UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  ___________ to ___________

Commission file number:  0-12668

Hills Bancorporation

(State or other jurisdiction of incorporation or organization)	I.R.S. Employer Identification No.
Iowa	42-1208067

131 MAIN STREET, HILLS, Iowa 52235

Telephone number: (319) 679-2291

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes  ☐ No

Indicate by checkmark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). ☑ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated Filer	☑
Non-accelerated filer	☐	Small Reporting Company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes  ☑ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

		SHARES OUTSTANDING
CLASS		April 30, 2024
Common Stock	No par value	9,089,649

HILLS BANCORPORATION

Index to Form 10-Q

Part I

FINANCIAL INFORMATION

		Page
		Number
Item 1.	Financial Statements
	Consolidated balance sheets, March 31, 2024 (unaudited) and December 31, 2023	4
	Consolidated statements of income (unaudited) for three months ended March 31, 2024 and 2023	5
	Consolidated statements of comprehensive income (unaudited) for three months ended March 31, 2024 and 2023	6
	Consolidated statements of stockholders' equity (unaudited) for three months ended March 31, 2024 and 2023	7
	Consolidated statements of cash flows (unaudited) for three months ended March 31, 2024 and 2023	8
	Notes to consolidated financial statements (condensed)	10
Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	65
	Part II
	OTHER INFORMATION
Item 1.	Legal proceedings	65
Item 1A.	Risk factors	65
Item 2.	Unregistered sales of equity securities and use of proceeds	66
Item 3.	Defaults upon senior securities	67
Item 4.	Mine safety disclosures	67
Item 5.	Other information	67
Item 6.	Exhibits	68
	Signatures	69

Page 3

HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts) 

	March 31, 2024		December 31, 2023
ASSETS	(Unaudited)
Cash and cash equivalents	$	94,054	$	59,482
Investment securities available for sale at fair value (amortized cost March 31, 2024 $823,091; December 31, 2023 $814,839)	784,030		779,421
Stock of Federal Home Loan Bank	14,422		15,746
Loans held for sale	3,702		2,023
Loans, net of allowance for credit losses March 31, 2024 $49,830; December 31, 2023 $49,410	3,392,930		3,389,372
Property and equipment, net	33,920		34,230
Tax credit real estate investments	7,546		7,910
Accrued interest receivable	21,861		19,786
Deferred income taxes, net	22,279		21,271
Goodwill	2,500		2,500
Other assets	10,803		9,926
Total Assets	$	4,388,047	$	4,341,667
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits	$	572,838	$	600,398
Interest-bearing deposits	2,789,253		2,682,382
Total deposits	$	3,362,091	$	3,282,780
Other short-term borrowings, including Bank Term Funding Program and federal funds purchased	329,000		219,000
Federal Home Loan Bank borrowings	152,400		296,648
Accrued interest payable	7,441		6,102
Allowance for credit losses on off-balance sheet credit exposures	4,360		5,110
Other liabilities	20,939		16,888
Total Liabilities	$	3,876,231	$	3,826,528
Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)	$	46,375	$	44,853
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 20,000,000 shares; issued March 31, 2024 10,346,258 shares; December 31, 2023 10,345,832 shares	$	—	$	—
Paid in capital	64,095		63,827
Retained earnings	543,378		541,329
Accumulated other comprehensive loss	(29,751)		(27,176)
Treasury stock at cost (March 31, 2024 1,253,925 shares; December 31, 2023 1,210,112 shares)	(65,906)		(62,841)
Total Stockholders' Equity	$	511,816	$	515,139
Less maximum cash obligation related to ESOP shares	46,375		44,853
Total Stockholders' Equity Less Maximum Cash Obligation Related to ESOP Shares	$	465,441	$	470,286
Total Liabilities & Stockholders' Equity	$	4,388,047	$	4,341,667

See Notes to Consolidated Financial Statements.

Page 4

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Amounts In Thousands, Except Per Share Amounts)

	Three Months Ended March 31,
	2024		2023
Interest income:
Loans, including fees	$	43,450	$	34,707
Investment securities:
Taxable	3,273		2,697
Nontaxable	1,488		1,187
Federal funds sold	510		196
Total interest income	$	48,721	$	38,787
Interest expense:
Deposits	$	14,269	$	7,274
Other short-term borrowings	3,472		2,312
FHLB borrowings	3,310		—
Total interest expense	$	21,051	$	9,586
Net interest income	$	27,670	$	29,201
Credit loss (benefit) expense	(363)		368
Net interest income after credit loss expense	$	28,033	$	28,833
Noninterest income:
Net gain on sale of loans	$	373	$	145
Trust fees	3,497		3,270
Service charges and fees	3,033		3,033
Other noninterest income (expense)	104		(67)
	$	7,007	$	6,381
Noninterest expenses:
Salaries and employee benefits	$	11,187	$	11,503
Occupancy	1,083		1,177
Furniture and equipment	1,680		1,692
Office supplies and postage	514		448
Advertising and business development	811		874
Outside services	3,450		2,910
FDIC insurance assessment	481		270
Other noninterest expense	601		536
	$	19,807	$	19,410
Income before income taxes	$	15,233	$	15,804
Income taxes	3,133		3,342
Net income	$	12,100	$	12,462
Earnings per share:
Basic	$	1.33	$	1.35
Diluted	$	1.33	$	1.35

See Notes to Consolidated Financial Statements.

Page 5

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (Amounts In Thousands)

	Three Months Ended March 31,
	2024		2023
Net income	$	12,100	$	12,462
Other comprehensive (loss) income
Securities:
Net change in unrealized (loss) gain on securities available for sale	$	(3,643)	$	8,487
Income taxes	866		(2,085)
Other comprehensive (loss) income on securities available for sale	$	(2,777)	$	6,402
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain on derivatives	$	267	$	—
Income taxes	(65)		—
Other comprehensive income (loss) on cash flow hedges	$	202	$	—
Other comprehensive (loss) income, net of tax	$	(2,575)	$	6,402
Comprehensive income	$	9,525	$	18,864

See Notes to Consolidated Financial Statements.

Page 6

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Amounts In Thousands, Except Share Amounts)

Three Months Ended March 31, 2024 and 2023
	Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Maximum Cash Obligation Related to ESOP Shares		Total
Balance, December 31, 2022	$	63,220	$	512,841	$	(41,060)	$	(55,730)	$	(51,011)	$	428,260
Issuance of 4,589 shares of common stock	204		—		—		126		—		330
Issuance of 1,716 shares of common stock under the employee stock purchase plan	111		—		—		—		—		111
Unearned restricted stock compensation	42		—		—		—		—		42
Forfeiture of 1,871 shares of common stock	(125)		—		—		—		—		(125)
Share-based compensation	6		—		—		—		—		6
Change related to ESOP shares	—		—		—		—		1,207		1,207
Net income	—		12,462		—		—		—		12,462
Cash dividends ($1.05 per share)	—		(9,688)		—		—		—		(9,688)
Purchase of 32,682 shares of common stock	—		—		—		(2,352)		—		(2,352)
Other comprehensive income	—		—		6,402		—		—		6,402
Balance, March 31, 2023	$	63,458	$	515,615	$	(34,658)	$	(57,956)	$	(49,804)	$	436,655
Balance, December 31, 2023	$	63,827	$	541,329	$	(27,176)	$	(62,841)	$	(44,853)	$	470,286
Issuance of 3,339 shares of common stock	131		—		—		92		—		223
Issuance of 1,719 shares of common stock under the employee stock purchase plan	105		—		—		—		—		105
Unearned restricted stock compensation	115		—		—		—		—		115
Forfeiture of 1,293 shares of common stock	(89)		—		—		—		—		(89)
Share-based compensation	6		—		—		—		—		6
Change related to ESOP shares	—		—		—		—		(1,522)		(1,522)
Net income	—		12,100		—		—		—		12,100
Cash dividends ($1.10 per share)	—		(10,051)		—		—		—		(10,051)
Purchase of 47,152 shares of common stock	—		—		—		(3,157)		—		(3,157)
Other comprehensive loss	—		—		(2,575)		—		—		(2,575)
Balance, March 31, 2024	$	64,095	$	543,378	$	(29,751)	$	(65,906)	$	(46,375)	$	465,441

 See Notes to Consolidated Financial Statements.

Page 7

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts In Thousands)

	Three Months Ended March 31,
	2024		2023
Cash Flows from Operating Activities
Net income	$	12,100	$	12,462
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation	611		616
Credit loss (benefit) expense	(363)		368
Forfeiture of common stock	(89)		(125)
Share-based compensation	6		6
Compensation expensed through issuance of common stock	223		330
Provision for deferred income taxes	(207)		(171)
Net (gain) loss on sale of other real estate owned and other repossessed assets	(19)		2
Increase in accrued interest receivable	(2,075)		(1,599)
Accretion of discount on investment securities, net	(149)		(103)
(Increase) decrease in other assets	(949)		18
Amortization of operating lease right-of-use assets	64		86
Increase in accrued interest payable and other liabilities	5,772		4,306
Loans originated for sale	(16,965)		(19,326)
Proceeds on sales of loans	15,659		18,143
Net gain on sales of loans	(373)		(145)
Net cash and cash equivalents provided by operating activities	$	13,246	$	14,868
Cash Flows from Investing Activities
Proceeds from maturities of investment securities available for sale	$	37,129	$	20,295
Proceeds from sales of investment securities available for sale	—		509
Purchases of investment securities available for sale	(45,232)		(550)
Proceeds from sale of stock of Federal Home Loan Bank	5,676		—
Purchases of stock of Federal Home Loan Bank	(4,352)		(7,124)
Loans made to customers, net of collections	(4,008)		(91,146)
Proceeds on sale of other real estate owned and other repossessed assets	90		—
Purchases of property and equipment	(301)		(131)
Net changes from tax credit real estate investment	364		519
Net cash and cash equivalents used in investing activities	$	(10,634)	$	(77,628)
Cash Flows from Financing Activities
Net increase in deposits	$	79,311	$	86,714
Net increase (decrease) in other short-term borrowings	110,000		(82,061)
Net increase (decrease) in short-term FHLB borrowings	(144,248)		180,000
Purchase of common stock	(3,157)		(2,352)
Proceeds from the issuance of common stock through the employee stock purchase plan	105		111
Dividends paid	(10,051)		(9,688)
Net cash and cash equivalents provided by financing activities	$	31,960	$	172,724

(Continued)

Page 8

HILLS BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) (Amounts In Thousands)

	Three Months Ended March 31,
	2024		2023
Increase in cash and cash equivalents	$	34,572	$	109,964
Cash and cash equivalents:
Beginning of period	59,482		36,641
End of period	$	94,054	$	146,605
Supplemental Disclosures
Cash payments for:
Interest paid to depositors	$	13,700	$	6,793
Interest paid on other obligations	6,012		2,312
Noncash activities:
Increase (decrease) in maximum cash obligation related to ESOP shares	$	1,522	$	(1,207)
Transfers to other real estate owned	63		111
Sale and financing of other real estate owned	100		—

See Notes to Consolidated Financial Statements.

