NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with instructions for Form 10-Q and Regulation S-X. These financial statements include all adjustments (consisting of normal recurring accruals) which in the opinion of management are considered necessary for the fair presentation of the financial position and results of operations for the periods shown. The Company considers that it operates as one business segment, a commercial bank.
Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K Annual Report of Hills Bancorporation and subsidiary (the “Company”) for the year ended December 31, 2022 filed with the Securities Exchange Commission on March 3, 2023. The consolidated balance sheet as of December 31, 2022, has been derived from the audited consolidated financial statements for that period.
The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC.
Accounting Estimates:
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain Significant Estimates:
The allowance for credit losses, fair values of securities and other financial instruments, and share-based compensation expense involve certain significant estimates made by management. These estimates are reviewed by management routinely and it is reasonably possible that circumstances that exist at March 31, 2023 may change in the near-term and the effect could be material to the consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process.
Revenue Recognition:
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit and investment securities. Interest income on loans and investment securities is recognized on the accrual method in accordance with written contracts.
Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606 are the following: Service charges and fees on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue which includes interchange income, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received.
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. As of March 31, 2023, the Company did not have any significant contract balances.
An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. The Company has not incurred or capitalized any contract acquisition costs as of March 31, 2023.
Tax credit real estate: Tax credit real estate represents three multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi-family senior living rental property, all of which are affordable housing projects as of March 31, 2023. The Company has a 99% or greater limited partnership interest in each limited partnership. The investment in each was completed after the projects had been developed by the general partner. On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if an allowance for credit losses is necessary. The allowance for credit losses is measured by a comparison of the carrying amount of the investments to the future undiscounted cash flows expected to be generated by the investment properties, including the low-income housing tax credits and any estimated proceeds from eventual disposition. If there is an indication of impairment, the allowance for credit losses would be established with a charge to credit loss expense. There were no indications of impairment based on management's evaluation and therefore no allowance for credit losses was determined necessary as of March 31, 2023. Depreciation expense is provided on a straight-line basis over the estimated useful life of the assets. Expenditures for normal repairs and maintenance are charged to expense as incurred.
The investments in tax credit real estate are recorded for all years presented using the equity method of accounting, with the exception of the investment in the affordable housing project described below. The operations of the properties are not expected to contribute significantly to the Company’s income before income taxes. However, the properties do contribute in the form of income tax credits, which lowers the Company’s effective tax rate. Once established, the credits on each property last for ten years and are passed through from the limited partnerships to the Company and reduces the consolidated federal tax liability of the Company.
In February 2021, the Company provided construction financing and contributed capital of $4.18 million to Del Ray Ridge LP, as limited partner, which owns and operates an affordable housing property in Iowa City, Iowa. The Company accounts for the investment in this tax credit real estate using the proportional amortization method as provided for under Accounting Standards Codification (ASC) 323-740. The investment qualifies for the proportional amortization method as it meets all of the criteria under ASC 323-740-25-1. Substantially all of the projected benefits are from tax credits and other tax benefits due to the minimum buyout clause included in the partnership agreement.
Available-for-sale debt securities and the allowance for credit losses on available-for-sale debt securities: Available-for-sale ("AFS") securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. There were no trading or held to maturity securities as of March 31, 2023 or 2022. Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from earnings and reported, net of tax, in other comprehensive income ("OCI"). Premiums on debt securities are amortized to the earliest call date and discounts on debt securities are accreted over the period to maturity of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.
Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the individual security level. For asset-backed securities performance indicators considered related to the underlying assets include default rates, delinquency rates, percentage of nonperforming assets, debt-to-collateral ratios, third-party guarantees, current levels of subordination, vintage, geographic concentration, analyst reports and forecasts, credit ratings and other market data. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis.
If we intend to sell a debt security or more likely than not we will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental impairment reported in earnings.
Accrued interest receivable on AFS debt securities totaled $3.63 million at March 31, 2023 and is excluded from the estimate of credit losses.
Loans held for sale: Loans held for sale are stated at the lower of aggregate cost or estimated fair value. Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan. The Company has had very few experiences of repurchasing loans previously sold into the secondary market. A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.
Loans held for investment: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost net of the allowance for credit losses ("ACL"). Amortized cost is the principal balance outstanding, net of deferred loan fees and costs. Accrued interest receivable on loans held for investment totaled $13.75 million at March 31, 2023 and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Nonrefundable loan fees and origination costs are deferred and recognized as a yield adjustment over the life of the related loan.
The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the
borrower's ability to meet payments of interest or principal when they become due, which is generally when a loan is 90 days or
more past due unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed against interest income. Loans are returned to an accrual status when all of the principal and interest amounts contractually due are brought current and repayment of the remaining contractual principal and interest is expected. A loan may also return to accrual status if additional collateral is received from the borrower and, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the collection of the amount contractually due. Payment received on nonaccrual loans are applied first to principal. Once principal is recovered, any remaining payments received are applied to interest income.
The policy for charging off loans is consistent throughout all loan categories. A loan is charged off based on criteria that includes but is not limited to: delinquency status, financial condition of the entire customer credit line and underlying collateral coverage, economic or external conditions that might impact full repayment of the loan, legal issues, overdrafts, and the customer’s willingness to work with the Company.
Allowance for credit losses for loans held for investment: The allowance for credit losses is an estimate of the expected losses over the remaining life of the Company's existing loans held for investment portfolio. The allowance for credit losses for loans held for investment, as reported in our consolidated balance sheet, is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The loan loss estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
segments which consist of agricultural, 1 to 4 family first and junior liens, commercial, and consumer lending. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. For each of these pools, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data. The following provides the credit quality indicators and risk elements that are most relevant and most carefully considered and monitored for each loan portfolio segment.
