposits $ 600,398 $ 600,398 $ — $ 600,398 $ — Interest-bearing deposits 2,682,382 2,678,798 — 2,678,798 — Other borrowings 219,000 219,164 — 219,164 — 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 — Total financial instrument liabilities $ 3,804,763 $ 3,801,843 $ — $ 3,801,843 $ — Face Amount Financial instrument with off-balance sheet risk: Loan commitments $ 685,861 $ — $ — $ — $ — Letters of credit 7,654 — — — — Total financial instrument liabilities with off-balance-sheet risk $ 693,515 $ — $ — $ — $ — (1) Considered Level 1 under Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). (2) Considered Level 2 under ASC 820. (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. Page 110 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying value and estimated fair values of the Company’s financial instruments as of December 31, 2022 are as follows: December 31, 2022 Carrying Amount Estimated Fair Value Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) (Amounts In Thousands) Financial instrument assets: Cash and cash equivalents $ 36,641 $ 36,641 $ 36,641 $ — $ — Investment securities 782,565 782,565 445,392 337,173 — Loans held for sale 1,663 1,663 — 1,663 — Loans Agricultural 110,163 108,992 — — 108,992 Commercial and financial 263,309 259,500 — — 259,500 Real estate: Construction, 1 to 4 family residential 91,297 91,279 — — 91,279 Construction, land development and commercial 193,162 188,726 — — 188,726 Mortgage, farmland 253,581 237,849 — — 237,849 Mortgage, 1 to 4 family first liens 1,120,150 1,055,091 — — 1,055,091 Mortgage, 1 to 4 family junior liens 121,890 118,279 — — 118,279 Mortgage, multi-family 432,517 411,092 — — 411,092 Mortgage, commercial 397,861 377,753 — — 377,753 Loans to individuals 35,278 36,934 — — 36,934 Obligations of state and political subdivisions 47,773 45,653 — — 45,653 Accrued interest receivable 15,782 15,782 — 15,782 — Total financial instrument assets $ 3,903,632 $ 3,767,799 $ 482,033 $ 354,618 $ 2,931,148 Financial instrument liabilities: Deposits Noninterest-bearing deposits $ 647,450 $ 647,450 $ — $ 647,450 $ — Interest-bearing deposits 2,709,917 2,711,088 — 2,711,088 — Other borrowings 82,061 82,061 — 82,061 — Federal Home Loan Bank borrowings 40,000 40,000 — 40,000 — Accrued interest payable 1,394 1,394 — 1,394 — Total financial instrument liabilities 3,480,822 3,481,993 — 3,481,993 — Financial instrument with off-balance sheet risk: Face Amount Loan commitments $ 701,729 $ — $ — $ — $ — Letters of credit 6,618 — — — — Total financial instrument liabilities with off-balance-sheet risk $ 708,347 $ — $ — $ — $ — (1) Considered Level 1 under Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). (2) Considered Level 2 under ASC 820. (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 Page 111 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. There are three levels of inputs that may be used to measure fair value as follows: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than quoted prices included within Level 1. Observable inputs include the quoted prices for similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability. Level 3 Unobservable inputs supported by little or no market activity for financial instruments. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. Investment securities available for sale : Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities. U.S. Treasury securities are considered Level 1 with the remaining securities considered Level 2. The pricing for investment securities is obtained from an independent source. There are no Level 3 investment securities owned by the Company. The Company obtains an understanding of the independent source’s valuation methodologies used to determine fair value by level of security. The Company validates assigned fair values on a sample basis using an additional third-party provider pricing service to determine if the fair value measurement is reasonable. Due to the nature of our investment portfolio, we do not expect significant and unusual fluctuations as fair value changes primarily relate to interest rate changes. No unusual fluctuations were identified during the year ended December 31, 2023. If a fluctuation requiring investigation was identified, the Company would research the change with the independent source or other available information. Individually analyzed loans under ASC 326 CECL : See Note 1 for further discussion of individually analyzed loans under CECL. A loan is considered to be non-performing when it is probable that all of the principal and interest due may not be collected according to its contractual terms. Generally, when a loan is considered non-performing, the amount of reserve is measured based on the fair value of the underlying collateral. The Company makes such measurements on all material loans deemed non-performing using the fair value of the collateral for collateral dependent loans or based on the present value of the estimated future cash flows of interest and principal discounted at the loans effective interest rate or the fair value of the loan if determinable. The fair value of collateral used by the Company is determined by obtaining an observable