Page 9

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X.  These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown.  The Company considers that it operates as one business segment, a commercial bank.

Operating results for the three month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the “Company”) for the year ended December 31, 2023 filed with the Securities Exchange Commission on March 5, 2024.  The consolidated balance sheet as of December 31, 2023, has been derived from the audited consolidated financial statements for that period.

The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC.

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 March 31, 2024 may change in the near-term and the effect could be material to the consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process.

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. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts.

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

Page 10

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 March 31, 2024 and December 31, 2023, the Company did not have any significant contract balances.

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The 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 has not incurred or capitalized any contract acquisition costs as of March 31, 2024 and December 31, 2023.

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 March 31, 2024. The Company 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 March 31, 2024. 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 Company 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.

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 March 31, 2024 or 2023. 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.

Page 11

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 $5.02 million at March 31, 2024 and is excluded from the estimate of credit losses.

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.

Loans held for investment: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the allowance for credit losses ("ACL"). Amortized cost is the principal balance outstanding, net of deferred loan fees and costs. Accrued interest receivable on loans held for investment totaled $16.84 million at March 31, 2024 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 unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed against interest income. 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.

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 the expected losses over the remaining life of 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

Page 12

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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, 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 including obligations of states and political subdivisions, 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 Company 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 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,

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(Unaudited)

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 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

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(Unaudited)

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.

Effect of New Financial Accounting Standards:

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.

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 adoption of the ASU on a prospective basis by the Company on January 1, 2024 did not have a material impact 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

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(Unaudited)

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.

In March 2024, the FASB issued ASU 2024-01, Compensation - Stock Compensation (Topic 718) Scope Application of Profits Interest and Similar Awards. The FASB is issuing this ASU to improve generally accepted accounting principles by adding an illustrative example to demonstrate how an entity should apply the scope guidance to determine whether profits interest and similar awards ("profit interest awards") should be accounted for in accordance with Topic 718, Compensation - Stock Compensation. The illustrative example is intended to reduce 1) complexity in determining whether a profits interest award is subject to the guidance in Topic 718 and 2) existing diversity in practice. For public business entities, the amendments are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The amendments in this Update should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. The Company is in the process of evaluating the impact of this ASU on the financial statements.

Note 2.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 computation of basic and diluted earnings per share for the periods presented is as follows:

	Three Months Ended March 31,
	2024		2023
Common shares outstanding at the beginning of the period	9,135,720		9,225,484
Weighted average number of net shares redeemed	(16,940)		(6,484)
Weighted average shares outstanding (basic)	9,118,780		9,219,000
Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method	486		765
Weighted average number of shares (diluted)	9,119,266		9,219,765
Net income (In thousands)	$	12,100	$	12,462
Earnings per share:
Basic	$	1.33	$	1.35
Diluted	$	1.33	$	1.35

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(Unaudited)

Note 3.Accumulated Other Comprehensive (Loss)

The following table summarizes the balances of each component of accumulated other comprehensive (loss) income (AOCI), included in stockholders’ equity, at March 31, 2024 and December 31, 2023:

	March 31, 2024		December 31, 2023
	(amounts in thousands)
Net unrealized loss on available-for-sale securities	$	(39,061)	$	(35,418)
Net unrealized gain (loss) on derivatives used for cash flow hedges	34		(233)
Tax effect	9,276		8,475
Net-of-tax amount	$	(29,751)	$	(27,176)

Note 4.Securities

The carrying values of investment securities at March 31, 2024 and December 31, 2023 are summarized in the following table (dollars in thousands):

	March 31, 2024				December 31, 2023
	Amount		Percent		Amount		Percent
Securities available for sale
U.S. Treasury	$	394,540	50.32	%	$	422,490	54.20	%
Other securities (FHLB, FHLMC and FNMA)	33,183		4.23		33,049		4.24
State and political subdivisions	285,091		36.36		262,953		33.74
Mortgage-backed securities and collateralized mortgage obligations (MBS and CMO)	71,216		9.09		60,929		7.82
Total securities available for sale	$	784,030	100.00	%	$	779,421	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 March 31, 2024 and December 31, 2023, 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. There were no trading or held to maturity securities as of March 31, 2024 or December 31, 2023.

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(Unaudited)

The carrying amount of available-for-sale securities, fair values and allowance for credit losses were as follows as of March 31, 2024 and December 31, 2023 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Allowance for Credit Losses		Estimated Fair Value
March 31, 2024
U.S. Treasury	$	408,620	$	120	$	(14,200)	$	—	$	394,540
Other securities (FHLB, FHLMC and FNMA)	35,131		—		(1,948)		—		33,183
State and political subdivisions	301,609		1,426		(17,944)		—		285,091
MBS and CMO	77,731		133		(6,648)		—		71,216
Total	$	823,091	$	1,679	$	(40,740)	$	—	$	784,030
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
MBS and CMO	66,532		241		(5,844)		—		60,929
Total	$	814,839	$	2,914	$	(38,332)	$	—	$	779,421

The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at March 31, 2024, were as follows (in thousands) below. 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 following summary.

	Amortized Cost		Fair Value
Due in one year or less	$	252,979	$	249,294
Due after one year through five years	304,984		290,196
Due after five years through ten years	122,422		109,658
Due over ten years	64,975		63,666
	$	745,360	$	712,814
MBS and CMO	77,731		71,216
	$	823,091	$	784,030

As of March 31, 2024, investment securities with a carrying value of $416.57 million were pledged to collateralize other borrowings. As of March 31, 2024, 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):

	March 31, 2024		March 31, 2023
Sale proceeds	$	—	$	509
Gross realized gains	—		—
Gross realized losses	—		—

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(Unaudited)

The following table shows the fair value, gross unrealized losses and the percentage of fair value represented by gross unrealized losses of applicable investment securities owned by the Company, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023 (in thousands):

	Less than 12 months							12 months or more							Total
March 31, 2024 Description of Securities	#	Fair Value		Unrealized Loss		%		#	Fair Value		Unrealized Loss		%		#	Fair Value		Unrealized Loss		%
U.S. Treasury	15	$	35,325	$	(368)	1.04	%	109	$	325,768	$	(13,832)	4.25	%	124	$	361,093	$	(14,200)	3.93	%
Other securities (FHLB, FHLMC and FNMA)	—	—		—		—		14	33,183		(1,948)		5.87		14	33,183		(1,948)		5.87
State and political subdivisions	121	45,158		(684)		1.51		693	172,902		(17,260)		9.98		814	218,060		(17,944)		8.23
MBS and CMO	4	10,689		(106)		(0.99)		18	44,723		(6,542)		14.63		22	55,412		(6,648)		12.00
Total	140	$	91,172	$	(1,158)	1.27	%	834	$	576,576	$	(39,582)	6.87	%	974	$	667,748	$	(40,740)	6.10	%

	Less than 12 months							12 months or more							Total
December 31, 2023 Description of Securities	#	Fair Value		Unrealized Loss		%		#	Fair Value		Unrealized Loss		%		#	Fair Value		Unrealized Loss		%
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
MBS and CMO	—	—		—		—		18	46,483		(5,844)		12.57		18	46,483		(5,844)		12.57
Total	116	$	36,900	$	(316)	0.86	%	786	$	611,806	$	(38,016)	6.21	%	902	$	648,706	$	(38,332)	5.91	%

The Company considered the following information in reaching the conclusion that the unrealized losses 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 March 31, 2024. 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 MBS and CMOs 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 March 31, 2024.

