EDGAR 10-K Filing

Company CIK: 732417
Filing Year: 2022
Filename: 732417_10-K_2022_0000732417-22-000007.json

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ITEM 1. BUSINESS
Item 1. Business
GENERAL
Hills Bancorporation (the "Company") is a holding company principally engaged, through its subsidiary bank, in the business of banking. The Company was incorporated December 12, 1982 and all operations are conducted within the state of Iowa. The Company became owner of 100% of the outstanding stock of Hills Bank and Trust Company, Hills, Iowa (“Hills Bank and Trust” or the “Bank”) as of January 23, 1984 when stockholders of Hills Bank and Trust exchanged their shares for shares of the Company. Effective July 1, 1996, the Company formed a new subsidiary, Hills Bank, which acquired for cash all the outstanding shares of a bank in Lisbon, Iowa. Subsequently an office of Hills Bank was opened in Mount Vernon, Iowa, a community that is contiguous to Lisbon. Effective November 17, 2000, Hills Bank was merged into the Bank. On September 20, 1996, another subsidiary, Hills Bank Kalona, acquired cash and other assets and assumed the deposits of the Kalona, Iowa office of Boatmen's Bank Iowa, N.A. Effective October 26, 2001, Hills Bank Kalona was merged into the Bank.
Through its internet website (www.hillsbank.com), the Company makes available the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed or furnished.
The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers. The Bank is actively engaged in all areas of commercial banking, including acceptance of demand, savings and time deposits; making commercial, real estate, agricultural and consumer loans; maintaining night and safe deposit facilities; and performing collection, exchange and other banking services tailored for individual customers. The Bank administers estates, personal trusts, and pension plans and provides farm management, investment advisory and custodial services for individuals, corporations and nonprofit organizations. In addition, the Bank earns substantial fees from originating mortgages that are sold on the secondary residential real estate market without mortgage servicing rights being retained.
Lending Activities
Real Estate Loans
Real estate loans totaled $2.248 billion and comprised 84.52% of the Bank’s loan portfolio as of December 31, 2021. The Bank’s real estate loans include construction loans and mortgage loans.
Mortgage Loans. The Bank offers residential, commercial and agricultural real estate loans. As of December 31, 2021, mortgage loans totaled $2.041 billion and comprised 76.72% of the Bank’s loan portfolio.
Residential real estate loans totaled $1.024 billion and were 38.49% of the Bank’s loan portfolio as of December 31, 2021. These loans include first and junior liens on 1 to 4 family residences. The Bank originates 1 to 4 family mortgage loans to individuals and businesses within its trade area. The Bank sells certain mortgage loans to third parties on the secondary market. For the loans sold on the secondary market, the Bank does not retain any percentage of ownership or servicing rights. Interest rates for residential real estate mortgages are determined by competitive pricing factors on the secondary market and within the Bank’s trade area. Collateral for residential real estate mortgages is generally the underlying property. Generally, repayment of these loans is from monthly principal and interest payments from the borrower’s personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets that the Bank serves.
Commercial real estate loans totaled $401.38 million and were 15.09% of the Bank’s loan portfolio at December 31, 2021. The Bank originates loans for commercial properties to individuals and businesses within its 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. Generally, terms for commercial real estate loans range from one to five years with an amortization period of 25 years or less. The Bank offers both fixed and variable rate loans for commercial real estate.
Multi-family real estate loans totaled $382.79 million and were 14.39% of the Bank’s loan portfolio at December 31, 2021. Multi-family real estate loans are made to individuals and businesses in the Bank’s trade area. These loans are primarily secured by properties such as apartment complexes. 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. Generally, terms for commercial real estate loans range from one to five years with an amortization period of 25 years or less. Generally, interest rates for multi-family loans are fixed for the loan term.
Mortgage loans secured by farmland totaled $232.74 million and were 8.75% of the Bank’s loan portfolio at December 31, 2021. Loans for farmland are made to individuals and businesses within the Bank’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.
Construction Loans. The Bank offers loans both to individuals that are constructing personal residences and to real estate developers and building contractors for the acquisition of land for development and the construction of homes and commercial properties. The Bank makes these loans to established borrowers in the Bank’s trade area. Construction loans generally have a term of one year or less, with interest payable at maturity. Interest rate arrangements are variable for construction projects. Generally, collateral for construction loans is the underlying construction project.
As of December 31, 2021, construction loans for personal residences totaled $80.49 million and were 3.03% of the Bank’s loan portfolio. Construction loans for land development and commercial projects totaled $127.02 million and were 4.77% of the Bank’s loan portfolio. In total, construction loans totaled $207.51 million and were 7.80% of the Bank’s loan portfolio as of December 31, 2021.
Commercial and Financial Loans
The Bank’s commercial and financial loan portfolio totaled $222.0 million and comprised 8.33% of the total loan portfolio at December 31, 2021. The Bank’s commercial and financial loans include loans to contractors, retailers and other businesses. The Bank provides a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment. Although most loans are made on a secured basis, loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial and financial loans generally range from one to five years. Interest rates for commercial loans can be fixed or variable.
The Bank’s commercial and financial loans are primarily made based on the reported cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of personal guarantees, if applicable. The primary repayment risks of commercial loans are that the cash flows of the borrower may be unpredictable, and the collateral securing these loans may fluctuate in value.
In response to the Coronavirus Disease 2019 ("COVID-19"), during the year ended December 31, 2021, the Company provided $58.34 million of Paycheck Protection Program (PPP) loans which are included with commercial and financial loans in the financial statements. As of December 31, 2021, the Company had outstanding PPP loan balances of $5.34 million. See further discussion in Item 1A and Item 7.
Agricultural Loans
Agricultural loans include loans made to finance agricultural production and other loans to farmers and farming operations. These loans totaled $106.93 million and constituted 4.02% of the total loan portfolio at December 31, 2021. Agricultural 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 loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural loans generally have a term of one year and may have a fixed or variable rate.
Consumer Lending
The Bank offers consumer loans including personal loans and automobile loans. These consumer loans typically have shorter terms and lower balances. At December 31, 2021, consumer loans totaled $32.69 million and were 1.23% of the Bank’s total loan portfolio.
Loans to State and Political Subdivisions
Loans to State and Political Subdivisions include only tax-exempt loans. These loans totaled $50.29 million and comprised 1.89% of the Bank’s total loan portfolio at December 31, 2021.
Deposit Activities
The Bank’s primary funding source for its loan portfolio and other investments consist of the acceptance of demand, savings and time deposits.
Average Daily Balances
The following table shows average balances of assets, liabilities and stockholders’ equity:
AVERAGE BALANCES
(Average Daily Basis)
Years Ended December 31,
2021 2020 2019
(Amounts In Thousands)
ASSETS
Noninterest-bearing cash and cash equivalents $ 30,957 $ 28,885 $ 27,663
Interest-bearing cash and cash equivalents 751,169 362,352 190,205
Taxable securities 246,550 178,239 139,188
Nontaxable securities 223,770 196,437 189,739
Federal funds sold 172 191 79
Loans, net 2,644,701 2,704,989 2,611,546
Property and equipment, net 35,115 36,385 36,584
Other assets 48,329 48,545 44,631
$ 3,980,763 $ 3,556,023 $ 3,239,635
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 578,931 $ 459,664 $ 366,682
Interest-bearing demand deposits 1,062,059 876,595 716,848
Savings deposits 1,093,560 875,091 851,503
Time deposits 643,934 695,468 661,548
Other borrowings 6 9 8
FHLB borrowings 101,895 181,093 213,468
Noninterest-bearing other liabilities 25,621 24,777 26,162
Redeemable common stock held by Employee Stock Ownership Plan 48,671 49,578 50,348
Stockholders' equity 426,086 393,748 353,068
$ 3,980,763 $ 3,556,023 $ 3,239,635
Other Information
The Bank’s business is not seasonal. As of December 31, 2021, the Company had no employees and the Bank had 472 full-time and 26 part-time employees.
For additional discussion of the impact of the economy on the financial condition and results of operations of the Company, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Executive Officers of the Registrant
The executive officers of the Company and the Bank, along with their respective ages and positions held, are identified in the table below.
Name Age Position
Company
Dwight O. Seegmiller 69 Mr. Seegmiller, who joined the Company in 1975, has served as its President since 1986. Prior to 1986, Mr. Seegmiller was the Senior Vice President of Lending.
Joseph A. Schueller 44 Mr. Schueller has held the position of Treasurer and Principal Financial Officer since March 2021.
Bank
Shelley R. Asher 43 Ms. Asher has held the position of Senior Vice President, Director of Operations since June 2021.
Becky DeWaard 61 Ms. DeWaard has held the position of Senior Vice President, Director of Human Resources since March 2021.
Timothy D. Finer 60 Mr. Finer has held the position of Senior Vice President, Director of Mortgage Lending since 2005.
Brian R. Globokar 48 Mr. Globokar has held the position of Senior Vice President, Director of Trust and Wealth Management Services since 2020.
Kenneth W. Hinrichs 48 Mr. Hinrichs has held the position of Senior Vice President, Director of Operations and Digital Banking since 2019.
Neal T. Marple 52 Mr. Marple has held the position of Senior Vice President, Director of Information Services since 2019.
Kenza B. Nelson 42 Ms. Nelson has held the position of Senior Vice President, General Counsel since May 2020.
Steven R. Ropp 61 Mr. Ropp has held the position of Senior Vice President, Director of Commercial Banking since 2008.
Lisa A. Shileny 45 Ms. Shileny has held the position of Chief Operating Officer since December 2021. Previously, Ms. Shileny held the position of Senior Vice President, Director of Administration since 2019.
Nicole M. Slaubaugh 44 Ms. Slaubaugh has held the position of Senior Vice President, Director of Retail Banking since 2016.
MARKET AREA
Johnson County
The Bank’s trade area includes the Johnson County communities of Iowa City, Coralville, Hills and North Liberty, located near Interstate 80 and Interstate 380 in Eastern Iowa. These communities have a combined population of approximately 123,000. Johnson County, Iowa has a population of approximately 158,000. The University of Iowa in Iowa City has approximately 31,200 students and 34,400 full and part-time employees, including 11,400 employees of The University of Iowa Hospitals and Clinics.
Linn County
The Bank operates offices in the Linn County, Iowa communities of Lisbon, Marion, Mount Vernon and Cedar Rapids, Iowa. Lisbon has a population of approximately 2,300 and Mount Vernon, located two miles from Lisbon, has a population of about 4,800. Both communities are within easy commuting distances to Cedar Rapids and Iowa City, Iowa. Cedar Rapids has a metropolitan population of approximately 177,000 including approximately 40,000 from adjoining Marion, Iowa and is located approximately 10 miles west of Lisbon, Iowa and 25 miles north of Iowa City on Interstate 380. The total population of Linn County is approximately 232,000. The largest employer in the Cedar Rapids area is Collins Aerospace, manufacturer of communications instruments, with approximately 10,000 employees.
Washington County
The Bank has offices located in Kalona, Washington and Wellman, Iowa, which are in Washington County. Kalona is located approximately 14 miles north of Washington. Wellman is located approximately 5 miles west of Kalona. Kalona has a population of approximately 2,900, Washington has a population of approximately 7,200 and Wellman has a population of about 1,400. The population of Washington County is approximately 22,200. Kalona, Washington and Wellman are primarily agricultural communities, but are located within easy driving distance for employment in Iowa City, Coralville and North Liberty.
COMPETITION
Competition among financial institutions in attracting and retaining deposits and making loans is intense. Traditionally, the Company’s most direct competition for deposits has come from commercial banks, savings institutions and credit unions doing business in its areas of operation. Increasingly, the Company has experienced competition for deposits from nonbanking sources, such as securities firms, insurance companies, money market mutual funds and financial services subsidiaries of commercial and manufacturing companies. Competition for loans comes primarily from other commercial banks, savings institutions, consumer finance companies, credit unions, mortgage banking companies, insurance companies and other institutional lenders. The Company competes primarily on the basis of products offered, customer service and price. A number of institutions with which the Company competes enjoy the benefits of fewer regulatory constraints and lower cost structures including favorable income tax treatments. Some have greater assets and capital than the Company does and, thus, are better able to compete on the basis of price than the Company. Technological advances, which may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties, could make it more difficult for the Company to compete in the future.
The Bank is in direct competition for loans and deposits and financial services with a number of other banks and credit unions in Johnson, Linn and Washington County. A comparison of the number of office locations and deposits in the three counties as of June, 2021 (most recent date of available data from the FDIC and national credit union websites) is as follows:
Johnson County Linn County Washington County
Offices Deposits
(in millions) Offices Deposits
(in millions) Offices Deposits
(in millions)
Hills Bank and Trust Company 9 $ 2,272 7 $ 764 3 $ 287
Branches of largest competing national bank 4 421 5 1,056 - -
Largest competing independent bank 7 901 5 1,222 2 300
Largest competing credit union (1) 6 6,308 6 1,250 1 1
All other bank and credit union offices 22 1,175 79 4,288 8 244
Total Market in County 48 $ 11,077 102 $ 8,580 14 $ 832
(1)Deposit balance of the largest competing credit union in Johnson County and Linn County includes the credit union’s deposit balance for the entire institution. County specific deposit balances for the credit union are unavailable.
SUPERVISION AND REGULATION
Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Iowa Superintendent of Banking (the “Superintendent”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the “SEC”). The effect of applicable statutes, regulations and regulatory policies can be significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiary Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds and the depositors, rather than the stockholders, of financial institutions. The enforcement powers available to federal and state banking regulators are substantial and include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions.
The following is a summary of the material elements of the regulatory framework applicable to the Company and its subsidiary Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of the Company and its subsidiary Bank.
Regulation of the Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide support. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is also required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiary as the Federal Reserve may require.
Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares), (ii) acquiring all or substantially all of the assets of another bank or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. On approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking as to be a proper incident thereto.” Under current regulations of the Federal Reserve, the Company either directly or through non-bank subsidiaries would be permitted to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person from acquiring “control” of a bank holding company without prior notice to the appropriate federal bank regulator. “Control” is defined in certain cases as the acquisition of 10% or more of the outstanding shares of a bank or a bank holding company depending on the circumstances surrounding the acquisition.
Regulatory Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with bank regulatory agencies' capital guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The guidelines include requirements to maintain certain core capital amounts included as Tier 1 capital at minimum levels relative to total assets (the "Tier 1 Leverage Capital Ratio") and at minimum levels relative to "risk-weighted assets" which is calculated by assigning value to assets, and off balance sheet commitments, based on their risk characteristics (the "Total Risk-Based Capital Ratio"), and to maintain total capital at minimum levels relative to risk-weighted assets (the "Total Risk-Based Capital Ratio").
On January 1, 2015, the final rules of the Federal Reserve Board went into effect implementing in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision. The final rule also adopted changes to the agencies’ regulatory capital requirements that meet the requirements of section 171 and section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule includes a new Common Equity Tier 1 Capital Ratio, an increased Tier 1 Leverage Capital Ratio and an increased Tier 1 Risk-Based Capital Ratio. Bank holding companies are required to include in Common Equity Tier 1 capital the effects of other comprehensive income adjustments, such as gains and losses on securities held to maturity, that are currently excluded from the definition of Tier 1 capital, but were allowed to make a one-time election not to include those effects. The Company and the Bank meet the well-capitalized requirements under the regulatory framework for prompt corrective action and have made the one-time election to exclude the effects of other comprehensive income adjustments on Tier 1 capital. Under the BASEL III rules, the minimum capital ratios are 4% for Tier 1 Leverage Capital Ratio, 4.5% for the Common Equity Tier 1 Capital Ratio, 6% for the Tier 1 Risk-Based Capital Ratio and 8% for the Total Risk-Based Capital Ratio.
The Bank elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. Under the CBLR framework, the Bank is required to maintain a CBLR of greater than 9%. The Coronavirus Aid, Relief and Economic Security ("CARES") Act reduced the minimum ratio to 8% beginning in the 2nd quarter of 2020 through December 31, 2020, increasing to 8.5% for 2021 and returning to 9% beginning January 1, 2022. As of December 31, 2021, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirement, with a CBLR of 11.80%.
Dividends. The ability of the Company to pay dividends to its shareholders is dependent upon the earnings and capital adequacy of its subsidiary Bank, which directly impact the ability of the Bank to pay dividends to the Company. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends, which restrictions are discussed more thoroughly below. The Iowa Business Corporation Act (“IBCA”) allows the Company to make distributions, including cash dividends, to its shareholders unless, after giving effect to such distributions, either (i) the Company would not be able to pay its debts as they become due in the ordinary course of business or (ii) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy preferential shareholder rights, if any, that are superior to the rights of those receiving the distribution. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Regulation of the Bank
General. The Bank is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC. As an Iowa-chartered, FDIC insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Superintendent of Banking of the State of Iowa (the “Superintendent”), as the chartering authority for Iowa banks, and the FDIC, as the Bank’s primary federal regulator.
Deposit Insurance. The deposits of the Bank are insured up to regulatory limits set by the FDIC, and, accordingly in 2021, were subject to deposit insurance assessments based on the Federal Deposit Insurance Reform Act of 2005, as adopted and effective on April 21, 2006. The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium (assessment). The amount assessed to each institution is based on the average total assets of the Company less average tangible equity as well as the degree of risk the institution poses to the DIF. The FDIC assesses higher rates to those institutions that pose greater risks to the insurance fund.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation (FICO), a mixed-ownership government corporation established in the 1980’s to recapitalize the Federal Savings and Loan Insurance Corporation. The current annualized assessment rate is 3.00 basis points.
Capital Requirements. The Bank is an insured state bank, incorporated under the laws of the state of Iowa. As such, the Bank is subject to regulation, supervision and periodic examination by the Superintendent. Among the requirements and restrictions imposed upon state banks by the Superintendent are the requirements to maintain reserves against deposits, restrictions on the nature and amount of loans, and restrictions relating to investments, opening of bank offices and other activities of state banks. Changes in the capital structure of state banks are also approved by the Superintendent. State banks must have a Tier 1 risk-based leverage ratio of 6.50% plus a fully-funded loan loss reserve. In certain instances, the Superintendent may mandate higher capital, but the Superintendent has not imposed such a requirement on the Bank. In determining the Tier 1 risk-based leverage ratio, the Superintendent uses total equity capital without unrealized securities gains and the allowance for credit losses less any intangible assets. At December 31, 2021, the Community Bank Leverage Ratio of the Bank was 11.80% and exceeded the ratio required by the Superintendent.
Capital adequacy for banks took on an added dimension with the establishment of a formal system of prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which provides the federal banking regulators of the Bank with broad power to take prompt corrective action to resolve the problems of undercapitalized banking institutions. The extent of the regulators’ powers depends on whether the institution in question is “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Under prompt corrective action, banks that are inadequately capitalized face a variety of mandatory and discretionary supervisory actions. For example, “undercapitalized banks” must restrict asset growth, obtain prior approval for business expansion, and have an approved plan to restore capital. “Critically undercapitalized banks” must be placed in receivership or conservatorship within 90 days unless some other action would result in lower long-term costs to the deposit insurance fund.
The actual amounts of risk-based capital and risk-based capital ratios as of December 31, 2021 and the minimum regulatory requirements for the Company and the Bank are presented below (amounts in thousands):
Actual For Capital Adequacy Purposes
Amount Ratio Ratio
As of December 31, 2021:
Company:
Community Bank Leverage Ratio $ 484,486 11.80 % 8.50 %
Bank:
Community Bank Leverage Ratio 484,429 11.80 8.50
Supervisory Assessments. All Iowa banks are required to pay supervisory assessments to the Superintendent to fund the Superintendent’s examination and supervision operations. The method of computation of the supervisory assessment is based on the assets of the bank, the expected hours needed to conduct examinations of that size bank and an additional amount if more work is required.
Community Investment and Consumer Protection Laws. The Community Reinvestment Act requires insured institutions to offer credit products and take other actions that respond to the credit needs of the community. Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Home Mortgage Disclosure Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) posed a significant impact on financial regulations. The Dodd-Frank Act created an independent regulatory body, the Bureau of Consumer Financial Protection (“Bureau”), with authority and responsibility to set rules and regulations for most consumer protection laws applicable to all banks - large and small - which adds another regulator to scrutinize and police financial activities. The Bureau has responsibility for mortgage reform and enforcement, as well as broad new powers over consumer financial activities which could impact what consumer financial services would be available and how they are provided. The following consumer protection laws are the designated laws that fall under the Bureau’s rulemaking authority: the Alternative Mortgage Transactions Parity Act of 1928, the Consumer Leasing Act of 1976, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act subject to certain exclusions, the Fair Debt Collection Practices Act, the Home Owners Protection Act, certain privacy provisions of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act (HMDA), the Home Ownership and Equity Protection Act of 1994, the Real Estate Settlement Procedures Act (RESPA), the S.A.F.E. Mortgage Licensing Act of 2008 (SAFE Act), and the Truth in Lending Act.
Dividends. The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends in an amount greater than its undivided profits. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2021. Notwithstanding the availability of funds for dividends, however, the Superintendent may prohibit the payment of any dividends by the Bank if the Superintendent determines such payment would constitute an unsafe or unsound practice. To maintain acceptable capital ratios in the Bank, certain of its retained earnings are not available for the payment of dividends. To maintain a ratio of total risk-based capital to assets of 8.5%, $135.62 million of the Bank’s Tier 1 capital of $484.43 million as of December 31, 2021, is available for the payment of dividends to the Company. Also, the capital conservation buffer discussed previously could limit the amount of payment of dividends if the Company fails to maintain required capital levels.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company, on investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiary, to principal stockholders of
the Company, and to related interests of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
Branching Authority. Historically, Iowa’s intrastate branching statutes have been rather restrictive when compared with those of other states. Effective July 1, 2004, all limitations on bank office locations were repealed, which effectively allowed statewide branching. Since that date, banks have been allowed to establish an unlimited number of offices in any location in Iowa subject only to regulatory approval.
Under the Riegle-Neal Act, both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions including limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. Iowa permits interstate bank mergers, subject to certain restrictions, including a prohibition against interstate mergers involving an Iowa bank that has been in existence and continuous operation for fewer than five years.
State Bank Activities. Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the Bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the Bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.
Financial Privacy. In accordance with the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”), federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Depositor Preference Statute. In the "liquidation or other resolution" of an institution by any receiver, U.S. federal legislation provides that deposits and certain claims for administrative expenses and employee compensation against the insured depository institution would be afforded a priority over general unsecured claims against that institution, including federal funds and letters of credit.
Government Monetary Policy. The earnings of the Company are affected primarily by general economic conditions and to a lesser extent by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve. Its policies influence, to some degree, the volume of bank loans and deposits, and interest rates charged and paid thereon, and thus have an effect on the earnings of the Company's subsidiary Bank.
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. The Dodd-Frank Act represents the most sweeping financial services industry reform since the 1930s. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the Dodd-Frank Act. The Dodd-Frank Act was expected to be fully phased in over several years. Among other things, the Dodd-Frank Act may result in added costs of doing business and regulatory compliance burdens and affect competition among financial services entities. Uncertainty exists as to the ultimate impact of many provisions of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole and on the Company’s business, results of operations and financial condition. Additional information, including a summary of certain provisions of the Dodd-Frank Act, is available on the Federal Deposit Insurance Corporation website at www.fdic.gov/regulations/reform/dfa_selections.html.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The performance of our Company is subject to various risks. We consider the risks described below to be the most significant risks we face, but such risks are not the only risk factors that could affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or results of operations. For a discussion of the impact of risks on our financial condition and results of operations in recent years and on forward looking statements contained in this report, reference is made to Item 7 below.
Economic and Market Risks
We may be adversely affected by economic conditions in the local economies in which we conduct our operations, and in the United States in general.
Our primary market includes the Iowa counties of Johnson, Linn and Washington. Our market has been one of the strongest economic areas in Iowa over the past ten years. The unemployment rate for our prime market area is favorable and the rate historically has been lower than the unemployment rates for both the United States and the State of Iowa. However, unfavorable or uncertain economic and market conditions may adversely affect our business and profitability. Our business faces various material risks, including credit risk, liquidity risk and the risk that the demand for our products and services will decrease. Consumer confidence, real estate values, interest rates and investment returns could make the types of loans we originate less profitable and could increase our credit risk and litigation expense. And, while the presence of the University of Iowa and its affiliated institutions has a significant favorable impact upon the regional economy, it is unclear what impact the State budget and funding models will have on the University of Iowa and the University of Iowa Hospitals and Clinics.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home, which resulted in an unprecedented slow-down in economic activity and a related increase in unemployment throughout most of 2020 and 2021.
Government response to the COVID-19 pandemic was sweeping, including passage of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) which was signed into law on March 27, 2020 and further legislation was passed in December 2020, the Coronavirus Response and Relief Supplemental Appropriations Act 2021, which extended many provisions in the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion. Congress, the Federal Reserve Bank and the other U.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic. In addition, the federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed measures to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.
The broader U.S. and global economies slowly began reopening during the first half of 2021 as vaccines against COVID-19 became widely available. However, labor and supply disruptions resulting from the global pandemic continue, and the emergence of new variants of COVID-19 have created ongoing health and safety concerns that may lead to further disruptions in local, national and global economies.
While significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological conditions are trending in a positive direction, if there is a resurgence in the virus and any new variants thereof, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows.
The Company could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
•demand for our products and services may decline, making it difficult to grow assets and income;
•decreased consumer confidence and business generally could lead to increased risk of loan delinquencies, problem assets, and foreclosures, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
•our allowance for credit losses may be insufficient given the significant economic uncertainties created by the pandemic and, as a result, may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
•a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
•Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects. Even after the COVID-19 outbreak has subsided, the Company may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
As a participating lender in the Paycheck Protection Program (PPP), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the Small Business Administration (SBA) may not fund some or all PPP loan guarantees.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the Bank may be exposed to the risk of similar litigation from both customers and non-customers that approached the Bank regarding PPP loans. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
Changing interest rates may adversely affect our profits.
Our income and cash flows depend to a great extent on the difference between the interest rates earned by us on interest-earning assets such as loans and investment securities and the interest rates paid by us on interest-bearing liabilities such as deposits and borrowings. Our net interest margin will be affected by general economic conditions, fiscal and monetary policies of the federal government, and our ability to respond to changes in such rates. Our assets and liabilities are affected differently by a change in interest rates. An increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process is presented under the heading "Quantitative and Qualitative Disclosures about Market Risk" included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our financial condition and results of operations.
Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.
The U.S. government has implemented tariffs on certain products from countries or entities such as Mexico, Canada, China and the European Union. These countries have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products. The United States and these countries may impose additional tariffs and retaliatory tariffs in the future. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including agricultural products such as soybeans, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt. This could adversely affect our financial condition and results of operations. In addition, to the
extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.
We may be adversely impacted by recent legislation and potential additional legislation and rulemaking.
The 2008-2009 recession produced a number of new laws that impact financial institutions including the Dodd-Frank Act. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) and granted it the broad authority to administer and enforce a new federal regulatory framework of consumer financial regulation. Any changes to state and federal banking laws and regulations may adversely impact our ability to expand services and to increase the value of our business. We are subject to extensive state and federal regulation, supervision, and legislation that govern almost all aspects of our operations. These laws may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds. In addition, our earnings are affected by the monetary policies of the Board of Governors of the Federal Reserve. These policies, which include regulating the national supply of bank reserves and bank credit, may have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve influences the size and distribution of bank reserves through its open market operations and changes in cash reserve requirements against member bank deposits. We cannot predict what effect such act and any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, including changes with the new government administration, but such changes could be materially adverse to our financial performance.
Reduction in the value, or impairment of our investment securities, may impact our earnings and stockholders' equity.
We maintained a balance of $555.90 million, or 13.74% of our assets, in investment securities at December 31, 2021. Changes in market interest rates may affect the value of these investment securities, with increasing interest rates generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income that may reduce our stockholders' equity. Available-for-sale (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. In assessing whether the impairment of investment securities is due to credit losses, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
Growth levels in local and national real estate markets may impact our operations and/or financial condition.