market price or by obtaining an appraised value from an independent, licensed or certified appraiser, using observable market data. This data includes information such as selling price of similar properties and capitalization rates of similar properties sold within the market, expected future cash flows or earnings of the subject property based on current market expectations, and other relevant factors. All appraised values are adjusted for market-related trends based on the Company's experience in sales and other appraisals of similar property types as well as estimated selling costs. These loans are considered Level 3 as the instruments used to determine fair market value require significant management judgment and estimation. Page 112 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreclosed assets : The Company does not record foreclosed assets at fair value on a recurring basis. Foreclosed assets consist mainly of other real estate owned but may include other types of assets repossessed by the Company. 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 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. Foreclosed assets are classified as Level 3. Off-balance sheet instruments : Fair values for outstanding letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the outstanding letters of credit is not significant. 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 The table below represents the balances of assets and liabilities measured at fair value on a recurring basis: December 31, 2023 Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) Total at Fair Value Securities available for sale (Amounts in Thousands) U.S. Treasury $ 422,490 $ — $ — $ 422,490 State and political subdivisions — 262,953 — 262,953 Mortgage-backed securities and collateralized mortgage obligations — 60,929 — 60,929 Other securities (FHLB, FHLMC and FNMA) — 33,049 — 33,049 Total $ 422,490 $ 356,931 $ — $ 779,421 December 31, 2022 Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) Total at Fair Value Securities available for sale (Amounts in Thousands) U.S. Treasury $ 445,392 $ — $ — $ 445,392 State and political subdivisions — 248,582 — 248,582 Mortgage-backed securities and collateralized mortgage obligations — 50,196 — 50,196 Other securities (FHLB, FHLMC and FNMA) — 31,934 — 31,934 Total $ 445,392 $ 330,712 $ — $ 776,104 (1) Considered Level 1 under ASC 820. (2) Considered Level 2 under ASC 820. (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. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2023 and 2022. Page 113 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company is required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. For assets measured at fair value on a nonrecurring basis that were still held on the balance sheet at December 31, 2023 and 2022, the following tables provide the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets at year end. December 31, 2023 Year Ended December 31, 2023 Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) Total at Fair Value Total (Gains) Losses (Amounts in Thousands) Loans (4) Agricultural $ — $ — $ — $ — $ 419 Commercial and financial — — 1,044 1,044 26 Real Estate: Construction, 1 to 4 family residential — — 5,235 5,235 1,148 Construction, land development and commercial — — 2,755 2,755 447 Mortgage, farmland — — — — — Mortgage, 1 to 4 family first liens — — 1,518 1,518 ( 33 ) Mortgage, 1 to 4 family junior liens — — — — — Mortgage, multi-family — — — — 20 Mortgage, commercial — — 1,911 1,911 725 Loans to individuals — — — — — Foreclosed assets (5) — — — — — Total $ — $ — $ 12,463 $ 12,463 $ 2,752 (1) Considered Level 1 under ASC 820. (2) Considered Level 2 under ASC 820. (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. (4) Represents carrying value and related write-downs of loans for which adjustments are based on the value of the collateral. The carrying value of loans fully charged off is zero. (5) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. Page 114 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 Year Ended December 31, 2022 Readily Available Market Prices(1) Observable Market Prices(2) Company Determined Market Prices(3) Total at Fair Value Total Losses (Amounts in Thousands) Loans (4) Agricultural $ — $ — $ — $ — $ — Commercial and financial — — 1,324 1,324 225 Real Estate: Construction, 1 to 4 family residential — — 277 277 — Construction, land development and commercial — — 191 191 — Mortgage, farmland — — 1,662 1,662 123 Mortgage, 1 to 4 family first liens — — 5,639 5,639 367 Mortgage, 1 to 4 family junior liens — — 193 193 5 Mortgage, multi-family — — 620 620 50 Mortgage, commercial — — 2,778 2,778 — Loans to individuals — — — — — Foreclosed assets (5) — — — — — Total $ — $ — $ 12,684 $ 12,684 $ 770 (1) Considered Level 1 under ASC 820. (2) Considered Level 2 under ASC 820. (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. (4) Represents carrying value and related write-downs of loans for which adjustments are based on the value of the collateral. The carrying value of loans fully charged off is zero. (5) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. Page 115 