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(Unaudited)

Note 5.Loans

Classes of loans are as follows:

	March 31, 2024		December 31, 2023
	(Amounts In Thousands)
Agricultural	$	110,621	$	115,786
Commercial and financial	311,828		307,190
Real estate:
Construction, 1 to 4 family residential	83,817		80,255
Construction, land development and commercial	288,024		313,878
Mortgage, farmland	285,014		281,164
Mortgage, 1 to 4 family first liens	1,203,944		1,221,296
Mortgage, 1 to 4 family junior liens	143,831		144,524
Mortgage, multi-family	478,507		471,009
Mortgage, commercial	452,115		416,670
Loans to individuals	38,524		40,205
Obligations of state and political subdivisions	46,194		46,446
	$	3,442,419	$	3,438,423
Net unamortized fees and costs	341		359
	$	3,442,760	$	3,438,782
Less allowance for credit losses	49,830		49,410
	$	3,392,930	$	3,389,372

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(Unaudited)

Changes in the allowance for credit losses (ACL) for the three months ended March 31, 2024 and 2023 were as follows:

	Three Months Ended March 31, 2024
	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 on loans:
Beginning balance	$	2,516	$	8,750	$	6,482	$	3,429	$	18,552	$	8,156	$	1,525	$	49,410
Charge-offs	(1)		(431)		(88)		—		(272)		(38)		(350)		(1,180)
Recoveries	23		411		284		22		203		165		105		1,213
Credit loss expense (benefit)	380		(829)		(580)		(290)		(295)		839		1,162		387
Ending balance	$	2,918	$	7,901	$	6,098	$	3,161	$	18,188	$	9,122	$	2,442	$	49,830
	Three Months Ended March 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 on loans:
Beginning balance	$	2,542	$	6,259	$	4,189	$	2,989	$	14,208	$	9,416	$	1,837	$	41,440
Charge-offs	(440)		(90)		—		—		(86)		—		(271)		(887)
Recoveries	7		83		1		27		81		26		64		289
Credit loss expense (benefit)	47		(689)		540		(165)		532		255		(292)		228
Ending balance	$	2,156	$	5,563	$	4,730	$	2,851	$	14,735	$	9,697	$	1,338	$	41,070

The allowance for credit losses and the related loan balances as of 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)
2023
ACL on loans:
Ending balance	$	2,516	$	8,750	$	6,482	$	3,429	$	18,552	$	8,156	$	1,525	$	49,410

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(Unaudited)

Changes in the allowance for credit losses (ACL) for off-balance sheet credit exposures for the three months ended March 31, 2024 and 2023 were as follows:

	Three Months Ended March 31, 2024
	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	$	283	$	1,407	$	2,841	$	73	$	363	$	88	$	55	$	5,110
Credit loss expense (benefit)	269		(224)		(739)		(42)		62		(74)		(2)		(750)
(Charge-offs), net recoveries	—		—		—		—		—		—		—		—
Ending balance	$	552	$	1,183	$	2,102	$	31	$	425	$	14	$	53	$	4,360
	Three Months Ended March 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 expense (benefit)	(253)		(29)		477		(1)		(14)		(34)		(6)		140
(Charge-offs), net recoveries	—		—		—		—		—		—		—		—
Ending balance	$	272	$	1,070	$	2,603	$	54	$	457	$	88	$	26	$	4,570

The ACL for off-balance sheet credit exposures as of December 31, 2023 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)
Ending balance	$	283	$	1,407	$	2,841	$	73	$	363	$	88	$	55	$	5,110

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(Unaudited)

Credit loss expense for off-balance sheet credit exposures is included in credit loss expense on the consolidated statement of income for the three months ended March 31, 2024 and 2023.

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 the Company, maintains high deposit balances and has an established payment history with the Company 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 the Company 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 the Company. 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 liquidity 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 the Company 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

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(Unaudited)

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-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 the Company's 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 Company 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 March 31, 2024 (amounts in thousands):

	Agricultural
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	687	$	92	$	720	$	—	$	79	$	10	$	3,752	$	5,340
Good	170		3,006		1,681		346		311		353		7,221		13,088
Satisfactory	3,041		7,010		7,562		2,263		1,696		495		29,891		51,958
Monitor	1,363		4,516		2,236		737		363		635		14,169		24,019
Special Mention	910		1,340		1,617		166		32		509		5,219		9,793
Substandard	317		420		403		56		—		—		5,227		6,423
Total	$	6,488	$	16,384	$	14,219	$	3,568	$	2,481	$	2,002	$	65,479	$	110,621
Current-period gross write offs	$	—	$	1	$	—	$	—	$	—	$	—	$	—	$	1

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(Unaudited)

	Commercial and Financial
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	331	$	2,878	$	391	$	339	$	431	$	—	$	4,055	$	8,425
Good	3,059		8,331		9,432		4,721		1,396		243		17,178		44,360
Satisfactory	10,411		48,370		29,587		15,312		5,347		2,513		65,209		176,749
Monitor	8,936		13,482		13,125		5,238		3,000		562		23,589		67,932
Special Mention	2,179		1,640		1,277		395		179		49		3,777		9,496
Substandard	867		1,652		459		434		591		444		419		4,866
Total	$	25,783	$	76,353	$	54,271	$	26,439	$	10,944	$	3,811	$	114,227	$	311,828
Current-period gross write offs	$	50	$	262	$	19	$	—	$	—	$	—	$	100	$	431

	Real Estate: Construction, 1 to 4 Family Residential
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	4	$	4
Good	—		485		—		—		—		—		12,578		13,063
Satisfactory	583		3,135		—		—		—		—		33,282		37,000
Monitor	—		1,920		650		—		—		—		22,477		25,047
Special Mention	103		762		—		—		—		—		1,666		2,531
Substandard	—		851		4,688		—		—		—		633		6,172
Total	$	686	$	7,153	$	5,338	$	—	$	—	$	—	$	70,640	$	83,817
Current-period gross write offs	$	—	$	45	$	—	$	—	$	—	$	—	$	31	$	76

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(Unaudited)

	Real Estate: Construction, Land Development and Commercial
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	250	$	—	$	—	$	101	$	9,937	$	10,288
Good	215		3,148		651		305		947		194		8,677		14,137
Satisfactory	3,340		16,337		8,094		7,352		328		1,311		156,771		193,533
Monitor	2,512		4,569		1,358		1,065		181		—		49,276		58,961
Special Mention	8		1,766		—		116		—		—		2,177		4,067
Substandard	—		3,267		3,127		—		582		—		62		7,038
Total	$	6,075	$	29,087	$	13,480	$	8,838	$	2,038	$	1,606	$	226,900	$	288,024
Current-period gross write offs	$	—	$	—	$	—	$	—	$	—	$	12	$	—	$	12

	Real Estate: Mortgage, Farmland
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	1,922	$	4,310	$	1,856	$	150	$	—	$	95	$	8,333
Good	860		5,435		20,342		8,163		6,787		1,267		6,725		49,579
Satisfactory	14,556		35,908		51,565		38,377		15,685		10,355		15,980		182,426
Monitor	1,284		5,858		14,146		3,594		3,643		1,081		2,031		31,637
Special Mention	—		1,954		1,176		1,666		350		216		3,380		8,742
Substandard	2,274		1,436		67		—		235		285		—		4,297
Total	$	18,974	$	52,513	$	91,606	$	53,656	$	26,850	$	13,204	$	28,211	$	285,014
Current-period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	Real Estate: Mortgage, 1 to 4 Family First Liens
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	444	$	1,381	$	1,154	$	335	$	637	$	—	$	3,951
Good	—		11,354		20,178		4,649		7,408		12,190		5,482		61,261
Satisfactory	12,962		188,413		305,747		172,233		116,204		171,372		14,192		981,123
Monitor	2,231		15,974		43,744		16,319		17,958		13,955		10,109		120,290
Special Mention	362		1,789		6,198		4,656		1,505		5,542		194		20,246
Substandard	171		2,114		2,539		3,715		2,039		5,826		669		17,073
Total	$	15,726	$	220,088	$	379,787	$	202,726	$	145,449	$	209,522	$	30,646	$	1,203,944
Current-period gross write offs	$	—	$	33	$	43	$	50	$	3	$	12	$	31	$	172

	Real Estate: Mortgage, 1 to 4 Family Junior Liens
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Good	—		86		256		184		421		529		4,148		5,624
Satisfactory	1,144		9,775		12,859		8,701		6,513		11,006		79,336		129,334
Monitor	67		490		677		328		468		484		3,345		5,859
Special Mention	—		82		226		276		164		218		828		1,794
Substandard	—		102		51		134		48		155		730		1,220
Total	$	1,211	$	10,535	$	14,069	$	9,623	$	7,614	$	12,392	$	88,387	$	143,831
Current-period gross write offs	$	—	$	42	$	16	$	37	$	4	$	1	$	—	$	100

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	Real Estate: Mortgage, Multi-Family
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	5,743	$	2,959	$	3,028	$	105	$	—	$	11,835
Good	—		29,020		49,248		14,720		22,022		8,001		2,104		125,115
Satisfactory	3,199		28,114		72,353		59,135		21,988		14,593		28,810		228,192
Monitor	485		26,322		25,597		20,490		21,769		1,125		1,023		96,811
Special Mention	—		—		1,914		899		190		—		5,492		8,495
Substandard	—		155		7,848		55		—		—		1		8,059
Total	$	3,684	$	83,611	$	162,703	$	98,258	$	68,997	$	23,824	$	37,430	$	478,507
Current-period gross write offs	$	—	$	—	$	—	$	22	$	—	$	—	$	—	$	22

	Real Estate: Mortgage, Commercial
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	1,272	$	1,450	$	1,410	$	549	$	14,793	$	546	$	—	$	20,020
Good	299		6,919		18,903		17,731		16,689		5,279		12,677		78,497
Satisfactory	10,065		31,525		37,833		45,247		38,444		21,396		54,086		238,596
Monitor	15,056		9,657		29,950		14,437		11,026		8,760		14,780		103,666
Special Mention	—		491		1,118		602		539		993		989		4,732
Substandard	599		399		297		2,221		2,036		87		965		6,604
Total	$	27,291	$	50,441	$	89,511	$	80,787	$	83,527	$	37,061	$	83,497	$	452,115
Current-period gross write offs	$	5	$	3	$	8	$	—	$	—	$	—	$	—	$	16

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	Loans to Individuals
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Good	84		110		6		—		—		3		4		207
Satisfactory	16,028		11,617		5,681		2,564		884		237		236		37,247
Monitor	69		352		131		38		1		—		8		599
Special Mention	4		73		119		46		—		—		1		243
Substandard	40		169		13		4		—		1		1		228
Total	$	16,225	$	12,321	$	5,950	$	2,652	$	885	$	241	$	250	$	38,524
Current-period gross write offs	$	289	$	44	$	16	$	—	$	—	$	—	$	1	$	350