Agricultural - Agricultural operating loans include loans made to finance agricultural production and other loans to farmers and farming operations. Agricultural loans also include mortgage loans secured by farmland. Agricultural operating loans, most of which are secured by crops and machinery, are provided to finance capital improvement and farm operations as well as acquisitions of livestock and machinery. The ability of the borrower to repay may be affected by many factors outside of the borrower’s control including adverse weather conditions, loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural operating loans is dependent upon the profitable operation or management of the agricultural entity. Agricultural operating loans generally have a term of one year and may have a fixed or variable rate.
Mortgage loans secured by farmland are made to individuals and businesses within the Company's trade area. The primary source of repayment is the cash flow generated by the collateral underlying the loan. The secondary repayment source would be the liquidation of the collateral. Terms for real estate loans secured by farmland range from one to ten years with an amortization period of 25 years or less. Generally, interest rates are fixed for mortgage loans secured by farmland. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real gross domestic product (GDP).
1 to 4 Family First and Junior Liens - The 1 to 4 family first and junior liens portfolio segment is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower's capacity to repay, credit, and collateral. Several factors are considered when assessing a borrower's capacity, including the borrower's employment, income, current debt, assets, and level of equity in the property. Credit refers to how well a borrower manages their current and prior debts as documented by a credit report that provides credit scores and the borrower's current and past information about their credit history. Collateral refers to the type and use of property, occupancy, and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the all-transactions house price index for Iowa.
Commercial - The commercial loan portfolio segment is comprised of the commercial real estate mortgage including obligations of states and political subdivisions, multifamily residential mortgage, construction/land development and commercial and financial loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party's financial position. These other factors include assessing liquidity, the level and composition of net worth, leverage, considering all other lender amounts and position, an analysis of cash expected to flow through the obligors including the outflow to other lenders, vacancies and prior experience with the borrower. This information is used to assess adequate financial capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate, the all-transactions house price index for Iowa and the Iowa real GDP.
Consumer Lending - The Company offers consumer loans to individuals including personal loans and automobile loans. These consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer collections are dependent on the borrower's continuing financial stability and are more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time,
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
may be difficult to recover and may fluctuate in value based on condition. Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real GDP.
The allowance level is influenced by loan volumes, loan credit quality indicator migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics; and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow method or remaining life method to estimate expected credit losses.
Discounted cash flow method: In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and purpose. This model calculates an expected loss percentage for each loan class by considering the probability of default, using life-of-loan analysis periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class. The default and severity factors used to calculate the allowance for credit losses for loans that share similar risk characteristics with other loans are adjusted for differences between the historical period used to calculate historical default and loss severity rates and expected conditions over the remaining lives of the loans in the portfolio related to: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending management and other relevant staff; (5) the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans; (6) the quality of our loan review system and (7) the value of underlying collateral for collateralized loans. Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast. The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the economic variables.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over twelve quarters on a straight-line basis. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.
Remaining life method: Expected credit losses for credit cards and overdrafts are determined through use of the remaining life method. The remaining life method utilizes average annual charge-off rates and remaining life to estimate the allowance for credit losses. This is done by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period and applying those principal payments against the balance outstanding as of the reporting period along with the average annual charge-off rate until the expected payments have been fully allocated.
Collateral dependent financial assets: For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge- offs and deferred loan fees and costs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
The Company’s estimate of the ACL reflects losses expected over the contractual life of the assets, adjusted for estimated prepayments or curtailments. The contractual term does not consider extensions, renewals or modifications unless the Company
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
has identified a modification including a concession to a borrower experiencing financial difficulties. A modification of a loan to a borrower experiencing financial difficulties occurs when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.
Allowance for credit losses on off-balance sheet credit exposures, including unfunded loan commitments: The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, including unfunded loan commitments, which is disclosed on the balance sheet. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet (OBS) credit exposures that are unconditionally cancellable by the Company, such as credit card receivables, or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. The allowance for credit losses on OBS credit exposures is adjusted as credit loss expense. Categories of OBS credit exposures correspond to the loan portfolio segments described previously.
Troubled debt restructurings (“TDR loans”): Prior to January 1, 2023, a loan was accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, the Company granted a concession to a borrower experiencing financial difficulty that the Company would not otherwise consider. These concessions 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 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.
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.
Effect of New Financial Accounting Standards:
In May 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in this ASU affect entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. An entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option to compensate for goods or services in accordance with the guidance in Topic 718, Compensation-Stock Compensation. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The adoption of the ASU by the Company on January 1, 2022 did not have a material impact on the financial statements.
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
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
after December 15, 2022, including interim periods within those fiscal years. An entity should apply the amendments prospectively to business combinations occurring on or after the effective date of the amendments. The adoption of the ASU by the Company on January 1, 2023 did not have a material impact on the financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The FASB issued these amendments to eliminate accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty, and to require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period. The adoption of the ASU on a prospective basis by the Company on January 1, 2023 did not have a material impact on the financial statements
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using Proportional Amortization Method. The FASB is issuing this ASU to allow reporting entities to consistently account for equity investments made primarily for the purposes of receiving income tax credits and other income tax benefits. The ASU permits reporting entities to elect to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period. The Company is in the process of evaluating the impact of this ASU on the financial statements.
Note 2.Earnings Per Share
Basic earnings per share is computed using the weighted average number of actual common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur from the exercise of common stock options outstanding. ESOP shares are considered outstanding for this calculation unless unearned.