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15. Parent Company Only Financial Information Following is condensed financial information of the Company (parent company only): CONDENSED BALANCE SHEETS December 31, 2023 and 2022 (Amounts In Thousands) ASSETS 2023 2022 Cash and cash equivalents at subsidiary bank $ 652 $ 600 Investment in subsidiary bank 516,889 481,589 Other assets 1,348 1,296 Total assets $ 518,889 $ 483,485 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 3,750 $ 4,214 Redeemable common stock held by ESOP 44,853 51,011 Stockholders' equity: Capital stock 63,827 63,220 Retained earnings 541,329 512,841 Accumulated other comprehensive (loss) ( 27,176 ) ( 41,060 ) Treasury stock at cost ( 62,841 ) ( 55,730 ) 515,139 479,271 Less maximum cash obligation related to ESOP shares 44,853 51,011 Total stockholders' equity 470,286 428,260 Total liabilities and stockholders' equity $ 518,889 $ 483,485 CONDENSED STATEMENTS OF INCOME Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands) 2023 2022 2021 Dividends received from subsidiary $ 16,687 $ 12,806 $ 12,273 Other expenses ( 199 ) ( 720 ) ( 836 ) Income before income tax benefit and equity in undistributed income of subsidiary 16,488 12,086 11,437 Income tax benefit 54 269 297 16,542 12,355 11,734 Equity in undistributed income of subsidiary 21,634 35,398 36,351 Net income $ 38,176 $ 47,753 $ 48,085 Page 116 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2023, 2022 and 2021 (Amounts In Thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 38,176 $ 47,753 $ 48,085 Adjustments to reconcile net income to cash and cash equivalents provided by operating activities: Equity in undistributed income of subsidiary ( 21,634 ) ( 35,398 ) ( 36,351 ) Share-based compensation 25 25 25 Compensation expensed through issuance of common stock 1,630 1,349 1,618 Forfeiture of common stock ( 564 ) ( 791 ) ( 455 ) (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 Cash flows from financing activities: Issuance of common stock, net of costs — 1,242 — Stock options exercised — 238 — Purchase of treasury stock ( 7,710 ) ( 7,906 ) ( 3,569 ) Proceeds from the issuance of common stock through the employee stock purchase plan 398 417 427 Capital contribution to subsidiary — — — Dividends paid ( 9,688 ) ( 9,304 ) ( 8,773 ) Net cash and cash equivalents used by financing activities ( 17,000 ) ( 15,313 ) ( 11,915 ) Increase (decrease) in cash and cash equivalents 52 ( 1,576 ) 1,076 Cash and cash equivalents: Beginning of year 600 2,176 1,100 Ending of year $ 652 $ 600 $ 2,176 Supplemental Disclosures Noncash financing activities: (Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684 Note 16. Commitments and Contingencies Concentrations of credit risk : The Bank’s loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within the Bank's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $ 114.05 million. The concentrations of credit by type of loan are set forth in Note 3 to the Consolidated Financial Statements. Outstanding letters of credit were granted primarily to commercial borrowers. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in Johnson, Linn and Washington Counties, Iowa. Contingencies : In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. 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. Page 117 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial instruments with off-balance sheet risk : The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, credit card participations and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card participations and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments at December 31, 2023 and 2022 is as follows: 2023 2022 (Amounts In Thousands) Firm loan commitments and unused portion of lines of credit: Home equity loans $ 84,939 $ 84,869 Credit cards 73,677 66,535 Commercial, real estate and home construction 245,208 241,983 Commercial lines and real estate purchase loans 282,037 308,342 Outstanding letters of credit 7,654 6,618 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties. Credit card commitments are the unused portion of the holders' credit limits. Such amounts represent the maximum amount of additional unsecured borrowings. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2023 and 2022, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees. Lease commitments: The Company leases certain facilities under operating leases. The minimum future rental commitments as of December 31, 2023 for all non-cancellable leases relating to Bank premises were as follows: Year ending December 31: (Amounts In Thousands) 2024 239 2025 157 2026 157 2027 157 2028 121 Thereafter 1 $ 832 Rent expense was $ 0.36 million, $ 0.41 million and $ 0.40 million for the years ended December 31, 2023, 2022 and 2021, respectively. Page 118 Table of Contents HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. 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: Notional Amount Fair Value Balance Sheet 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 $ — Note 18. Subsequent Events Subsequent events have been evaluated through March 5, 2024. Page 119 Table of Contents Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.