	Obligations of State and Political Subdivisions
March 31, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Cost Basis		Total
Grade:
Excellent	$	—	$	—	$	—	$	—	$	—	$	4,389	$	—	$	4,389
Good	—		—		—		—		1,722		6,903		—		8,625
Satisfactory	616		1,371		1,821		787		1,812		13,905		5,198		25,510
Monitor	—		—		757		—		518		881		—		2,156
Special Mention	—		—		—		—		289		154		—		443
Substandard	—		—		99		—		—		1,966		3,006		5,071
Total	$	616	$	1,371	$	2,677	$	787	$	4,341	$	28,198	$	8,204	$	46,194
Current-period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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(Unaudited)

The following table presents the credit quality indicators by type of loans in each category as of December 31, 2023 (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
Gross write-offs for period	$	56	$	416	$	—	$	—	$	—	$	—	309		$	781

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

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(Unaudited)

	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
Gross write-offs for period	$	149	$	1,019	$	—	$	—	$	—	$	—	234		$	1,402

	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
Gross write-offs for period	$	456	$	187	$	—	$	9	$	—	$	—	12		$	664

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(Unaudited)

	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
Gross write-offs for period	$	21	$	—	$	—	$	—	$	—	$	—	—		$	21

	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
Gross write-offs for period	$	—	$	120	$	25	$	46	$	14	$	31	1		$	237

Page 32

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	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
Gross write-offs for period	$	24	$	34	$	77	$	25	$	15	$	44	11		$	230

	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
Gross write-offs for period	$	—	$	83	$	18	$	—	$	—	$	—	—		$	101

Page 33

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	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
Gross write-offs for period	$	7	$	—	$	761	$	—	$	—	$	—	—		$	768

	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
Gross write-offs for period	$	1,064	$	101	$	33	$	11	$	7	$	—	3		$	1,219

Page 34

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

	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
Gross write-offs for period	$	—	$	—	$	—	$	—	$	—	$	—	—		$	—

Page 35

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Past due loans as of March 31, 2024 and December 31, 2023 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)
March 31, 2024
Agricultural	$	704	$	141	$	203	$	1,048	$	109,573	$	110,621	$	—
Commercial and financial	1,110		—		358		1,468		310,360		311,828		—
Real estate:
Construction, 1 to 4 family residential	3,366		314		5,242		8,922		74,895		83,817		—
Construction, land development and commercial	1,830		804		6,993		9,627		278,397		288,024		—
Mortgage, farmland	700		90		—		790		284,224		285,014		—
Mortgage, 1 to 4 family first liens	11,095		686		1,884		13,665		1,190,279		1,203,944		129
Mortgage, 1 to 4 family junior liens	311		108		4		423		143,408		143,831		—
Mortgage, multi-family	—		2,298		5,067		7,365		471,142		478,507		—
Mortgage, commercial	966		450		2,114		3,530		448,585		452,115		—
Loans to individuals	340		59		—		399		38,125		38,524		—
Obligations of state and political subdivisions	—		—		—		—		46,194		46,194		—
	$	20,422	$	4,950	$	21,865	$	47,237	$	3,395,182	$	3,442,419	$	129
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

The Company does not have a material 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.

Page 36

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Certain nonaccrual loan information by loan type at March 31, 2024 and December 31, 2023, was as follows:

	March 31, 2024				December 31, 2023
	Non-accrual loans		Accruing loans past due 90 days or more		Non- accrual loans		Accruing loans past due 90 days or more
	(Amounts In Thousands)				(Amounts In Thousands)
Agricultural	$	279	$	—	$	—	$	—
Commercial and financial	493		—		524		—
Real estate:
Construction, 1 to 4 family residential	5,242		—		5,505		—
Construction, land development and commercial	6,993		—		8,049		30
Mortgage, farmland	—		—		—		—
Mortgage, 1 to 4 family first liens	6,008		129		5,805		515
Mortgage, 1 to 4 family junior liens	259		—		221		—
Mortgage, multi-family	7,576		—		7,685		—
Mortgage, commercial	3,277		—		3,099		—
Loans to individuals	—		—		—		—
Obligations of state and political subdivisions	—		—		—		—
	$	30,127	$	129	$	30,888	$	545

Loans 90 days or more past due that are still accruing interest decreased $0.42 million from December 31, 2023 to March 31, 2024. As of March 31, 2024, there was 1 accruing loan past due 90 days or more with an average loan balance of $0.13 million. There were 7 accruing loans past due 90 days or more as of December 31, 2023 with an average loan balance of $0.08 million. The accruing loans past due 90 days or more balances are believed to be adequately collateralized and the Company expects to collect all principal and interest as contractually due under these loans. There was no interest income recognized on nonaccrual loans for the three months ended March 31, 2024 and year ended December 31, 2023. As of March 31, 2024, nonaccrual loans had no ACL allocation recorded except for $0.08 million recorded for 1 to 4 family first lien mortgages, $0.05 million for commercial mortgages and $0.01 million for agricultural loans. 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.

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.

Page 37

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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
	March 31, 2024				March 31, 2023
	Amortized Cost Basis			% of Total Class of Financing Receivable	Amortized Cost Basis			% of Total Class of Financing Receivable
Loan Type
Mortgage, farmland	$	2,274	6 month payment deferral	0.80%	$	1,236	Term extension	0.46%
Agricultural	—		None	—%	176		Term extension	0.17%
Mortgage, commercial	436		Interest only 4 months	0.10%	—		None	—%
Commercial and financial	417		Term extension	0.13%	—		None	—%
Total	$	3,127			$	1,412

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

March 31, 2024		March 31, 2023
Loan Type	Financial Effect	Loan Type	Financial Effect
Mortgage, farmland	Provided a payment deferral, which temporarily reduced monthly payment amounts for the borrowers.	Mortgage, farmland	Added a weighted-average 4.6 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Agricultural	None	Agricultural	Added a weighted-average 0.5 year to the life of loans, which reduced monthly payment amounts for the borrowers.
Mortgage, commercial	Provided interest only payments, which temporarily reduced monthly payment amounts for the borrowers.	Mortgage, commercial	None
Commercial and financial	Added a weighted-average 0.73 year to the life of loans, which reduced monthly payment amounts for the borrowers.	Commercial and financial	None

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 as of March 31, 2024 and for the three months ending March 31, 2023.

Page 38

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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):

March 31, 2024 Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
Loan Type
Mortgage, farmland	$	2,274	$	—	$	—
Agricultural	2,497		—		—
Mortgage, commercial	312		436		—
Commercial and financial	417		—		—
	$	5,500	$	436	$	—
March 31, 2023 Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
Loan Type
Mortgage, Farmland	$	1,236	$	—	$	—
Agricultural	176		—		—
	$	1,412	$	—	$	—

Page 39

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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

	Primary Type of Collateral
	Real Estate		Accounts Receivable		Equipment		Other		Total		ACL Allocation
	(Amounts In Thousands)
March 31, 2024
Agricultural	$	2,734	$	—	$	76	$	—	$	2,810	$	557
Commercial and financial	1,330		—		—		—		1,330		240
Real estate:
Construction, 1 to 4 family residential	5,242		—		—		—		5,242		—
Construction, land development and commercial	6,993		—		—		—		6,993		—
Mortgage, farmland	4,333		—		166		—		4,499		—
Mortgage, 1 to 4 family first liens	6,404		—		—		—		6,404		87
Mortgage, 1 to 4 family junior liens	276		—		—		—		276		—
Mortgage, multi-family	7,576		—		—		—		7,576		—
Mortgage, commercial	5,966		—		—		—		5,966		288
Loans to individuals	—		—		—		—		—		—
Obligations of state and political subdivisions	—		—		—		—		—		—
	$	40,854	$	—	$	242	$	—	$	41,096	$	1,172

	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 40

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

The changes in the ACL in 2024 compared to December 31, 2023 is the result of the following factors: slight decrease in forecasted Iowa unemployment used in the ACL calculation which resulted in a decrease of $0.15 million; increase in loan volume which resulted in an increase of $0.09 million; changes in prepayment and curtailment rates resulting in an increase of $1.30 million; increase in the individually analyzed loans reserve of $0.44 million; decreases in qualitative factors determined necessary by management which resulted in a decrease of $2.69 million and an increase in other changes of $1.43 million, primarily increased charge-offs leading to higher loss rates.

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 $0.75 million from December 31, 2023 to March 31, 2024.  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 1.19% of loans held for investment as of March 31, 2024 and 1.17% as of December 31, 2023.  The increase in collateral-dependent loans is due to an increase in loans facing financial difficulties of $2.66 million, a decrease in loans with a specific reserve of $0.60 million, a decrease in nonaccrual loans of $0.76 million, and a decrease in 90 days or more accruing loans of $0.42 million from December 31, 2023 to March 31, 2024. There were no significant changes noted in the extent to which collateral secures collateral-dependent loans.

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

Note 6.Leases

The Bank leases certain of its branch offices, parking facilities and certain equipment under operating leases. The leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. As the options are reasonably certain to be exercised, they are recognized as part of the right-of-use assets and lease liabilities.

Page 41

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

For the three months ended March 31, 2024 and 2023, total operating lease expense was $0.12 million and $0.14 million respectively, and is included in occupancy expenses in the consolidated statements of income. Included in this for the three months ended March 31, 2024 and 2023 were $0.10 million and $0.12 million, respectively, of operating lease costs, $0.01 million and $0.01 million, respectively, of short term lease costs, and $0.01 million and $0.01 million, respectively, of variable lease costs.