The computation of basic and diluted earnings per share for the periods presented is as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | | | |
| Common shares outstanding at the beginning of the period | 9,225,484 | | | 9,299,640 | | | | | | | |
| Weighted average number of net shares redeemed | (6,484) | | | (9,053) | | | | | | | |
| Weighted average shares outstanding (basic) | 9,219,000 | | | 9,290,587 | | | | | | | |
| Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method | 765 | | | 3,194 | | | | | | | |
| Weighted average number of shares (diluted) | 9,219,765 | | | 9,293,781 | | | | | | | |
| Net income (In thousands) | $ | 12,462 | | | $ | 10,652 | | | | | | | |
| Earnings per share: | | | | | | | | | |
| Basic | $ | 1.35 | | | $ | 1.15 | | | | | | | |
| Diluted | $ | 1.35 | | | $ | 1.15 | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 3.Accumulated Other Comprehensive Income (Loss)
The following table summarizes the balances of each component of accumulated other comprehensive (loss) income (AOCI), included in stockholders’ equity, at March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (amounts in thousands) |
| Net unrealized loss on available-for-sale securities | $ | (45,711) | | | $ | (54,198) | |
| | | |
| Tax effect | 11,053 | | | 13,138 | |
| Net-of-tax amount | $ | (34,658) | | | $ | (41,060) | |
Note 4.Securities
The carrying values of investment securities at March 31, 2023 and December 31, 2022 are summarized in the following table (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Amount | | Percent | | Amount | | Percent |
| Securities available for sale | | | | | | | |
| U.S. Treasury | $ | 435,202 | | | 56.93 | % | | $ | 445,392 | | | 57.39 | % |
| Other securities (FHLB, FHLMC and FNMA) | 32,365 | | | 4.23 | | | 31,934 | | | 4.11 | |
| State and political subdivisions | 247,277 | | | 32.35 | | | 248,582 | | | 32.03 | |
| Mortgage-backed securities and collateralized mortgage obligations | 49,597 | | | 6.49 | | | 50,196 | | | 6.47 | |
| Total securities available for sale | $ | 764,441 | | | 100.00 | % | | $ | 776,104 | | | 100.00 | % |
Investment securities have been classified in the consolidated balance sheets according to management’s intent. Available-for-sale securities consist of debt securities not classified as trading or held to maturity. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. Municipal bonds are comprised of general obligation bonds and revenue bonds issued by various municipal corporations. As of March 31, 2023 and December 31, 2022, all securities held were rated investment grade based upon external ratings where available and, where not available, based upon management knowledge of the local issuers and their financial situations. There were no trading or held to maturity securities as of March 31, 2023 or December 31, 2022.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The carrying amount of available-for-sale securities, fair values and allowance for credit losses were as follows as of March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
(Losses) | | Allowance for Credit Losses | | Estimated Fair
Value |
| March 31, 2023 | | | | | | | | | |
| U.S. Treasury | $ | 455,938 | | | $ | 13 | | | $ | (20,749) | | | $ | — | | | $ | 435,202 | |
| Other securities (FHLB, FHLMC and FNMA) | 35,230 | | | — | | | (2,865) | | | — | | | 32,365 | |
| State and political subdivisions | 262,996 | | | 523 | | | (16,242) | | | — | | | 247,277 | |
| Mortgage-backed securities and collateralized mortgage obligations | 55,988 | | | — | | | (6,391) | | | — | | | $ | 49,597 | |
| Total | $ | 810,152 | | | $ | 536 | | | $ | (46,247) | | | $ | — | | | $ | 764,441 | |
| December 31, 2022: | | | | | | | | | |
| U.S. Treasury | $ | 470,581 | | | $ | — | | | $ | (25,189) | | | $ | — | | | $ | 445,392 | |
| Other securities (FHLB, FHLMC and FNMA) | 35,255 | | | — | | | (3,321) | | | — | | | 31,934 | |
| State and political subdivisions | 267,351 | | | 239 | | | (19,008) | | | — | | | 248,582 | |
| Mortgage-backed securities and collateralized mortgage obligations | 57,115 | | | — | | | (6,919) | | | — | | | 50,196 | |
| Total | $ | 830,302 | | | $ | 239 | | | $ | (54,437) | | | $ | — | | | $ | 776,104 | |
The amortized cost and estimated fair value of available-for-sale securities classified according to their contractual maturities at March 31, 2023, were as follows (in thousands) below. Expected maturities of MBS may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
| | | | | | | | | | | |
| | Amortized
Cost | | Fair Value |
| Due in one year or less | $ | 140,553 | | | $ | 138,514 | |
| Due after one year through five years | 466,069 | | | 442,673 | |
| Due after five years through ten years | 113,909 | | | 104,664 | |
| Due over ten years | 33,633 | | | 28,993 | |
| $ | 754,164 | | | $ | 714,844 | |
| Mortgage-backed securities and collateralized mortgage obligations | 55,988 | | | 49,597 | |
| $ | 810,152 | | | $ | 764,441 | |
As of March 31, 2023, investment securities with a carrying value of $9.58 million were pledged to collateralize other borrowings. As of March 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders' equity.