Change in growth in the national housing market as evidenced by reports of levels of new and existing home sales, inventories of houses on the market, property values, building permits, and the time houses remain on the market may indicate increased levels of credit risk. In past history of real estate growth, some lenders made many adjustable-rate mortgage loans, and lowered their credit standards with respect to mortgage loans and home equity loans. A subsequent slowdown in the national housing market created uncertainty and liquidity issues relating to the value of such mortgage loans, which caused disruption in credit markets. Management will continue to monitor that the Bank has maintained appropriate lending standards in times of real estate growth and decline. No assurance can be given that these conditions will not directly or indirectly affect our operations.
The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, or interest rate changes, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to the impact these risk factors have on our operating results or financial position.
Regulatory and Legal Risks
We are subject to a variety of litigation or other proceedings, which could adversely affect our business.
We are involved from time to time in a variety of litigation or other proceedings arising out of business or operations. We establish reserves for claims when appropriate under accounting principles generally accepted in the United States of America, but costs often may be incurred in connection with a matter before any reserve has been created. In addition, the actual costs associated with resolving a claim may be substantially higher than amounts that we have reserved. Substantial legal claims could have a detrimental impact on our business, results of operations, and financial condition and may cause reputational harm.
If we do not continue to meet or exceed regulatory capital requirements and maintain our “well-capitalized” status, there could be an adverse effect on the manner in which we do business and on the confidence of our customers in us.
Under regulatory capital adequacy guidelines, we must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. Failure to meet minimum capital requirements could have a material effect on our financial condition and could subject us to a variety of enforcement actions, as well as certain restrictions on our business. Failure to maintain the status of “well-capitalized” under the regulatory framework could adversely affect the confidence that our customers have in us, which may lead to a decline in the demand for or a reduction in the prices that we are able to charge for our products and services. Failure to meet the guidelines could also limit our access to liquidity sources.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. Consumers and businesses may also change their behavior on their own as a result of these concerns. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities.
There may be issues with environmental law compliance if we take possession of real property that secures a loan.
A significant portion of our loan portfolio is secured by real property. We may foreclose on and take title to certain real property. There is a risk that hazardous substances could be found on the property and we may be liable for remediation costs, personal injury and/or property damage. We may incur substantial expenses to comply with environmental laws which may materially reduce the property's value or limit our ability to dispose of the property. The remediation costs and any other financial liabilities associated with the property could have a material adverse effect on our financial condition and results of operations.
Credit and Lending Risks
Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Real estate loans, which constitute a large portion of our loan portfolio, include home equity, commercial, construction and residential loans, and such loans are concentrated in the Bank’s trade area. As of December 31, 2021, 84.52% of our loans had real estate as a primary component of collateral. The market value of real estate may fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in our market could increase the credit risk associated with our loan portfolio. Also, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower could adversely impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Our real estate loans also include construction loans, including land acquisition and development. Construction, land acquisition and development lending involves additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, commercial construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.
Commercial loans make up a significant portion of our loan portfolio.
Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Repayment of our commercial loans is often dependent on the cash flows of the borrower, which may be unpredictable. Most often, this collateral is accounts receivable, inventory, machinery and equipment. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The other types of collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
Our agricultural loans may involve a greater degree of risk than other loans, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.
Payments on agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, changes in market prices for agricultural products (both domestically and internationally) and the impact of government regulation (including changes in price supports, subsidies and environmental regulation). In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary crops in our market areas are corn and soybeans. Accordingly, adverse circumstances affecting these crops could have an adverse effect on our agricultural real estate loan portfolio.
We also originate agricultural operating loans. As with agricultural real estate loans, the repayment of operating loans is dependent on the successful operation or management of the farm property. Likewise, agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment or assets such as livestock or crops. The primary livestock in our market areas is hogs and turkeys. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.
We may be required to repurchase mortgage loans or reimburse investors and others as a result of breaches in contractual representations and warranties.
We sell residential mortgage loans to various parties that purchase mortgage loans for investment. The agreements under which we sell mortgage loans contain various representations and warranties regarding the origination and characteristics of the mortgage loans, including ownership of the loan, compliance with loan criteria set forth in the applicable agreement, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, and compliance with applicable origination laws. We may be required to repurchase mortgage loans, indemnify the investor, or reimburse the investor for credit losses incurred on loans in the event of a breach of contractual representations or warranties. The agreements under which we sell mortgage loans require us to deliver various documents to the investor, and we may be obligated to repurchase any mortgage loan as to which the required documents are not delivered or are defective.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors and accountants if made available. If this information is inaccurate, we may be subject to regulatory action, reputational harm or other adverse effects with respect to the operation of our business, our financial condition and our results of operation.
Capital and Liquidity Risks
If we are unable to continuously attract deposits and other short-term funding, our financial condition and our business prospects could be adversely affected.
In managing our liquidity, our primary source of short-term funding is customer deposits. Our ability to continue to attract these deposits, and other short-term funding sources, is subject to variability based upon a number of factors, including the relative interest rates we are prepared to pay for these liabilities and the perception of safety of those deposits or short-term obligations relative to alternative short-term investments. The availability and cost of credit in short-term markets depends upon market perceptions of our liquidity and creditworthiness. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated changes in event-driven reductions in liquidity. In such events, our cost of funds may increase, thereby reducing our net interest revenue, or we may need to dispose of a portion of our investment portfolio, which, depending on market conditions, could result in our realizing a loss or experiencing other adverse consequences.
Conditions in the financial markets may limit our access to funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial adverse effect on our liquidity. Our access to funding sources in the amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could adversely affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or adverse news and expectations about the prospects for the financial services industry as a whole.
As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered money markets and certificates of deposit, federal funds purchased, lines of credit and Federal Home Loan Bank advances. Negative operating results or changes in industry conditions could lead to an inability to replace these additional funding sources at maturity. Our financial flexibility could be constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our results of operations and financial condition would be adversely affected.
Our profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money or other assets.
We are exposed to the risk that third parties that owe us money or other assets will not fulfill their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Our rights against third parties may not be enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses and/or adversely affect our ability to use those securities or obligations for liquidity purposes.
Our financial condition has not been materially impacted by the deterioration in the credit quality of third parties except as related to borrower credit quality. Management believes that the allowance for credit losses is adequate to absorb probable losses on any existing loans that may become uncollectible but cannot predict loan losses with certainty and cannot assure that our allowance for credit losses will prove sufficient to cover actual losses in the future.
Our growth may require us to raise additional capital in the future, but that capital may not be available.
We may at some point need to raise additional capital to maintain our “well-capitalized” status. Any capital we obtain may result in the dilution of the interests of existing holders of our stock. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances of our ability to raise additional capital if needed, or if the terms will be acceptable to us.
Competitive and Strategic Risks
We experience intense competition for loans and deposits.
Competition in banking and financial services business in our market is highly competitive and is currently undergoing significant change. Our competitors include local commercial banks, local credit unions, online banks, mortgage companies, finance companies and other non-bank financial services providers. Increasingly, competitors are able to provide integrated financial services over a broad geographic area. Increased competition may result in a decrease in the amounts of loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are less favorable to us. Competition may also accelerate investments in technology or infrastructure. Any of these results could have a material adverse effect on our ability to grow and remain profitable.
New products and services are essential to remain competitive but may subject us to additional risks.
We consistently attempt to offer new products and services to our customers to remain competitive. There can be risks and uncertainties associated with these new products and services especially if they are newer to market products and services. We may spend significant time and resources in development of new products and services to market to customers. Through our development and implementation process we may incur risks associated with delivery timetables, pricing and profitability, compliance with regulations, effect on internal controls and shifting customer preferences. Failure to successfully manage these risks could have a material effect on our financial condition, result of operations, and business.
Our customers may decide to use non-bank competitors for financial transactions, which could result in loss of business.
Advancement in technology and other changes are increasing the ability for customers to complete financial transactions that have traditionally involved banks through non-bank competitors. Elimination of banks as intermediaries of financial transactions could result in the loss of customer deposits as well as fee income to us.
We are subject to risks associated with negative publicity.
Reputational risk arises from the potential that negative publicity regarding our business practices, whether true or not, could cause a decline in our customer base, costly litigation, or revenue reductions. In addition, our success in maintaining our reputation depends on the ability to adapt to a rapidly changing environment including increasing reliance on social media.
Accounting and Tax Risks
Our allowances for credit losses for loans and debt securities may prove inadequate or we may be negatively affected by credit risk exposures. Also, future additions to our allowance for credit losses will reduce our future earnings.
Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain allowances for credit losses for loans and debt securities to provide for defaults and nonperformance, which represent an estimate of expected losses over the remaining contractual lives of the loan and debt security portfolios. This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, including, but not limited to, the ongoing economic impact of the COVID-19 pandemic and the related uncertainties created thereby, industry concentrations, reasonable and supportable forecasts for future conditions and other factors that may indicate losses. The determination of the appropriate levels of the allowances for loan and debt security credit losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our nonperforming loans and OREO reflect operating difficulties of individual borrowers and weaknesses in the economies of the markets we serve. The allowances may not be adequate to cover actual losses, and future allowance for credit losses could materially and adversely affect our financial condition, results of operations and cash flows.
Our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and we use estimates in determining the fair value of certain of our assets, the expected credit losses related to loans and debt securities, and the amount of other loss contingencies as of the balance sheet date, which estimates are subject to very large uncertainty.
A portion of our assets are carried on the balance sheet at fair value, including debt securities available for sale. Generally, for assets that are reported at fair value, we use quoted market prices or valuation models that utilize observable market data inputs to estimate their fair value as of the balance sheet date. In certain cases, observable market prices and data may not be readily available or their availability may be diminished due to market conditions. We use financial models to value certain of these assets. These models are complex and use asset-specific collateral data and market inputs for interest rates. Although we have processes and procedures in place governing valuation models and their testing and calibration, such assumptions are complex as we must make judgments about the effect of matters that are inherently uncertain. Different assumptions could have resulted in significant changes in valuation, which in turn would have affected earnings or resulted in significant changes in the dollar amount of assets reported on the balance sheet or both.
We may be adversely affected by changes in U.S. tax laws and regulations.
Changes in tax laws at national or state levels could have an effect on the Company’s short-term and long-term earnings. Changes in tax laws could affect the Company’s earnings as well as its customers’ financial positions, or both. Changes in tax laws could also require the revaluation of the Company’s net deferred tax position, which could have a material adverse effect on our results of operations and financial condition.
Operational Risks
Our growth strategy relies heavily on our management team, and the unexpected loss of key managers and/or officers may adversely affect our operations.
Our success is dependent on experienced senior management with a strong local community network. Our ability to retain the current management team is key to the successful implementation of our growth strategy. It is equally important that we are able to continue to attract and retain quality and community-focused managers and officers. The unexpected loss of one of our key managers and/or officers or the inability to attract qualified personnel could have an adverse effect on our operations, financial condition and reputation.
The potential for business interruption exists throughout our organization.
Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the array of personnel involved with bank operations. Failure by any or all of these resources subjects us to
risks that may vary in size, scale and scope. This includes, but is not limited to, operational or technical failures, ineffectiveness or exposure due to interruption in third-party support, as well as the loss of key individuals or failure on the part of key individuals to perform properly. These risks are heightened during data system changes or conversions. Although management has established policies and procedures to address such failures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our risk management framework may not be effective in mitigating risk and loss.
We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report and control the risks that we face. These include credit, liquidity, market, operational, reputational, compliance, strategic, information technology and security, and trust risks. While we assess this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in the risk management program or if its controls break down, the performance and value of our business could be adversely affected.
Our internal controls may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and may provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operation.
The replacement of LIBOR could adversely affect the Company’s revenue or expenses and the value of those assets or obligations.
LIBOR and certain other “benchmarks” are the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. LIBOR is set based on interest information reported by certain banks, which may stop reporting such information after 2021. It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any particular benchmark.
While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of large banks, the Alternative Reference Rate Committee or ARRC, selected by the Federal Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Finance Rate or SOFR as an alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, given the depth and robustness of the U.S. Treasury repurchase market. At this time, it is impossible to predict whether SOFR will become an accepted alternative to LIBOR.
The market transition away from LIBOR to an alternative reference rate, including SOFR, is complex and could have a range of adverse effects on the Bank’s business, financial condition and results of operations. In particular, any such transition could:
•adversely affect the interest rates paid or received on, and the revenue and expenses associated with, the Bank’s floating rate obligations, loans, deposits, derivatives and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
•adversely affect the value of the Bank’s floating rate obligations, loans, deposits, derivatives and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
•prompt inquiries or other actions from regulators in respect of the Bank’s preparation and readiness for the replacement of LIBOR with an alternative reference rate;
•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities; and
•require the transition to or development of appropriate systems and analytics to effectively transition the Bank’s risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.
The manner and impact of this transition, as well as the effect of these developments on the Bank’s funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.
We are subject to risks associated with technological changes and the resources needed to implement the changes.
Our industry is susceptible to significant technological changes as there continue to be a high level of new technology driven products and services introduced. Technological advancement aids us in providing customer service and increases efficiency. Our national competitors may have more resources to invest in technological changes. As a result they may be able to offer products and services that are more technologically advanced and that may put us at a competitive disadvantage. Our future may depend on our ability to analyze technological changes to determine the best course of action for our business, customers and shareholders.
We rely heavily on our network security and any system failure or data breach could subject us to increased costs as well as reputational risk.
Our operations are dependent on our ability to process financial transactions in a secure manner. Failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, could disrupt our business or the businesses of our customers, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. We must ensure that information is properly protected from a variety of threats such as cyber attacks, error, fraud, sabotage, terrorism, industrial espionage, privacy violation, service interruption, and natural disaster. These threats arise from numerous sources including human error, fraud on the part of employees or third parties, technological failure, telecommunication outages, and severe weather conditions. Information security risks for financial institutions like us have increased recently in part because of new technologies, the increased use of the internet and telecommunications technologies (including mobile devices and cloud computing) to conduct financial and other business transactions, political activism, and the increased sophistication and activities of organized crime. Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection.
While we have not been materially impacted by cyber incidents, we have been subject to other intentional cyber incidents from third parties over the last several years, including denial of service attacks which attempt to interrupt service to customers and malicious software attacks on computer systems which attempt to allow unauthorized entrance. We also face risks related to cyber attacks and other security breaches in connection with card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we conduct security assessments on our higher risk third party service providers, we cannot be sure that their information security protocols are sufficient to withstand a cyber attack or other security breach. There can be no assurance that cyber incidents will not occur and they could occur more frequently and on a more significant scale.
We devote significant resources to implement, maintain, monitor and regularly upgrade our systems and networks with measures such as intrusion detection and prevention and firewalls to safeguard critical business applications. The additional cost to the Company of our cyber security monitoring and protection systems and controls includes the cost of hardware and software, third party technology providers, consulting, and legal fees, in addition to the incremental cost of our personnel who focus a substantial portion of their responsibilities on cyber security. In addition, because cyber attacks can change frequently we may be unable to implement effective preventive or proactive measures in time. With the assistance of third-party service providers, we intend to continue to implement security technology and establish procedures to maintain network security, but there is no assurance that these measures will be successful. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Any activity that jeopardizes our network and the security of the information stored thereon may result in significant cost and have a significant adverse effect on our reputation. We maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks. Such insurance coverage may be insufficient to cover all losses.
Any successful cyber attack or other security breach involving the misappropriation or other unauthorized disclosure of confidential customer information or that compromises our ability to function could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business. Any successful cyber attack may also subject the Company to regulatory investigations, litigation or enforcement, or require the payment of regulatory fines or penalties or undertaking costly
remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Company’s business, financial condition or results of operations and damage its reputation.
Loss of key third-party vendor relationships or failure of a vendor to protect information of our customers or employees could adversely affect our business or result in losses.
We rely on third-party vendors to provide key components of our business operations such as data processing, recording and monitoring transactions, online and mobile banking interfaces and services, internet connections and network access. While we have performed due diligence procedures in selecting vendors, we do not control their actions. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, or fails to protect non-public personal information of our customers or employees, we may suffer operational impairments, reputational damage and financial losses. Replacing these third-party vendors could create significant delay and expense. Accordingly, use of such third parties creates an inherent risk to our business operations.
Risks Related to the Company's Common Stock
Our stock is thinly traded.
The average daily trading volume of our common stock is relatively small compared to many public companies. The desired market characteristics of depth, liquidity, and orderliness require the substantial presence of willing buyers and sellers in the marketplace at any given time. In our case, this presence depends on the individual decisions of a relatively small number of investors and general economic and market conditions over which we have no control. Due to the relatively small trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause the stock price to fall more than would be justified by the inherent worth of the Company. Conversely, attempts to purchase a significant amount of our stock could cause the market price to rise above the reasonable inherent worth of the Company.
There can be no assurances concerning continuing dividend payments.
Our common stockholders are only entitled to receive the dividends declared by our Board of Directors. Although we have historically paid annual dividends on our common stock, there can be no assurances that we will be able to continue to pay regular annual dividends or that any dividends we do declare will be in any particular amount. The primary source of money to pay our dividends comes from dividends paid to the Company by the Bank. The Bank’s ability to pay dividends to the Company is subject to, among other things, its earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as dividends.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company's office and the main office of the Bank are located at 131 E. Main Street, Hills, Iowa. This is a brick building containing approximately 45,000 square feet. A portion of the building was built in 1977, a two-story addition was completed in 1984, and a two-story brick addition was completed in February 2001. With the completion of the 2001 addition, the entire Bank’s operations and administrative functions were consolidated in Hills, Iowa. The Bank operates its business from its main office and its 18 full service branches in the Iowa counties of Johnson, Linn and Washington. The Bank owns its main office complex and 14 of its branch offices. Four of the Bank’s branches are leased.
All of the properties owned by the Bank are free and clear of any mortgages or other encumbrances of any type. See Note 15 to the Consolidated Financial Statements for minimum future rental commitments for leased properties.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
None.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of January 31, 2022, the Company had 2,727 stockholders. There is no established trading market for the Company's common stock, and the Company's stock is not actively traded. Our common stock is not listed on the NASDAQ stock market or any other stock exchange. While there is no established public trading market for our common stock, our shares are currently quoted in the inter-dealer quotation, or “over-the-counter,” marketplace under the trading symbol “HBIA.” The principal over-the-counter market is operated by OTC Markets Group, Inc., which provides quotes for the Company on its OTC Pink tier.
The high and low bid information for the Company’s stock for each quarter of the two most recent fiscal years, as reported by OTC Market Groups, Inc., is provided below. The prices indicated reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
2021 2020
High Low High Low
1st quarter $ 64.00 $ 60.82 $ 65.00 $ 61.06
2nd quarter 70.00 62.65 65.00 58.65
3rd quarter 69.90 64.55 62.04 58.35
4th quarter 69.20 66.50 62.04 60.07
In addition, based on the Company’s stock transfer records and information informally provided to the Company, stock trading transactions have been as follows:
Year Number of Shares Traded Number of Transactions High Selling Price Low Selling Price
2021 138,552 197 $ 68.00 $ 62.50 (1)
2020 173,598 188 $ 66.00 $ 60.00 (2)
2019 126,189 146 $ 65.00 $ 61.00 (3)
(1)2021 transactions included repurchases by the Company of 55,119 shares of stock under the 2005 Stock Repurchase Program. 2021 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $62.50 to $68.00 per share.
(2)2020 transactions included repurchases by the Company of 133,622 shares of stock under the 2005 Stock Repurchase Program. 2020 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $60.00 to $66.00 per share.
(3)2019 transactions included repurchases by the Company of 89,124 shares of stock under the 2005 Stock Repurchase Program. 2019 transactions made under the 2005 Stock Repurchase Program were made at prices that ranged from $61.00 to $65.00 per share.
All transactions under the 2005 Stock Repurchase Program were at a price equal to the most recent quarterly independent appraisal of the shares of the Company's common stock. The most recent independent current quarterly appraisal value of the stock is $70.00 a share. The closing bid for the Company's stock on February 14, 2022 was $67.75 a share as reported by the OTC Markets Group, Inc.
The Company currently pays an annual dividend on its common stock to stockholders, and it expects to continue to maintain its annual dividend for the foreseeable future periods.
The following performance graph provides information regarding cumulative, five-year shareholder returns on an indexed basis of the Company's Common Stock compared to the NASDAQ Market Index prepared by MORNINGSTAR of Chicago, IL and a custom peer group of Midwest community banks. The latter index reflects the performance of bank holding companies operating principally in the Midwest in the following states: Iowa, Illinois, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wisconsin. The indexes assume the investment of $100 on December 31, 2016 in Company Common Stock, the NASDAQ Index and the Midwest Community Banks Index, with all dividends reinvested.
2016 2017 2018 2019 2020 2021
HILLS BANCORPORATION $ 100.00 $ 114.14 $ 130.73 $ 141.17 $ 137.60 $ 148.61
MIDWEST COMMUNITY BANKS $ 100.00 $ 110.31 $ 96.52 $ 120.40 $ 107.70 $ 140.67
NASDAQ MARKET INDEX $ 100.00 $ 129.64 $ 125.96 $ 172.18 $ 249.51 $ 304.85
Note regarding the performance graph: Cumulative five-year Shareholder returns on an indexed basis. The indexes assume the investment of $100 in year with all dividends reinvested.
The following table sets forth the Company’s equity compensation plan information as of December 31, 2021, all of which relates to stock options issued under stock option plans approved by stockholders of the Company:
Plan Category Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights (a) Weighted-average
exercise price of
outstanding options,
warrants and rights (b) Number of securities
remaining available for
future issuance under equity
compensation plans
[excluding securities reflected
in column (a)] (c)
Equity compensation plans approved by security holders 13,025 $ 45.92 208,543
Equity compensation plans not approved by security holders - - -
Total 13,025 $ 45.92 208,543
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”). The Company’s Board of Directors has authorized the 2005 Stock Repurchase Program through December 31, 2023. 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 following table sets forth information about the Company’s stock purchases pursuant to the 2005 Stock Repurchase Program for the quarter ended December 31, 2021:
Period in 2021 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
October 1 to October 31 3,012 $ 66.50 3,012 98,227
November 1 to November 30 1,397 67.94 1,397 96,830
December 1 to December 31 1,574 67.98 1,574 95,256
Total 5,983 $ 67.23 5,983 95,256

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion by management is presented regarding the financial results for the Company for the dates and periods indicated. The discussion should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document. For a discussion on the comparison of results of operations for the years ended December 31, 2020 and 2019, refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Form 10-K filed with the SEC on March 5, 2021.
An overview of the year 2021 is presented following the section discussing a special note regarding forward looking statements.
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.
•The effects of financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions and recession, including in response to the COVID-19 pandemic.
•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.
•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.
•The ability of the Company to develop and maintain secure and reliable technology systems.
•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, including any extended impact from the COVID-19 pandemic, 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.
COVID-19: Update on Company Action and Ongoing Risks
Our response to COVID-19 continues to be focused on how we can best serve our employees, customers, and communities. We implemented additional safety measures to achieve appropriate social distancing for both customers and employees throughout our locations. We have continued to adjust procedures and restrictions based on local conditions and generally in alignment with guidance from the Centers for Disease Control. Drive-thru services remain available as well as all ATM’s to complete needed transactions. Customers are also able to directly contact our bankers through calling the customer contact center, engaging with a digital banker via the HERE by Hills Bank app, or through Hills Bank Online which is available 24/7.
Lending Assistance
The Bank continues to work with customers to determine how best to serve them, including providing short-term modifications for customers primarily through deferrals of principal only payments for three to six months. Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82% of total loans. As of December 31, 2021 and December 31, 2020, COVID-19 related payment deferrals were approximately 0.12% and 1.20% of total loans, respectively.
The Bank continues to assist customers through this difficult time in the best manner possible by providing $127.10 million of Paycheck Protection Program (PPP) loans through December 31, 2020. With the passage of the Coronavirus Response and Relief Supplemental Appropriations Act 2021 in late December 2020, the Bank provided additional PPP loans in 2021 totaling $58.34 million through December 31, 2021 to further assist our customers. The PPP loans have a two or five year term and earn interest at 1%. Loans funded through the PPP program are fully guaranteed by the U.S. government if certain criteria are met. The Bank believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2021, the Bank has outstanding PPP loan balances of $5.34 million and for the year ended December 31, 2021 has received total forgiveness payments of $140.1 million from the SBA.
Financial Exposures
The COVID-19 pandemic continues to represent an unprecedented challenge to the global economy in general and the financial services sector in particular. However, given the emergence of multiple new and more infectious variants of COVID-19 along with the hesitancy of a significant portion of the U.S. population to become vaccinated, there is still significant uncertainty regarding the overall length of the pandemic and the aggregate impact that it will have on global and regional economies, including uncertainties regarding the potential positive effects of governmental actions taken in response to the pandemic. 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, we currently expect to be able to continue to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized. However, the Company may be required to make additional loan loss provisions as warranted by the fluid COVID-19 situation.
Overview
The Company is a bank holding company engaged, through its wholly-owned subsidiary bank, in the business of commercial banking. The Company’s subsidiary is Hills Bank and Trust Company, Hills, Iowa. 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.
The Company’s net income for 2021 was $48.09 million compared to $38.65 million in 2020 and $45.32 million in 2019. Diluted earnings per share were $5.16, $4.12, and $4.85 for the years ended December 31, 2021, 2020 and 2019, respectively.
The Bank’s net interest income is the largest component of the Bank’s revenue, and is a function of the average earning assets and the net interest margin percentage. Net interest margin is the ratio of net interest income to average earning assets. For the years ended December 31, 2021 and 2020, the Bank achieved a net interest margin of 2.75% and 3.00%, respectively. For the year ended December 31, 2021, net interest income on a tax equivalent basis increased by $2.82 million. In 2021, net interest income increased $1.77 million due to growth of $424.15 million in the Bank's average earning assets and decreases in certficates of deposit and FHLB borrowings as well as increased $1.05 million due to interest rate changes.
Highlights with respect to items on the Company’s balance sheet as of December 31, 2021 included the following:
•Total assets were $4.045 billion, an increase of $262.20 million since December 31, 2020.
•Cash and cash equivalents were $781.92 million, an increase of $207.61 million since December 31, 2020. A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic and equity investors fleeing volatile capital markets in an effort to preserve principal.
•Loans, net of allowance for credit losses and unamortized fees and costs, totaling $2.631 billion, a decrease of $87.18 million since December 31, 2020. The decrease is primarily attributable to the forgiveness of PPP loans totaling a net of $81.16 million for the year ended December 31, 2021. Loans held for sale decreased $38.23 million since December 31, 2020 due to the slowdown in mortgage loan refinance activity later in 2021.
•Tax credit real estate increased by $2.54 million for the year ended December 31, 2021, primarily attributable to a $4.18 million investment in a multi-family affordable housing rental property.
•Deposit growth of $341.43 million in 2021. Deposits increased to $3.534 billion and included $51.59 million of brokered deposits. A substantial portion of the increase can be attributed to increased savings with the current negative economic environment due to the pandemic.
•FHLB borrowings decreased $105.00 million due to prepaying all outstanding FHLB borrowings compared to December 31, 2020.
•Liabilities as of December 31, 2021 include $3.85 million of allowance for credit losses on off-balance sheet credit exposures under CECL compared to zero under the incurred loss model as of December 31, 2020.
•Stockholders’ equity increased $22.37 million to $438.45 million in 2021, with dividends having been paid in 2021 of $8.77 million.
Reference is made to Note 13 of the Company’s consolidated financial statements for a discussion of fair value measurements which relate to methods used by the Company in recording certain assets and liabilities on its consolidated financial statements.
The return on average equity was 11.29% in 2021 compared to 9.82% in 2020. The Company remains well-capitalized as of December 31, 2021 with total risk-based capital at 20.24% and Tier 1 risk-based capital at 17.25%. The minimum regulatory guidelines are 8% and 6% respectively. The Company paid a dividend per share of $0.940 in 2021, $0.890 in 2020 and $0.820 in the year ended December 31, 2019.