For the three months ended March 31, 2024 and 2023, cash paid for amounts included in the measurement of operating lease liabilities was $0.10 million and $0.12 million, respectively.

As of March 31, 2024 and December 31, 2023, operating lease right-of-use assets included in other assets was $2.06 million and $2.13 million respectively. Operating lease liabilities included in other liabilities were $2.16 million and $2.22 million as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, the weighted average remaining lease term for operating leases was 8.36 years and 8.56 years, respectively, and the weighted average discount rate for operating leases was 3.68% and 3.69%, respectively. Discount rates used were determined from FHLB borrowing rates for comparable terms.

As of March 31, 2024, maturities of lease liabilities were as follows:

Year ending December 31:	(Amounts In Thousands)
2024 (excluding the three months ended March 31, 2024)	$	248
2025	332
2026	335
2027	333
2028	295
Thereafter	984
Total lease payments	2,527
Less imputed interest	(366)
Total operating lease liabilities	$	2,161

Page 42

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 7.Fair Value Measurements

The carrying value and estimated fair values of the Company's financial instruments as of March 31, 2024 are as follows:

	March 31, 2024
	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	$	94,054	$	94,054	$	94,054	$	—	$	—
Investment securities	798,452		798,452		394,540		403,912		—
Loans held for sale	3,702		3,702		—		3,702		—
Loans, net of allowance for credit losses
Agricultural	107,702		107,011		—		—		107,011
Commercial and financial	303,927		299,816		—		—		299,816
Real estate:
Construction, 1 to 4 family residential	82,400		82,573		—		—		82,573
Construction, land development and commercial	283,343		277,522		—		—		277,522
Mortgage, farmland	281,853		263,138		—		—		263,138
Mortgage, 1 to 4 family first liens	1,190,128		1,101,057		—		—		1,101,057
Mortgage, 1 to 4 family junior liens	139,800		134,477		—		—		134,477
Mortgage, multi-family	474,681		441,786		—		—		441,786
Mortgage, commercial	446,819		416,749		—		—		416,749
Loans to individuals	36,313		35,133		—		—		35,133
Obligations of state and political subdivisions	45,964		43,591		—		—		43,591
Accrued interest receivable	21,861		21,861		—		21,861		—
Total financial instrument assets	$	4,310,999	$	4,120,922	$	488,594	$	429,475	$	3,202,853
Financial instrument liabilities
Deposits
Noninterest-bearing deposits	$	572,838	$	572,838	$	—	$	572,838	$	—
Interest-bearing deposits	2,789,253		2,789,744		—		2,789,744		—
Other short-term borrowings	329,000		328,604		—		328,604		—
Federal Home Loan Bank borrowings	152,400		152,647		—		152,647		—
Interest rate swaps	(34)		(34)		—		(34)		—
Accrued interest payable	7,441		7,441		—		7,441		—
Total financial instrument liabilities	$	3,850,898	$	3,851,240	$	—	$	3,851,240	$	—
	Face Amount
Financial instrument with off-balance sheet risk:
Loan commitments	$	609,213	$	—	$	—	$	—	$	—
Letters of credit	8,976		—		—		—		—
Total financial instrument liabilities with off-balance-sheet risk	$	618,189	$	—	$	—	$	—	$	—

(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.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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, net of allowance for credit losses
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 short-term 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	$	—	$	—	$	—	$	—

 Considered Level 1 under ASC 820.

(1)Considered Level 2 under ASC 820.

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

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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.

ASSETS

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 three months ended March 31, 2024. 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.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 cost 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:

	March 31, 2024
	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	$	394,540	$	—	$	—	$	394,540
State and political subdivisions	—		285,091		—		285,091
Mortgage-backed securities and collateralized mortgage obligations	—		71,216		—		71,216
Other securities (FHLB, FHLMC and FNMA)	—		33,183		—		33,183
Total	$	394,540	$	389,490	$	—	$	784,030

	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

(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 three months ended March 31, 2024 and the year ended December 31, 2023.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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.    The following tables present the Company’s assets that are measured at fair value on a nonrecurring basis.

	March 31, 2024								Three Months Ended March 31, 2024
	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	$	—	$	—	$	1,676	$	1,676	$	—
Commercial and financial	—		—		99		99		—
Real Estate:
Construction, 1 to 4 family residential	—		—				—		61
Construction, land development and commercial	—		—				—		—
Mortgage, farmland	—		—				—		—
Mortgage, 1 to 4 family first liens	—		—		792		792		104
Mortgage, 1 to 4 family junior liens	—		—				—		25
Mortgage, multi-family	—		—		55		55		—
Mortgage, commercial	—		—		538		538		—
Loans to individuals	—		—		—		—		—
Foreclosed assets (5)	—		—		—		—		—
Total	$	—	$	—	$	3,160	$	3,160	$	190

(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.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis (continued)

	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 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 48

Note 8.Stock Repurchase Program

On July 26, 2005, the Company’s Board of Directors authorized a program to repurchase up to a total of 1,500,000 shares of the Company’s common stock (the “2005 Stock Repurchase Program”).  On August 9, 2022, the Company’s Board of Directors authorized the expansion of the 2005 Stock Repurchase Program to allow an additional 750,000 shares for repurchase and the continuation through December 31, 2027. The Company expects the purchases pursuant to the 2005 Stock Repurchase Program to be made from time to time in private transactions at a price equal to the most recent quarterly independent appraisal of the shares of the Company’s common stock and with the Board reviewing the overall results of the 2005 Stock Repurchase Program on a quarterly basis.  All purchases made pursuant to the 2005 Stock Repurchase Program since its inception have been made on that basis.  The amount and timing of stock repurchases will be based on various factors, such as the Board’s assessment of the Company’s capital structure and liquidity, the amount of interest shown by shareholders in selling shares of stock to the Company at their appraised value, and applicable regulatory, legal and accounting factors.  The Company has purchased 1,675,483 shares of its common stock in privately negotiated transactions from August 1, 2005 through March 31, 2024.  Of these 1,675,483 shares, 47,152 shares were purchased during the quarter ended March 31, 2024, at an average price per share of $66.96.

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HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

Note 9. Commitments and Contingencies

Concentrations of credit risk:  The Company’s loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within the Company's market area.  Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $122.26 million.  The concentrations of credit by type of loan are set forth in Note 5 to the Consolidated Financial Statements.  Outstanding letters of credit were granted primarily to commercial borrowers.  Although the Company 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.

Financial instruments with off-balance sheet risk:  The Company 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 Company’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 Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  A summary of the Company’s commitments at March 31, 2024 and December 31, 2023 is as follows:

	March 31, 2024		December 31, 2023
	(Amounts In Thousands)
Firm loan commitments and unused portion of lines of credit:
Home equity loans	$	84,090	$	84,939
Credit cards	74,851		73,677
Commercial, real estate and home construction	182,053		245,208
Commercial lines and real estate purchase loans	268,219		282,037
Outstanding letters of credit	8,976		7,654

Note 10.Income Taxes

Federal income tax expense for the three months ended March 31, 2024 and 2023 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 State of Iowa purposes.  The tax years ended December 31, 2023, 2022, and 2021 remain subject to examination by the Internal Revenue Service.  For state tax purposes, the tax years ended December 31, 2023, 2022, and 2021 remain open for examination.  There were no material unrecognized tax benefits at March 31, 2024  and December 31, 2023 and therefore no interest or penalties on unrecognized tax benefits has been recorded.  As of March 31, 2024, the Company does not anticipate any significant increase in unrecognized tax benefits during the twelve-month period ending March 31, 2025. Income taxes as a percentage of income before taxes were 20.57% for the three months ended March 31, 2024 and 21.15% for the same period in 2023. 

Note 11.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

Page 50

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

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 $250 thousand of collateral as of March 31, 2024.

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 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 March 31, 2024 and December 31, 2023:

	Notional Amount		Fair Value		Balance Sheet Category	Maturity
	(Amounts in Thousands)
March 31, 2024
Interest rate swap	$	11,500	$	34	Other Liabilities	5/15/2025
December 31, 2023
Interest rate swap	$	2,100	$	(233)	Other Liabilities	5/15/2025

The table below identifies the gains and losses recognized on the Bank’s derivative instrument designated as cash flow hedges for the three months ended March 31, 2024 and year ended December 31, 2023:

	Recognized in Other Comprehensive Income (Loss)		Reclassified from AOCI into Income			Recognized in Income on Derivatives
	Amount of Gain (Loss)		Category	Amount of Gain (Loss)		Category	Amount of Gain (Loss)
	(Amounts in Thousands)
March 31, 2024
Interest rate swap	$	202	Interest Expense	$	—	Other Income	$	—
December 31, 2023
Interest rate swap	$	(177)	Interest Expense	$	—	Other Income	$	—

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HILLS BANCORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the financial condition of Hills Bancorporation (“Hills Bancorporation” or “the Company”) and its banking subsidiary Hills Bank and Trust Company (“the Bank”) for the dates and periods indicated.  The discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying footnotes.

Special Note Regarding Forward Looking Statements

This report contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Actual results may differ materially from those included in the forward-looking statements.  Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following:

•The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets. This includes current concerns related to higher inflation, rising energy prices, the Russia-Ukraine war, Israeli-Palestinian conflict, and supply chain imbalances.

•The effects of recent financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions, recession, or pandemics.

•The financial strength of the counterparties with which the Company or the Company’s customers do business and as to which the Company has investment or financial exposure.

•The credit quality and credit agency ratings of the securities in the Company’s investment securities portfolio, a deterioration or downgrade of which could lead to recognition of an allowance for credit losses on the affected securities and the recognition of a credit loss.

•The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company, including, but not limited to, potential changes in U.S. tax laws and regulations.