Sales proceeds and gross realized gains and losses on available-for-sale securities were as follows (in thousands):
| | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2022 |
| Sale proceeds | $ | 509 | | | $ | — | |
| Gross realized gains | — | | | — | |
| Gross realized losses | — | | | — | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table shows the fair value, gross unrealized losses and the percentage of fair value represented by gross unrealized losses of applicable investment securities owned by the Company, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
March 31, 2023
Description of Securities | # | | Fair Value | | Unrealized
Loss | | % | | # | | Fair Value | | Unrealized
Loss | | % | | # | | Fair Value | | Unrealized
Loss | | % |
| U.S. Treasury | 27 | | | $ | 92,533 | | | $ | (1,999) | | | 2.16 | % | | 117 | | | $ | 340,288 | | | $ | (18,750) | | | 5.51 | % | | 144 | | | $ | 432,821 | | | $ | (20,749) | | | 4.79 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other securities (FHLB, FHLMC and FNMA) | — | | | — | | | — | | | — | | | 14 | | | 32,365 | | | (2,865) | | | 8.85 | | | 14 | | | 32,365 | | | (2,865) | | | 8.85 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| State and political subdivisions | 244 | | | 66,231 | | | (667) | | | 1.01 | | | 485 | | | 134,114 | | | (15,575) | | | 11.61 | | | 729 | | | 200,345 | | | (16,242) | | | 8.11 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities and collateralized mortgage obligations | 1 | | | 4,392 | | | (299) | | | 6.81 | | | 17 | | | 45,205 | | | (6,092) | | | 13.48 | | | 18 | | | 49,597 | | | (6,391) | | | 12.89 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired securities | 272 | | | $ | 163,156 | | | $ | (2,965) | | | 1.82 | % | | 633 | | | $ | 551,972 | | | $ | (43,282) | | | 7.84 | % | | 905 | | | $ | 715,128 | | | $ | (46,247) | | | 6.47 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
December 31, 2022
Description of Securities | # | | Fair Value | | Unrealized
Loss | | % | | # | | Fair Value | | Unrealized
Loss | | % | | # | | Fair Value | | Unrealized
Loss | | % |
| U.S. Treasury | 89 | | | $ | 306,407 | | | $ | (10,695) | | | 3.49 | % | | 60 | | | $ | 136,486 | | | $ | (14,494) | | | 10.62 | % | | 149 | | | $ | 442,893 | | | $ | (25,189) | | | 5.69 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other securities (FHLB, FHLMC and FNMA) | — | | | — | | | — | | | — | | | 14 | | | 31,934 | | | (3,321) | | | 10.40 | | | 14 | | | 31,934 | | | (3,321) | | | 10.40 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| State and political subdivisions | 479 | | | 124,647 | | | (3,351) | | | 2.69 | | | 337 | | | 87,221 | | | (15,657) | | | 17.95 | | | 816 | | | 211,868 | | | (19,008) | | | 8.97 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities and collateralized mortgage obligations | 14 | | | 43,035 | | | (5,314) | | | 12.35 | | | 4 | | | 7,160 | | | (1,605) | | | 22.42 | | | 18 | | | 50,195 | | | (6,919) | | | 13.78 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired securities | 582 | | | $ | 474,089 | | | $ | (19,360) | | | 4.08 | % | | 415 | | | $ | 262,801 | | | $ | (35,077) | | | 13.35 | % | | 997 | | | $ | 736,890 | | | $ | (54,437) | | | 7.39 | % |
The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are not attributable to credit losses. None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest. The unrealized losses are due to changes in interest rates. The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table. Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis. The securities are of high credit quality (investment grade credit ratings) and principal and interest payments are made timely with no payments past due as of March 31, 2023. The fair value is expected to recover as the securities approach maturity. The U.S. Treasury and other securities are issued and guaranteed by U.S. government-sponsored entities and agencies. The mortgage-
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 March 31, 2023.
Note 5.Loans
Classes of loans are as follows:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31,
2022 |
| | (Amounts In Thousands) |
| Agricultural | $ | 105,316 | | | $ | 112,705 | |
| Commercial and financial | 271,784 | | | 269,568 | |
| Real estate: | | | |
| Construction, 1 to 4 family residential | 91,526 | | | 92,408 | |
| Construction, land development and commercial | 236,265 | | | 196,240 | |
| Mortgage, farmland | 268,805 | | | 256,570 | |
| Mortgage, 1 to 4 family first liens | 1,162,996 | | | 1,130,989 | |
| Mortgage, 1 to 4 family junior liens | 130,179 | | | 124,951 | |
| Mortgage, multi-family | 440,990 | | | 436,952 | |
| Mortgage, commercial | 405,156 | | | 402,842 | |
| Loans to individuals | 37,937 | | | 36,675 | |
| Obligations of state and political subdivisions | 47,588 | | | 48,213 | |
| | $ | 3,198,542 | | | $ | 3,108,113 | |
| Net unamortized fees and costs | 316 | | | 308 | |
| | $ | 3,198,858 | | | $ | 3,108,421 | |
| Less allowance for credit losses | 41,070 | | | 41,440 | |
| | $ | 3,157,788 | | | $ | 3,066,981 | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Changes in the allowance for credit losses for the three months ended March 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| | Agricultural | | Commercial and
Financial | | Real Estate:
Construction and
land development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage, 1 to 4
family | | Real Estate:
Mortgage, multi-
family and
commercial | | Other | | Total |
| | (Amounts In Thousands) |
| Allowance for credit losses: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 2,542 | | | $ | 6,259 | | | $ | 4,189 | | | $ | 2,989 | | | $ | 14,208 | | | $ | 9,416 | | | $ | 1,837 | | | $ | 41,440 | |
| Charge-offs | (440) | | | (90) | | | — | | | — | | | (86) | | | — | | | (271) | | | (887) | |
| Recoveries | 7 | | | 83 | | | 1 | | | 27 | | | 81 | | | 26 | | | 64 | | | 289 | |
| Credit loss expense (benefit) | 47 | | | (689) | | | 540 | | | (165) | | | 532 | | | 255 | | | (292) | | | 228 | |
| | | | | | | | | | | | | | | |
| Ending balance | $ | 2,156 | | | $ | 5,563 | | | $ | 4,730 | | | $ | 2,851 | | | $ | 14,735 | | | $ | 9,697 | | | $ | 1,338 | | | $ | 41,070 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | |
| Ending balance | $ | 105,316 | | | $ | 271,784 | | | $ | 327,791 | | | $ | 268,805 | | | $ | 1,293,175 | | | $ | 846,146 | | | $ | 85,525 | | | $ | 3,198,542 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Changes in the allowance for credit losses for the three months ended March 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| | Agricultural | | Commercial and
Financial | | Real Estate:
Construction and
land development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage,
1 to 4 family | | Real Estate:
Mortgage, multi-
family and
commercial | | Other | | Total |
| | (Amounts In Thousands) |