A detailed discussion of the financial position and results of operations follows this overview.
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.
Allowance for Credit Losses
On January 1, 2021, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the allowance for credit losses use the current expected credit loss (CECL) methodology. The following is a discussion of the methodologies used by the Company with the adoption of ASC 326.
ASC 326 CECL Adoption: The preparation of financial statements in accordance with the accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain substantial inherent uncertainties. Management has made significant estimates in several areas, including the allowance for credit losses (see Note 3 - Loans and Note 2 - Securities) and the fair value of debt securities (see Note 2 - Securities).
We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate. For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10-K.
The allowance for credit losses for loans represents management's estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.
We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components: first, 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; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
Based upon this methodology, management establishes an asset-specific allowance for loans that do not share risk characteristics with other loans based on the amount of expected credit losses calculated on those loans and charges off amounts determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.
When a loan does not share risk characteristics with other loans, we measure expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan's effective interest rate except that, for collateral- dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying 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. In accordance with our appraisal policy, the fair value of collateral-dependent loans is based upon independent third-party appraisals or on collateral valuations prepared by in-house evaluations. Once a third-party appraisal is greater than one year old, or if its determined that market conditions, changes to the property, changes in intended use of the property or other factors indicate that an appraisal is no longer reliable, we perform an internal collateral valuation to assess whether a change in collateral value requires an additional adjustment to carrying value. When we receive an updated appraisal or collateral valuation, management reassesses the need for adjustments to the loan's expected credit loss measurements and, where appropriate, records an adjustment. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the allowance for credit losses. Loans designated having significantly increased credit
risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.
In estimating the component of the allowance for credit losses for loans that share common risk characteristics, 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. Credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and purpose. This model calculates an expected life-of-loan loss percentage for each loan category by considering the probability of default using historical life-of-loan analysis periods for agricultural, 1 to 4 family first and junior liens, commercial and consumer segments, and the severity of loss, based on the aggregate net lifetime losses incurred per loan class.
The component of the allowance for credit losses for loans that share common risk characteristics also considers factors for each loan class to adjust 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:
•Lending policies and procedures;
•International, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;
•The nature of the loan portfolio, including the terms of the loans;
•The experience, ability and depth of the lending management and other relevant staff;
•The volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans;
•The quality of our loan review and process;
•The value of underlying collateral for collateral-dependent loans;
•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. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the bank reduces, on a straight-line basis over the remaining life of the loans, the adjustments so that model reverts back to the historical rates of default and severity of loss.
The credit loss expense recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.
The allowance for credit losses for loans, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. For further information on the allowance for credit losses for loans, see Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to the financial statements of this Form 10-K.
This discussion of the Company’s critical accounting policies should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes presented elsewhere herein, as well as other relevant portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Financial Position
Year End Amounts 2021 2020 2019 2018 2017
(Amounts In Thousands)
Total assets $ 4,044,562 $ 3,782,362 $ 3,302,550 $ 3,044,037 $ 2,963,360
Investment securities 555,900 416,544 366,368 331,098 300,160
Loans held for sale 5,716 43,947 8,400 1,984 5,162
Loans, net 2,625,062 2,674,012 2,606,277 2,591,085 2,431,165
Deposits 3,533,994 3,192,568 2,661,364 2,421,124 2,288,565
Federal Home Loan Bank borrowings - 105,000 185,000 215,000 295,000
Redeemable common stock 50,013 47,329 51,826 48,870 43,308
Stockholders' equity 438,450 416,076 375,211 334,882 311,716
Total assets at December 31, 2021 increased $262.20 million, or 6.93%, from the prior year-end. The largest growth in assets in 2021 occurred in Cash and Cash Equivalents, which increased $207.61 million as of December 31, 2021 compared to December 31, 2020. Net Loans decreased $(48.95) million for the year ended December 31, 2021. Loans held for sale to the secondary market decreased $(38.23) million for the year ended December 31, 2021. Loans held for investment represent the largest component of the Bank’s earning assets. Loans held for investment were $2.661 billion and $2.711 billion at December 31, 2021 and 2020, respectively.
The local economy that generated consistent demand for loans was a significant factor in the trend of increasing net loans in past years. The trend of increasing Net Loans did slow in 2021 and 2020 and may not continue, and as a result, may not be indicative of future performance. The primary reason for the decrease in 2021 was the forgiveness of PPP loans totaling a net of $81.16 million that were provided to customers in response to the COVID-19 pandemic as discussed previously. Without the decrease due to PPP loan forgiveness, loans held for investment increased $30.61 million.
Commercial and financial loans represent a significant portion of the loan growth. These loans increased $16.92 million in 2021 excluding the impact of PPP loans. Construction loans, both 1 to 4 family residential and land development and commercial, had significant growth totaling $24.48 million in 2021. Agricultural loans increased $12.09 million in 2021 though farmland mortgages decreased $14.40 million due to significant competition in the Bank's trade area.
On a net basis, the Company collected $52.02 million in loan payments from customers and the SBA for the year ended December 31, 2021 compared to loan originations of $72.14 million for the year ended December 31, 2020, primarily due to the collections from the forgiveness of PPP loans. The Company does not engage in significant participation activity and does not purchase participations from outside its established trade area. The Company’s policy allows for the purchase or sale of participations related to existing customers or to participate in community development activity. The Company held participations purchased of $17.18, $19.83 and $15.17 million as of December 31, 2021, 2020 and 2019, respectively. The participations purchased were less than one percent of loans held for investment for each of the three years.
The Company did not experience a material change in the composition of its loans held for investment in 2021 or 2020. Residential real estate loans, including first and junior liens, were $1,023.91 million and $1,019.92 million as of December 31, 2021 and 2020, respectively. The dollar total of residential real estate loans increased 0.39% in 2021 and decreased 3.78% in 2020. Residential real estate loans were 38.49% of the loan portfolio at December 31, 2021 and 37.63% at December 31, 2020. Commercial real estate loans totaled $401.38 million at December 31, 2021, a 3.78% decrease over the December 31, 2020 total of $417.14 million. Commercial real estate loans increased 3.72% in 2020. Commercial real estate loans represented 15.09%, 15.39% and 15.24% of the Company’s loan portfolio as of December 31, 2021, 2020 and 2019, respectively. The Company monitors its commercial real estate level so that it does not have a concentration in that category that exceeds 300% of its capital. Commercial real estate loan concentration was 155.64% of capital as of December 31, 2021.
The following table shows the composition of loans (before deducting the allowance for credit losses) as of December 31 for each of the last five years. The table does not include loans held for sale to the secondary market.
2021 2020 2019 2018 2017
Agricultural $ 106,933 $ 94,842 $ 91,317 $ 92,673 $ 88,580
Commercial and financial 222,002 286,242 221,323 229,501 218,632
Real estate:
Construction, 1 to 4 family residential 80,486 71,117 80,209 72,279 69,738
Construction, land development and commercial 127,021 111,913 108,410 113,807 109,595
Mortgage, farmland 232,744 247,142 242,730 236,454 215,286
Mortgage, 1 to 4 family first liens 909,564 892,089 910,742 912,059 831,591
Mortgage, 1 to 4 family junior liens 114,342 127,833 149,227 152,625 144,200
Mortgage, multi-family 382,792 374,014 350,761 352,434 336,810
Mortgage, commercial 401,377 417,139 402,181 383,314 361,196
Loans to individuals 32,687 31,325 32,308 30,072 26,417
Obligations of state and political subdivisions 50,285 56,488 49,896 52,725 57,626
$ 2,660,233 $ 2,710,144 $ 2,639,104 $ 2,627,943 $ 2,459,671
Net unamortized fees and costs 299 938 933 952 894
$ 2,660,532 $ 2,711,082 $ 2,640,037 $ 2,628,895 $ 2,460,565
Less allowance for credit losses 35,470 37,070 33,760 37,810 29,400
$ 2,625,062 $ 2,674,012 $ 2,606,277 $ 2,591,085 $ 2,431,165
There were no foreign loans outstanding for any of the years presented.
The following table shows the principal payments due on loans as of December 31, 2021:
Amount
Of Loans Amounts Due in One Year
Or Less (1) Amounts Due in One To
Five Years Amounts Due in Five To Fifteen
Years Amounts Due in Over Fifteen
Years
(Amounts In Thousands)
Commercial and Agricultural $ 1,553,275 $ 411,079 $ 1,018,784 $ 92,625 $ 30,787
Real Estate (2) 1,022,975 154,595 638,276 196,627 33,477
Other 83,983 6,035 28,579 23,031 26,338
Totals $ 2,660,233 $ 571,709 $ 1,685,639 $ 312,283 $ 90,602
The types of interest rates applicable to these principal payments are shown below:
Fixed rate $ 1,695,079 $ 401,352 $ 1,064,357 $ 140,711 $ 88,659
Variable rate 965,154 170,357 621,282 171,572 1,943
$ 2,660,233 $ 571,709 $ 1,685,639 $ 312,283 $ 90,602
(1)A significant portion of the commercial loans are due in one year or less. A significant percentage of the loans will be re-evaluated prior to their maturity and are likely to be extended.
(2)Commercial, multi-family, construction 1 to 4 family residential, construction land development and commercial, and agricultural real estate loans are reflected in the Commercial and Agricultural total.
The overall economy in the Company’s trade area, Johnson, Linn and Washington Counties, remains in stable condition with levels of unemployment below national and state levels. The following table shows unemployment and estimated median income information as of December 31, 2021, 2020 and 2019.
Unemployment Rate % Median Income
2021 2020 2019 2021 2020 2019
United States 3.9 % 6.7 % 3.5 % $ 67,521 $ 68,703 $ 63,179
State of Iowa 3.5 % 3.1 % 2.7 % 64,386 62,995 61,082
Johnson County 2.5 % 2.8 % 2.2 % 68,510 66,353 64,337
Linn County 3.3 % 3.8 % 3.1 % 69,363 66,163 70,375
Washington County 2.5 % 2.7 % 2.5 % 68,975 63,938 61,450
Competition for quality loans and deposits may continue to be a challenge. The increased competition for both loans and deposits could result in a lower interest rate margin that could result in lower net interest income if the volume of loans and deposits does not increase to offset any such reduction in the interest margin.
Total deposits increased by $341.43 million in 2021. Deposits increased by $531.20 million in 2020. As of June 30, 2021 (latest data available from the FDIC), Johnson County total deposits were $11.077 billion and the Company’s deposits were $2.272 billion, which represent a 20.51% market share. The Company had nine office locations in Johnson County as of June 30, 2021. The total banking locations in Johnson County was 48 as of June 30, 2021. At June 30, 2020, the Company’s deposits were $2.060 billion or a 21.71% market share. As of June 30, 2021, Linn County total deposits were $8.580 billion and there were 102 total banking locations in the county. The seven Linn County offices of the Company had deposits of $764 million or a 8.9% share of the market. The Company’s Linn County deposits at June 30, 2020 were $612 million and represented a 7.9% market share. As of June 30, 2021, the Company’s three Washington County offices had deposits of $287 million which was 34.5% of the County’s total deposits of $832 million. Washington County had a total of 14 banking locations as of June 30, 2021. In 2020, the Company’s Washington County deposits were $254 million or a 33.0% market share.
The following tables show the amounts of the Company's average deposits and average rates paid on such deposits for the years ended December 31, 2021, 2020 and 2019 and the composition of the certificates of deposit issued in denominations in excess of $250,000 as of December 31, 2021, 2020 and 2019:
December 31,
2021 Rate 2020 Rate 2019 Rate
(Amounts In Thousands)
Average noninterest-bearing deposits $ 578,931 - $ 459,664 - $ 366,682 -
Average interest-bearing demand deposits 1,062,059 0.22 % 876,595 0.48 % 716,848 0.87 %
Average savings deposits 1,093,560 0.17 875,091 0.32 851,503 0.92
Average time deposits 643,934 1.63 695,468 2.07 661,548 2.19
$ 3,378,484 $ 2,906,818 $ 2,596,581
Uninsured deposits $ 884,402 $ 687,612 $ 550,489
Time certificates issued in amounts of $250,000 or more with maturity in:
2021 Rate
(Amounts In Thousands)
3 months or less $ 7,507 0.93 %
3 through 6 months 11,307 1.03
6 through 12 months 28,553 0.79
Over 12 months 41,150 2.07
$ 88,517
Portion uninsured $ 40,517
Investment securities increased $139.36 million in 2021. In 2020, investment securities increased by $50.18 million. The investment portfolio consists of $551.35 million of securities that are stated at fair value, with any unrealized gain or loss, net of
income taxes, reported as a separate component of stockholders’ equity. The securities portfolio is used for liquidity and pledging purposes and to provide a rate of return that is acceptable to management.
The following tables show the carrying value of the investment securities held by the Bank, including stock of the Federal Home Loan Bank, as of December 31, 2021, 2020 and 2019 and the maturities and weighted average yields of the investment securities, computed using amortized cost on a tax-equivalent basis using a federal tax rate of 21%, as of December 31, 2021:
December 31,
2021 2020 2019
(Amounts In Thousands)
Carrying value:
U.S. Treasury $ 243,925 $ 148,646 $ 128,585
Other securities (FHLB, FHLMC and FNMA) 34,467 35,160 15,229
Stock of the Federal Home Loan Bank 4,546 8,172 11,065
Mortgage-backed securities and collateralized mortgage obligations 9,446 - -
Obligations of state and political subdivisions 263,516 224,566 211,489
$ 555,900 $ 416,544 $ 366,368
December 31, 2021
Carrying
Value Weighted
Average
Yield
(Amounts In Thousands)
U.S. Treasury
Within 1 year $ 32,793 2.22 %
From 1 to 5 years 188,881 1.22
From 5 to 10 years $ 22,251 0.97
$ 243,925
Other securities (FHLB, FHLMC and FNMA), maturities:
Within 1 year $ - - %
From 1 to 5 years 34,467 0.42
From 5 to 10 years - -
$ 34,467
Stock of the Federal Home Loan Bank $ 4,546 4.45 %
Obligations of state and political subdivisions, maturities:
Within 1 year $ 36,442 1.45 %
From 1 to 5 years 85,794 2.25
From 5 to 10 years 93,113 2.39
Over 10 years 48,167 1.78
$ 263,516
Mortgage Backed Securities
From 1 to 5 years $ 2,385 1.25 %
From 5 to 10 years 7,061 1.51
$ 9,446
Total $ 555,900
As of December 31, 2021, the Company held no investment securities exceeding 10% of stockholders’ equity, other than securities of the U.S. Government agencies and corporations. The Company does not hold any investments in FNMA preferred stock, any pooled trust preferred stocks or other preferred stock type investments. See Note 2 to the Company’s Consolidated Financial Statements.
During 2021, the major funding source for the growth in loans and other assets was the $341.43 million increase in deposits. In 2020, the major source of funding for the growth in loans was deposit growth of $531.20 million. Brokered deposits totaled $51.59 million and $74.08 million as of December 31, 2021 and 2020, respectively. Total advances from the FHLB were $0.00 million at December 31, 2021 and $105.00 million in 2020. The FHLB funding source is considered when loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB are favorable compared to other funding alternatives.
Stockholders’ equity was $438.45 million at December 31, 2021 compared to $416.08 million at December 31, 2020. The Company’s capital resources are discussed in detail in the Liquidity and Capital Resources section. Over the last five years, the Company has realized cumulative earnings of $196.88 million and paid shareholders dividends of $38.24 million, or 19.42% of earnings, while maintaining capital ratios in excess of regulatory requirements.
The following table presents the return on average assets, return on average stockholders' equity, the dividend payout ratio and average stockholders’ equity to average assets ratio for the years ended December 31, 2021, 2020 and 2019:
2021 2020 2019
Return on average assets 1.21 % 1.09 % 1.40 %
Return on average stockholders' equity 11.29 9.82 11.23
Dividend payout ratio 18.24 21.54 16.90
Average stockholders' equity to average assets ratio 10.70 11.07 12.45
Net Income Overview
Net income and diluted earnings per share for the last three years are as presented below:
Year Net Income % (Decrease) Increase Earnings Per
Share - Diluted
(In Thousands)
2021 $ 48,085 24.42 % $ 5.16
2020 38,647 (14.72) 4.12
2019 45,318 23.26 4.85
Net income for 2021 increased by $9.44 million or 24.42% and diluted earnings per share increased by 25.24%. In 2021, net interest income, before credit loss expense, increased by $2.89 million due to the following reasons: 1) decrease in interest income of $6.44 million primarily due to decreases in interest rates and 2) decrease in interest expense of $9.33 million due to interest rate decreases and decreases in the volume of certificates of deposit and FHLB borrowings. Noninterest income increased by $5.13 million, the credit loss expense decreased by $9.87 million and total noninterest expenses increased by $5.71 million.
Annual fluctuations in the Company's net income are driven primarily by three important factors. The first important factor is net interest margin. Net interest income of $104.46 million in 2021 was derived from the Company's $3.866 billion of average earning assets and its net interest margin of 2.75%, compared to $3.442 billion of average earning assets and a 3.00% net interest margin in 2020. The importance of net interest margin is illustrated by the fact that a decrease or an increase in the net interest margin of 10 basis points would result in a $3.87 million decrease or increase in income before taxes. Net interest income for the Company increased primarily due to the continued low interest rates on interest bearing deposits resulting in decreased interest expense of $9.33 million compared to 2020. $7.34 million of the decrease in interest expense was due to interest rate decreases and $1.99 million was primarily due to volume decreases in certificates of deposit and FHLB borrowings. The Company expects net interest compression to impact earnings for the foreseeable future due to competition for loans and deposits combined with the interest rate decreases by the Federal Reserve Board. The Company believes growth in net interest income will be contingent on the growth of the Company’s earning assets and maintaining yield on loans.
The second significant factor affecting the Company's net income is the credit loss expense recorded under CECL. The majority of the Company's interest-earning assets are in loans outstanding, which amounted to $2.666 billion at the end of 2021. The Company’s allowance for credit losses was $35.47 million at December 31, 2021. Expected credit loss expense is computed on a quarterly basis and 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 Bank's loan portfolio. The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the borrowers’ ability to repay, past loss experience, loan collateral values, current economic conditions, reasonable and supportable economic forecasts, adjustments for prepayments and curtailments, the level of collateral-dependent loans and loans past due ninety days or more. In addition, management considers the credit quality of the loans based on management’s review of problem and watch loans, including loans with historically higher credit risk. Credit loss expense was a reduction of expense of $5.51 million in 2021 under CECL compared to an expense of $4.36 million in 2020 and a reduction of expense of $2.88 million in 2019 under the incurred loss model. The decrease is attributable to improvements in the economic factor forecasts, primarily Iowa unemployment in the first quarter 2021, and continued improvement in asset quality, relative to the sizable expense taken for the first half of 2020 from management increases to qualitative factors as a result of the significant economic uncertainties surrounding the pandemic. The Company believes that credit loss expense is expected to be dependent on the Company’s loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and will continue to have potential volatility for the foreseeable future resulting from the uncertainties due to the COVID-19 pandemic.
The third significant factor affecting the Company’s net income is noninterest income, primarily net gain on the sale of loans, services charges and trust fees. The net gain on the sale of loans was $7.59 million and $6.68 million for the years ended December 31, 2021 and 2020, respectively, an increase of 13.63% for the year ended December 31, 2021 compared to the same period in 2020. The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The volume of activity in these types of loans is directly related to the level of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25%, resulting in a significant amount of mortgage loan refinance activity. Services charges and fees were $11.77 million and $10.19 million for the years ended December 31, 2021 and 2020, respectively, an increase of 15.59% for the year ended December 31, 2021 compared to the same period in 2020. This is primarily due to an increase in debit and credit card interchange fees of $1.52 million compared to 2020 with increased usage activity. Trust fees were $13.52 million and $10.28 million for the years ended December 31, 2021 and 2020, respectively, an increase of 31.59% for the year ended December 31, 2021 compared to the same period in 2020. This is primarily driven by the increase in assets under management of $0.37 billion from $2.18 billion as of December 31, 2020 to $2.55 billion as of December 31, 2021 and increased investment transaction activity.
Net Interest Income
Net interest income is the excess of the interest and fees received on interest-earning assets over the interest paid on the interest-bearing liabilities. The factors that have the greatest impact on net interest income are the volume of average earning assets and interest-bearing liabilities and the net interest margin. The volume of average earning assets has continued to grow each year, primarily due to excess cash for 2021. The volume of interest-bearing liabilities also grew in 2021 due to growth of interest-bearing demand and savings deposits. The net interest margin was 2.75% in 2021, 3.00% in 2020 and 3.18% in 2019. The measure is shown on a tax-equivalent basis using a rate of 21% for 2021, 2020 and 2019 to make the interest earned on taxable and nontaxable assets more comparable. Interest income and expense for 2021, 2020 and 2019 are indicated on the following table:
Years Ended December 31,
2021 2020 2019
(Amounts In Thousands)
Income:
Loans (1) $ 114,202 $ 120,814 121,862
Taxable securities 3,604 3,512 3,239
Nontaxable securities (1) 5,177 5,201 5,168
Interest-bearing cash and cash equivalents 983 945 3,980
Total interest income $ 123,966 $ 130,472 $ 134,249
Expense:
Interest-bearing demand deposits 2,385 4,258 6,232
Savings deposits 1,827 2,841 7,825
Time deposits 10,500 14,454 14,483
FHLB borrowings 2,915 5,399 6,333
Total interest expense $ 17,627 $ 26,952 $ 34,873
Net interest income $ 106,339 $ 103,520 $ 99,376
(1) Presented on a tax equivalent basis using a rate of 21% for 2021, 2020 and 2019. Interest income includes certain loan origination and document preparation fees, which comprise approximately 2.0% of the amounts indicated.
Net interest income on a tax-equivalent basis changed in 2021 as follows:
Change In Change In Increase (Decrease)
Average
Balance Average
Rate Volume
Changes Rate
Changes Net
Change
(Amounts In Thousands)
Interest income:
Loans, net $ (60,288) (0.14) % $ (2,959) $ (3,653) $ (6,612)
Taxable securities 68,311 (0.51) 1,005 (913) 92
Nontaxable securities 27,333 (0.34) 724 (748) (24)
Interest-bearing cash and cash equivalents 388,817 (0.13) 1,009 (971) 38
Federal funds sold (19) (0.09) - - -
$ 424,154 $ (221) $ (6,285) $ (6,506)
Interest expense:
Interest-bearing demand deposits $ 185,464 (0.26) % $ (887) $ 2,760 $ 1,873
Savings deposits 218,469 (0.16) (609) 1,623 1,014
Time deposits (51,535) (0.44) 1,108 2,846 3,954
Other borrowings (3) (0.46) - - -
FHLB borrowings (79,198) (0.11) 2,369 115 2,484
Interest-bearing other liabilities - - - - -
$ 273,197 $ 1,981 $ 7,344 $ 9,325
Change in net interest income $ 1,760 $ 1,059 $ 2,819
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. Loan fees included in interest income are not material. Interest on nontaxable securities and loans is shown at tax equivalent amounts.
Net interest income on a tax equivalent basis changed in 2020 as follows:
Change In Average Balance Change In Average Rate Increase (Decrease)
Volume
Changes Rate
Changes Net
Change
(Amounts In Thousands)
Interest income:
Loans, net $ 93,443 (0.21) % $ 6,531 $ (7,579) $ (1,048)
Taxable securities 37,196 (0.32) 847 (574) 273
Nontaxable securities 6,698 (0.07) 183 (150) 33
Interest-bearing cash and cash equivalents 172,147 (1.83) 3,621 (6,654) (3,033)
Federal funds sold 112 (2.78) 3 (5) (2)
$ 309,596 $ 11,185 $ (14,962) $ (3,777)
Interest expense:
Interest-bearing demand deposits $ 159,747 (0.39) % $ (1,410) $ 3,384 $ 1,974
Savings deposits 23,588 (0.59) 634 4,350 4,984
Time deposits 33,920 (0.12) (784) 813 29
Other borrowings 1 (1.71) - - -
FHLB borrowings (32,375) - 946 (12) 934
Interest-bearing other liabilities - - - - -
$ 184,881 $ (614) $ 8,535 $ 7,921
Change in net interest income $ 10,571 $ (6,427) $ 4,144
A summary of the average yields, average rates paid, net interest spread and margin is as follows:
Years Ended December 31,
2021 2020 2019
Average yields:
Loans (1) 4.30 % 4.44 % 4.64 %
Loans (tax equivalent basis) (1) 4.32 4.46 4.67
Taxable securities 1.45 1.96 2.27
Nontaxable securities 1.74 1.99 2.04
Nontaxable securities (tax equivalent basis) 2.31 2.65 2.72
Interest-bearing cash and cash equivalents 0.13 0.26 2.09
Federal funds sold 0.03 0.11 2.89
Average rates paid:
Interest-bearing demand deposits 0.22 0.48 0.87
Savings deposits 0.17 0.32 0.92
Time deposits 1.63 2.07 2.19
Short-term borrowings 0.47 0.93 2.64
FHLB borrowings 2.82 2.93 2.93
Yield on average interest-earning assets 3.20 3.78 4.29
Rate on average interest-bearing liabilities 0.61 1.02 1.42
Net interest spread (2) 2.59 2.76 2.86
Net interest margin (3) 2.75 3.00 3.18
(1)Non-accruing loans have been included in the average loan balances for purposes of this computation.
(2)Net interest spread is the difference between the yield on average interest-earning assets and the yield on average interest-paying liabilities stated on a tax equivalent basis using a federal rate of 21% for 2021, 2020 and 2019. The net interest spread decreased 17 basis points in 2021 compared to 2020 and the net interest spread decreased 10 basis points compared to 2019.
(3)Net interest margin is net interest income, on a tax equivalent basis, divided by average interest-earning assets. The net interest margin decreased 25 basis points in 2021. The net interest margin decreased 18 basis points in 2020 compared to 2019.
In March 2020, the Federal Open Market Committee decreased the target rate to 0.25%. Interest rates on loans are generally affected by the target rate since interest rates for the U.S. Treasury market normally correlate to the Federal Reserve Board federal funds rate. In pricing of loans and deposits, the Bank considers the U.S. Treasury indexes as benchmarks in determining interest rates. As of December 31, 2021, the average rate indexes for the one, three and five year indexes were 0.39%, 0.97% and 1.26%, respectively. The one year index increased 290.00% from December 31, 2020, the three year index increased 470.59% and the five year index increased 250.00%.
CECL Adoption and Allowance for Credit Losses (ACL)
The framework requires that management's estimate reflects credit losses over the full remaining expected life of each credit and considers expected future changes in macroeconomic conditions. The adoption resulted in the recognition on January 1, 2021 of cumulative effect adjustments of $2.75 million related to the ACL for loans and $3.58 million related to the ACL on off-balance sheet credit exposures.
Credit loss expense was a reduction of expense of $5.51 million for the year ended December 31, 2021 compared to an expense of $4.36 million in 2020 under the incurred loss model, a decrease of expense of $9.87 million. The credit loss expense includes expense of $0.27 million related to the ACL on off-balance sheet credit exposures. 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 Bank's loan portfolio. The credit loss expense taken to fund the allowance for credit losses is computed on a quarterly basis and is a result of management’s determination of the quality of the loan portfolio. The expense reflects a number of factors, including the size of the loan portfolio, the overall composition of the loan portfolio and loan concentrations, the impact on the borrowers’ ability to repay, past loss experience, loan collateral values, the level of collateral-dependent loans and loans past due ninety days or more. In addition, management considers the credit quality of the
loans based on management’s review of special mention and substandard loans, including loans with historical higher credit risks. Also, under CECL, a significant component in estimating expected credit losses are economic forecasts such as Iowa unemployment, all-transactions house price index for Iowa and Iowa real GDP. The Company believes that credit loss expense is expected to be dependent on the Company’s loan growth, local economic conditions, including, but not limited to, conditions associated with the COVID-19 pandemic and the attendant risks and uncertainties related thereto, asset quality and will continue to have potential volatility for the foreseeable future resulting from the adoption of CECL and the uncertainties due to the COVID-19 pandemic. The percentage of the allowance to outstanding loans was 1.33% and 1.37% at December 31, 2021 and 2020, respectively. The credit loss expense totaled a reduction of expense of $5.51 million in 2021, an expense of $4.36 million in 2020 and a reduction of expense of $2.88 million in 2019. Loan recoveries net of charge-offs were $1.43 million in 2021, loan charge-offs net of recoveries were $1.05 million in 2020 and loan charge-offs net of recoveries were $1.17 million in 2019. Management has determined that the allowance for credit losses was appropriate at December 31, 2021, 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 and well-documented 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 peers. This review encompasses levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. However, there is no assurance losses will not exceed the allowance, and any growth in the loan portfolio or uncertainty in the general economy will require that management continue to evaluate the adequacy of the ACL and make additional provisions in future periods as deemed necessary.