•The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

•The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.

•The ability of the Company to obtain new customers and to retain existing customers.

•The timely development and acceptance of products and services, including products and services offered through alternative electronic delivery channels.

•Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.

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HILLS BANCORPORATION

•The ability of the Company to develop and maintain secure and reliable technology systems, including to detect and prevent the occurrence of fraudulent activity, breaches, or failures of our information security controls or cyber-security related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools.

•The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.

•Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

•The economic impact of natural disasters, diseases and/or pandemics, and terrorist attacks and military actions.

•Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.

•The costs, effects and outcomes of existing or future litigation.

•Changes in accounting policies and practices that may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

•The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

Economic Environment

Over the first quarter of 2024, incoming U.S. economic data continue to show consistent growth in the labor market, household consumption, and business investment, even as post-pandemic inflation remains stubbornly elevated. Although headline GDP growth slowed more than expected in the first quarter, underlying demand from households and businesses remained remarkably strong, with the national unemployment rate continuing to remain low. Inflation, however, has been slower to come down than expected after the rapid decline observed in 2023, and the cumulative effect of elevated prices compared with the pre-pandemic era may be weighing on consumer sentiment. While many economists continue to expect U.S. economic conditions consistent with a soft-landing as the economy decelerates over the remainder of 2024, persistent inflation may yet force additional Fed rate hikes, further raising the odds of a mild recession.

Higher borrowing costs continue to present a risk to the economy, with consumer and business budgets accounting for higher interest costs. Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will likely continue to impact our results in 2024.

Our credit administration continues to closely monitor and analyze the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors. Based on the Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, senior management is cautiously optimistic that the Company is positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the economy and remain adequately capitalized. However, the Company may be required to make additional credit loss provisions as warranted by the extremely fluid economic condition.

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Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policies to be those which are related to the allowance for credit losses. Information about our critical accounting policies is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024, and there have been no material changes in these critical accounting policies since December 31, 2023.

Overview

This overview highlights selected information and may not contain all of the information that is important to you in understanding our performance during the period.  For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire report.

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 was formed in Hills, Iowa in 1904.  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.  At March 31, 2024, the Bank has eighteen full-service locations.

Net income for the three month period ended March 31, 2024 was $12.10 million compared to $12.46 million for the same three months of 2023, a decrease of $0.36 million or 2.90%.  The principal factors in the decrease in net income for the first three months of 2024 were a decrease in net interest income of $(1.53) million offset by an increase in credit loss (benefit) expense of $(0.73) million and an increase in noninterest income of $0.63 million, .

The Company achieved a return on average assets of 0.90% and a return on average equity of 8.36% for the twelve months ended March 31, 2024, compared to the twelve months ended March 31, 2023, which were 1.24% and 11.69%, respectively. The return on average assets and return on average equity for the three months ended March 31, 2024 were 1.12% and 10.48%, respectively, compared to the three months ended March 31, 2023, which were 1.25% and 11.79%, respectively.  Dividends of $1.10 per share were paid in January 2024 to 2,701 shareholders.  The dividend paid in January 2023 was $1.05 per share.

The Company’s net interest income is the largest component of revenue and it is primarily a function of the average earning assets and the net interest margin percentage.  The Company achieved a net interest margin on a tax-equivalent basis of 2.68% for the three months ended March 31, 2024 compared to 3.05% for the same three months of 2023.  Average earning assets were $4.257 billion year to date in 2024 and $3.961 billion in 2023.

Highlights noted on the balance sheet as of March 31, 2024 for the Company included the following:

•Total assets were $4.388 billion, an increase of $46.38 million since December 31, 2023.

•Cash and cash equivalents were $94.05 million, an increase of $34.57 million since December 31, 2023. The majority of the increase can be attributed to temporary public funds.

•Net loans were $3.397 billion, an increase of $5.24 million since December 31, 2023. Loans held for sale increased $1.68 million since December 31, 2023.

•Deposits increased $79.31 million since December 31, 2023.

•Borrowings have decreased $34.25 million since December 31, 2023.

Refer to Note 7 for a discussion of fair value measurements which relate to methods used by the Company in recording assets and liabilities on its financial statements.

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Financial Condition

Loan demand has slowed in the first quarter of 2024. The lingering inflationary pressures have created significant uncertainty regarding projecting loan demand throughout the remainder of 2024.

The following table sets forth the composition of the loan portfolio as of March 31, 2024 and December 31, 2023:

	March 31, 2024				December 31, 2023
	Amount		Percent		Amount		Percent
	(Amounts In Thousands)				(Amounts In Thousands)
Agricultural	$	110,621	3.21	%	$	115,786	3.37	%
Commercial and financial	311,828		9.06		307,190		8.93
Real estate:
Construction, 1 to 4 family residential	83,817		2.44		80,255		2.33
Construction, land development and commercial	288,024		8.37		313,878		9.13
Mortgage, farmland	285,014		8.28		281,164		8.18
Mortgage, 1 to 4 family first liens	1,203,944		34.97		1,221,296		35.52
Mortgage, 1 to 4 family junior liens	143,831		4.18		144,524		4.20
Mortgage, multi-family	478,507		13.90		471,009		13.70
Mortgage, commercial	452,115		13.13		416,670		12.12
Loans to individuals	38,524		1.12		40,205		1.17
Obligations of state and political subdivisions	46,194		1.34		46,446		1.35
	$	3,442,419	100.00	%	$	3,438,423	100.00	%
Net unamortized fees and costs	341				359
	$	3,442,760			$	3,438,782
Less allowance for credit losses	49,830				49,410
	$	3,392,930			$	3,389,372

The Bank has an established formal loan origination policy.  In general, the loan origination policy attempts to reduce the risk of credit loss to the Company by requiring, among other things, maintenance of minimum loan to value ratios, evidence of appropriate levels of insurance carried by borrowers and documentation of appropriate types and amounts of collateral and sources of expected payment.  The collateral relied upon in the loan origination policy is generally the property being financed by the Company.  The source of expected payment is generally the income produced from the property being financed.  Personal guarantees are required of individuals owning or controlling at least 20% of the ownership of an entity.  Limited or proportional guarantees may be accepted in circumstances if approved by the Company’s Board of Directors.  Financial information provided by the borrower is verified as considered necessary by reference to tax returns, or audited, reviewed or compiled financial statements.  The Company does not originate subprime loans.  In order to modify, restructure or otherwise change the terms of a loan, the Company’s policy is to evaluate each borrower situation individually.  Modifications, restructures, extensions and other changes are done to improve the Company’s position and to protect the Company’s capital.  If a borrower is not current with its payments, any additional loans to such borrowers are evaluated on an individual borrower basis.

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 determining 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.

In accordance with Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues, and Staff Accounting Bulletin No. 119, which aligns the staff's guidance with FASB ASC Topic 326, or CECL, the Company determines and assigns ratings to loans using factors that include the following: an assessment of the financial condition of the

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borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans.

Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If the Company determines a loan amount or portion thereof, is uncollectible, the loan’s credit risk rating may be downgraded and the uncollectible amount charged-off or recorded as a specific allowance for losses.  The Company’s credit and legal departments undertake a thorough and ongoing analysis to determine if additional specific reserves and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize actual losses.

The following table presents the allowance for credit losses as of March 31, 2024 and December 31, 2023 by loan category, the percentage of the allowance for each category to the total allowance, and the percentage of all loans in each category to total loans:

	March 31, 2024						December 31, 2023
	Amount		% of Total Allowance		% of Loans to Total Loans		Amount		% of Total Allowance		% of Loans to Total Loans
	(In Thousands)						(In Thousands)
Agricultural	$	2,918	5.86	%	3.21	%	$	2,516	5.09	%	3.37	%
Commercial and financial	7,901		15.86		9.06		8,750		17.71		8.93
Real estate:
Construction, 1 to 4 family residential	1,417		2.84		2.44		1,113		2.25		2.33
Construction, land development and commercial	4,681		9.39		8.37		5,369		10.87		9.13
Mortgage, farmland	3,161		6.34		8.28		3,429		6.94		8.18
Mortgage, 1 to 4 family first liens	14,157		28.41		34.97		14,664		29.68		35.52
Mortgage, 1 to 4 family junior liens	4,031		8.09		4.18		3,888		7.87		4.20
Mortgage, multi-family	3,826		7.68		13.90		4,255		8.61		13.70
Mortgage, commercial	5,296		10.63		13.13		3,901		7.90		12.12
Loans to individuals	2,212		4.44		1.12		1,247		2.52		1.17
Obligations of state and political subdivisions	230		0.46		1.34		278		0.56		1.35
	$	49,830	100.00	%	100.00	%	$	49,410	100.00	%	100.00	%

The allowance for credit losses (ACL) totaled $49.83 million at March 31, 2024 compared to the allowance of $49.41 million at December 31, 2023. The percentage of the allowance to outstanding loans was 1.45% and 1.44% at March 31, 2024 and December 31, 2023, respectively.  The allowance was based on management’s consideration of a number of factors, including composition of the loan portfolio, loans with higher credit risks and the overall amount of loans outstanding. The changes in the ACL in 2024 compared to December 31, 2023 is the result of the following factors: slight decrease in forecasted Iowa unemployment used in the ACL calculation which resulted in a decrease of $0.15 million; increase in loan volume which resulted in an increase of $0.09 million; changes in prepayment and curtailment rates resulting in an increase of $1.30 million; increase in the individually analyzed loans reserve of $0.44 million; changes in qualitative factors determined necessary by management which resulted in a decrease of $2.69 million and an increase in other changes of $1.43 million, primarily increased charge-offs leading to higher loss rates.