| Allowance for credit losses: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 2,261 | | | $ | 4,269 | | | $ | 2,300 | | | $ | 3,433 | | | $ | 11,498 | | | $ | 10,498 | | | $ | 1,211 | | | $ | 35,470 | |
| | | | | | | | | | | | | | | |
| Charge-offs | — | | | (48) | | | — | | | — | | | (140) | | | (1) | | | (150) | | | (339) | |
| Recoveries | 14 | | | 123 | | | 3 | | | 43 | | | 207 | | | 22 | | | 43 | | | 455 | |
| Credit loss expense (benefit) | 139 | | | 551 | | | 44 | | | (166) | | | (127) | | | (285) | | | 108 | | | 264 | |
| | | | | | | | | | | | | | | |
| Ending balance | $ | 2,414 | | | $ | 4,895 | | | $ | 2,347 | | | $ | 3,310 | | | $ | 11,438 | | | $ | 10,234 | | | $ | 1,212 | | | $ | 35,850 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Loans: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Ending balance | $ | 104,900 | | | $ | 223,702 | | | $ | 222,743 | | | $ | 236,573 | | | $ | 1,031,012 | | | $ | 786,711 | | | $ | 81,965 | | | $ | 2,687,606 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The allowance for credit losses and the related loan balances as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Agricultural | | Commercial and Financial | | Real Estate: Construction
and land
development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage, 1 to 4 family | | Real Estate:
Mortgage, multi-family and
commercial | | Other | | Total |
| | (Amounts In Thousands) |
| 2022 | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | |
| Ending balance | $ | 2,542 | | | $ | 6,259 | | | $ | 4,189 | | | $ | 2,989 | | | $ | 14,208 | | | $ | 9,416 | | | $ | 1,837 | | | $ | 41,440 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Loan balances: | | | | | | | | | | | | | | | |
| Ending balance | $ | 112,705 | | | $ | 269,568 | | | $ | 288,648 | | | $ | 256,570 | | | $ | 1,255,940 | | | $ | 839,794 | | | $ | 84,888 | | | $ | 3,108,113 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Changes in the allowance for credit losses for off-balance sheet credit exposures for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Agricultural | | Commercial and
Financial | | Real Estate:
Construction and
land development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage, 1 to 4
family | | Real Estate:
Mortgage, multi-
family and
commercial | | Other | | Total |
| (Amounts In Thousands) |
| Allowance for credit losses for off-balance sheet credit exposures: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 525 | | $ | 1,099 | | $ | 2,126 | | $ | 55 | | $ | 471 | | $ | 122 | | $ | 32 | | $ | 4,430 |
| | | | | | | | | | | | | | | |
| Credit loss expense (benefit) | (253) | | (29) | | 477 | | (1) | | (14) | | (34) | | (6) | | 140 |
| (Charge-offs), net recoveries | — | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | | | | | | | | | |
| Ending balance | $ | 272 | | | $ | 1,070 | | | $ | 2,603 | | | $ | 54 | | | $ | 457 | | | $ | 88 | | | $ | 26 | | | $ | 4,570 | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Agricultural | | Commercial and
Financial | | Real Estate:
Construction and
land development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage, 1 to 4
family | | Real Estate:
Mortgage, multi-
family and
commercial | | Other | | Total |
| (Amounts In Thousands) |
| Allowance for credit losses for off-balance sheet credit exposures: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 383 | | | $ | 1,118 | | | $ | 849 | | | $ | 113 | | | $ | 794 | | | $ | 559 | | | $ | 34 | | | $ | 3,850 | |
| | | | | | | | | | | | | | | |
| Credit loss expense (benefit) | 130 | | | 302 | | | 277 | | | (13) | | | 131 | | | 34 | | | (21) | | | 840 | |
| (Charge-offs), net recoveries | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Ending balance | $ | 513 | | | $ | 1,420 | | | $ | 1,126 | | | $ | 100 | | | $ | 925 | | | $ | 593 | | | $ | 13 | | | $ | 4,690 | |
| | | | | | | | | | | | | | | |
The allowance for credit losses for off-balance sheet credit exposures as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Agricultural | | Commercial and
Financial | | Real Estate:
Construction and
land development | | Real Estate:
Mortgage,
farmland | | Real Estate:
Mortgage, 1 to 4
family | | Real Estate:
Mortgage, multi-
family and
commercial | | Other | | Total |
| (Amounts In Thousands) |
| Ending balance | $ | 525 | | | $ | 1,099 | | | $ | 2,126 | | | $ | 55 | | | $ | 471 | | | $ | 122 | | | $ | 32 | | | $ | 4,430 | |
| | | | | | | | | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Credit loss expense for off-balance sheet credit exposures is included in credit loss expense on the consolidated statement of income for the three months ended March 31, 2023 and 2022.
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk ratings ranging from 1 to 6, where a higher rating represents higher risk. The Company differentiates its lending portfolios into loans sharing common risk characteristics for which expected credit loss is measured on a pool basis and loans not sharing common risk characteristics for which credit loss is measured individually.
The below are descriptions of the credit quality indicators:
Excellent – Excellent rated loans are prime quality loans covered by highly liquid collateral with generous margins or supported by superior current financial conditions reflecting substantial net worth, relative to total credit extended, and based on assets of a stable and non-speculative nature whose values can be readily verified. Identified repayment source or cash flow is abundant and assured. Loans are secured with cash, cash equivalents, or collateral with very low loan to values. The borrower would qualify for unsecured debt and guarantors provide excellent secondary support to the relationship. The borrower has a long-term relationship with the Company, maintains high deposit balances and has an established payment history with the Company and an established business in an established industry.
Good – Good rated loans are adequately secured by readily marketable collateral or good financial condition characterized by liquidity, flexibility and sound net worth. Loans are supported by sound primary and secondary payment sources and timely and accurate financial information. The relationship is not quite as strong as a borrower that is assigned an excellent rating but still has a very strong liquidity position, low leverage, and track record of strong performance. These loans have a strong collateral position with limited risk to bank capital. The collateral will not materially lose value in a distressed liquidation. Guarantors provide additional secondary support to mitigate possible bank losses. The borrower has a long-term relationship with the Company with an established track record of payments; loans with shorter remaining loan amortization; deposit balances are consistent; loan payments could be made from cash reserves in the interim period; and source of income is coming from a stable industry.