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 nonaccrual 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 payment 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 we determine that a loan amount, or portion thereof, is uncollectible, the loan’s credit risk rating is immediately downgraded and the uncollectible amount is charged-off. The Bank’s credit and legal departments undertake a thorough and ongoing analysis to determine if an additional specific reserve and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize realized loss.
In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is either a reduction in interest rate, conversion to interest only payments, deferral of payments or extension of the maturity date. Generally, the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, so concessionary modification is granted to the borrower that otherwise would not be considered. TDR loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles. The Bank’s TDR loans occur on a case-by-case basis in connection with ongoing loan collection processes.
The Bank regularly reviews loans in the portfolio and assesses whether the loans are nonperforming. If the loans are nonperforming, the Bank determines if a specific reserve is appropriate. In addition, the Bank'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.
The extent to which collateral secures collateral-dependent loans and changes in the extent to which collateral secures its collateral-dependent loans are described below. Collateral-dependent loans decreased $4.10 million from December 31, 2020 to December 31, 2021. Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans. Collateral-dependent loans 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 0.63% of loans held for investment as of December 31, 2021 and 0.76% as of December 31, 2020. The decrease in collateral-dependent loans is due to a decrease of $0.55 million in loans with a specific reserve, a decrease in nonaccrual loans of $0.36 million, a decrease in 90 days or more accruing loans of $0.86 million and a decrease in TDR loans of $2.33 million from December 31, 2020 to December 30, 2021. There were no significant changes noted in the extent to which collateral secures collateral-dependent loans. See Note 1 Adoption of New Financial Accounting Standard for further discussion of the allowance for credit losses for loans held for investment. A description of the Bank's credit quality indicators are discussed in Note 3 to the Company's Consolidated Financial Statements.
The following table summarizes the Company's impaired loans and non-performing assets as of December 31 for each of the years presented:
2021 2020 2019 2018 2017
(Amounts In Thousands)
Nonaccrual loans (1) $ 8,491 $ 8,849 $ 10,768 $ 10,829 $ 9,096
Accruing loans past due 90 days or more (2) 201 1,056 606 370 971
Specific reserve loans 20 573 243 8,247 12,950
Troubled debt restructurings ("TDR loans")(1) (3) 7,921 10,251 9,308 8,539 8,470
Total non-performing loans $ 16,633 $ 20,729 $ 20,925 $ 27,985 $ 31,487
Other real estate - - - - -
Non-performing assets (includes impaired loans and other real estate) $ 16,633 $ 20,729 $ 20,925 $ 27,985 $ 31,487
Loans held for investment $2,660,233 $2,710.144 $2,639.104 $2,627,943 $2,459,671
Ratio of allowance for credit losses to loans held for investment 1.33 % 1.37 % 1.28 % 1.44 % 1.20 %
Ratio of allowance for credit losses to non-performing loans 213.25 178.83 161.34 135.11 93.37
Ratio of non-performing loans to total loans held for investment 0.63 0.76 0.79 1.06 1.28
Ratio of non-performing assets to total assets 0.41 0.55 0.63 0.92 1.06
(1)The gross interest income that would have been recorded if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period was $0.46 million in 2021 and $0.66 million in 2020. The amount of interest income on the loans that was included in income was $0.44 million in 2021 and $0.57 million in 2020.
(2)The accruing loans past due 90 days or more are still believed to be adequately collateralized. Loans are placed on nonaccrual status when management believes the collection of future principal and interest is not reasonably assured.
(3)Total TDR loans were $10.20, $13.22, $13.71, $13.38 and $12.09 million as of December 31, 2021, 2020, 2019, 2018 and 2017, respectively. Included in the total nonaccrual loans were $2.28, $2.97, $4.34, $4.84 and $3.62 million of TDR loans as of December 31, 2021, 2020, 2019, 2018 and 2017, respectively.
The ratio of allowance for credit losses to non-performing loans increased to 213.25% as of December 31, 2021 compared to 178.83% as of December 31, 2020. The increase in 2021 is primarily due to the reduction in non-performing loans compared to 2020. The ratio of non-performing loans to total gross loans was 0.63% and 0.76% at December 31, 2021 and 2020, respectively. The decrease in the 2021 ratio is primarily due to the decrease in TDR loans and accruing loans past due 90 days or more.
Other factors that are considered in determining the credit quality of the Company’s loan portfolio are the vacancy rates for both residential and commercial space, current equity the borrower has in the property and overall financial strength of the customer including cash flow to continue to fund loan payments. The Company also considers the state of the total economy including unemployment levels. In most instances, the borrowers have used in their rental projections of income at least a 10% vacancy rate. As of December 31, 2021, the unemployment levels in Johnson County and Linn County were 2.5% and 3.3%, respectively, compared to 2.8% and 3.8% in December of 2020. These levels compare favorably to the State of Iowa at 3.5% and the national unemployment level at 3.9% in December 2021 compared to 3.1% and 6.7%, respectively in December 2020.
The residential rental vacancy rates in 2020 and 2021 in Johnson and Linn County were estimated between 6.0% and 8.0%. The State of Iowa vacancy rate is 7.5% and the national rate is 5.6% with the Midwest rate at 6.5%. These vacancy rates one year ago were 8.5%, 6.5% and 7.8%, respectively. The Company continues to consider those vacancy rates among other factors in its current evaluation of the real estate portion of its loan portfolio. Favorable vacancy rates may not continue in 2021, and vacancy rates may rise and affect the overall quality of the loan portfolio.
See Note 3 to the Company's Consolidated Financial Statements for additional disclosures on loans.
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for credit losses balance is also affected by the charge-offs and recoveries for the periods presented. For the years ended December 31, 2021, 2020 and 2019, recoveries were $2.74 million, $1.87 million and $1.80 million, respectively; charge-offs were $1.32 million, $2.92 million and $2.97 million in 2021, 2020 and 2019, respectively.
Overall credit quality may deteriorate in 2022. Such deterioration could cause increases in non-performing loans, allowance for credit losses, credit loss expense and net charge-offs. Management will monitor changing market conditions as a part of its allowance for credit loss methodology. The following table summarizes the Bank's loan loss experience for the years ended December 31 for each of the years presented:
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)
Allowance for credit losses:
Beginning balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Impact of adopting ASC 326 (328) 298 327 763 522 1,396 (232) 2,746
Charge-offs (106) (136) (3) (1) (482) (265) (323) (1,316)
Recoveries 142 1,103 94 25 964 263 152 2,743
Credit loss (benefit) expense 45 (1,881) (437) (1,527) (1,874) (311) 212 (5,773)
Ending balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470
Net charge-offs/(net recoveries) to average net loans outstanding (0.04) % (0.38) % (0.05) % (0.01) % (0.05) % - % 0.20 % (0.05) %
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)
Allowance for loan losses:
Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Charge-offs (43) (1,425) (43) (1) (738) (291) (381) (2,922)
Recoveries 63 670 118 10 784 49 180 1,874
Provision 88 652 (355) 214 1,684 1,798 277 4,358
Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Net charge-offs/(net recoveries) to average net loans outstanding (0.02) % 0.30 % (0.04) % - % - % 0.03 % 0.24 % 0.04 %
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)
Allowance for loan losses:
Beginning balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810
Charge-offs (266) (981) (45) (6) (896) (341) (434) (2,969)
Recoveries 95 646 8 5 700 180 165 1,799
Provision (218) (503) (656) (21) (1,682) (145) 345 (2,880)
Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Net charge-offs/(net recoveries) to average net loans outstanding 0.19 % 0.15 % 0.02 % - % 0.02 % 0.02 % 0.33 % 0.04 %
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)
Allowance for loan losses:
Beginning balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400
Charge-offs (95) (585) - - (830) (251) (561) (2,322)
Recoveries 119 1,057 148 30 612 107 162 2,235
Provision 471 517 155 273 4,066 2,609 406 8,497
Ending balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810
Net charge-offs/(net recoveries) to average net loans outstanding (0.03) % (0.21) % (0.08) % (0.01) % 0.02 % 0.02 % 0.48 % - %
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)
Allowance for loan losses:
Beginning balance $ 2,947 $ 4,531 $ 2,890 $ 3,417 $ 7,677 $ 4,045 $ 1,023 $ 26,530
Charge-offs (167) (583) (114) (3) (553) (130) (554) (2,104)
Recoveries 146 1,183 662 - 661 376 258 3,286
Provision (632) (294) (449) 255 883 1,409 516 1,688
Ending balance $ 2,294 $ 4,837 $ 2,989 $ 3,669 $ 8,668 $ 5,700 $ 1,243 $ 29,400
Net charge-offs/(net recoveries) to average net loans outstanding 0.02 % (0.29) % (0.31) % - % (0.01) % (0.04) % 0.36 % (0.05) %
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
The following table presents the allowance for credit losses by type of loans, the percentage of the allocation for each category to the total allowance and the percentage of all loans in each category to total loans as of December 31, 2021, 2020, 2019, 2018 and 2017:
2021 2020
Amount % of Total Allowance % of Loans
to Total Loans Amount % of Total Allowance % of Loans
to Total Loans
(In Thousands) (In Thousands)
Agricultural $ 2,261 6.37 % 4.02 % $ 2,508 6.77 % 3.50 %
Commercial and financial 4,269 12.04 8.35 4,885 13.18 10.56
Real estate:
Construction, 1 to 4 family residential 818 2.31 3.03 907 2.45 2.62
Construction, land development and commercial 1,482 4.18 4.77 1,412 3.81 4.13
Mortgage, farmland 3,433 9.68 8.75 4,173 11.26 9.12
Mortgage, 1 to 4 family first liens 8,340 23.52 34.19 10,871 29.32 32.92
Mortgage, 1 to 4 family junior liens 3,158 8.90 4.30 1,497 4.04 4.72
Mortgage, multi-family 3,715 10.47 14.39 4,462 12.04 13.80
Mortgage, commercial 6,783 19.12 15.09 4,953 13.36 15.39
Loans to individuals 771 2.17 1.23 752 2.03 1.16
Obligations of state and political subdivisions 440 1.24 1.88 650 1.74 2.08
$ 35,470 100.00 % 100.00 % $ 37,070 100.00 % 100.00 %
2019 2018
Agricultural $ 2,400 7.11 % 3.46 % $ 2,789 7.38 % 3.53 %
Commercial and financial 4,988 14.77 % 8.39 5,826 15.41 % 8.73
Real estate:
Construction, 1 to 4 family residential 1,113 3.30 % 3.04 1,297 3.43 % 2.75
Construction, land development and commercial 1,486 4.40 % 4.11 1,995 5.28 % 4.33
Mortgage, farmland 3,950 11.70 % 9.20 3,972 10.51 % 9.00
Mortgage, 1 to 4 family first liens 9,045 26.79 % 34.51 10,750 28.43 % 34.71
Mortgage, 1 to 4 family junior liens 1,593 4.72 % 5.65 1,766 4.67 % 5.81
Mortgage, multi-family 3,823 11.32 % 13.29 4,083 10.80 % 13.41
Mortgage, commercial 4,036 11.95 % 15.24 4,082 10.80 % 14.58
Loans to individuals 853 2.53 % 1.22 723 1.91 % 1.14
Obligations of state and political subdivisions 473 1.41 1.89 527 1.38 2.01
$ 33,760 100.00 % 100.00 % $ 37,810 100.00 % 100.00 %
Amount % of Total Allowance % of Loans
to Total Loans
(In Thousands)
Agricultural $ 2,294 7.80 % 3.60 %
Commercial and financial 4,837 16.45 % 8.89
Real estate:
Construction, 1 to 4 family residential 1,193 4.06 % 2.84
Construction, land development and commercial 1,796 6.11 % 4.46
Mortgage, farmland 3,669 12.48 % 8.75
Mortgage, 1 to 4 family first liens 7,369 25.07 % 33.81
Mortgage, 1 to 4 family junior liens 1,299 4.42 % 5.86
Mortgage, multi-family 2,791 9.49 % 13.69
Mortgage, commercial 2,909 9.89 % 14.69
Loans to individuals 782 2.66 % 1.07
Obligations of state and political subdivisions 461 1.57 2.34
$ 29,400 100.00 % 100.00 %
The Company believes that the allowance for credit losses is at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions deteriorate, certain borrowers may experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require increases in the allowance for credit losses. The Company will continue to monitor the adequacy of the allowance on a quarterly basis and will consider 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.
Noninterest Income
The following table sets forth the various categories of noninterest income for the years ended December 31, 2021, 2020 and 2019.
Year Ended December 31, $ Change % Change
2021 2020 2019 2021/2020 2020/2019 2021/2020 2020/2019
(Amounts in thousands)
Net gain on sale of loans $ 7,588 $ 6,678 $ 3,539 $ 910 $ 3,139 13.63 % 88.70 %
Trust fees 13,521 10,275 9,579 3,246 696 31.59 7.27
Service charges and fees 11,774 10,186 10,276 1,588 (90) 15.59 (0.88)
Other noninterest income 581 1,187 1,426 (606) (239) (51.05) (16.76)
Gain (loss) on sale of investment securities $ - $ 10 $ (28) (10) 38 (100.00) (135.71)
$ 33,464 $ 28,336 $ 24,792 $ 5,128 $ 3,544 18.10 % 14.29 %
The noninterest income of the Company was $33.46 million in 2021 compared to $28.34 million in 2020. The increase of $5.13 million in 2021 was the result of a combination of factors discussed below.
The net gain on the sale of loans was $7.59 million and $6.68 million for the years ended December 31, 2021 and 2020, respectively, an increase of 13.63% for the year ended December 31, 2021 compared to the same period in 2020. The amount of the net gain on sale of secondary market mortgage loans in each year can vary significantly. The volume of activity in these types of loans is directly related to the level of interest rates and has been significantly impacted by the Federal Reserve Board's reduction of the federal funds rate to 0.25%, resulting in a significant amount of mortgage loan refinance activity. The servicing
of the loans sold into the secondary market is not retained by the Company so these loans do not provide an ongoing stream of income.
Trust fees were $13.52 million and $10.28 million for the years ended December 31, 2021 and 2020, respectively, an increase of 31.59% for the year ended December 31, 2021 compared to the same period in 2020. This is primarily driven by the increase in assets under management of $0.37 billion from $2.18 billion as of December 31, 2020 to $2.55 billion as of December 31, 2021 and increased investment transaction activity. The trust assets that are the most volatile are those that are held in common stocks, which amount to approximately 71% of assets under management. In 2021, the Dow Jones Industrial Average increased 18.73%.
Services charges and fees were $11.77 million and $10.19 million for the years ended December 31, 2021 and 2020, respectively, an increase of 15.59% for the year ended December 31, 2021 compared to the same period in 2020. This is primarily due to an increase in debit and credit card interchange fees of $1.52 million compared to 2020 with increased usage activity.
Other noninterest income decreased $0.61 million in 2021 primarily due to the net loss recognized on the tax credit real estate.
Noninterest Expenses
The following table sets forth the various categories of noninterest expenses for the year ended December 31, 2021, 2020 and 2019.
Year Ended December 31, $ Change % Change
2021 2020 2019 2021/2020 2020/2019 2021/2020 2020/2019
(Amounts in thousands)
Salaries and employee benefits $ 42,458 $ 40,621 $ 36,709 $ 1,837 $ 3,912 4.52 % 10.66 %
Occupancy 4,152 4,343 4,336 (191) 7 (4.40) 0.16
Furniture and equipment 7,276 7,357 6,795 (81) 562 (1.10) 8.27
Office supplies and postage 1,739 1,799 1,841 (60) (42) (3.34) (2.28)
Advertising and business development 2,132 2,082 2,595 50 (513) 2.40 (19.77)
Outside services 12,592 11,069 10,360 1,523 709 13.76 6.84
FDIC insurance assessment 1,043 856 194 187 662 21.85 341.24
Other noninterest expense 9,949 7,504 4,434 2,445 3,070 32.58 69.24
$ 81,341 $ 75,631 $ 67,264 $ 5,710 $ 8,367 7.55 % 12.44 %
Total noninterest expenses were $81.34 and $75.63 million for the years ended December 31, 2021 and 2020, respectively. The increase is $5.71 million or 7.55% in 2021 and an increase of $8.37 million or 12.44% in 2020.
Salaries and employee benefits increased $1.84 million in 2021. The increase is primarily the result of annual salary adjustments.
Outside services increased $1.52 million in 2021 compared to 2020 primarily due to increased debit and credit card processing charges with increase usage activity.
Other noninterest expenses increased $2.44 million in 2021 primarily due to $7.69 million in fees incurred from the prepayment of FHLB borrowings compared to $2.53 million of FHLB prepayment fees and $2.68 million of interest rate swap termination fees paid in 2020.
Income Taxes
Income tax expense was $14.01, $11.28 and $12.55 million for the years ended December 31, 2021, 2020 and 2019, respectively. Income taxes as a percentage of income before income taxes were 22.56% in 2021, 22.59% in 2020 and 21.69% in 2019. The amount of tax credits were $0.48, $0.05 and $0.53 million for 2021, 2020, and 2019, respectively.
Effects of Inflation
The consolidated financial statements and the accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact in the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Liquidity and interest rate adjustments are features of the Company’s asset/liability management, which are important to the maintenance of acceptable performance levels. Item 7A of this Form 10-K contains a more thorough discussion of interest rate risk. The Company attempts to maintain a balance between monetary assets and monetary liabilities to offset the potential effects of changing interest rates.
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of sufficient cash flows to fund operations, to meet depositor withdrawals, to provide for our customers' credit needs and to meet maturing obligations and existing commitments. The Company's principal source of funds is deposits. Other sources include loan principal repayments, proceeds from the maturity and sale of investment securities, federal funds purchased, advances from the FHLB, advances on bank lines of credit, brokered deposit relationships and funds provided by operations. Liquidity management is conducted on both a daily and a long-term basis. Investments in liquid assets are adjusted based on expected loan demand, projected loan and investment securities maturities and payments, expected deposit flows and the objectives set by the Company's asset-liability management, liquidity and contingency funding policies.
As of December 31, 2021, the Company had additional borrowing capacity available from the FHLB of $865.06 million. In addition, the Company had $554.18 million in borrowing capacity available through secured and unsecured lines of credit with correspondent banks. The Company had $0.25 million outstanding under those federal funds lines as of December 31, 2021.
On an unconsolidated basis, the Company had cash balances of $2.18 million as of December 31, 2021. In 2021, the Company received dividends of $12.27 million from its subsidiary Bank and used those funds to pay dividends to its stockholders of $8.77 million and to fund purchases of treasury stock under the 2005 Stock Repurchase Program. The total purchase of treasury stock under the 2005 Stock Repurchase Program totaled $3.57 and $8.55 million for the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021 and 2020, stockholders' equity, before deducting for the maximum cash obligation related to the ESOP, was $488.46 million and $463.41 million, respectively. This measure of stockholders’ equity as a percent of total assets was 12.08% at December 31, 2021 and 12.26% at December 31, 2020. As of December 31, 2021, total equity, after deducting the maximum cash value related to the ESOP, was 10.84% of assets compared to 11.00% of assets at the prior year end.
The Company and the Bank are subject to the Federal Deposit Insurance Corporation Improvement Act of 1991, and the Bank is subject to Prompt Corrective Action Rules as determined and enforced by the Federal Reserve. These regulations establish minimum capital requirements that member banks must maintain.
The Bank is classified as "well-capitalized" by FDIC capital guidelines. For more information regarding regulatory capital requirements, see the section under Part I, Item 1 to this 10-K captioned “Supervision and Regulation.”
On a consolidated basis, 2021 cash flows from operations provided $85.07 million, net increases in deposits provided $341.43 million and net collections on loans to customers provided $52.02 million. These cash flows were invested $245.38 million in purchases of investment securities. In addition, $1.46 million was used to purchase property and equipment and leasehold improvements and $4.18 million was used to invest in a tax credit real estate property.
The Bank has a contingency funding plan to address liquidity issues in times of crisis. The primary source of funding will be the Bank’s customer deposit base. The Bank has established alternative sources of funding available to increase liquidity. The availability of the funding sources is tested on an annual basis. The Bank performs quarterly stress testing to determine if the Bank has an appropriate amount of funding sources to address potential liquidity needs. At December 31, 2021, the Bank had total outstanding loan commitments and unused portions of lines of credit totaling $621.50 million (see Note 15 to the Company's Consolidated Financial Statements). Management believes that its liquidity levels are sufficient at this time, but the Bank may increase its liquidity by limiting the growth of its assets, by selling more loans in the secondary market or selling portions of loans to other banks through participation agreements. Another liquidity source includes obtaining additional funds from the Federal Home Loan Bank (FHLB). As of December 31, 2021, the Bank can obtain an additional $865.06 million from the FHLB based on the current real estate mortgage loans held. In addition, the Bank has arranged $544.18 million of credit lines at three banks. The borrowings under these credit lines would be secured by the Bank’s investment securities. Other liquidity sources include a $10.00 million line of credit with the Federal Reserve Bank of Chicago and various sources of brokered deposits.
The following table shows outstanding balances, weighted average interest rates at year end, maximum month-end balances, average month-end balances and weighted average interest rates of Federal Home Loan Bank borrowings during 2021, 2020 and 2019:
2021 2020 2019
(Amounts In Thousands)
Outstanding balance as of December 31 $ - $ 105,000 $ 185,000
Weighted average interest rate at year end 2.82 % 2.93 % 2.93 %
Maximum month-end balance 105,000 185,000 215,000
Average month-end balance 101,895 181,093 212,500
Weighted average interest rate for the year 2.82 % 2.93 % 2.93 %
The Bank has off-balance sheet commitments to fund additional borrowings of customers. Contractual commitments to fund loans are met from the proceeds of federal funds sold or investment securities and additional borrowings. Many of the contractual commitments to extend credit will not be funded because they represent the credit limits on credit cards and home equity lines of credits.
As disclosed in Note 15 to the Company's Consolidated Financial Statements, the Company has certain obligations and commitments to make future payments under contracts. The following table summarizes significant contractual obligations and other commitments as of December 31, 2021:
Payments Due By Period
(Amounts In Thousands)
Total Less Than
One Year One -
Three Years Three -
Five Years More Than
Five Years
Contractual obligations:
Long-term debt obligations $ - $ - $ - $ - $ -
Operating lease obligations 2,881 371 535 493 1,482
Total contractual obligations: $ 2,881 $ 371 $ 535 $ 493 $ 1,482
Other commitments:
Lines of credit $ 614,324 $ 460,198 $ 124,826 $ 24,376 $ 4,924
Standby letters of credit 7,179 7,179 - - -
Total other commitments $ 621,503 $ 467,377 $ 124,826 $ 24,376 $ 4,924
The Company and the Bank have no additional material commitments or plans that will materially affect liquidity or capital resources. Property and equipment may be acquired in cash purchases, or they may be financed if favorable terms are available.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changes in interest rates. Interest rate risk is the risk to current or anticipated earnings or capital arising from movements in interest rates. Interest rate risk arises from repricing risk, basis risk, yield curve risk and options risk. Repricing risk is the difference between the timing of rate changes and the timing of cash flows. Basis risk is the difference from changing rate relationships among different yield curve affecting Bank activities. Yield curve risk is the difference from changing rate relationships across the spectrum of maturities. Option risk is the difference resulting from interest-related options imbedded in Bank products. The Bank’s primary source of interest rate risk exposure arises from repricing risk. To measure this risk the Bank uses a static gap measurement system that identifies the repricing gaps across the full maturity spectrum of the Bank’s assets and liabilities and an earnings simulation approach. The gap schedule is known as the interest rate sensitivity report. The report reflects the repricing characteristics of the Bank’s assets and liabilities. The report details the calculation of the gap ratio. This ratio indicated the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period, and a ratio greater than 1.0 indicates that more assets reprice than liabilities.
The Company's asset/liability management, or its management of interest rate risk, is focused primarily on evaluating and managing net interest income given various risk criteria. Factors beyond the Company's control, such as market interest rates and competition, may also have an impact on the Company's interest income and interest expense. In the absence of other factors, the Company's overall yield on interest-earning assets will increase as will its cost of funds on its interest-bearing liabilities when market interest rates increase over an extended period of time. Inversely, the Company's yields and cost of funds will decrease when market rates decline. The Company is able to manage these swings to some extent by attempting to control the maturity or rate adjustments of its interest-earning assets and interest-bearing liabilities over given periods of time.
The Bank maintains an Asset/Liability Committee, which meets at least quarterly to review the interest rate sensitivity position and to review and develop various strategies for managing interest rate risk within the context of the following factors: 1) capital adequacy, 2) asset/liability mix, 3) economic outlook, 4) market characteristics and 5) the interest rate forecast. In addition, the Bank uses a simulation model to review various assumptions relating to interest rate movement. The model attempts to limit rate risk even if it appears the Bank’s asset and liability maturities are perfectly matched and a favorable interest margin is present. The Bank’s policy is to generally maintain a balance between profitability and interest rate risk.
The Bank uses derivative financial instruments, when needed, to manage the impact of changes in interest rates on future interest income or interest expense. The Bank is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments, but believe the risk of these losses has been minimized by entering into the contracts with large, stable financial institutions. The estimated fair market value of these derivative instruments are presented in Note 17 to the Consolidated Financial Statements.
In order to minimize the potential effects of adverse material and prolonged increases or decreases in market interest rates on the Company's operations, management has implemented an asset/liability program designed to mitigate the Company's interest rate sensitivity. The program emphasizes the origination of adjustable rate loans, which are held in the portfolio, the investment of excess cash in short or intermediate term interest-earning assets, and the solicitation of transaction deposit accounts, which are less sensitive to changes in interest rates and can be re-priced rapidly.
The table set forth below includes the portion of the balances in interest-bearing checking, savings and money market accounts that management has estimated to mature within one year. The classifications are used because the Bank’s historical data indicates that these have been very stable deposits without much interest rate fluctuation. Historically, these accounts would not need to be adjusted upward as quickly in a period of rate increases so the interest risk exposure would be less than the re-pricing schedule indicates. The FHLB borrowings are classified based on either their due date or if they are callable on their most likely call date based on the interest rate.
Repricing
Maturities Days More Than
Immediately 2-30 31-90 91-180 181-365 One Year Total
(Amounts in Thousands)
Earning assets:
Excess Cash $ 752,985 $ - $ - $ - $ - $ - $ 752,985
Federal funds sold - - - - - - -
Investment securities - 2,704 11,346 36,317 18,495 487,038 555,900
Loans 10,834 285,704 60,100 114,160 167,225 2,028,225 2,666,248
Total earning assets 763,819 288,408 71,446 150,477 185,720 2,515,263 3,975,133
Sources of funds:
Interest-bearing checking and savings accounts 136,417 - - - - 2,167,223 2,303,640
Certificates of deposit - 23,507 42,034 82,355 172,868 276,489 597,253
FHLB borrowings - - - - - - -
Federal funds and repurchase agreements 249 - - - - - 249
136,666 23,507 42,034 82,355 172,868 2,443,712 2,901,142
Other sources, primarily noninterest-bearing - - - - - 1,070,804 1,070,804
Total sources 136,666 23,507 42,034 82,355 172,868 3,514,516 3,971,946
Interest
Rate Gap $ 627,153 $ 264,901 $ 29,412 $ 68,122 $ 12,852 $ (999,253) $ 3,187
Cumulative Interest
Rate Gap at December 31, 2021 $ 627,153 $ 892,054 $ 921,466 $ 989,588 $ 1,002,440 $ 3,187
Gap Ratio 5.59 12.27 1.70 1.83 1.07 0.72
Cumulative Gap Ratio 5.59 6.57 5.56 4.48 3.19 1.00
Based on the data following, net interest income should decline with instantaneous increases in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's interest rate sensitive liabilities would re-price faster than its interest rate sensitive assets causing a decline in the Company's interest rate spread and margin. This would tend to reduce net interest income because the resulting increase in the Company’s cost of funds would not be immediately offset by an increase in its yield on earning assets. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in re-pricing of interest rate sensitive assets could be expected to have a positive effect on the Company's net interest income.