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The adequacy of the allowance is reviewed quarterly and adjusted as appropriate after consideration has been given to the impact of economic conditions on the borrowers’ ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition. The growth of the loan portfolio and the trends in nonperforming loans are significant elements in the determination of the allowance for credit losses.  Quantitative factors include the Company’s historical loss experience, which is then adjusted for levels and trends in past due, levels and trends in charged-off and recovered loans, trends in volume growth, trends in nonperforming loans, trends in modified loans, local economic trends and conditions, industry and other conditions, and effects of changing interest rates.

Management has determined that the allowance for credit losses was adequate at March 31, 2024, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area. This process involves a high degree of management judgment; however, the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry data. This review encompasses levels of total collateral-dependent loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs.

Investment securities available for sale held by the Company increased by $4.61 million from December 31, 2023 to March 31, 2024.  The fair value of securities available for sale was $39.06 million less than the amortized cost of such securities as of March 31, 2024. At December 31, 2023, the fair value of the securities available for sale was $35.42 million less than the amortized cost of such securities.

Deposits increased $79.31 million in the first three months of 2024. The increase can be attributed to approximately $100 million of temporary public funds received in March 2024. In the opinion of the Company’s management, the Company continues to have sufficient liquidity resources available to fund expected additional loan growth.

Brokered deposits are included in total deposits and totaled $24.34 million as of March 31, 2024 with an average rate of 5.35%.  Brokered deposits were $24.22 million as of December 31, 2023 with an average interest rate of 5.35%. As of March 31, 2024 and December 31, 2023, brokered deposits were 0.72% and 0.74% of total deposits, respectively.

There were $152.40 million and $296.65 million of Federal Home Loan Bank (FHLB) borrowings as of March 31, 2024 and December 31, 2023, respectively. There were $110 million of Federal Funds purchased as of March 31, 2024 and none as of December 31, 2023. Total funds purchased from the Bank Term Funding program was $219.00 million as of March 31, 2024, and December 31, 2023. It is expected that the FHLB and Federal Funds funding sources will be considered in the future if loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB and Federal Funds are favorable compared to other funding alternatives.

Dividends and Equity

In January 2024, Hills Bancorporation paid a dividend of $10.05 million or $1.10 per share.  The dividend paid in January 2023 was $1.05 per share. After payment of the dividend and the adjustment for accumulated other comprehensive income (loss), stockholders’ equity as of March 31, 2024 totaled $465.44 million.

The Company elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. Under the CBLR framework, the Company is required to maintain a CBLR of greater than 9%, as measured by dividing the Bank's Tier 1 capital by its average total consolidated assets. As of March 31, 2024 and December 31, 2023, the Company had regulatory capital in excess of the Federal Reserve’s minimum and well-capitalized definition requirements. The actual amounts and capital ratios as of March 31, 2024 and December 31, 2023 are presented below (amounts in thousands):

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	Actual
	Amount of Tier 1 Capital		Ratio
As of March 31, 2024:
Company:
Community Bank Leverage ratio	$	539,067	12.42	%
Bank:
Community Bank Leverage ratio	539,229		12.43

	Actual
	Amount of Tier 1 Capital		Ratio
As of December 31, 2023:
Company:
Community Bank Leverage ratio	$	539,815	12.77	%
Bank:
Community Bank Leverage ratio	541,566		12.82

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Discussion of operations for the three months ended March 31, 2024 and 2023

Net Income Overview

Total net income was $12.10 million in 2024 and $12.46 million in the comparable period in 2023, a decrease of $0.36 million or 2.90%.  The change in net income in 2024 from the first three months of 2023 was primarily the result of the following:

•Net interest income decreased by $1.53 million, before credit loss expense.

•For the three months ended March 31, 2024, credit loss (benefit) expense was $(0.36) million. This represents a decrease in expense of $0.73 million from the credit loss expense of $0.37 million for the three months ended March 31, 2023.

•Noninterest income increased by $0.63 million.

•Noninterest expenses increased by $0.40 million.

•Income tax expense decreased by $0.21 million.

For the three month period ended March 31, 2024 and March 31, 2023 basic earnings per share was $1.33 and $1.35, respectively. Diluted earnings per share was $1.33 for the three months ended March 31, 2024 compared to $1.35 for the same period in 2023.

The Company’s net income for the period was driven primarily by three factors.  The first factor affecting the Company’s net income is the interaction between changes in net interest margin and changes in average volumes of the Company's earnings assets.  Net interest income of $27.67 million for the first three months of 2024 was derived from the Company’s $4.257 billion of average earning assets during that period and its tax-equivalent net interest margin of 2.68%.  Average earning assets in the three months ended March 31, 2023 were $3.961 billion and the tax-equivalent net interest margin was 3.05%. Net interest income for the Company decreased primarily as a result of increased interest expense from increased interest rates on investment checking and money market accounts as well as certificates of deposits. Interest expense also increased due to the increased volume of certificates of deposits and borrowings the Company has utilized. This is partially offset by increased interest income from increased interest rates and volume on real estate and commercial loans. Interest income also increased on higher interest rates and volume for investments. The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits. The Company believes growth in net interest income will be contingent on the growth of the Company’s earning assets, increasing yield on loans and the ongoing interest rate stance of the Federal Reserve Board.

The second factor is credit loss expense. The majority of the Company’s interest-earning assets are in loans outstanding, which amounted to more than $3.397 billion at March 31, 2024. Credit loss (benefit) expense was $(0.36) million in 2024 compared to $0.37 million in 2023. The decrease in expense when compared to the same period in 2023 is primarily attributable to the decreases in qualitative factors determined necessary by management which is partially offset by increased charge-offs leading to higher loss rates and an increase in the individually analyzed loans reserve. The Company believes that credit loss (benefit) expense is expected to be dependent on the Company’s loan growth, local economic conditions and asset quality.

The third factor affecting the Company’s net income is noninterest income, primarily the increase in trust fees and net gain on sale of loans. Trust fees were $3.50 million and $3.27 million for the three months ended March 31, 2024 and 2023, respectively, an increase of 6.94%. This is primarily driven by the increase in assets under management of $0.418 billion from $2.371 billion as of March 31, 2023 to $2.789 billion as of March 31, 2024. Net gain on sale of loans were $0.37 million and $0.15 million for the three months ended March 31, 2024 and 2023, respectively, an increase of 157.24%. This is primarily driven by increased activity compared to the same period in 2023.

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Net Interest Income

Net interest income is the excess of the interest and fees earned on interest-earning assets over the interest expense of the interest-bearing liabilities. Net interest income on a tax equivalent basis decreased $1.38 million for the three months ended March 31, 2024 compared to the comparable period in 2023.  The decrease was primarily as a result of increased interest expense from increased interest rates on investment checking and money market accounts as well as certificates of deposits. Interest expense also increased due to the increased volume of certificates of deposits and borrowings the Company has utilized. This is partially offset by increased interest income from increased interest rates and volume on real estate and commercial loans. The Company has continued to experience the migration of funds into time deposits with higher yields as well as increased borrowings leading to the increased interest expense. The net interest margin for the first three months of 2024 was 2.68% compared to 3.05% in 2023 for the same period. The measure is shown on a tax-equivalent basis using a tax rate of 21% to make the interest earned on taxable and non-taxable assets more comparable.  The change in average balances and average rates between periods and the effect on the net interest income on a tax equivalent basis for the three months ended in 2024 compared to the comparable period in 2023 are shown in the following table:

					Increase (Decrease) in Net Interest Income
	Change in Average Balance		Change in Average Rate		Volume Changes		Rate Changes		Net Change
	(Amounts in Thousands)
Interest income:
Loans, net	$	279,752	0.61	%	$	3,687	$	5,056	8,743
Taxable securities	(23,968)		0.39		(1)		577		576
Nontaxable securities	20,745		0.65		137		315		452
Interest-bearing bank balances	19,573		0.90		237		77		314
	$	296,102			$	4,060	$	6,025	$	10,085
Interest expense:
Interest-bearing demand deposits	$	(135,926)	0.47	%	$	273	$	(1,055)	$	(782)
Savings deposits	(140,530)		0.43		54		(818)		(764)
Time deposits	281,919		1.73		(1,588)		(3,861)		(5,449)
Other short-term borrowings	93,091		0.07		(1,138)		(22)		(1,160)
FHLB Borrowings	$	228,027	5.74		(3,310)		—		(3,310)
	$	326,581			$	(5,709)	$	(5,756)	$	(11,465)
Change in net interest income					$	(1,649)	$	269	$	(1,380)

Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Interest on nontaxable securities and loans is shown on a tax-equivalent basis.

A summary of the net interest spread and margin is as follows:

(Tax Equivalent Basis)	2024		2023
Yield on average interest-earning assets	4.66	%	4.03	%
Rate on average interest-bearing liabilities	2.61		1.34
Net interest spread	2.05	%	2.69	%
Effect of noninterest-bearing funds	0.63		0.36
Net interest margin (tax equivalent net interest income divided by average interest-earning assets)	2.68	%	3.05	%

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In pricing loans and deposits, the Company considers the U.S. Treasury indexes as benchmarks in determining interest rates.  The Federal Open Market Committee met two times during the first three months of 2024.  The federal funds target rate increased to 5.50% as of March 31, 2024 from 5.00% as of the same period in 2023.  Interest rates on loans are generally affected by the federal funds target rate since interest rates for the U.S. Treasury market normally increase or decrease when the Federal Reserve Board raises or lowers the federal funds rate.  As of March 28, 2024, the rate indexes for the one, three and five year indexes were 5.03%, 4.40% and 4.21%, respectively.  The one year index increased 8.41% from 4.64% at March 31, 2023, the three year index increased 15.49% and the five year index increased 16.94%.  The three year index was 3.81% and the five year index was 3.60% at March 31, 2023. 