Satisfactory – Satisfactory rated loans are loans to borrowers of average financial means not especially vulnerable to changes in economic or other circumstances, where the major support for the extension is sufficient collateral of a marketable nature, and the primary source of repayment is seen to be clear and adequate. The borrower's financial performance is consistent, ratios and trends are positive and the primary repayment source can clearly be identified and supported with acceptable financial information. The loan relationship could be vulnerable to changes in economic or industry conditions but have the ability to absorb unexpected issues. The loan collateral coverage is considered acceptable and guarantors can provide financial support but net worth might not be as liquid as a 1 or 2 rated relationship. The borrower has an established relationship with the Company. The relationship is making timely loan payments, any operating line is revolving and deposit balances are positive with limited to no overdrafts. Management and industry is considered stable.
Monitor – Monitor rated loans are identified by management as warranting special attention for a variety of reasons that may bear on ultimate collectability. This may be due to adverse trends, a particular industry, loan structure, or repayment that is dependent on projections, or a one-time occurrence. The relationship liquidity levels are minimal and the borrower’s leverage position is brought into question. The primary repayment source is showing signs of being stressed or is not proven. If the borrower performs as planned, the loan will be repaid. The collateral coverage is still considered acceptable but there might be some concern with the type of real estate securing the debt or highly dependent on chattel assets. Some loans may be better secured than others. Guarantors still provide some support but there is not an abundance of financial strength supporting the guaranty. A monitor credit may be appropriate when the borrower is experiencing rapid growth which is impacting liquidity levels and increasing debt levels. Other attributes to consider would include if the business is a start-up or newly acquired, if the relationship has significant financing relationships with other financial institutions, the quality of financial information being received, management depth of the company, and changes to the business model. The track history with the Company has some deficiencies such as slow payments or some overdrafts.
Special Mention – Special mention rated loans are supported by a marginal payment capacity and are marginally protected by collateral. There are identified weaknesses that if not monitored and corrected may adversely affect the Company’s credit position. A special mention credit would typically have a weakness in one of the general categories (cash flow, collateral
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
position or payment history) but not in all categories. Potential indicators of a special mention would include past due payments, overdrafts, management issues, poor financial performance, industry issues, or the need for additional short-term borrowing. The ability to continue to make payments is in question; there are “red flags” such as past due payments, non-revolving credit lines, overdrafts, and the inability to sell assets. The borrower is experiencing delinquent taxes, legal issues, etc., obtaining financial information has become a challenge, collateral coverage is marginal at best, and the value and condition could be brought into question. Collateral document deficiencies have been noted and if not addressed, could become material. Guarantors provide minimal support for this relationship. The credit may include an action plan or follow up established in the asset quality process. There is a change in the borrower’s communication pattern. Industry issues may be impacting the relationship. Adverse credit scores or history of payment deficiencies could be noted.
Substandard – Substandard loans are not adequately supported by the paying capacity of the borrower and may be inadequately collateralized. These loans have a well-defined weakness or weaknesses. Full repayment of the loan(s) according to the original terms and conditions is in question or not expected. For these loans, it is more probable than not that the Company could sustain some loss if the deficiency(ies) is not corrected. There are identified shortfalls in the primary repayment source such as carry over debt, past due payments, and overdrafts. Obtaining quality and timely financial information is a weakness. The loan is under secured with exposure that could impact the Company's capital. It appears the liquidation of collateral has become the repayment source. The collateral may be difficult to foreclose or have little to no value. Collateral documentation deficiencies have been noted during the review process. Guarantor(s) provide minimal to no support of the relationship. The borrower’s communication with the Company continues to decrease and the borrower is not addressing the situation. There is some concern about the borrower’s ability and willingness to repay the loans. Problems may be the result of external issues such as economic or industry related issues.