The following table, which presents principal cash flows and related weighted average interest rates by expected maturity dates, provides information about the Company's loans, investment securities and deposits that are sensitive to changes in interest rates.
2022 2023 2024 2025 2026 Thereafter Total Fair Value
(Amounts In Thousands)
Assets:
Loans, fixed:
Balance $ 401,352 $ 81,748 $ 168,627 $ 444,786 $ 369,196 $ 229,370 $ 1,695,079 $ 1,451,558
Average interest rate 3.93 % 4.51 % 4.21 % 3.91 % 3.76 % 2.43 % 3.74 %
Loans, variable:
Balance $ 170,357 $ 78,954 $ 75,639 $ 261,210 $ 205,479 $ 173,515 $ 965,154 $ 1,161,122
Average interest rate 3.60 % 4.14 % 4.31 % 3.77 % 3.57 % 3.40 % 3.70 %
Investments (1):
Balance $ 73,781 $ 60,885 $ 79,654 $ 81,239 $ 89,749 $ 170,592 $ 555,900 $ 555,900
Average interest rate 1.98 % 2.19 % 1.48 % 0.92 % 1.25 % 1.99 % 1.66 %
Liabilities:
Liquid deposits (2):
Balance $ - $ - $ - $ - $ - $ - $ 2,303,640 $ 2,303,642
Average interest rate - % - % - % - % - % - % 0.15 %
Deposits, certificates:
Balance $ 320,764 $ 174,043 $ 63,193 $ 23,108 $ 16,145 $ - $ 597,253 $ 603,424
Average interest rate 1.11 % 2.51 % 1.16 % 0.79 % 0.95 % - % 1.51 %
1.11
(1)Includes all available-for-sale investments, federal funds and Federal Home Loan Bank stock.
(2)Includes NOW and other demand, savings and money market funds.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data are included on pages 54 through 118.
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Hills Bancorporation
Hills, Iowa
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hills Bancorporation (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on Internal Control-Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 4, 2022, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has changed its method of accounting for the allowance for credit losses in 2021 due to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. As discussed below, auditing the Company’s allowance for credit losses, including adoption of the new accounting guidance related to the estimate of allowance for credit losses, was a critical audit matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to an account or disclosure that is material to the financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
As discussed in Notes 1 and 3, the Company adopted Topic 326 effective January 1, 2021. The Company uses the discounted cash flow (DCF) method to estimate expected losses for most of the Company’s loan pools that exhibit similar risk characteristics. For each of these loan pools, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default and loss given default. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers when modeling lifetime probability of default and loss given default. The Company’s analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. Additional qualitative adjustments are applied for risk factors that are not considered within the modeling process but are relevant in assessing the expected credit losses within the loan pools. Loans that do not share risk characteristics are evaluated on an individual basis. For loans individually evaluated, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The Company applies expected funding percentages to the respective model loss rates to estimate the allowance related to unfunded commitments.
Auditing management’s estimate of the allowances for loan credit losses (ACL) and unfunded commitments involved a high degree of subjectivity due to the complexities of the probability of default and loss given default models and the nature of the qualitative factor adjustments. Management’s qualitative factor adjustments are highly judgmental and had a significant effect on the ACL.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the ACL and allowance for unfunded commitments included the following procedures, among others:
•Obtained an understanding of the Company’s process for establishing the ACL, including the implementation of models and assumptions and the qualitative factor adjustments of the ACL.
•Obtained an understanding, evaluated the design and tested the operating effectiveness of controls, including information technology, over the reliability and accuracy of data used to calculate and estimate the various components of the ACL including:
◦Loan data completeness and accuracy
◦Grouping of loans by segment
◦Model inputs utilized
◦Approval of model assumptions selected
◦Establishment of qualitative factors
•Tested the mathematical accuracy of the calculation of the ACL
•Tested individual loan files to evaluate the reasonableness of loan credit risk ratings
•Tested the completeness and accuracy of inputs utilized in the calculation of the ACL
•Evaluated the reasonableness of selected loss drivers utilized and loss driver forecasts for each loan segment
•Tested the reasonableness of specific reserves on individually evaluated loans
•Tested estimated funding rate of unfunded loan commitments
•Evaluated the qualitative adjustments, including assessing the reasonableness and basis for adjustments
BKD, LLP
We have served as the Company’s auditor since 2012.
Springfield, Missouri
March 4, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Hills Bancorporation
Hills, Iowa
Opinion on the Internal Control over Financial Reporting
We have audited Hills Bancorporation’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company and our report dated March 4, 2022, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. Because management’s assessment and our audit also were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our audit of Hills Bancorporation’s internal control over financial reporting included controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
BKD, LLP
Springfield, Missouri
March 4, 2022
HILLS BANCORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
(Amounts In Thousands, Except Shares)
ASSETS 2021 2020
Cash and cash equivalents $ 781,918 $ 574,310
Investment securities available for sale at fair value (amortized cost 2021 $549,386; 2020 $396,670) (Notes 1, 2 and 13)
551,354 408,372
Stock of Federal Home Loan Bank 4,546 8,172
Loans held for sale 5,716 43,947
Loans, net of allowance for credit losses (2021 $35,470; 2020 $37,070) (Notes 1, 3, and 12)
2,625,062 2,674,012
Property and equipment, net (Note 4) 34,290 35,878
Tax credit real estate 9,815 7,273
Accrued interest receivable 11,437 12,177
Deferred income taxes, net (Notes 1 and 10) 9,125 6,088
Goodwill 2,500 2,500
Other assets 8,799 9,633
Total Assets $ 4,044,562 $ 3,782,362
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 633,101 $ 532,190
Interest-bearing deposits (Note 6) 2,900,893 2,660,378
Total deposits 3,533,994 3,192,568
Other borrowings, federal funds purchased 249 -
Federal Home Loan Bank borrowings (Note 7) - 105,000
Accrued interest payable 1,165 1,733
Allowance for credit losses on off-balance sheet credit exposures 3,850 -
Other liabilities 16,841 19,656
Total Liabilities 3,556,099 3,318,957
Commitments and Contingencies (Notes 9 and 15)
Redeemable Common Stock Held By Employee Stock
Ownership Plan (ESOP) (Note 9) 50,013 47,329
Stockholders' Equity (Note 11)
Common stock, no par value; authorized 20,000,000 shares; issued 2021 10,329,493 shares; 2020 10,330,242 shares
- -
Paid in capital 60,938 60,233
Retained earnings 474,392 439,831
Accumulated other comprehensive gain (Note 8) 1,477 8,782
Treasury stock at cost (2021 1,029,853 shares; 2020 999,247 shares)
(48,344) (45,441)
Total Stockholders' Equity 488,463 463,405
Less maximum cash obligation related to ESOP shares (Note 9) 50,013 47,329
Total Stockholders' Equity Less Maximum Cash Obligations Related To ESOP Shares 438,450 416,076
Total Liabilities & Stockholders' Equity $ 4,044,562 $ 3,782,362
See Notes to Consolidated Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands, Except Per Share Amounts)
2021 2020 2019
Interest income:
Loans, including fees $ 113,648 $ 120,196 $ 121,269
Investment securities:
Taxable 3,604 3,512 3,239
Nontaxable 3,854 3,876 3,844
Federal funds sold 983 945 3,980
Total interest income 122,089 128,529 132,332
Interest expense:
Deposits 14,712 21,553 28,540
FHLB borrowings 2,915 5,399 6,333
Total interest expense 17,627 26,952 34,873
Net interest income 104,462 101,577 97,459
Credit loss (benefit) expense (Note 3) (5,507) 4,358 (2,880)
Net interest income after credit loss (benefit) expense 109,969 97,219 100,339
Noninterest income:
Net gain on sale of loans 7,588 6,678 3,539
Trust fees 13,521 10,275 9,579
Service charges and fees 11,774 10,186 10,276
Other noninterest income 581 1,187 1,426
Gain (loss) on sale of investment securities - 10 (28)
33,464 28,336 24,792
Noninterest expenses:
Salaries and employee benefits 42,458 40,621 36,709
Occupancy 4,152 4,343 4,336
Furniture and equipment 7,276 7,357 6,795
Office supplies and postage 1,739 1,799 1,841
Advertising and business development 2,132 2,082 2,595
Outside services 12,592 11,069 10,360
FDIC insurance assessment 1,043 856 194
Other noninterest expenses 9,949 7,504 4,434
81,341 75,631 67,264
Income before income taxes 62,092 49,924 57,867
Income taxes (Note 10) 14,007 11,277 12,549
Net income $ 48,085 $ 38,647 $ 45,318
Earnings per share:
Basic $ 5.16 $ 4.12 $ 4.85
Diluted 5.16 4.12 4.85
See Notes to Consolidated Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands)
2021 2020 2019
Net income $ 48,085 $ 38,647 $ 45,318
Other comprehensive income (loss)
Securities:
Net change in unrealized (loss) gain on securities available for sale (9,734) 7,478 6,940
Reclassification adjustment for net (gains) losses realized in net income - (10) 28
Income taxes 2,429 (1,864) (1,738)
Other comprehensive (loss) income on securities available for sale (7,305) 5,604 5,230
Derivatives used in cash flow hedging relationships:
Net change in unrealized loss on derivatives - (335) (753)
Reclassification adjustment for losses realized in net income - 2,684 -
Income taxes - (586) 188
Other comprehensive income (loss) on cash flow hedges - 1,763 (565)
Other comprehensive (loss) income, net of tax (7,305) 7,367 4,665
Comprehensive income $ 40,780 $ 46,014 $ 49,983
See Notes to Consolidated Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands, Except Share Data)
Paid In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury
Stock Maximum
Cash
Obligation
Related
To ESOP
Shares Total
Balance, December 31, 2018 $ 52,122 $ 371,848 $ (3,250) $ (36,968) $ (48,870) $ 334,882
Issuance of 101,912 shares of common stock
3,549 - - 2,672 - 6,221
Issuance of 7,720 shares of common stock under the employee stock purchase plan
434 - - - - 434
Unearned restricted stock compensation 86 - - - - 86
Forfeiture of 5,255 shares of common stock
(262) - - - - (262)
Share-based compensation 14 - - - - 14
Change related to ESOP shares - - - - (2,956) (2,956)
Net income - 45,318 - - - 45,318
Cash dividends ($0.82 per share)
- (7,657) - - - (7,657)
Purchase of 89,124 shares of common stock
- - - (5,534) - (5,534)
Other comprehensive (loss) - - 4,665 - - 4,665
Balance, December 31, 2019 $ 55,943 $ 409,509 $ 1,415 $ (39,830) $ (51,826) $ 375,211
Issuance of 110,337 shares of common stock
4,177 - - 2,939 - 7,116
Issuance of 7,449 shares of common stock under the employee stock purchase plan
413 - - - - 413
Unearned restricted stock compensation (68) - - - - (68)
Forfeiture of 4,863 shares of common stock
(257) - - - - (257)
Share-based compensation 25 - - - - 25
Change related to ESOP shares - - - - 4,497 4,497
Net income - 38,647 - - - 38,647
Cash dividends ($0.89 per share)
- (8,325) - - - (8,325)
Purchase of 133,622 shares of common stock
- - - (8,550) - (8,550)
Other comprehensive income - - 7,367 - - 7,367
Balance, December 31, 2020 $ 60,233 $ 439,831 $ 8,782 $ (45,441) $ (47,329) $ 416,076
Cumulative change in accounting principle (Note 1) - (4,751) - - - (4,751)
Balance, January 1, 2021 (as adjusted for change in accounting principle) 60,233 435,080 8,782 (45,441) (47,329) 411,325
Issuance of 24,513 shares of common stock
952 - - 666 - 1,618
Issuance of 7,334 shares of common stock under the employee stock purchase plan
427 - - - - 427
Unearned restricted stock compensation (244) - - - - (244)
Forfeiture of 8,083 shares of common stock
(455) - - - - (455)
Share-based compensation 25 - - - - 25
Change related to ESOP shares - - - - (2,684) (2,684)
Net income - 48,085 - - - 48,085
Cash dividends ($0.94 per share)
- (8,773) - - - (8,773)
Purchase of 55,119 shares of common stock
- - - (3,569) - (3,569)
Other comprehensive income - - (7,305) - - (7,305)
Balance, December 31, 2021 $ 60,938 $ 474,392 $ 1,477 $ (48,344) $ (50,013) $ 438,450
See Notes to Consolidated Financial Statements.
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands)
2021 2020 2019
Cash Flows from Operating Activities
Net income $ 48,085 $ 38,647 $ 45,318
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation 3,052 3,128 3,072
Credit loss (benefit) expense (5,507) 4,358 (2,880)
Net (gain) loss on sale of investment securities available for sale - (10) 28
Share-based compensation 25 25 14
Compensation expensed through issuance of common stock 1,618 1,272 1,133
Forfeiture of common stock (455) (257) (262)
Provision for deferred income taxes 971 (520) 1,301
Net gain on sale of other real estate owned and other repossessed assets (51) (120) (94)
Decrease (increase) in accrued interest receivable 740 265 (658)
Amortization of premium on investment securities, net 1,203 818 441
Decrease (increase) in other assets 392 1,228 (2,681)
Amortization of operating lease right of use assets 397 386 354
(Decrease) increase in accrued interest and other liabilities (3,627) (5,527) 650
Loans originated for sale (429,343) (475,187) (299,223)
Proceeds on sales of loans 475,162 446,318 296,346
Net gain on sales of loans (7,588) (6,678) (3,539)
Net cash and cash equivalents provided by operating activities 85,074 8,146 39,320
Cash Flows from Investing Activities
Proceeds from maturities of investment securities available for sale 91,459 85,530 63,301
Proceeds from sale of investment securities available for sale - 313 12,467
Purchases of investment securities available for sale (245,378) (129,359) (104,539)
Proceeds from sale of stock of FHLB 4,201 - -
Purchases of stock of FHLB (575) - -
Loans made to customers, net of collections 52,018 (72,138) (13,024)
Proceeds on sale of other real estate owned and other repossessed assets 55 120 818
Purchases of property and equipment (1,464) (1,860) (3,167)
Investment in tax credit real estate (4,183) - -
Net changes from tax credit real estate investment 1,641 1,007 913
Net cash and cash equivalents used in investing activities (102,226) (116,387) (43,231)
(Continued)
HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands)
2021 2020 2019
Cash Flows from Financing Activities
Net increase in deposits 341,426 531,204 240,240
Net increase in short-term borrowings 249 - -
Net decrease in FHLB borrowings (105,000) (80,000) (30,000)
Borrowings from FRB 1 1 1
Payments on FRB borrowings (1) (1) (1)
Issuance of common stock, net of costs - 5,844 5,026
Stock options exercised - - 62
Purchase of treasury stock (3,569) (8,550) (5,534)
Proceeds from the issuance of common stock through the employee stock purchase plan 427 413 434
Dividends paid (8,773) (8,325) (7,657)
Net cash and cash equivalents provided by financing activities 224,760 440,586 202,571
Increase in cash and cash equivalents 207,608 332,345 198,660
Cash and cash equivalents:
Beginning of year 574,310 241,965 43,305
End of year $ 781,918 $ 574,310 $ 241,965
Supplemental Disclosures
Cash payments for:
Interest paid to depositors $ 15,280 $ 22,294 $ 27,878
Interest paid on other obligations 2,915 5,399 6,333
Income taxes paid 9,565 9,874 10,784
Noncash financing activities:
Increase (decrease) in maximum cash obligation related to ESOP shares $ 2,684 $ (4,497) $ 2,956
Transfers to other real estate owned 96 45 712
Sale and financing of other real estate owned 137 - 97
Right of use assets obtained in exchange for operating lease obligations - 48 3,581
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.Nature of Activities and Significant Accounting Policies
Nature of activities: Hills Bancorporation (the "Company") is a holding company engaged in the business of commercial banking. The Company's subsidiary is Hills Bank and Trust Company, Hills, Iowa (the “Bank”), which is wholly-owned. The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion and Washington, Iowa.
The Bank competes with other financial institutions and non-financial institutions providing similar financial products. Although the loan activity of the Bank is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, the Bank's credit is concentrated in real estate loans. All of the Company’s operations are considered to be one reportable operating segment.
Accounting estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for credit losses, fair values of securities and other financial instruments, and share-based compensation expense involve certain significant estimates made by management. These estimates are reviewed by management routinely and it is reasonably possible that circumstances that exist at December 31, 2021 may change in the near-term and the effect could be material to the consolidated financial statements.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassification of prior year presentation: Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Revenue recognition: Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit and investment securities as these activities are not subject to the requirements of ASC 606. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts. Loan origination fees of mortgage loans originated for sale are recognized when the loans are sold.
Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606 are the following: Service charges and fees on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue which includes interchange income, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received.
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. As of December 31, 2021 and 2020, 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 did not capitalize any contract acquisition costs for the years ending December 31, 2021 and 2020.
Cash and cash equivalents: The Company considers all investments with original maturities of three months or less to be cash equivalents. At December 31, 2021 and 2020, cash equivalents consisted primarily of deposits with other banks.
Investment securities: Available-for-sale ("AFS") securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading or held to maturity securities as of December 31, 2021 or 2020.
Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from earnings and reported, net of tax, in other comprehensive income ("OCI"). Premiums on debt securities are amortized to the earliest call date and discounts on debt securities are accreted over the period to maturity of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.
Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the individual security level. For asset-backed securities performance indicators considered related to the underlying assets include default rates, delinquency rates, percentage of nonperforming assets, debt-to-collateral ratios, third-party guarantees, current levels of subordination, vintage, geographic concentration, analyst reports and forecasts, credit ratings and other market data. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis.
If we intend to sell a debt security or more likely than not we will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental impairment reported in earnings.
Accrued interest receivable on AFS debt securities totaled $2.05 million at December 31, 2021 and is excluded from the estimate of credit losses.
Stock of the Federal Home Loan Bank is carried at cost. The Company has evaluated the stock and determined there is no impairment.
Loans held for sale: Loans held for sale are stated at the lower of aggregate cost or estimated fair value. Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan. The Company has had very few experiences of repurchasing loans previously sold into the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
secondary market. A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.
Loans held for investment: Loans are stated at the amount of unpaid principal, net of deferred loan fees, and reduced by the allowance for credit losses ("ACL"). Accrued interest receivable on loans held for investment totaled $9.29 million at December 31, 2021 and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Nonrefundable loan fees and origination costs are deferred and recognized as a yield adjustment over the life of the related loan.
The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due, which is generally when a loan is 90 days or more past due. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Loans are returned to an accrual status when all of the principal and interest amounts contractually due are brought current and repayment of the remaining contractual principal and interest is expected. A loan may also return to accrual status if additional collateral is received from the borrower and, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the collection of the amount contractually due. Payment received on nonaccrual loans are applied first to principal. Once principal is recovered, any remaining payments received are applied to interest income. As of December 31, 2021, none of the Company’s nonaccrual loans were earning interest on a cash basis.
The policy for charging off loans is consistent throughout all loan categories. A loan is charged off based on criteria that includes but is not limited to: delinquency status, financial condition of the entire customer credit line and underlying collateral coverage, economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company.
Allowance for credit losses for loans held for investment: The allowance for credit losses is an estimate of expected losses inherent within the Company's existing loans held for investment portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments which consist of agricultural, 1 to 4 family first and junior liens, commercial, and consumer lending. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The following provides the credit quality indicators and risk elements that are most relevant and most carefully considered and monitored for each loan portfolio segment.
Agricultural - Agricultural operating loans include loans made to finance agricultural production and other loans to farmers and farming operations. Agricultural loans also include mortgage loans secured by farmland. Agricultural operating loans, most of which are secured by crops and machinery, are provided to finance capital improvement and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural operating loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural operating loans generally have a term of one year and may have a fixed or variable rate.
Mortgage loans secured by farmland are made to individuals and businesses within the Company's trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for real estate loans secured by farmland range from one to ten years with an amortization period of 25 years or less. Generally, interest rates are fixed for mortgage loans secured by farmland. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real gross domestic product (GDP).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, multifamily residential mortgage, construction/land development and commercial and financial loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party's financial position. These other factors include assessing liquidity, the level and composition of net worth, leverage, considering all other lender amounts and position, an analysis of cash expected to flow through the obligors including the outflow to other lenders, vacancies and prior experience with the borrower. This information is used to assess adequate financial capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate, the all-transactions house price index for Iowa and the Iowa real GDP.
Consumer Lending - The Bank offers consumer loans to individuals including personal loans and automobile loans. These consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loans collections are dependent on the borrower's continuing financial stability and are more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real GDP.
The allowance level is influenced by loan volumes, loan credit quality indicator migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow method or remaining life method to estimate expected credit losses.
Discounted cash flow method: In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and purpose. This model calculates an expected loss percentage for each loan class by considering the probability of default, using life-of-loan analysis periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending management and other relevant staff; (5) the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans; (6) the quality of our loan review system and (7)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the value of underlying collateral for collateralized loans. Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast. The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve quarters on a straight-line basis. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Remaining life method: Expected credit losses for credit cards and overdrafts are determined through use of the remaining life method. The remaining life method utilizes average annual charge-off rates and remaining life to estimate the allowance for credit losses. This is done by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period and applying those principal payments against the balance outstanding as of the reporting period along with the average annual charge-off rate until the expected payments have been fully allocated.
Collateral dependent financial assets: For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge- offs and deferred loan fees and costs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
The Company’s estimate of the ACL reflects losses expected over the contractual life of the assets, adjusted for estimated prepayments or curtailments. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructure (TDR). A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments: The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, including unfunded loan commitments, which is disclosed on the balance sheet. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet (OBS) credit exposures that are unconditionally cancellable by the Company, such as credit card receivables, or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. The allowance for credit losses on OBS credit exposures is adjusted as credit loss expense. Categories of OBS credit exposures correspond to the loan portfolio segments described previously.
Troubled debt restructurings (“TDR loans”): A loan is accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses to the Company. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt's original contractual maturity or original expected duration.
TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan is no longer classified as a TDR in the quarter following the modification. Management evaluates loans where there is a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower for purposes of estimating the allowance for credit losses.
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. Under Section 4013 of the CARES Act, loan modifications that qualify for such suspension are those where the borrower was not more than 30 days past due as of December 31, 2019. In addition, the loan modification being made in response to the COVID-19 pandemic must include a deferral or delay in the payment of principal or interest, or change in the interest rate on the loan. In March 2020, various regulatory agencies, including the FRB and the FDIC, issued an interagency statement, effective immediately, on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs. This includes short-term (e.g., six months) modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The relief related to TDRs expired on January 1, 2022. See Note 3 for further discussion.
Transfers of financial assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Tax credit real estate: Tax credit real estate represents three multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi-family senior living rental property, all which are affordable housing projects as of December 31, 2021. The Bank has a 99% or greater limited partnership interest in each limited partnership. The investment in each was completed after the projects had been developed by the general partner. The Company evaluates the recoverability of the carrying value on a regular basis. If the recoverability was determined to be in doubt, a valuation allowance would be established by way of a charge to expense. 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years and are passed through from the limited partnerships to the Bank and reduces the consolidated federal tax liability of the Company.
In February 2021, the Company provided construction financing and contributed capital of $4.18 million to Del Ray Ridge LP, as limited partner, which owns and operates an affordable housing property in Iowa City, Iowa. 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.
On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if an allowance for credit losses is necessary. The allowance for credit losses is measured by a comparison of the carrying amount of the investments to the future undiscounted cash flows expected to be generated by the investment properties, including the low-income housing tax credits and any estimated proceeds from eventual disposition. If there is an indication of impairment, the allowance for credit losses would be established with a charge to credit loss expense. There were no indications of impairment based on management's evaluation and therefore no allowance for credit losses was determined necessary as of December 31, 2021.
Property and equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using primarily declining-balance methods over the estimated useful lives of 7-40 years for buildings and improvements and 3-10 years for furniture and equipment.
Deferred income taxes: Deferred income taxes are provided under the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties on unrecognized tax benefits are classified as other noninterest expense. As of December 31, 2021, the Company had no material unrecognized tax benefits.
Goodwill: Goodwill represents the excess of cost over the fair value of the net assets acquired, and is not subject to amortization, but requires, at a minimum, annual impairment tests for intangibles that are determined to have an indefinite life.
Other real estate: Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The Bank will obtain updated appraisals to determine the estimated fair value of the property based on the type of collateral securing the loan and the date of the latest appraisal. Subsequent write downs estimated on the basis of later valuations are charged to net loss on sale of other real estate owned and other repossessed assets. Net operating expenses incurred in maintaining such properties are charged to other non-interest expense. Net capital expenditures incurred are capitalized to the property.
Derivative financial instruments: The Bank uses interest rate swaps as part of its interest rate risk management. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815 establishes accounting and reporting standards for derivative instruments and hedging activities. The Bank records all interest rate swaps on the balance sheet at fair value. Derivatives used to hedge the exposure to variability in expected future cash flows are considered cash flow hedges. To qualify for hedge accounting, the Bank must comply with the detailed rules and documentation requirements at the inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of the hedging relationship. As of December 31, 2021 and 2020, the Bank did not have any outstanding interest rate swaps.
For derivatives designated as cash flow hedges, the changes in the fair value of the derivatives is initially reported in other comprehensive income and subsequently reclassified to interest income or expense when the hedged transaction affects
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
earnings. The Bank assesses the effectiveness of each hedging relationship by comparing the cumulative changes in cash flows of the derivative hedging instruments with the cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.
The Bank does not use derivatives for trading or speculative purposes.
Earnings per share: Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding. ESOP shares are considered outstanding for this calculation unless unearned.
The following table presents calculations of earnings per share:
Year Ended December 31,
2021 2020 2019
(Amounts In Thousands, except share and per share data)
Computation of weighted average number of basic and diluted shares:
Common shares outstanding at the beginning of the year 9,330,995 9,351,694 9,336,441
Weighted average number of net shares (redeemed) issued (23,793) 17,571 19,304
Weighted average shares outstanding (basic) 9,307,202 9,369,265 9,355,745
Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method 3,660 3,640 4,035
Weighted average number of shares (diluted) 9,310,862 9,372,905 9,359,780
Net income $ 48,085 $ 38,647 $ 45,318
Earnings per share:
Basic $ 5.16 $ 4.12 $ 4.85
Diluted $ 5.16 $ 4.12 $ 4.85
Stock awards and options: Compensation expense for stock issued through the stock award plan is accounted for using the fair value method prescribed by FASB ASC 718, “Share-Based Payment” (“ASC 718”). Under this method, compensation expense is measured and recognized for all stock-based awards made to employees and directors based on the fair value of each award as of the date of the grant.
Common stock held by ESOP: The Company's maximum cash obligation related to these shares is classified outside stockholders' equity because the shares are not readily traded and could be put to the Company for cash.
Treasury stock: Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price.
Trust department assets: Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Company.
Effect of New Financial Accounting Standards
Accounting guidance adopted in 2021
On January 1, 2021, the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the recognition of the allowance for credit losses be estimated using the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet (OBS) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $4.75 million as of January 1, 2021 for the cumulative effect of adopting ASC 326, which includes deferred taxes of $1.58 million. The transition adjustment includes a $2.75 million increase to the Allowance for Credit Losses and the recording of a $3.58 million Allowance for Credit Losses on OBS Credit Exposures.