Credit Loss Expense

Credit loss (benefit) was $(0.36) million for the three months ended March 31, 2024 compared to $0.37 million in 2023, a decrease of expense of $0.73 million.  Credit loss expense is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Company's loan portfolio.

A significant component of the Company's approach to estimating expected credit losses are economic forecasts such as Iowa unemployment, all-transactions house price index for Iowa and Iowa real gross domestic product. The decrease in expense when compared to the same period in 2023 is primarily attributable to the decreases in qualitative factors determined necessary by management which is partially offset by increased charge-offs leading to higher loss rates and an increase in the individually analyzed loans reserve.

The allowance for credit losses balance is impacted by charge-offs, net of recoveries, for the periods presented.  For the three months ended March 31, 2024 and 2023, recoveries were $1.21 million and $0.29 million, respectively; and charge-offs were $1.18 million in 2024 and $0.89 million in 2023.  The allowance for credit losses totaled $49.83 million at March 31, 2024 compared to $49.41 million as of December 31, 2023. The allowance represented 1.45% and 1.44% of loans held for investment at March 31, 2024 and December 31, 2023.

Noninterest Income

The following table sets forth the various categories of noninterest income for the three months ended March 31, 2024 and 2023.

	Three Months Ended March 31,
	2024		2023		$ Change		% Change
	(Amounts in thousands)
Net gain on sale of loans	$	373	$	145	$	228	157.24	%
Trust fees	3,497		3,270		227		6.94
Service charges and fees	3,033		3,033		—		—
Other noninterest income (expense)	104		(67)		171		(255.22)
	$	7,007	$	6,381	$	626	9.81

Trust fees were $3.50 million and $3.27 million for the three months ended March 31, 2024 and 2023, respectively, an increase of 6.94%. This is primarily driven by the increase in assets under management of $0.418 billion from $2.371 billion as of March 31, 2023 to $2.789 billion as of March 31, 2024.

Net gain on sale of loans were $0.37 million and $0.15 million for the three months ended March 31, 2024 and 2023, respectively, an increase of 157.24%. This is primarily driven by increased activity compared to the same period in 2023.

Other noninterest income categories experienced marginal period-to-period fluctuations for the three months ended March 31, 2024.

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Noninterest Expenses

The following table sets forth the various categories of noninterest expenses for the three months ended March 31, 2024 and 2023.

	Three Months Ended March 31,
	2024		2023		$ Change		% Change
	(Amounts in thousands)
Salaries and employee benefits	$	11,187	$	11,503	$	(316)	(2.75)	%
Occupancy	1,083		1,177		(94)		(7.99)
Furniture and equipment	1,680		1,692		(12)		(0.71)
Office supplies and postage	514		448		66		14.73
Advertising and business development	811		874		(63)		(7.21)
Outside services	3,450		2,910		540		18.56
FDIC insurance assessment	481		270		211		78.15
Other noninterest expense	601		536		65		12.13
	$	19,807	$	19,410	$	397	2.05

In the three months ended March 31, 2024, outside services expense increased $0.54 million due an increase in other professional fees, data processing charges, and debit card processing expense compared to the same period in 2023.

In the three months ended March 31, 2024, FDIC insurance assessment expense increased $0.21 million due rate increases implemented in 2023.

Other noninterest expense categories experienced marginal period-to-period fluctuations for the three months ended March 31, 2024.

Income Taxes

Federal and state income tax expenses were $3.13 million and $3.34 million for the three months ended March 31, 2024 and 2023, respectively. Income taxes as a percentage of income before taxes were 20.57% in 2024 and 21.15% in 2023.

Liquidity

The Company actively monitors and manages its liquidity position with the objective of maintaining sufficient cash flows to fund operations, meet commitments, take advantage of market opportunities and provide a margin against unforeseeable liquidity needs.  Federal funds sold and investment securities available for sale are readily marketable assets.  Maturities of all investment securities are managed to meet the Company’s normal liquidity needs, to respond to market changes or to adjust the Company’s interest rate risk position.  Investment securities available for sale comprised 17.87% of the Company’s total assets at March 31, 2024 compared to 17.95% at December 31, 2023. As of March 31, 2024, investment securities with a carrying value of $416.57 million were pledged to collateralize public and trust deposits and other borrowings.  As of December 31, 2023, investment securities with a carrying value of $427.68 million were pledged.

The Company has historically maintained a stable deposit base and a relatively low level of large deposits, which has mitigated the volatility in the Company’s liquidity position.  Deposit inflows and outflows can vary widely based on prevailing market interest rates, competition, economic conditions, our business customers' liquidity needs and by recent developments in the financial services industry. Uninsured deposits as of March 31, 2024 and December 31, 2023 were approximately $755.51 million and $693.83 million, respectively, which comprised 22.47% and 21.14% of total deposits.

As of March 31, 2024, the Company had $152.40 million of outstanding borrowings from the Federal Home Loan Bank (“FHLB”) of Des Moines compared to $296.65 million as of December 31, 2023.  The Company had $110 million of Fed Funds purchased as of March 31, 2024 compared to no Fed Funds purchased as of December 31, 2023. The Company had $219 million outstanding in Bank Term Funding Program borrowings as of March 31, 2024 and December 31, 2023. These

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borrowings are used as a means of providing both long and short-term funding for certain assets and for managing interest rate risk.

The Company had additional borrowing capacity available from the FHLB of approximately $822.47 million at March 31, 2024. As additional sources of liquidity, the Company has the ability to borrow up to $100.00 million from the Federal Reserve Bank of Chicago, and has lines of credit with three banks totaling $175.00 million. The borrowings under these credit lines would be secured by the Company’s investment securities.  In addition, the Company has the option of issuing short-, medium-, and long-term debt, should the Company decide to do so. The Bank Term Funding Program was established by the Federal Reserve in March 2023 to provide an additional source of liquidity against high-quality securities. The combination of high levels of potentially liquid assets, low dependence on volatile liabilities, positive cash flows from operations, and both additional borrowing and brokered deposits capacity provided sources of liquidity for the Company which management considered sufficient at March 31, 2024.

Contractual Obligations

There have been no material changes with regard to contractual obligations disclosed in the Company’s Form 10-K for the year ended December 31, 2023.

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Item 3. 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 curves 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 embedded in Company products.  The Company’s primary source of interest rate risk exposure arises from repricing risk.  To measure this risk the Company uses a static gap measurement system that identifies the repricing gaps across the full maturity spectrum of the Company’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 Company’s assets and liabilities.  The report details the calculation of the gap ratio.  This ratio indicates 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 Company 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 Company 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 Company’s asset and liability maturities are perfectly matched and a favorable interest margin is present.  The Company’s policy is to generally maintain a balance between profitability and interest rate risk.

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 Company's interest rate risk, as monitored by management, has not significantly increased since year-end. Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including domestic and local economic conditions and the policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Further increases to prevailing interest rates could influence the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings. For instance, if our liabilities are positioned to reprice faster than our assets in a rising-rate environment, our net interest income could be detrimentally impacted as a result. Moreover, additional increases to the target range for the federal funds rate, combined with recent bank failures and ongoing geopolitical instability, raise the risk of economic recession. Any such downturn, especially in the regions in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations.

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Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Principal Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, the Company’s Principal Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this report, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files with the Securities and Exchange Commission.  There have been no changes in the Company’s internal controls over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

HILLS BANCORPORATION

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information about the Company’s stock purchases, all of which were made pursuant to the 2005 Stock Repurchase Program, for the three months ended March 31, 2024:

Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs (1)
January 1 to January 31	980	$	66.00	980	620,689
February 1 to February 29	32,507	66.42		32,507	588,182
March 1 to March 31	13,665	68.00		13,665	574,517
Total	47,152	$	66.96	47,152	574,517

(1)  On July 26, 2005, the Company’s Board of Directors authorized a program to repurchase up to 1,500,000 shares of the Company’s common stock (the “2005 Stock Repurchase Program”).  On August 9, 2022, the Company’s Board of Directors authorized the expansion of the 2005 Stock Repurchase Program to allow an additional 750,000 shares for repurchase and the continuation through December 31, 2027. The Company expects the purchases pursuant to the 2005 Stock Repurchase Program to be made from time to time in private transactions at a price equal to the most recent quarterly independent appraisal of the shares of the Company’s common stock and with the Board reviewing the overall results of the 2005 Stock Repurchase Program on a quarterly basis. All purchases made pursuant to the 2005 Stock Repurchase Program since its inception have been made on that basis.  The amount and timing of stock repurchases will be based on various factors, such as the Board’s assessment of the Company’s capital structure and liquidity, the amount of interest shown by shareholders in selling shares of stock to the Company at their appraised value, and applicable regulatory, legal and accounting factors. 

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Item 3. Defaults upon Senior Securities

Hills Bancorporation has no senior securities.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Director or Officer Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements

None.

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Item 6. Exhibits

3.1	Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Form 10-K Filed with the Commission on May 5, 2024.
3.2	Amended and Restated Bylaws of Hills Bancorporation, incorporated by reference to Exhibit 3.2 to the Company's Form 10-K Filed with the Commission on May 5, 2024.
4.1	Description of Registered Securities, incorporated by reference to Exhibit 4.1 to the Company's Form 10-K filed with the Commission on March 6, 2020.
31	Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications under Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document (1), (2)
101.SCH	XBRL Taxonomy Extension Schema Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1)Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, and are otherwise not subject to liability under these sections.

(2)The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		HILLS BANCORPORATION
Date:	May 8, 2024	By:  /s/ Dwight O. Seegmiller
		Dwight O. Seegmiller, Director, President and Chief Executive Officer
Date:	May 8, 2024	By:  /s/ Anthony V. Roetlin
		Anthony V. Roetlin, Treasurer, Chief Financial Officer and Chief Accounting Officer

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