The following tables present the credit quality indicators and origination years by type of loan in each category as of March 31, 2023 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agricultural |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 310 | | $ | 1,482 | | $ | — | | $ | 175 | | $ | 20 | | $ | — | | $ | 3,800 | | $ | 5,787 | |
| Good | 2,020 | | 1,941 | | 666 | | 1,061 | | 405 | | 31 | | 6,737 | | 12,861 | |
| Satisfactory | 3,300 | | 20,692 | | 3,643 | | 2,334 | | 739 | | 1,160 | | 23,102 | | 54,970 | |
| Monitor | 3,398 | | 5,087 | | 1,600 | | 1,473 | | 830 | | 439 | | 15,339 | | 28,166 | |
| Special Mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | 96 | | 614 | | — | | 263 | | 58 | | 152 | | 2,349 | | 3,532 | |
| Total | $ | 9,124 | | $ | 29,816 | | $ | 5,909 | | $ | 5,306 | | $ | 2,052 | | $ | 1,782 | | $ | 51,327 | | $ | 105,316 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | 440 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 440 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Financial |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 396 | | $ | 1,414 | | $ | 621 | | $ | 643 | | $ | — | | $ | 176 | | $ | 7,861 | | $ | 11,111 | |
| Good | 1,747 | | 12,362 | | 6,496 | | 2,247 | | 459 | | 177 | | 14,540 | | 38,028 | |
| Satisfactory | 13,497 | | 53,485 | | 21,686 | | 9,624 | | 3,303 | | 2,083 | | 52,192 | | 155,870 | |
| Monitor | 6,250 | | 13,095 | | 6,991 | | 5,175 | | 1,093 | | 86 | | 24,833 | | 57,523 | |
| Special Mention | 650 | | 1,108 | | 429 | | 252 | | 146 | | 422 | | 1,495 | | 4,502 | |
| Substandard | 95 | | 1,008 | | 359 | | 375 | | 109 | | — | | 2,804 | | 4,750 | |
| Total | $ | 22,635 | | $ | 82,472 | | $ | 36,582 | | $ | 18,316 | | $ | 5,110 | | $ | 2,944 | | $ | 103,725 | | $ | 271,784 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | 87 | | $ | 3 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 90 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Construction, 1 to 4 Family Residential |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Good | — | | 876 | | — | | — | | — | | — | | 20,450 | | 21,326 | |
| Satisfactory | 709 | | 2,924 | | — | | — | | — | | — | | 42,301 | | 45,934 | |
| Monitor | 749 | | 2,244 | | — | | — | | — | | — | | 14,267 | | 17,260 | |
| Special Mention | — | | — | | — | | — | | — | | — | | 6,786 | | 6,786 | |
| Substandard | — | | 115 | | 105 | | — | | — | | — | | — | | 220 | |
| Total | $ | 1,458 | | $ | 6,159 | | $ | 105 | | $ | — | | $ | — | | $ | — | | $ | 83,804 | | $ | 91,526 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Construction, Land Development and Commercial |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | 375 | | $ | — | | $ | — | | $ | — | | $ | 120 | | $ | 1,293 | | $ | 1,788 | |
| Good | 1,399 | | 2,525 | | 834 | | 947 | | — | | 216 | | 18,359 | | 24,280 | |
| Satisfactory | 3,901 | | 16,999 | | 7,736 | | 1,183 | | 307 | | 1,063 | | 125,360 | | 156,549 | |
| Monitor | 2,313 | | 3,596 | | 781 | | 118 | | — | | 103 | | 29,263 | | 36,174 | |
| Special Mention | 2,960 | | 3,775 | | — | | — | | — | | — | | 3,290 | | 10,025 | |
| Substandard | 6,998 | | 207 | | 191 | | 53 | | — | | — | | — | | 7,449 | |
| Total | $ | 17,571 | | $ | 27,477 | | $ | 9,542 | | $ | 2,301 | | $ | 307 | | $ | 1,502 | | $ | 177,565 | | $ | 236,265 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Farmland |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 2,000 | | $ | 4,906 | | $ | 50 | | $ | 234 | | $ | 68 | | $ | 4 | | $ | 112 | | $ | 7,374 | |
| Good | 3,191 | | 22,521 | | 13,604 | | 8,023 | | 1,489 | | 1,435 | | 6,915 | | 57,178 | |
| Satisfactory | 14,130 | | 61,433 | | 41,326 | | 19,863 | | 3,689 | | 11,419 | | 14,953 | | 166,813 | |
| Monitor | 571 | | 13,113 | | 5,365 | | 4,815 | | 3,260 | | 1,684 | | 4,087 | | 32,895 | |
| Special Mention | — | | 830 | | 90 | | 111 | | — | | 15 | | 1 | | 1,047 | |
| Substandard | 1,236 | | 1,728 | | — | | — | | 60 | | 473 | | 1 | | 3,498 | |
| Total | $ | 21,128 | | $ | 104,531 | | $ | 60,435 | | $ | 33,046 | | $ | 8,566 | | $ | 15,030 | | $ | 26,069 | | $ | 268,805 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, 1 to 4 Family First Liens |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | 1,483 | | $ | 447 | | $ | 348 | | $ | — | | $ | 353 | | $ | — | | $ | 2,631 | |
| Good | 318 | | 12,091 | | 5,911 | | 8,266 | | 1,317 | | 12,545 | | 4,653 | | 45,101 | |
| Satisfactory | 59,226 | | 372,408 | | 196,053 | | 138,601 | | 50,005 | | 164,030 | | 16,702 | | 997,025 | |
| Monitor | 1,777 | | 27,911 | | 19,924 | | 17,955 | | 3,413 | | 14,415 | | 7,466 | | 92,861 | |
| Special Mention | 273 | | 1,578 | | 2,437 | | 3,405 | | 1,040 | | 3,244 | | 38 | | 12,015 | |
| Substandard | — | | 1,693 | | 2,165 | | 2,464 | | 1,030 | | 5,815 | | 196 | | 13,363 | |
| Total | $ | 61,594 | | $ | 417,164 | | $ | 226,937 | | $ | 171,039 | | $ | 56,805 | | $ | 200,402 | | $ | 29,055 | | $ | 1,162,996 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | 24 | | $ | 4 | | $ | — | | $ | 3 | | $ | 19 | | $ | — | | $ | 50 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, 1 to 4 Family Junior Liens |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | 6 | | $ | — | | $ | — | | $ | 6 | | $ | 12 | |
| Good | — | | 485 | | 188 | | 457 | | 90 | | 511 | | 2,056 | | 3,787 | |
| Satisfactory | 2,510 | | 15,416 | | 10,458 | | 7,622 | | 4,370 | | 10,832 | | 69,251 | | 120,459 | |