The following table illustrates the impact of ASC 326 (amounts in thousands).
January 1, 2021
As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption
Assets:
Loans
Allowance for credit losses on loans $ 39,816 $ 37,070 $ 2,746
Liabilities:
Allowance for credit losses on off-balance sheet credit exposures $ 3,584 $ - $ 3,584
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing specific exceptions included in Topic 740, introducing other simplifications and making technical corrections. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The adoption of ASU 2019-12 by the Company on January 1, 2021 did not have a material impact on the financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. The amendments in this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. For each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (that is, the premium) shall be amortized to the next call date, unless the guidance in paragraph 310-20-35-26 is applied to consider estimated prepayments. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. The adoption of the ASU by the Company on January 1, 2021 did not have a material impact on the financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which consists of two sections. The first applicable section contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate disclosure section and provide the option to give certain information either on the face of the financial statements or in the notes to the financial statements. The second section contains Codification improvements that vary in nature. The amendments in this Update do not change GAAP and, therefore, are not expected to result in a significant change in practice. For public business entities, these amendments are effective for annual periods beginning after December 15, 2020. The adoption of the ASU by the Company on January 1, 2021 did not have a material impact on the financial statements.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting guidance pending adoption as of December 31, 2021
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in this ASU affect entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. An entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate for goods or services in accordance with the guidance in Topic 718, Compensation-Stock Compensation. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The adoption of the ASU by the Company on January 1, 2022 is not expected to have a material impact on the financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 815) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. An entity should apply the amendments prospectively to business combinations occurring on or after the effective date of the amendments. The Company is in the process of evaluating the impact of this ASU on the financial statements.
Note 2.Investment Securities
The carrying values of investment securities at December 31, 2021 and December 31, 2020 are summarized in the following table (Amounts in Thousands):
December 31, 2021 December 31, 2020
Amount Percent Amount Percent
Securities available for sale
U.S. Treasury $ 243,925 44.24 % $ 148,646 36.40 %
Other securities (FHLB, FHLMC and FNMA) 34,467 6.25 % 35,160 8.61 %
State and political subdivisions 263,516 47.80 % 224,566 54.99 %
Mortgage-backed securities and collateralized mortgage obligations 9,446 1.71 % - - %
Total securities available for sale $ 551,354 100.00 % $ 408,372 100.00 %
Investment securities have been classified in the consolidated balance sheets according to management’s intent. Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity. Municipal bonds are comprised of general obligation bonds and revenue bonds issued by various municipal corporations. As of December 31, 2021 and 2020, all securities held were rated investment grade based upon external ratings where available and, where not available, based upon management knowledge of the local issuers and their financial situations. The Company had no securities designated as trading or held to maturity in its portfolio at December 31, 2021 or 2020.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount of available-for-sale securities and their approximate fair values were as follows (Amounts in Thousands):
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
(Losses) Allowance for Credit Losses Estimated
Fair
Value
December 31, 2021:
U.S. Treasury $ 244,192 $ 2,011 $ (2,278) $ - $ 243,925
Other securities (FHLB, FHLMC and FNMA) 35,353 - (886) - 34,467
State and political subdivisions 260,266 4,420 (1,170) - 263,516
Mortgage-backed securities and collateralized mortgage obligations 9,575 - (129) - 9,446
Total $ 549,386 $ 6,431 $ (4,463) $ - $ 551,354
December 31, 2020:
U.S. Treasury $ 143,467 $ 5,179 $ - $ - $ 148,646
Other securities (FHLB, FHLMC and FNMA) 35,195 35 (70) - 35,160
State and political subdivisions 218,008 6,674 (116) - 224,566
Total $ 396,670 $ 11,888 $ (186) $ - $ 408,372
The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at December 31, 2021, were as follows (Amounts in Thousands).
Amortized
Cost Fair
Value
Due in one year or less $ 68,862 $ 69,235
Due after one year through five years 308,895 309,142
Due after five years through ten years 113,536 115,364
Due over ten years 48,518 48,167
$ 539,811 $ 541,908
Mortgage-backed securities and collateralized mortgage obligations 9,575 9,446
$ 549,386 $ 551,354
Expected maturities of MBS may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the above summary.
As of December 31, 2021, investment securities with a carrying value of $10.03 million were pledged to collateralize other borrowings. As of December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders' equity.
Sales proceeds and gross realized gains and losses on available-for-sale securities were as follows (in thousands):
December 31, 2021 December 31, 2020
Sales proceeds $ - $ 313
Gross realized gains - 10
Gross realized losses - -
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2021 and 2020 (Amounts in Thousands):
Less than 12 months 12 months or more Total
Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss %
of Securities
U.S. Treasury 55 $ 136,867 $ (2,203) 1.61 % 1 $ 2,416 $ (75) 3.10 % 56 $ 139,283 $ (2,278) 1.64 %
Other securities (FHLB, FHLMC and FNMA) 5 12,484 (303) 2.43 % 9 21,984 (583) 2.65 % 14 34,468 (886) 2.57 %
State and political subdivisions 231 70,542 (1,055) 1.50 % 14 9,248 (115) 1.24 % 245 79,790 (1,170) 1.47 %
Mortgage-backed securities and collateralized mortgage obligations 4 9,446 (129) 1.37 % - - - - % 4 9,446 (129) 1.37 %
295 $ 229,339 (3,690) 1.61 % 24 $ 33,648 $ (773) 2.30 % 319 $ 262,987 $ (4,463) 1.70 %
Less than 12 months 12 months or more Total
Description # Fair Value Unrealized Loss % # Fair Value Unrealized Loss % # Fair Value Unrealized Loss %
of Securities
U.S. Treasury - $ - $ - - % - $ - $ - - % - $ - $ - - %
Other securities (FHLB, FHLMC and FNMA) 8 20,019 (70) 0.35 % - - - - % 8 20,019 (70) 0.35 %
State and political subdivisions 35 14,168 (110) 0.78 % 4 370 (6) 1.62 % 39 14,538 (116) 0.80 %
43 $ 34,187 $ (180) 0.53 % 4 $ 370 $ (6) 1.62 % 47 $ 34,557 $ (186) 0.54 %
The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are temporary and not other-than-temporary impairments. None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest. The unrealized losses are due to changes in interest rates. The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table. Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized
cost basis. The securities are of high credit quality (investment grade credit ratings) and principal and interest payments are made timely with no payments past due as of December 31, 2021. The fair value is expected to recover as the securities approach maturity. The U.S. Treasury and other securities are issued and guaranteed by U.S. government-sponsored entities and agencies. The mortgage-backed securities and collateralized mortgage obligations have implied U.S. government guarantees of the agency securities. The Company evaluates if a credit loss exists by monitoring to ensure it has adequate credit support considering the nature of the investment, number and significance of investments in an unrealized loss position, collectability or delinquency issues, the underlying financial statements of the issuers, credit ratings and subsequent changes thereto, and other available relevant information. Considering the above factors, management has determined that no allowance for credit losses is necessary for the securities portfolio as of December 31, 2021.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3.Loans
Classes of loans are as follows:
December 31,
2021 2020
(Amounts In Thousands)
Agricultural $ 106,933 $ 94,842
Commercial and financial 222,002 286,242
Real estate:
Construction, 1 to 4 family residential 80,486 71,117
Construction, land development and commercial 127,021 111,913
Mortgage, farmland 232,744 247,142
Mortgage, 1 to 4 family first liens 909,564 892,089
Mortgage, 1 to 4 family junior liens 114,342 127,833
Mortgage, multi-family 382,792 374,014
Mortgage, commercial 401,377 417,139
Loans to individuals 32,687 31,325
Obligations of state and political subdivisions 50,285 56,488
2,660,233 2,710,144
Net unamortized fees and costs 299 938
2,660,532 2,711,082
Less allowance for credit losses (2021) and loan losses (2020) 35,470 37,070
$ 2,625,062 $ 2,674,012
As of December 31, 2021 and 2020, the Company has outstanding balances of $5.34 million and $86.5 million of loans issued under the Paycheck Protection Program (PPP). For the year ended December 31, 2021, the Company recognized $5.81 million of deferred PPP loan fees in interest income and received forgiveness payments totaling $140.1 million from the SBA. For the year ended December 31, 2020, the Company recognized $2.88 million of PPP loan fees in interest income and has received forgiveness payments totaling $40.4 million from the SBA.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for credit losses, the allowance for credit losses applicable to individually evaluated loans and the related loan balances for the years ended December 31, 2021, 2020 and 2019 are as follows:
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)
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326 $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Impact of adopting ASC 326 (328) 298 327 763 522 1,396 (232) 2,746
Charge-offs (106) (136) (3) (1) (482) (265) (323) (1,316)
Recoveries 142 1,103 94 25 964 263 152 2,743
Credit loss (benefit) expense 45 (1,881) (437) (1,527) (1,874) (311) 212 (5,773)
Ending balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470
Ending balance, individually evaluated for credit losses $ 1 $ 189 $ 124 $ - $ 49 $ 1 $ 20 $ 384
Ending balance, collectively evaluated for credit losses $ 2,260 $ 4,080 $ 2,176 $ 3,433 $ 11,449 $ 10,497 $ 1,191 $ 35,086
Loan balances:
Ending balance $ 106,933 $ 222,002 $ 207,507 $ 232,744 $ 1,023,906 $ 784,169 $ 82,972 $ 2,660,233
Ending balance, individually evaluated for credit losses $ 788 $ 2,062 $ 603 $ 1,277 $ 6,187 $ 5,696 $ 20 $ 16,633
Ending balance, collectively evaluated for credit losses $ 106,145 $ 219,940 $ 206,904 $ 231,467 $ 1,017,719 $ 778,473 $ 82,952 $ 2,643,600
Agricultural Commercial and Financial Real Estate: 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)
Allowance for loan losses:
Beginning balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Charge-offs (43) (1,425) (43) (1) (738) (291) (381) (2,922)
Recoveries 63 670 118 10 784 49 180 1,874
Provision 88 652 (355) 214 1,684 1,798 277 4,358
Ending balance $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070
Ending balance, individually evaluated for impairment $ 86 $ 411 $ 7 $ - $ 93 $ 14 $ 51 $ 662
Ending balance, collectively evaluated for impairment $ 2,422 $ 4,474 $ 2,312 $ 4,173 $ 12,275 $ 9,401 $ 1,351 $ 36,408
Loan balances:
Ending balance $ 94,842 $ 286,242 $ 183,030 $ 247,142 $ 1,019,922 $ 791,153 $ 87,813 $ 2,710,144
Ending balance, individually evaluated for impairment $ 1,543 $ 2,191 $ 1,266 $ 2,061 $ 7,417 $ 6,200 $ 51 $ 20,729
Ending balance, collectively evaluated for impairment $ 93,299 $ 284,051 $ 181,764 $ 245,081 $ 1,012,505 $ 784,953 $ 87,762 $ 2,689,415
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Allowance for loan losses:
Beginning balance $ 2,789 $ 5,826 $ 3,292 $ 3,972 $ 12,516 $ 8,165 $ 1,250 $ 37,810
Charge-offs (266) (981) (45) (6) (896) (341) (434) (2,969)
Recoveries 95 646 8 5 700 180 165 1,799
Provision (218) (503) (656) (21) (1,682) (145) 345 (2,880)
Ending balance $ 2,400 $ 4,988 $ 2,599 $ 3,950 $ 10,638 $ 7,859 $ 1,326 $ 33,760
Ending balance, individually evaluated for impairment $ 87 $ 792 $ - $ - $ 111 $ 1 $ 93 $ 1,084
Ending balance, collectively evaluated for impairment $ 2,313 $ 4,196 $ 2,599 $ 3,950 $ 10,527 $ 7,858 $ 1,233 $ 32,676
Loan balances:
Ending balance $ 91,317 $ 221,323 $ 188,619 $ 242,730 $ 1,059,969 $ 752,942 $ 82,204 $ 2,639,104
Ending balance, individually evaluated for impairment $ 1,730 $ 2,742 $ 421 $ 4,081 $ 8,670 $ 3,188 $ 93 $ 20,925
Ending balance, collectively evaluated for impairment $ 89,587 $ 218,581 $ 188,198 $ 238,649 $ 1,051,299 $ 749,754 $ 82,111 $ 2,618,179
Changes in the allowance for credit losses for off-balance sheet credit exposures for the year ended December 31, 2021 were as follows:
Year Ended December 31, 2021
Agricultural Commercial and
Financial Real Estate:
Construction and
land development Real Estate:
Mortgage,
farmland Real Estate:
Mortgage, 1 to 4
family Real Estate:
Mortgage, multi-
family and
commercial Other Total
(Amounts In Thousands)
Allowance for credit losses for off-balance sheet credit exposures:
Beginning balance, prior to adoption of ASC 326 $ - $ - $ - $ - $ - $ - $ - $ -
Impact of adopting ASC 326 385 1,585 736 180 471 212 15 3,584
Credit loss (benefit) expense (2) (467) 113 (67) 323 347 19 266
(Charge-offs), net recoveries - - - - - - - -
Ending balance $ 383 $ 1,118 $ 849 $ 113 $ 794 $ 559 $ 34 $ 3,850
Credit loss (benefit) expense for off-balance sheet credit exposures is included in credit loss (benefit) expense on the consolidated statement of income for the year ended December 31, 2021.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk ratings ranging from 1 to 6, where a higher rating represents higher risk. The Company differentiates its lending portfolios into loans sharing common risk characteristics for which expected credit loss is measured on a pool basis and loans not sharing common risk characteristics for which credit loss is measured individually.
The below are descriptions of the credit quality indicators:
Excellent - Excellent rated loans are prime quality loans covered by highly liquid collateral with generous margins or supported by superior current financial conditions reflecting substantial net worth, relative to total credit extended, and based on assets of a stable and non-speculative nature whose values can be readily verified. Identified repayment source or cash flow is abundant and assured. Loans are secured with cash, cash equivalents, or collateral with very low loan to values. The borrower would qualify for unsecured debt and guarantors provide excellent secondary support to the relationship. The borrower has a long-term relationship with Hills Bank, maintains high deposit balances and has an established payment history with Hills Bank and an established business in an established industry.
Good - Good rated loans are adequately secured by readily marketable collateral or good financial condition characterized by liquidity, flexibility and sound net worth. Loans are supported by sound primary and secondary payment sources and timely and accurate financial information. The relationship is not quite as strong as a borrower that is assigned an excellent rating but still has a very strong liquidity position, low leverage, and track record of strong performance. These loans have a strong collateral position with limited risk to bank capital. The collateral will not materially lose value in a distressed liquidation. Guarantors provide additional secondary support to mitigate possible bank losses. The borrower has a long-term relationship with Hills Bank with an established track record of payments; loans with shorter remaining loan amortization; deposit balances are consistent; loan payments could be made from cash reserves in the interim period; and source of income is coming from a stable industry.
Satisfactory - Satisfactory rated loans are loans to borrowers of average financial means not especially vulnerable to changes in economic or other circumstances, where the major support for the extension is sufficient collateral of a marketable nature, and the primary source of repayment is seen to be clear and adequate. The borrower's financial performance is consistent, ratios and trends are positive and the primary repayment source can clearly be identified and supported with acceptable financial information. The loan relationship could be vulnerable to changes in economic or industry conditions but have the ability to absorb unexpected issues. The loan collateral coverage is considered acceptable and guarantors can provide financial support but net worth might not be as liquid as a 1 or 2 rated relationship. The borrower has an established relationship with Hills Bank. The relationship is making timely loan payments, any operating line is revolving and deposit balances are positive with limited to no overdrafts. Management and industry is considered stable.
Monitor - Monitor rated loans are identified by management as warranting special attention for a variety of reasons that may bear on ultimate collectability. This may be due to adverse trends, a particular industry, loan structure, or repayment that is dependent on projections, or a one-time occurrence. The relationship 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 Hills Bank has some deficiencies such as slow payments or some overdrafts.
Special Mention - Special mention rated loans are supported by a marginal payment capacity and are marginally protected by collateral. There are identified weaknesses that if not monitored and corrected may adversely affect the Company’s credit position. A special mention credit would typically have a weakness in one of the general categories (cash flow, collateral position or payment history) but not in all categories. Potential indicators of a special mention would include past due payments, overdrafts, management issues, poor financial performance, industry issues, or the need for additional short-term borrowing. The ability to continue to make payments is in question; there are “red flags” such as past due payments, non-
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revolving credit lines, overdrafts, and the inability to sell assets. The borrower is experiencing delinquent taxes, legal issues, etc., obtaining financial information has become a challenge, collateral coverage is marginal at best, and the value and condition could be brought into question. Collateral document deficiencies have been noted and if not addressed, could become material. Guarantors provide minimal support for this relationship. The credit may include an action plan or follow up established in the asset quality process. There is a change in the borrower’s communication pattern. Industry issues may be impacting the relationship. Adverse credit scores or history of payment deficiencies could be noted.
Substandard - Substandard loans are not adequately supported by the paying capacity of the borrower and may be inadequately collateralized. These loans have a well-defined weakness or weaknesses. Full repayment of the loan(s) according to the original terms and conditions is in question or not expected. For these loans, it is more probable than not that the Company could sustain some loss if the deficiency(ies) is not corrected. There are identified shortfalls in the primary repayment source such as carry over debt, past due payments, and overdrafts. Obtaining quality and timely financial information is a weakness. The loan is under secured with exposure that could impact bank capital. It appears the liquidation of collateral has become the repayment source. The collateral may be difficult to foreclose or have little to no value. Collateral documentation deficiencies have been noted during the review process. Guarantor(s) provide minimal to no support of the relationship. The borrower’s communication with the Bank continues to decrease and the borrower is not addressing the situation. There is some concern about the borrower’s ability and willingness to repay the loans. Problems may be the result of external issues such as economic or industry related issues.
The following tables present the credit quality indicators and origination years by type of loan in each category as of December 31, 2021 (amounts in thousands):
Agricultural
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 762 $ 213 $ 30 $ 10 $ - $ - $ 2,312 $ 3,327
Good 1,799 1,767 603 46 52 26 7,593 11,886
Satisfactory 10,335 6,404 1,476 1,770 403 66 26,285 46,739
Monitor 8,125 5,017 998 765 164 253 23,995 39,317
Special Mention 1,662 11 85 - 7 - 2,807 4,572
Substandard 592 69 203 - - - 228 1,092
Total $ 23,275 $ 13,481 $ 3,395 $ 2,591 $ 626 $ 345 $ 63,220 $ 106,933
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial and Financial
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 965 $ 924 $ 4 $ 235 $ 31 $ - $ 3,391 $ 5,550
Good 13,722 5,570 1,105 1,086 276 1,494 20,709 43,962
Satisfactory 44,964 20,847 7,684 3,582 2,106 331 41,832 121,346
Monitor 18,337 8,019 3,591 1,123 297 416 13,368 45,151
Special Mention 603 525 353 70 102 4 174 1,831
Substandard 1,092 670 266 54 92 - 1,988 4,162
Total $ 79,683 $ 36,555 $ 13,003 $ 6,150 $ 2,904 $ 2,245 $ 81,462 $ 222,002
Real Estate: Construction, 1 to 4 Family Residential
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ - $ - $ - $ - $ - $ - $ - $ -
Good 212 - - - - - 18,755 18,967
Satisfactory 7,457 94 - - - - 42,988 50,539
Monitor 1,307 - - - - - 9,187 10,494
Special Mention - - - - - - 374 374
Substandard 111 - - - - - 1 112
Total $ 9,087 $ 94 $ - $ - $ - $ - $ 71,305 $ 80,486
Real Estate: Construction, Land Development and Commercial
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 5,079 $ - $ - $ - $ 143 $ 4 $ - $ 5,226
Good 3,294 1,200 - - 153 242 12,678 17,567
Satisfactory 22,907 4,354 2,356 263 1,081 21 40,048 71,030
Monitor 5,694 547 7 38 74 - 18,832 25,192
Special Mention - - - - - - - -
Substandard 7,515 298 193 - - - - 8,006
Total $ 44,489 $ 6,399 $ 2,556 $ 301 $ 1,451 $ 267 $ 71,558 $ 127,021
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate: Mortgage, Farmland
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ - $ 3,568 $ 124 $ 60 $ 80 $ 41 $ 134 $ 4,007
Good 17,827 14,308 2,144 2,460 5,932 3,929 3,844 50,444
Satisfactory 51,639 35,616 4,689 8,358 6,745 8,339 8,242 123,628
Monitor 8,532 16,925 5,518 3,901 2,154 4,866 5,695 47,591
Special Mention 4,031 288 - - 298 190 - 4,807
Substandard 1,283 447 291 47 - 199 - 2,267
Total $ 83,312 $ 71,152 $ 12,766 $ 14,826 $ 15,209 $ 17,564 $ 17,915 $ 232,744
Real Estate: Mortgage, 1 to 4 Family First Liens
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 462 $ 914 $ 427 $ 19 $ 149 $ 404 $ 1 $ 2,376
Good 9,598 12,300 3,124 3,443 3,091 10,943 2,496 44,995
Satisfactory 233,412 189,247 69,037 65,201 60,906 118,608 8,443 744,854
Monitor 24,908 33,863 5,038 6,527 7,273 12,203 4,066 93,878
Special Mention 1,682 3,422 887 962 1,051 3,168 - 11,172
Substandard 1,571 1,261 1,129 1,609 576 6,142 1 12,289
Total $ 271,633 $ 241,007 $ 79,642 $ 77,761 $ 73,046 $ 151,468 $ 15,007 $ 909,564
Real Estate: Mortgage, 1 to 4 Family Junior Liens
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ - $ 13 $ - $ - $ - $ - $ 6 $ 19
Good 193 611 96 - 108 482 1,374 2,864
Satisfactory 13,684 10,116 5,854 7,309 5,230 6,053 55,496 103,742
Monitor 326 1,233 70 365 140 281 2,801 5,216
Special Mention 103 489 35 56 42 110 142 977
Substandard 77 209 79 441 74 99 545 1,524
Total $ 14,383 $ 12,671 $ 6,134 $ 8,171 $ 5,594 $ 7,025 $ 60,364 $ 114,342
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate: Mortgage, Multi-Family
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 2,539 $ 4,513 $ - $ - $ - $ 701 $ - $ 7,753
Good 16,931 35,396 1,555 - - 9,289 - 63,171
Satisfactory 107,192 69,287 13,635 2,030 1,561 14,660 14,764 223,129
Monitor 26,088 35,886 176 - 131 1,584 5,669 69,534
Special Mention 640 - 820 - - - - 1,460
Substandard 12,186 - - - - 5,559 - 17,745
Total $ 165,576 $ 145,082 $ 16,186 $ 2,030 $ 1,692 $ 31,793 $ 20,433 $ 382,792
Real Estate: Mortgage, Commercial
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ 597 $ 16,781 $ - $ - $ 3,313 $ 350 $ 1 $ 21,042
Good 20,143 36,773 2,619 1,356 3,811 7,085 9,812 81,599
Satisfactory 75,040 52,653 14,727 12,091 9,707 17,398 16,333 197,949
Monitor 18,664 49,774 3,923 2,202 3,037 8,461 3,387 89,448
Special Mention 5,791 795 303 - 554 337 - 7,780
Substandard 1,528 1,721 - 208 - 102 - 3,559
Total $ 121,763 $ 158,497 $ 21,572 $ 15,857 $ 20,422 $ 33,733 $ 29,533 $ 401,377
Loans to Individuals
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ - $ - $ - $ - $ - $ - $ - $ -
Good - - 67 21 5 - 1 94
Satisfactory 12,162 5,606 2,212 967 141 10,867 57 32,012
Monitor 200 160 15 46 3 - 1 425
Special Mention 37 32 29 4 - - 1 103
Substandard 12 24 12 - 1 3 1 53
Total $ 12,411 $ 5,822 $ 2,335 $ 1,038 $ 150 $ 10,870 $ 61 $ 32,687
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations of State and Political Subdivisions
December 31, 2021 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Grade:
Excellent $ - $ - $ - $ - $ - $ 6,076 $ - $ 6,076
Good - 1,984 - - - 9,051 - 11,035
Satisfactory 1,009 2,034 1,551 706 11,557 3,634 9,400 29,891
Monitor - 933 203 249 - 1,898 - 3,283
Special Mention - - - - - - - -
Substandard - - - - - - - -
Total $ 1,009 $ 4,951 $ 1,754 $ 955 $ 11,557 $ 20,659 $ 9,400 $ 50,285
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the credit quality indicators by type of loans in each category as of December 31, 2020:
Agricultural Commercial
and Financial Real Estate:
Construction, 1 to 4
family residential Real Estate:
Construction, land
development and commercial
(Amounts In Thousands)
Grade:
Excellent $ 3,761 $ 9,024 $ - $ 227
Good 12,369 62,310 13,675 15,187
Satisfactory 42,015 144,999 41,616 64,301
Monitor 29,381 56,439 13,654 23,368
Special Mention 5,143 8,258 1,857 7,137
Substandard 2,173 5,212 315 1,693
Total $ 94,842 $ 286,242 $ 71,117 $ 111,913
Real Estate:
Mortgage,
farmland Real Estate:
Mortgage, 1 to 4
family first liens Real Estate:
Mortgage, 1 to 4
family junior liens Real Estate:
Mortgage, multi-family
Grade:
Excellent $ 5,706 $ 2,303 $ 204 $ 14,650
Good 41,878 47,233 3,707 57,281
Satisfactory 129,210 701,273 115,731 197,493
Monitor 61,298 114,207 5,153 70,885
Special Mention 6,074 12,890 1,307 15,374
Substandard 2,976 14,183 1,731 18,331
Total $ 247,142 $ 892,089 $ 127,833 $ 374,014
Real Estate:
Mortgage,
commercial Loans to
individuals Obligations of state
and political
subdivisions Total
Grade:
Excellent $ 26,940 $ 1 $ 6,752 $ 69,568
Good 92,699 145 13,094 359,578
Satisfactory 196,310 30,487 26,571 1,690,006
Monitor 77,125 479 9,924 461,913
Special Mention 19,731 127 147 78,045
Substandard 4,334 86 - 51,034
Total $ 417,139 $ 31,325 $ 56,488 $ 2,710,144
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past due loans as of December 31, 2021 and 2020 were as follows:
30 - 59 Days
Past Due 60 - 89 Days
Past Due 90 Days
or More
Past Due Total Past
Due Current Total
Loans
Receivable Accruing Loans
Past Due 90
Days or More
(Amounts In Thousands)
December 31, 2021
Agricultural $ 41 $ - $ 219 $ 260 $ 106,673 $ 106,933 $ 6
Commercial and financial 300 537 468 1,305 220,697 222,002 91
Real estate:
Construction, 1 to 4 family residential 276 - - 276 80,210 80,486 -
Construction, land development and commercial 194 66 96 356 126,665 127,021 -
Mortgage, farmland 503 362 - 865 231,879 232,744 -
Mortgage, 1 to 4 family first liens 5,085 864 2,481 8,430 901,134 909,564 104
Mortgage, 1 to 4 family junior liens 246 41 124 411 113,931 114,342 -
Mortgage, multi-family 640 - - 640 382,152 382,792 -
Mortgage, commercial 466 - 829 1,295 400,082 401,377 -
Loans to individuals 177 26 5 208 32,479 32,687 -
Obligations of state and political subdivisions 394 - - 394 49,891 50,285 -
$ 8,322 $ 1,896 $ 4,222 $ 14,440 $ 2,645,793 $ 2,660,233 $ 201
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 - 59 Days
Past Due 60 - 89 Days
Past Due 90 Days
or More
Past Due Total Past
Due Current Total
Loans
Receivable Accruing Loans
Past Due 90
Days or More
(Amounts In Thousands)
December 31, 2020
Agricultural $ 438 $ - $ 629 $ 1,067 $ 93,775 $ 94,842 $ 111
Commercial and financial 867 195 140 1,202 285,040 286,242 20
Real estate:
Construction, 1 to 4 family residential 190 - 536 726 70,391 71,117 536
Construction, land development and commercial - - - - 111,913 111,913 -
Mortgage, farmland 279 28 - 307 246,835 247,142 -
Mortgage, 1 to 4 family first liens 4,969 1,342 2,486 8,797 883,292 892,089 342
Mortgage, 1 to 4 family junior liens 436 21 155 612 127,221 127,833 47
Mortgage, multi-family - - - - 374,014 374,014 -
Mortgage, commercial 783 - 461 1,244 415,895 417,139 -
Loans to individuals 218 59 4 281 31,044 31,325 -
Obligations of state and political subdivisions - - - - 56,488 56,488 -
$ 8,180 $ 1,645 $ 4,411 $ 14,236 $ 2,695,908 $ 2,710,144 $ 1,056
The Company does not have a significant amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
Accruing loans past due 90 days or more decreased $0.86 million from December 31, 2020 to December 31, 2021. As of December 31, 2021 and 2020, accruing loans past due 90 days or more were 0.01% and 0.04% of total loans, respectively. The average balance of the accruing loans past due 90 days or more decreased in 2021 as compared to 2020. The average 90 days or more past due accruing loan balance per loan was $0.03 million as of December 31, 2021 compared to $0.09 million as of December 31, 2020. The loans 90 days or more past due and still accruing are believed to be adequately collateralized. Loans are placed on nonaccrual status when management believes the collection of future principal and interest is not reasonably assured.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain nonaccrual and TDR loan information by loan type at December 31, 2021 and 2020 was as follows:
December 31, 2021 December 31, 2020
Nonaccrual
loans (1) Interest income recognized on non-accrual Accruing loans
past due 90
days or more TDR
loans Nonaccrual
loans (1) Accruing loans
past due 90
days or more TDR
loans
(Amounts In Thousands) (Amounts In Thousands)
Agricultural $ 221 $ - $ 6 $ 374 $ 1,252 $ 111 $ 85
Commercial and financial 707 - 91 1,085 479 20 1,263
Real estate:
Construction, 1 to 4 family residential 111 - - - 315 536 -
Construction, land development and commercial 290 - - 202 204 - 211
Mortgage, farmland 251 - - 1,206 446 - 1,616
Mortgage, 1 to 4 family first liens 4,685 - 104 1,364 4,331 342 1,751
Mortgage, 1 to 4 family junior liens 200 - - 20 193 47 20
Mortgage, multi-family - - - 1,460 79 - 1,695
Mortgage, commercial 2,026 - - 2,210 1,550 - 3,610
Loans to individuals - - - - - - -
$ 8,491 $ - $ 201 $ 7,921 $ 8,849 $ 1,056 $ 10,251
(1)There were $2.28 million and $2.97 million of TDR loans included within nonaccrual loans as of December 31, 2021 and 2020, respectively.
The Company may modify the terms of a loan to maximize the collection of amounts due. In most cases, the modification is a reduction in interest rate, conversion to interest only payments or an extension of the maturity date. The borrower is experiencing financial difficulties or is expected to experience financial difficulties in the near-term, so a concessionary modification is granted to the borrower that would otherwise not be considered. TDR loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles.
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. As of December 31, 2021, the total amount of the eligible loans in deferral (deferral of principal and/or interest) that met the requirements set forth under the CARES Act and therefore were not considered TDRs was 16 loans, totaling $9.4 million. As of December 31, 2020, there were 13 loans, totaling $9.4 million that met the requirements and were not considered TDRs.
Throughout 2020, COVID-19 related payment deferrals provided for customers totaled approximately 14.82% of total loans. As of December 31, 2021 and 2020, COVID-19 related payment deferrals were approximately 0.12% and 1.20% of total loans, respectively.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of information for TDR loans as of December 31, 2021 and 2020:
December 31, 2021
Number of
contracts Recorded
investment Commitments
outstanding
(Dollar Amounts In Thousands)
Agricultural 4 $ 586 $ -
Commercial and financial 12 1,116 60
Real estate:
Construction, 1 to 4 family residential - - -
Construction, land development and commercial 1 202 -
Mortgage, farmland 5 1,409 -
Mortgage, 1 to 4 family first liens 14 1,441 -
Mortgage, 1 to 4 family junior liens 1 20 -
Mortgage, multi-family 2 1,460 -
Mortgage, commercial 11 3,963 -
Loans to individuals - - -
50 $ 10,197 $ 60
December 31, 2020
Number of
contracts Recorded
investment Commitments
outstanding
(Dollar Amounts In Thousands)
Agricultural 6 $ 1,028 $ -
Commercial and financial 17 1,743 35
Real estate:
Construction, 1 to 4 family residential - - -
Construction, land development and commercial 1 211 4
Mortgage, farmland 6 2,009 -
Mortgage, 1 to 4 family first liens 17 1,898 -
Mortgage, 1 to 4 family junior liens 1 20 -
Mortgage, multi-family 2 1,695 -
Mortgage, commercial 13 4,621 -
Loans to individuals - - -
63 $ 13,225 $ 39
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of TDR loans that were modified during the year ended December 31, 2021 and 2020 was as follows:
December 31, 2021
Number of
Contracts Pre-modification
recorded
investment Post-modification
recorded
investment
( Dollar Amounts In Thousands)
Agricultural 1 $ 178 $ 178
Commercial and financial - - -
Real estate:
Construction, 1 to 4 family residential - - -
Construction, land development and commercial - - -
Mortgage, farmland 1 319 319
Mortgage, 1 to 4 family first liens 4 112 112
Mortgage, 1 to 4 family junior liens - - -
Mortgage, multi-family - - -
Mortgage, commercial 1 232 232
Loans to individuals - - -
7 $ 841 $ 841
December 31, 2020
Number of
Contracts Pre-modification
recorded
investment Post-modification
recorded
investment
( Dollar Amounts In Thousands)
Agricultural 2 $ 93 $ 93
Commercial and financial 7 623 623
Real estate:
Construction, 1 to 4 family residential - - -
Construction, land development and commercial - - -
Mortgage, farmland - - -
Mortgage, 1 to 4 family first liens 6 283 283
Mortgage, 1 to 4 family junior liens 1 20 20
Mortgage, multi-family - - -
Mortgage, commercial 7 3,635 3,635
Loans to individuals - - -
23 $ 4,654 $ 4,654
.
The Company has allocated $0.01 million of allowance for TDR loans and the Company had commitments to lend $0.06 million in additional borrowings to restructured loan customers as of December 30, 2021. The Company allocated $0.25 million of allowance for TDR loans and had commitments to lend $0.04 million in additional borrowings to restructured loan customers as of December 31, 2020. These commitments were in the normal course of business. The additional borrowings were not used to facilitate payments on these loans. The modifications of the terms of loans performed during the years ended December 31, 2021 and 2020 included extensions of the maturity date.
There were no TDR loans modified that were in payment default (defined as past due 90 days or more) during the years ended December 31, 2021 and 2020.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
Primary Type of Collateral
Real Estate Accounts Receivable Equipment Other Total ACL Allocation
(Amounts In Thousands)
December 31, 2021
Agricultural $ 734 $ - $ 54 $ - $ 788 $ 1
Commercial and financial 1,951 - 111 - 2,062 189
Real estate:
Construction, 1 to 4 family residential 111 - - - 111 111
Construction, land development and commercial 492 - - - $ 492 13
Mortgage, farmland 1,277 - - - 1,277 -
Mortgage, 1 to 4 family first liens 5,967 - - - $ 5,967 31
Mortgage, 1 to 4 family junior liens 220 - - - 220 18
Mortgage, multi-family 1,460 - - - $ 1,460 -
Mortgage, commercial 4,236 - - - 4,236 1
Loans to individuals 20 - - - $ 20 20
Obligations of state and political subdivisions - - - - - -
$ 16,468 $ - $ 165 $ - $ 16,633 $ 384
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pre-ASC 326 (CECL) adoption impaired loan information as of December 31, 2020 is as follows:
Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
(Amounts in Thousands)
With no related allowance recorded:
Agricultural $ 1,337 $ 1,928 $ - $ 1,518 $ 24
Commercial and financial 1,520 2,907 - 2,054 85
Real estate:
Construction, 1 to 4 family residential 315 337 - 475 -
Construction, land development and commercial 415 421 - 420 13
Mortgage, farmland 2,061 2,598 - 3,008 120
Mortgage, 1 to 4 family first liens 6,253 8,013 - 6,578 108
Mortgage, 1 to 4 family junior liens 108 350 - 134 -
Mortgage, multi-family 1,773 1,898 - 1,795 80
Mortgage, commercial 4,124 4,960 - 4,315 126
Loans to individuals - 47 - - -
$ 17,906 $ 23,459 $ - $ 20,297 $ 556
With an allowance recorded:
Agricultural $ 206 $ 206 $ 86 $ 141 $ 14
Commercial and financial 671 724 411 755 27
Real estate:
Construction, 1 to 4 family residential 536 536 7 486 24
Construction, land development and commercial - - - - -
Mortgage, farmland - - - - -
Mortgage, 1 to 4 family first liens 924 975 56 955 25
Mortgage, 1 to 4 family junior liens 132 158 37 149 2
Mortgage, multi-family - - - - -
Mortgage, commercial 303 304 14 306 3
Loans to individuals 51 51 51 53 3
$ 2,823 $ 2,954 $ 662 $ 2,845 $ 98
Total:
Agricultural $ 1,543 $ 2,134 $ 86 $ 1,659 $ 38
Commercial and financial 2,191 3,631 411 2,809 112
Real estate:
Construction, 1 to 4 family residential 851 873 7 961 24
Construction, land development and commercial 415 421 - 420 13
Mortgage, farmland 2,061 2,598 - 3,008 120
Mortgage, 1 to 4 family first liens 7,177 8,988 56 7,533 133
Mortgage, 1 to 4 family junior liens 240 508 37 283 2
Mortgage, multi-family 1,773 1,898 - 1,795 80
Mortgage, commercial 4,427 5,264 14 4,621 129
Loans to individuals 51 98 51 53 3
$ 20,729 $ 26,413 $ 662 $ 23,142 $ 654
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding impaired loans as of and for the year ended December 31, 2019 is as follows:
Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
(Amounts in Thousands)
With no related allowance recorded:
Agricultural $ 1,596 $ 2,157 $ - $ 1,785 $ 37
Commercial and financial 1,340 2,220 - 1,617 64
Real estate:
Construction, 1 to 4 family residential 101 144 - 106 -
Construction, land development and commercial 320 336 - 324 18
Mortgage, farmland 4,081 4,613 - 4,144 157
Mortgage, 1 to 4 family first liens 7,157 9,015 - 6,822 51
Mortgage, 1 to 4 family junior liens - 246 - - -
Mortgage, multi-family 1,816 1,930 - 1,873 83
Mortgage, commercial 1,302 1,852 - 1,364 26
Loans to individuals - 14 - - -
$ 17,713 $ 22,527 $ - $ 18,035 $ 436
With an allowance recorded:
Agricultural $ 134 $ 134 $ 87 $ 287 $ 17
Commercial and financial 1,402 1,539 792 1,510 83
Real estate:
Construction, 1 to 4 family residential - - - - -
Construction, land development and commercial - - - - -
Mortgage, farmland - - - - -
Mortgage, 1 to 4 family first liens 1,280 1,501 64 1,318 29
Mortgage, 1 to 4 family junior liens 233 233 47 239 6
Mortgage, multi-family - - - - -
Mortgage, commercial 70 70 1 73 4
Loans to individuals 93 93 93 62 2
$ 3,212 $ 3,570 $ 1,084 $ 3,489 $ 141
Total:
Agricultural $ 1,730 $ 2,291 $ 87 $ 2,072 $ 54
Commercial and financial 2,742 3,759 792 3,127 147
Real estate:
Construction, 1 to 4 family residential 101 144 - 106 -
Construction, land development and commercial 320 336 - 324 18
Mortgage, farmland 4,081 4,613 - 4,144 157
Mortgage, 1 to 4 family first liens 8,437 10,516 64 8,140 80
Mortgage, 1 to 4 family junior liens 233 479 47 239 6
Mortgage, multi-family 1,816 1,930 - 1,873 83
Mortgage, commercial 1,372 1,922 1 1,437 30
Loans to individuals 93 107 93 62 2
$ 20,925 $ 26,097 $ 1,084 $ 21,524 $ 577
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Post-ASC 326 CECL Adoption:
The changes in the ACL in 2021 compared to December 31, 2020 is the result of the following factors: $2.75 million increase upon adoption of ASC 326 (CECL) on January 1, 2021; changes after adoption for the year ended December 31, 2021 include improvements in the economic factor forecasts, primarily Iowa unemployment, used in the ACL calculation which resulted in a decrease of $2.46 million; decrease in loan volume which resulted in a decrease of $0.37 million; changes in prepayment and curtailment rates resulting in a decrease of $0.03 million; decreases in historical loss rates along with net recoveries resulting in a decrease of $2.00 million; decreases in the individually analyzed loans reserve of $0.25 million; and increases in qualitative factors determined necessary by management which resulted in an increase of $0.76 million.
The extent to which collateral secures collateral-dependent loans is provided in the previous individually analyzed loans table and changes in the extent to which collateral secures its collateral-dependent loans are described below. Collateral-dependent loans decreased $4.10 million from December 31, 2020 to December 31, 2021. Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and TDR loans. Collateral-dependent loans 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 0.63% of loans held for investment as of December 31, 2021 and 0.76% as of December 31, 2020. The decrease in collateral-dependent loans is due to a decrease of $0.55 million in loans with a specific reserve, a decrease in nonaccrual loans of $0.36 million, a decrease in 90 days or more accruing loans of $0.86 million and a decrease in TDR loans of $2.33 million from December 31, 2020 to December 30, 2021. 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 where a TDR is reasonably possible. Loans that are determined not to be collateral-dependent and for which there are no specific allowances are classified into one or more risk categories and expected credit loss is measured on a pool basis. See Note 1 Effect of New Financial Accounting Standards for further discussion of the allowance for credit losses for loans held for investment.
Specific allowances for credit losses on loans assessed individually are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral based on updated appraisals and/or updated collateral analysis for the properties if the loan is collateral dependent. The Company may recognize a charge off or record a specific allowance related to an individually analyzed loan if there is a collateral shortfall or it is unlikely the borrower can make all principal and interest payments as contractually due.
For loans that are collateral dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral. In general, this is the amount that the carrying value of the loan exceeds the related appraised value less estimated costs to sell the collateral. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the credit loss is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variables affecting its value may have changed since the appraisal was performed. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide an additional charge off or specific reserve based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a specific reserve may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional specific reserve may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge-offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in helping to determine the appropriate charge-off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loans that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for credit losses. When individual loans are reviewed for credit loss, the Company determines allowances based on management's estimate of the borrower's ability to repay the loan given the availability of the collateral, other sources of cash flow, as well as evaluation of legal options available. The allowance for credit losses on individually evaluated loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4.Property and Equipment
The major classes of property and equipment and the total accumulated depreciation are as follows:
December 31,
2021 2020
(Amounts In Thousands)
Land $ 11,266 $ 11,266
Buildings and improvements 38,041 37,512
Furniture and equipment 40,989 40,053
90,296 88,831
Less accumulated depreciation 56,006 52,953
Net $ 34,290 $ 35,878
Note 5.Leases
The Bank leases branch offices, parking facilities and certain equipment under operating leases. The leases have remaining lease terms of 1 year to 15 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. As the options are reasonably certain to be exercised, they are recognized as part of the right-of-use assets and lease liabilities.
For the years ended December 31, 2021 and 2020, total operating lease expense was $0.59 million and $0.56 million, respectively, and is included in occupancy expenses in the consolidated statement of income. Included in this were $0.51 million and $0.47 million of operating lease costs, respectively, $0.03 million and $0.03 million of short term lease costs, respectively, and $0.05 million and $0.06 million of variable lease costs, respectively.
For the years ended December 31, 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $0.51 million and $0.47 million, respectively, and right-of-use assets obtained in exchange for lease obligations was none and $0.05 million, respectively.
As of December 31, 2021 and 2020, operating lease right-of-use assets included in other assets were $2.47 million and $2.86 million, respectively. Operating lease liabilities included in other liabilities were $2.53 million and $2.91 million, respectively. The weighted average remaining lease term for operating leases was 9.94 years and 10.27 years, respectively, and the weighted average discount rate for operating leases was 3.49% and 3.45%, respectively. Discount rates used were determined from FHLB borrowing rates for comparable terms.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, maturities of lease liabilities were as follows:
Year ending December 31: (Amounts In Thousands)
2022 464
2023 317
2024 250
2025 253
2026 257
Thereafter 1,499
Total lease payments 3,040
Less imputed interest (507)
Total operating lease liabilities $ 2,533
Note 6.Interest - Bearing Deposits
A summary of these deposits is as follows:
December 31,
2021 2020
(Amounts In Thousands)
NOW and other demand $ 964,730 $ 801,550
Savings 1,338,910 1,161,324
Time, $250,000 and over 88,517 114,260
Other time 508,736 583,244
$ 2,900,893 $ 2,660,378
Brokered deposits totaled $51.59 million and $74.08 million as of December 31, 2021 and 2020, respectively, with an average interest rate of 0.36% and 0.34% as of December 31, 2021 and 2020, respectively. As of December 31, 2021, brokered deposits of $51.59 million are included in savings deposits. At December 31, 2020, brokered deposits of $74.08 million were included in savings deposits.
Time deposits have a maturity as follows:
December 31,
2021 2020
(Amounts In Thousands)
Due in one year or less $ 320,764 $ 307,962
Due after one year through two years 174,043 190,763
Due after two years through three years 63,193 150,275
Due after three years through four years 23,108 39,089
Due over four years 16,145 9,415
$ 597,253 $ 697,504
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7.Federal Home Loan Bank Borrowings
As of December 31, 2021 and 2020, the borrowings were as follows:
2021 2020
(Effective interest rates as of December 31, 2021) (Amounts In Thousands)
Due 2025, 2.81% to 2.94%
- 45,000
Due 2026, 2.52% to 2.86%
- 30,000
Due 2027, 2.76% to 2.95%
- 30,000
$ - $ 105,000
On December 21, 2021 the Company paid the remaining $105.00 million in FHLB Borrowings due in 2025 through 2027. Fees incurred with the 2021 prepayments were $7.69 million and were recorded in other noninterest expenses.
On November 9, 2020 the Company paid $25.00 million in FHLB Borrowings due in 2020. On December 30, 2020 the Company paid $25.00 million in FHLB Borrowings that were due in 2023, $15.00 million in FHLB Borrowings due in 2024 and $15.00 million in FHLB Borrowings due in 2025. Fees incurred with the 2020 prepayments were $2.53 million and recorded in other noninterest expenses.
To participate in the FHLB advance program, the Company is required to have an investment in FHLB stock. The Company’s investment in FHLB stock was $4.55 million and $8.17 million at December 31, 2021 and 2020, respectively. Collateral is provided by the Company’s 1 to 4 family mortgage loans totaling none at December 31, 2021 and $141.75 million at December 31, 2020. The Company has the ability to borrow against agricultural real estate, commercial real estate and multi-family loans totaling $300.93 million as of December 31, 2021 and $315.86 million as of December 31, 2020 and there was $0 borrowed against this collateral as of December 31, 2021 or 2020.
Note 8.Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (AOCI), included in stockholders’ equity, are as follows:
December 31,
2021 2020
(amounts in thousands)
Net unrealized gain on available-for-sale securities $ 1,968 $ 11,702
Net unrealized loss on derivatives used for cash flow hedges - -
Tax effect (491) (2,920)
Net-of-tax amount $ 1,477 $ 8,782
Note 9.Employee Benefit Plans
The Company has an Employee Stock Purchase Plan (the “ESPP”). For each quarterly offering period, eligible employees can elect to contribute from 1% to 15% of his or her compensation. The purchase price is the lesser of 90% of the fair market value on the first day of the offering period or the last day of the offering period. The maximum dollar amount any one employee can elect to contribute in a year is $9,000. During the year ended December 31, 2021, 7,334 shares of stock were purchased by employees of the Bank through the ESPP. 7,449 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2020.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has an Employee Stock Ownership Plan (the "ESOP") to which it makes discretionary cash contributions. The Company's contribution to the ESOP totaled $1.27 million, $1.27 million and $1.08 million for the years ended December 31, 2021, 2020 and 2019, respectively. The 2021, 2020 and 2019 discretionary contribution rate was 4.5% of qualified salaries.
In the event a terminated plan participant desires to sell his or her shares of the Company stock, or for certain employees who elect to diversify their account balances, the Company may be required to purchase the shares from the participant at their fair value. To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity. The Company obtains a quarterly independent appraisal of the shares of stock. As of December 31, 2021 and 2020, the shares held by the ESOP, fair value and maximum cash obligation were as follows:
2021 2020
Shares held by the ESOP 735,482 757,262
Fair value per share $ 68.00 $ 62.50
Maximum cash obligation $ 50,013,000 $ 47,329,000
The Company has a profit-sharing plan with a 401(k) feature, which provides for discretionary annual contributions in amounts to be determined by the Board of Directors. The Company made a 4.50% or $1.27 million contribution to the profit sharing plan for the year ended December 31, 2021. The Company made a 4.50% or $1.27 million contribution to the profit sharing plan for the year ended December 31, 2020. The Company made a 4.50% or $1.08 million contribution to the profit sharing plan for the year ended December 31, 2019. The Company made matching contributions under its 401(k) plan of $0.26 million in 2021, $0.26 million in 2020, and $0.22 million in 2019 and each such amount is included in salaries and employee benefits expense.
The Company provides a deferred compensation program for executive officers. This program allows executive officers to elect to defer a portion of their salaried compensation for payment by the Company at a subsequent date. The executive officers can defer up to 30% of their base compensation and up to 100% of any bonus into the deferral plan. Any amount so deferred is credited to the executive officer’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The executive officer’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferrals and earnings grow tax deferred until withdrawn from the plan. Earnings credited to the individual’s accounts are recorded as compensation expense when earned. The deferred compensation liability is recorded in other liabilities and totals $1.94 million and $3.31 million at December 31, 2021 and 2020, respectively. Expense related to the deferred compensation plan was $0.25 million for 2021, $(0.02) million for 2020 and $0.42 million for 2019 and is included in salaries and employee benefits expense.
The Company also provides a deferred compensation program for its Board of Directors. Under the plan, each director may elect to defer up to 50% of such director’s cash compensation from retainers and meeting fees for payment by the Company at a subsequent date. Any amount so deferred is credited to the director’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The director’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferred compensation liability for the directors’ plan is recorded in other liabilities and totaled $4.08 million and $3.78 million at December 31, 2021 and 2020, respectively. Expense related to the directors’ deferred compensation plan was $0.38 million for 2021, $(0.09) million for 2020 and $0.28 million for 2019 and is included in other noninterest expense.
The Company has a Stock Option and Incentive Plan for certain key employees and directors whereby shares of common stock have been reserved for awards in the form of stock options or restricted stock awards. Under the plan, the aggregate number of options and shares granted cannot exceed 250,000 shares. A Stock Option Committee may grant options at prices equal to the fair value of the stock at the date of the grant. Options expire 10 years from the date of the grant. Director options and officers' rights under the plan vest over a five-year period from the date of the grant.
The fair value of each option is estimated as of the date of grant using a Black Scholes option pricing model. The expected lives of options granted incorporate historical employee exercise behavior. The risk-free rate for periods that coincide with the expected life of the options is based on the ten year interest rate swap rate as published by the Federal Reserve Bank on the date
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of issuance. Expected volatility is based on volatility levels of the Company’s peers’ common stock as the Company’s stock has limited trading activity. Expected dividend yield was based on historical dividend rates. Significant assumptions at the date of grant on May 14, 2019 include the risk-free interest rate of 2.39%, expected option life of 7.5 years, expected volatility of 33% and expected dividends of 1.23%.
There were no stock options granted in 2021 and 2020 and 5,805 in 2019. The weighted-average fair value of options granted in 2019 was $21.31 per share. The intrinsic value of options exercised was $0.00 million, $0.00 million and $0.06 million for 2021, 2020 and 2019, respectively.
A summary of the stock options is as follows:
Number of Shares Weighted-
Average
Exercise Price Weighted-Average
Remaining
Contractual Term
(Years) Aggregate
Intrinsic Value
(In Thousands)
Balance, December 31, 2018 9,020 $ 33.30 3.41 250
Granted 5,805
Exercised (1,800)
Balance, December 31, 2019 13,025 $ 45.92 5.47 248
Granted -
Exercised -
Balance, December 31, 2020 13,025 $ 45.92 4.47 216
Granted -
Exercised -
Balance, December 31, 2021 13,025 $ 45.92 3.47 $ 288
Other pertinent information related to the options outstanding at December 31, 2021 is as follows:
Exercise Price Number Outstanding Remaining Contractual Life Number Exercisable
33.00 7,220 4 months 7,220
62.00 5,805 89 months -
13,025 7,220
As of December 31, 2021, the outstanding options have a weighted-average exercise price of $45.92 per share and a weighted average remaining contractual term of 3.47 years. There was $0.06 million in unrecognized compensation cost for stock options granted under the plan as of December 31, 2021. The cost is expected to be recognized over a weighted-average period of 2.40 years. As of December 31, 2021, the vested options totaled 7,220 shares with a weighted-average exercise price of $33.00 per share.
As of December 31, 2021, 208,543 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan). The 2010 Stock Option and Incentive Plan (2010 Plan) was discontinued upon the approval of the 2020 Plan in April 2020. No stock options or stock awards will be issued from the 2010 Plan after April 2020. The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock. A summary of the restricted stock option activity for the year ended December 31, 2021 is as follows:
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 Stock Option and Incentive Plan 2010 Stock Option and Incentive Plan
Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value
Balance, December 31, 2020 231,425 22,864
Authorization of shares - -
Granted 24,513 $66.01 - $0.00
Forfeited 1,631 $62.81 6,452 $54.61
Balance, December 31, 2021 208,543 29,316
The Company authorized the issuance of 24,513 shares in 2021, 20,427 shares in 2020, and 23,527 shares in 2019 to certain employees. The vesting period for these awards is five years and the Bank amortizes the expense on a straight line basis during the vesting period. The expense relating to these awards for the years ended December 31, 2021, 2020 and 2019 was $0.92 million, $0.95 million and $0.96 million, respectively. 12,800, 10,800 and 7,200 shares of the restricted common stock shares awarded in December 31, 2021, 2020 and 2019, are subject to forfeiture upon termination of the employee's employment with the Company within eight years of the award.
Note 10.Income Taxes
Income taxes for the years ended December 31, 2021, 2020 and 2019 are summarized as follows:
2021 2020 2019
(Amounts In Thousands)
Current:
Federal $ 10,383 $ 9,124 $ 8,857
State 2,653 2,673 2,391
Deferred:
Federal 757 (417) 1,068
State 214 (103) 233
$ 14,007 $ 11,277 $ 12,549
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows:
December 31,
2021 2020
(Amounts In Thousands)
Deferred income tax assets:
Allowance for credit losses $ 8,849 $ 9,249
Deferred compensation and unearned restricted stock 2,239 2,401
Allowance for credit losses on off-balance sheet credit exposures 961 -
Accrued expenses 611 589
State net operating loss 1,094 1,011
Gross deferred tax assets $ 13,754 $ 13,250
Valuation allowance (1,094) (1,011)
Deferred tax asset, net of valuation allowance $ 12,660 $ 12,239
Deferred income tax liabilities:
Property and equipment 1,852 1,941
Unrealized gains on investment securities 491 2,920
Goodwill 407 407
Prepaid expenses 400 431
Other 385 452
Gross deferred tax liabilities $ 3,535 $ 6,151
Net deferred tax assets $ 9,125 $ 6,088
The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carry-forwards. The net operating loss carry-forwards are generated by the Company largely from its investment in tax credit real estate properties. The Company is required to file a separate Iowa tax return and cannot be consolidated with the Bank. The net operating loss carry-forwards will expire, if not utilized, between 2022 and 2040. The Company has recorded a valuation allowance to reduce the deferred tax asset attributable to the net operating loss carry-forwards. At December 31, 2021 and 2020, the Company believes it is more likely than not that the Iowa net operating loss carry-forwards will not be realized. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance increased by $83,000 and $82,000 for the years ended December 31, 2021 and 2020, respectively.
The net change in the deferred income taxes for the years ended December 31, 2021, 2020 and 2019 is reflected in the consolidated financial statements as follows:
Year Ended December 31,
2021 2020 2019
(Amounts In Thousands)
Consolidated statements of income $ 971 $ (520) $ 1,301
Consolidated statements of stockholders' equity (4,008) 2,450 1,550
$ (3,037) $ 1,930 $ 2,851
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense for the years ended December 31, 2021, 2020 and 2019 are less than the amounts computed by applying the maximum effective federal income tax rate to the income before income taxes because of the following items:
2021 2020 2019
Amount % Of
Pretax
Income Amount % Of
Pretax
Income Amount % Of
Pretax
Income
(Amounts In Thousands)
Expected tax expense $ 13,039 21.0 % $ 10,484 21.0 % $ 12,152 20.9 %
Tax-exempt interest (1,176) (1.9) (1,219) (2.4) (1,201) (2.1)
Interest expense limitation 50 0.1 79 0.1 109 0.2
State income taxes, net of federal income tax benefit 2,265 3.7 2,030 4.1 2,073 3.5
Income tax credits (475) (0.8) (51) (0.1) (531) (0.9)
Other 304 0.5 (46) (0.1) (53) 0.1
$ 14,007 22.6 % $ 11,277 22.6 % $ 12,549 21.7 %
Federal income tax expense for the years ended December 31, 2021, 2020 and 2019 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes. The tax years ended December 31, 2021, 2020, 2019 and 2018, remain subject to examination by the Internal Revenue Service. For state tax purposes, the tax years ended December 31, 2021, 2020, 2019 and 2018, remain open for examination. There were no material unrecognized tax benefits at December 31, 2021 and December 31, 2020. No interest or penalties on these unrecognized tax benefits has been recorded. As of December 31, 2021, the Company does not anticipate any significant increase or decrease in unrecognized tax benefits during the twelve month period ending December 31, 2022.
Note 11.Regulatory Capital Requirements, Restrictions on Subsidiary Dividends and Cash Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial results. Under capital adequacy guidelines and the regulatory frameworks for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and the Bank are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by the regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of capital. Under the BASEL III rules, the minimum capital ratios are 4% for Tier 1 Leverage Capital Ratio, 4.5% for the Common Equity Tier 1 Capital Ratio, 6% for the Tier 1 Risk-Based Capital Ratio and 8% for the Total Risk-Based Capital Ratio. A capital conservation buffer of 2.5% of risk-weighted assets was completely phased in beginning January 1, 2019. As of March 31, 2020, the Bank elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. Under the CBLR framework, the Bank is required to maintain a CBLR of greater than 9%. The Coronavirus Aid, Relief and Economic Security ("CARES") Act reduced the minimum ratio to 8% beginning in the 2nd quarter of 2020 through December 31, 2020, increasing to 8.5% for 2021 and returning to 9% beginning January 1, 2022. Management believes that, as of December 31, 2021 and 2020, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2021 and 2020, the most recent notifications from the Federal Reserve System categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 common equity and Tier 1 leverage ratios as set forth in the table that follows. There are no conditions or events since that notification that management believes have changed the Bank's category.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual amounts and capital ratios as of December 31, 2021 and 2020, with the minimum regulatory requirements for the Company and Bank are presented below (amounts in thousands):
Actual For Capital Adequacy Purposes
Amount Ratio Ratio
As of December 31, 2021:
Company:
Community Bank Leverage Ratio $ 484,486 11.80 % 8.50 %
Bank:
Community Bank Leverage Ratio 484,429 11.80 8.50
Actual For Capital Adequacy Purposes
Amount Ratio Ratio
As of December 31, 2020:
Company:
Community Bank Leverage Ratio $ 452,123 11.91 % 8.00 %
Bank:
Community Bank Leverage Ratio 453,073 11.94 8.00
The ability of the Company to pay dividends to its stockholders is dependent upon dividends paid by the Bank. The Bank is subject to certain statutory and regulatory restrictions on the amount it may pay in dividends. To maintain acceptable capital ratios in the Bank, certain of its retained earnings are not available for the payment of dividends. To maintain a ratio of capital to assets of 8.50%, retained earnings of $135.62 million as of December 31, 2021 are available for the payment of dividends to the Company.
The Bank is required to maintain reserve balances in cash or with the Federal Reserve Bank. Reserve balances totaled $752.99 million and $541.05 million as of December 31, 2021 and 2020, respectively.
Note 12.Related Party Transactions
Certain directors of the Company and the Bank, companies with which the directors are affiliated, and certain principal officers are customers of, and have banking transactions with, the Bank in the ordinary course of business. Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2021 and 2020:
Year Ended December 31,
2021 2020
(Amounts In Thousands)
Balance, beginning $ 54,053 $ 55,717
Net increase due to change in related parties 735 -
Advances 23,671 14,406
Collections (25,614) (16,070)
Balance, ending $ 52,845 $ 54,053
Deposits from these related parties totaled $21.27 million and $13.18 million as of December 31, 2021 and 2020, respectively. Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Fair Value Measurements
The carrying value and estimated fair values of the Company’s financial instruments as of December 31, 2021 are as follows:
December 31, 2021
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 $ 781,918 $ 781,918 $ 781,918 $ - $ -
Investment securities 555,900 555,900 243,925 311,975 -
Loans held for sale 5,716 5,716 - 5,716 -
Loans
Agricultural 104,672 103,745 - - 103,745
Commercial and financial 217,733 216,466 - - 216,466
Real estate:
Construction, 1 to 4 family residential 79,668 79,311 - - 79,311
Construction, land development and commercial 125,539 124,466 - - 124,466
Mortgage, farmland 229,311 228,365 - - 228,365
Mortgage, 1 to 4 family first liens 901,523 897,255 - - 897,255
Mortgage, 1 to 4 family junior liens 111,184 110,903 - - 110,903
Mortgage, multi-family 379,077 378,193 - - 378,193
Mortgage, commercial 394,594 391,950 - - 391,950
Loans to individuals 31,916 31,871 - - 31,871
Obligations of state and political subdivisions 49,845 50,155 - - 50,155
Accrued interest receivable 11,437 11,437 - 11,437 -
Total financial instrument assets $ 3,980,033 $ 3,967,651 $ 1,025,843 $ 329,128 $ 2,612,680
Financial instrument liabilities:
Deposits
Noninterest-bearing deposits $ 633,101 $ 633,101 $ - $ 633,101 $ -
Interest-bearing deposits 2,900,893 2,909,243 - 2,909,243 -
Other borrowings 249 249 - 249 -
Federal Home Loan Bank borrowings - - - - -
Accrued interest payable 1,165 1,165 - 1,165 -
Total financial instrument liabilities $ 3,535,408 $ 3,543,758 $ - $ 3,543,758 $ -
Face Amount
Financial instrument with off-balance sheet risk:
Loan commitments $ 614,324 $ - $ - $ - $ -
Letters of credit 7,179 - - - -
Total financial instrument liabilities with off-balance-sheet risk $ 621,503 $ - $ - $ - $ -
(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.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value and estimated fair values of the Company’s financial instruments as of December 31, 2020 are as follows:
December 31, 2020
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 $ 574,310 $ 574,310 $ 574,310 $ - $ -
Investment securities 416,544 416,544 148,646 267,898 -
Loans held for sale 43,947 43,947 - 43,947 -
Loans
Agricultural 92,334 92,922 - - 92,922
Commercial and financial 281,357 282,015 - - 282,015
Real estate:
Construction, 1 to 4 family residential 70,210 70,432 - - 70,432
Construction, land development and commercial 110,501 110,039 - - 110,039
Mortgage, farmland 242,969 242,978 - - 242,978
Mortgage, 1 to 4 family first liens 882,156 890,409 - - 890,409
Mortgage, 1 to 4 family junior liens 126,336 124,945 - - 124,945
Mortgage, multi-family 369,552 370,538 - - 370,538
Mortgage, commercial 412,186 413,409 - - 413,409
Loans to individuals 30,573 31,164 - - 31,164
Obligations of state and political subdivisions 55,838 59,300 - - 59,300
Accrued interest receivable 12,177 12,177 - 12,177 -
Total financial instrument assets $ 3,720,990 $ 3,735,129 $ 722,956 $ 324,022 $ 2,688,151
Financial instrument liabilities:
Deposits
Noninterest-bearing deposits $ 532,190 $ 532,190 $ - $ 532,190 $ -
Interest-bearing deposits 2,660,378 2,673,815 - 2,673,815 -
Federal Home Loan Bank Borrowings 105,000 115,259 - 115,259 -
Accrued interest payable 1,733 1,733 - 1,733 -
Total financial instrument liabilities $ 3,299,301 $ 3,322,997 $ - $ 3,322,997 $ -
Face Amount
Financial instrument with off-balance sheet risk:
Loan commitments $ 483,602 $ - $ - $ - $ -
Letters of credit 8,056 - - - -
Total financial instrument liabilities with off-balance-sheet risk $ 491,658 $ - $ - $ - $ -
(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
Fair value of financial instruments: FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a single definition for fair value, a framework for measuring fair value and expanded disclosures concerning fair value. Fair value is
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company determines the fair market value of its financial instruments based on the fair value hierarchy established in ASC 820. There are three levels of inputs that may be used to measure fair value as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included within Level 1. Observable inputs include the quoted prices for similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability.
Level 3 Unobservable inputs supported by little or no market activity for financial instruments. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment securities available for sale: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities. U.S. Treasury securities are considered Level 1 with the remaining securities considered Level 2.
The pricing for investment securities is obtained from an independent source. There are no Level 3 investment securities owned by the Company. The Company obtains an understanding of the independent source’s valuation methodologies used to determine fair value by level of security. The Company validates assigned fair values on a sample basis using an additional third-party provider pricing service to determine if the fair value measurement is reasonable. Due to the nature of our investment portfolio, we do not expect significant and unusual fluctuations as fair value changes primarily relate to interest rate changes. No unusual fluctuations were identified during the year ended December 31, 2021. 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.
Foreclosed assets: The Company does not record foreclosed assets at fair value on a recurring basis. Foreclosed assets consist mainly of other real estate owned but may include other types of assets repossessed by the Company. Foreclosed assets are adjusted to the lower of carrying value or fair value less the costs of disposal. Fair value is generally based upon independent
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market prices or appraised values of the collateral, and may include a marketability discount as deemed necessary by management based on its experience with similar types of real estate. 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).
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below represents the balances of assets and liabilities measured at fair value on a recurring basis:
December 31, 2021
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 $ 243,925 $ - $ - $ 243,925
State and political subdivisions - 263,516 - 263,516
Mortgage-backed securities and collateralized mortgage obligations - 9,446 - 9,446
Other securities (FHLB, FHLMC and FNMA) - 34,467 - 34,467
Total $ 243,925 $ 307,429 $ - $ 551,354
December 31, 2020
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 $ 148,646 $ - $ - $ 148,646
State and political subdivisions - 224,566 - 224,566
Other securities (FHLB, FHLMC and FNMA) - 35,160 - 35,160
Total $ 148,646 $ 259,726 $ - $ 408,372
(1)Considered Level 1 under ASC 820.
(2)Considered Level 2 under ASC 820.
(3)Considered Level 3 under ASC 820 and are based on valuation models that use significant assumptions that are not observable in an active market.
There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2021 and 2020.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. For assets measured at fair value on a nonrecurring basis that were still held on the balance sheet at December 31, 2021 and 2020, the following tables provide the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets at year end.
December 31, 2021 Year Ended December 31, 2021
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 $ - $ - $ 399 $ 399 $ -
Commercial and financial - - 1,527 1,527 -
Real Estate:
Construction, 1 to 4 family residential - - 383 383 -
Construction, land development and commercial - - 96 96 -
Mortgage, farmland - - 1,114 1,114 -
Mortgage, 1 to 4 family first liens - - 5,902 5,902 212
Mortgage, 1 to 4 family junior liens - - 202 202 9
Mortgage, multi-family - - 1,460 1,460 -
Mortgage, commercial - - 4,176 4,176 255
Loans to individuals - - - - -
Foreclosed assets (5) - - - - -
Total $ - $ - $ 15,259 $ 15,259 $ 476
(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.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 Year Ended December 31, 2020
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 $ - $ - $ 1,081 $ 1,081 $ -
Commercial and financial - - 1,692 1,692 385
Real Estate:
Construction, 1 to 4 family residential - - 414 414 -
Construction, land development and commercial - - 315 315 -
Mortgage, farmland - - 1,718 1,718 -
Mortgage, 1 to 4 family first liens - - 5,906 5,906 252
Mortgage, 1 to 4 family junior liens - - 176 176 19
Mortgage, multi-family - - 1,773 1,773 -
Mortgage, commercial - - 5,082 5,082 250
Loans to individuals - - - - -
Foreclosed assets (5) - - - - -
Total $ - $ - $ 18,157 $ 18,157 $ 906
(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.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14.Parent Company Only Financial Information
Following is condensed financial information of the Company (parent company only):
CONDENSED BALANCE SHEETS
December 31, 2021 and 2020
(Amounts In Thousands)
ASSETS 2021 2020
Cash and cash equivalents at subsidiary bank $ 2,176 $ 1,100
Investment in subsidiary bank 488,406 464,355
Other assets 2,067 1,846
Total assets $ 492,649 $ 467,301
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 4,186 $ 3,896
Redeemable common stock held by ESOP 50,013 47,329
Stockholders' equity:
Capital stock 60,938 60,233
Retained earnings 474,392 439,831
Accumulated other comprehensive gain 1,477 8,782
Treasury stock at cost (48,344) (45,441)
488,463 463,405
Less maximum cash obligation related to ESOP shares 50,013 47,329
Total stockholders' equity 438,450 416,076
Total liabilities and stockholders' equity $ 492,649 $ 467,301
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands)
2021 2020 2019
Dividends received from subsidiary $ 12,273 $ 14,822 $ 7,657
Other expenses (836) (362) (708)
Income before income tax benefit and equity in undistributed income of subsidiary 11,437 14,460 6,949
Income tax benefit 297 173 271
11,734 14,633 7,220
Equity in undistributed income of subsidiary 36,351 24,014 38,098
Net income $ 48,085 $ 38,647 $ 45,318
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2021, 2020 and 2019
(Amounts In Thousands)
2021 2020 2019
Cash flows from operating activities:
Net income $ 48,085 $ 38,647 $ 45,318
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Equity in undistributed income of subsidiary (36,351) (24,014) (38,098)
Share-based compensation 25 25 14
Compensation expensed through issuance of common stock 1,618 1,272 1,133
Forfeiture of common stock (455) (257) (262)
Increase in other assets (221) (515) (100)
Increase (decrease) in other liabilities 290 (3,554) 1,036
Net cash and cash equivalents provided by operating activities 12,991 11,604 9,041
Cash flows from financing activities:
Issuance of common stock, net of costs - 5,844 5,026
Stock options exercised - - 62
Purchase of treasury stock (3,569) (8,550) (5,534)
Proceeds from the issuance of common stock through the employee stock purchase plan 427 413 434
Capital contribution to subsidiary - (5,000) -
Dividends paid (8,773) (8,325) (7,657)
Net cash and cash equivalents used by financing activities (11,915) (15,618) (7,669)
Increase (decrease) in cash and cash equivalents 1,076 (4,014) 1,372
Cash and cash equivalents:
Beginning of year 1,100 5,114 3,742
Ending of year $ 2,176 $ 1,100 $ 5,114
Supplemental Disclosures
Noncash financing activities:
Increase (decrease) in maximum cash obligation related to ESOP shares $ 2,684 $ (4,497) $ 2,956
Note 15.Commitments and Contingencies
Concentrations of credit risk: The Bank’s loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within the Bank's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $98.92 million. The concentrations of credit by type of loan are set forth in Note 3 to the Consolidated Financial Statements. Outstanding letters of credit were granted primarily to commercial borrowers. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in Johnson, Linn and Washington Counties, Iowa.
Contingencies: In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management believes at this time that the outcome of such litigation will not have a material adverse effect on the Company’s business, financial conditions, or results of operations.
The outbreak of Coronavirus Disease 2019 (“COVID-19”) continues to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. The World
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Health Organization declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.
The spread of the outbreak has caused significant disruptions in the U.S. economy and is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could also potentially create widespread business continuity issues for the Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. While significant progress has been made to combat the outbreak of COVID-19, and while it appears that the epidemiological and macroeconomic conditions are trending in a positive direction, if there is a resurgence in the virus, the Company could experience further adverse effects on its business, financial condition, results of operations and cash flows. See Note 3 for further discussion regarding the financial impact of COVID-19.
Financial instruments with off-balance sheet risk: The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, credit card participations and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card participations and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments at December 31, 2021 and 2020 is as follows:
2021 2020
(Amounts In Thousands)
Firm loan commitments and unused portion of lines of credit:
Home equity loans $ 78,961 $ 69,974
Credit cards 65,913 60,535
Commercial, real estate and home construction 170,539 118,186
Commercial lines and real estate purchase loans 298,911 234,907
Outstanding letters of credit 7,179 8,056
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties. Credit card commitments are the unused portion of the holders' credit limits. Such amounts represent the maximum amount of additional unsecured borrowings.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, which may include accounts receivable, inventory, property, equipment, and income-producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2021 and 2020, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease commitments: The Company leases certain facilities under operating leases. The minimum future rental commitments as of December 31, 2021 for all non-cancellable leases relating to Bank premises were as follows:
Year ending December 31: (Amounts In Thousands)
2022 $ 319
2023 316
2024 82
2025 1
2026 1
Thereafter 3
$ 722
Rent expense was $0.40 million, $0.38 million and $0.40 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Note 16.Quarterly Results of Operations (unaudited, amounts in thousands, except per share amounts)
Quarter Ended
March June September December Year
Interest income $ 31,127 $ 30,794 $ 31,196 $ 28,972 $ 122,089
Interest expense 4,894 4,598 4,172 3,963 17,627
Net interest income $ 26,233 $ 26,196 $ 27,024 $ 25,009 $ 104,462
Credit loss (benefit) expense (2,984) (1,659) 82 (946) (5,507)
Other income 9,038 7,982 8,244 8,200 33,464
Other expense 18,699 18,219 18,198 26,225 81,341
Income before income taxes $ 19,556 $ 17,618 $ 16,988 $ 7,930 $ 62,092
Income taxes 4,359 4,008 3,863 1,777 14,007
Net income $ 15,197 $ 13,610 $ 13,125 $ 6,153 $ 48,085
Basic earnings per share $ 1.63 $ 1.46 $ 1.41 $ 0.66 $ 5.16
Diluted earnings per share 1.63 1.46 1.41 0.66 5.16
Interest income $ 32,452 $ 32,246 $ 31,675 $ 32,156 $ 128,529
Interest expense 7,862 6,645 6,465 5,980 26,952
Net interest income $ 24,590 $ 25,601 $ 25,210 $ 26,176 $ 101,577
Provision for loan losses 4,649 8 (157) (142) 4,358
Other income 6,167 6,531 7,510 8,128 28,336
Other expense 17,227 16,872 18,055 23,477 75,631
Income before income taxes $ 8,881 $ 15,252 $ 14,822 $ 10,969 $ 49,924
Income taxes 1,806 3,541 3,392 2,538 11,277
Net income $ 7,075 $ 11,711 $ 11,430 $ 8,431 $ 38,647
Basic earnings per share $ 0.75 $ 1.25 $ 1.22 $ 0.90 $ 4.12
Diluted earnings per share 0.75 1.25 1.22 0.90 4.12
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17.Derivative Financial Instruments
In the normal course of business, the Bank may use derivative financial instruments to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying consolidated financial statements and are measured at fair value. The Bank’s objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amount to be exchanged between the counterparties. The Bank is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. The Bank minimizes this risk by entering into derivative contracts with large, stable financial institutions. The Bank has not experienced any losses from nonperformance by counterparties. The Bank monitors counterparty risk in accordance with the provisions of ASC 815. In addition, the Bank’s interest rate-related derivative instruments contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. The Bank terminated one interest rate swap in December 2020 and the other matured in November 2020, therefore the Bank was not required to pledge collateral as of December 31, 2021 and 2020.
Cash Flow Hedges:
The Bank executed two forward-starting interest rate swap transactions on November 7, 2013. One of the interest rate swap transactions had an effective date of November 9, 2015, and an expiration date of November 9, 2020, effectively converting $25.00 million of variable rate debt to fixed rate debt. The other interest rate swap transaction had an effective date of November 7, 2016 and an expiration date of November 7, 2023, effectively converting $25.00 million of variable rate debt to fixed rate debt. For accounting purposes, these swap transactions were designated as a cash flow hedge of the changes in cash flows attributable to changes in three-month LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on an amount of the Bank’s debt principal equal to the then-outstanding swap notional amount. At inception, the Bank asserted that the underlying principal balance would remain outstanding throughout the hedge transaction making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. The Bank terminated the remaining interest rate swap in December 2020 and in connection with the termination paid $2.684 million to the counterparty. The losses realized on the interest rate swap were reclassified into the income statement from other comprehensive income. In connection with the termination of the swap, the related FHLB borrowings were paid off. There were no remaining derivative instruments designated as cash flow hedges as of December 31, 2021 and 2020.
There were no gains or losses recognized on the Bank's derivative instruments designated as cash flow hedges for the year ended December 31, 2021. The table below identifies the gains and losses recognized on the Bank’s derivative instruments designated as cash flow hedges for the year ended December 31, 2020:
Recognized in OCI Reclassified from AOCI into Income Recognized in Income on Derivatives
Amount of Gain (Loss) Category Amount of Gain (Loss) Category Amount of Gain (Loss)
(Amounts in Thousands)
December 31, 2020
Interest rate swap $ 209 Interest Expense $ - Other Income $ -
Interest rate swap (438) Interest Expense (1,992) Other Income -
Note 18.Subsequent Events
Subsequent events have been evaluated through March 4, 2022.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief 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) and Rule 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting of the Company includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. Important features of the Company’s system of internal control over financial reporting include the adoption and implementation of written policies and procedures, careful selection and training of financial management personnel, a continuing management commitment to the integrity of the system and through examinations by an internal audit function that coordinates its activities with the Company’s Independent Registered Public Accounting Firm.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The Company’s management conducted an evaluation of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2021. Management’s assessment is based on the criteria described in “Internal Control - Integrated Framework” issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2021.
Attestation Report of the Registered Public Accounting Firm
The Company’s independent registered public accounting firm that audited the consolidated financial statements included in this annual report, has issued a report on the Company’s internal control over financial reporting as of December 31, 2021. Reference is made to the Report of Independent Registered Public Accounting Firm included in this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 of Part III is presented under the items entitled “Information Concerning Nominees for Election as Directors,” "Information Concerning Directors other than Nominees," "Corporate Governance and Board of Directors," and “Delinquent Section 16(a) Reports” in the Company’s Definitive Proxy Statement dated March 18, 2022 for the Annual Meeting of Stockholders on April 18, 2022. Such information is incorporated herein by reference.
The Company has a Code of Ethics in place covering its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. A copy of the Company’s Code of Ethics will be provided free of charge, upon written request to:
Joseph Schueller
Treasurer
Hills Bancorporation
131 Main Street
PO Box 160
Hills, Iowa 52235
Information about our Executive Officers is incorporated into this section by reference to Part I, Item 1 of this Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by Item 11 of Part III is presented under the items entitled “Compensation Discussion and Analysis,” “Summary of Cash and Certain Other Compensation Paid to the Named Executive Officers,” "Risk Management and Compensation Policies and Practices," “Compensation and Incentive Stock Committee Interlocks and Insider Participation,” "Schedule of Director Fees," "Director Compensation Table," and “Compensation and Incentive Stock Committee Report” in the Company’s Definitive Proxy Statement dated March 18, 2022 for the Annual Meeting of Stockholders on April 18, 2022. Such information is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Part III is presented under the item entitled “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Definitive Proxy Statement dated March 18, 2022 for the Annual Meeting of Stockholders on April 18, 2022. Such information is incorporated herein by reference.
The following table sets forth information regarding the Company’s equity compensation plan as of December 31, 2021, all of which relates to stock options issued under stock option plans approved by stockholders of the Company.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities
remaining available for future
issuance under equity
compensation plans
[excluding securities
reflected in column (a)]
Plan Category (a) (b) (c)
Equity compensation plans approved by security holders 13,025 $ 45.92 208,453
Equity compensation plans not approved by security holders - - -
Total 13,025 $ 45.92 208,453

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of Part III is presented under the items entitled “Corporate Governance and the Boards of Directors,” and “Compensation and Incentive Stock Committee Interlocks and Insider Participation” in the Company’s Definitive Proxy Statement dated March 18, 2022 for the Annual Meeting of Stockholders on April 18, 2022. Such information is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Information required by this item is contained in the Company’s Definitive Proxy Statement dated March 18, 2022 for the Annual Meeting of Shareholders on April 18, 2022, under the heading “Audit Committee,” which information is incorporated herein by this reference.
The three additional data elements required to be tagged by a registrant that files financial statements using Inline XBRL are as follows:
•BKD, LLP
•Springfield, Missouri
•PCAOB ID: 686
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Consolidated Financial Statement Schedules
Form 10-K
(a) 1 Financial Statements Reference
Independent registered public accounting firm's report on the financial statements Page 54-57
Consolidated balance sheets as of December 31, 2021 and 2020 Page 58
Consolidated statements of income for the years ended December 31, 2021, 2020, and 2019 Page 59
Consolidated statements of comprehensive income for the years ended December 31, 2021, 2020, and 2019 Page 60
Consolidated statements of stockholders' equity for the years ended December 31, 2021, 2020, and 2019 Page 61
Consolidated statements of cash flows for the years ended December 31, 2021, 2020, and 2019 Page 62
Notes to consolidated financial statements Page 64
2 Financial Statements Schedules
All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(b) 3 Exhibits
3.1 Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q Filed with the Commission on May 6, 2015.
3.2 Amended and Restated ByLaws filed as Exhibit 3.2 to the Company's Form 10-Q for the quarter ended March 31, 2019 filed with the Commission on May 6, 2019 is incorporated by reference.
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.
10.1 1995 Deferred Compensation Plans filed as Exhibit 10(c) in Form 10-K for the year ended December 31, 1995 is incorporated by reference.
10.2 2010 Stock Option and Incentive Plan filed on Form S-8 dated June 29, 2012 is incorporated by reference.
10.3 2020 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed with the Commission on May 4, 2020.
10.4 Form of Stock Option Grant Agreement under the Stock Option and Incentive Plan filed as Exhibit 10.3 in Form 10-K for the year ended December 31, 2018 is incorporated by reference.
10.5 Form of Restricted Stock 5 Year Agreement under the Stock Option and Incentive Plan filed as Exhibit 10.4 in Form 10-K for the year ended December 31, 2018 is incorporated by reference.
10.6 Form of Restricted Stock 8 Year Agreement under the Stock Option and Incentive Plan filed as Exhibit 10.5 in Form 10-K for the year ended December 31, 2018 is incorporated by reference.
10.7 Employment Agreement between the Company and Joseph A. Schueller, dated March 29, 2021, filed as Exhibit 10.1 to the Company's Form 10-Q filed with the Commission on May 7, 2021.
11 Statement Regarding Computation of Basic and Diluted Earnings Per Share. (Note: Statement included in Note 1 under Item 8 of Part II above)
21 Subsidiary of the Registrant is attached on Page 123.
23.1 Consent of Independent Registered Public Accounting Firm is attached on Page 124. BKD LLP
31.1 Certification under Section 302 of the Sarbanes-Oxley Act of 2002 on Page 125.
31.2 Certification under Section 302 of the Sarbanes-Oxley Act of 2002 on Page 126.
32 Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 on Page 127.
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