| Monitor | — | | 233 | | 240 | | 508 | | 81 | | 420 | | 2,253 | | 3,735 | |
| Special Mention | 43 | | 116 | | 190 | | 237 | | 36 | | 95 | | 249 | | 966 | |
| Substandard | — | | 121 | | 72 | | 225 | | 85 | | 168 | | 549 | | 1,220 | |
| Total | $ | 2,553 | | $ | 16,371 | | $ | 11,148 | | $ | 9,055 | | $ | 4,662 | | $ | 12,026 | | $ | 74,364 | | $ | 130,179 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | 15 | | $ | — | | $ | — | | $ | — | | $ | 22 | | $ | — | | $ | 37 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Multi-Family |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | 6,000 | | $ | 3,090 | | $ | 2,969 | | $ | — | | $ | 279 | | $ | — | | $ | 12,338 | |
| Good | 516 | | 14,728 | | 23,226 | | 25,997 | | — | | 8,431 | | 1,147 | | 74,045 | |
| Satisfactory | 9,260 | | 94,980 | | 84,633 | | 25,876 | | 2,324 | | 14,495 | | 10,545 | | 242,113 | |
| Monitor | 8,482 | | 42,454 | | 22,257 | | 20,687 | | 168 | | 1,186 | | 3,360 | | 98,594 | |
| Special Mention | — | | 10,128 | | 951 | | — | | — | | — | | 2,821 | | 13,900 | |
| Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 18,258 | | $ | 168,290 | | $ | 134,157 | | $ | 75,529 | | $ | 2,492 | | $ | 24,391 | | $ | 17,873 | | $ | 440,990 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Commercial |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 1,527 | | $ | 1,840 | | $ | 571 | | $ | 19,171 | | $ | — | | $ | 1,104 | | $ | — | | $ | 24,213 | |
| Good | 5,555 | | 19,301 | | 18,689 | | 13,993 | | 1,650 | | 5,430 | | 11,489 | | 76,107 | |
| Satisfactory | 12,024 | | 57,276 | | 56,005 | | 37,926 | | 10,444 | | 17,961 | | 27,537 | | 219,173 | |
| Monitor | 1,251 | | 22,420 | | 14,210 | | 21,456 | | 307 | | 8,836 | | 7,364 | | 75,844 | |
| Special Mention | 186 | | 766 | | 1,417 | | 1,165 | | — | | 763 | | — | | 4,297 | |
| Substandard | 259 | | — | | 3,060 | | 726 | | 698 | | 94 | | 685 | | 5,522 | |
| Total | $ | 20,802 | | $ | 101,603 | | $ | 93,952 | | $ | 94,437 | | $ | 13,099 | | $ | 34,188 | | $ | 47,075 | | $ | 405,156 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans to Individuals |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Good | 13 | | 37 | | — | | — | | 14 | | — | | 1 | | 65 | |
| Satisfactory | 3,006 | | 12,333 | | 5,163 | | 2,185 | | 644 | | 13,604 | | 145 | | 37,080 | |
| Monitor | 112 | | 248 | | 120 | | 41 | | 3 | | 19 | | 3 | | 546 | |
| Special Mention | — | | 97 | | 63 | | 3 | | 7 | | — | | 1 | | 171 | |
| Substandard | 12 | | 45 | | 4 | | 2 | | 7 | | 4 | | 1 | | 75 | |
| Total | $ | 3,143 | | $ | 12,760 | | $ | 5,350 | | $ | 2,231 | | $ | 675 | | $ | 13,627 | | $ | 151 | | $ | 37,937 | |
| | | | | | | | |
| Current-period gross write offs | $ | 188 | | $ | 51 | | $ | 28 | | $ | 1 | | $ | — | | $ | — | | $ | 2 | | $ | 270 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of State and Political Subdivisions |
| March 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 4,575 | | $ | — | | $ | 4,575 | |
| Good | — | | — | | — | | 1,840 | | — | | 8,166 | | — | | 10,006 | |
| Satisfactory | — | | 2,470 | | 820 | | 2,412 | | 1,484 | | 16,049 | | 8,721 | | 31,956 | |
| Monitor | — | | 341 | | — | | 302 | | 176 | | 232 | | — | | 1,051 | |
| Special Mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | — | | $ | 2,811 | | $ | 820 | | $ | 4,554 | | $ | 1,660 | | $ | 29,022 | | $ | 8,721 | | $ | 47,588 | |
| | | | | | | | |
| Current-period gross write offs | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents the credit quality indicators by type of loans in each category as of December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agricultural |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 395 | | $ | — | | $ | 199 | | $ | 20 | | $ | 3 | | $ | — | | $ | 4,196 | | $ | 4,813 | |
| Good | 3,823 | | 550 | | 1,003 | | 427 | | 23 | | 13 | | 9,671 | | 15,510 | |
| Satisfactory | 17,417 | | 4,144 | | 2,659 | | 855 | | 1,250 | | 48 | | 24,233 | | 50,606 | |
| Monitor | 12,835 | | 1,885 | | 1,770 | | 891 | | 272 | | 225 | | 19,623 | | 37,501 | |
| Special Mention | — | | — | | — | | — | | — | | — | | 62 | | 62 | |
| Substandard | 1,450 | | — | | 278 | | 59 | | 166 | | — | | 2,260 | | 4,213 | |
| Total | $ | 35,920 | | $ | 6,579 | | $ | 5,909 | | $ | 2,252 | | $ | 1,714 | | $ | 286 | | $ | 60,045 | | $ | 112,705 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and Financial |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 1,644 | | $ | 690 | | $ | 691 | | $ | — | | $ | 176 | | $ | — | | $ | 8,404 | | $ | 11,605 | |
| Good | 14,733 | | 6,854 | | 2,504 | | 546 | | 105 | | 1,059 | | 15,836 | | 41,637 | |
| Satisfactory | 57,920 | | 24,028 | | 11,139 | | 4,339 | | 1,979 | | 356 | | 53,618 | | 153,379 | |
| Monitor | 16,153 | | 7,570 | | 6,031 | | 1,172 | | 260 | | 1 | | 24,434 | | 55,621 | |
| Special Mention | 1,201 | | 343 | | 278 | | 196 | | 29 | | 391 | | 668 | | 3,106 | |
| Substandard | 746 | | 477 | | 291 | | 68 | | — | | — | | 2,638 | | 4,220 | |
| Total | $ | 92,397 | | $ | 39,962 | | $ | 20,934 | | $ | 6,321 | | $ | 2,549 | | $ | 1,807 | | $ | 105,598 | | $ | 269,568 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Construction, 1 to 4 Family Residential |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
| Good | 322 | | — | | — | | — | | — | | — | | 21,467 | | 21,789 | |
| Satisfactory | 1,962 | | 328 | | — | | — | | — | | — | | 47,229 | | 49,519 | |
| Monitor | 775 | | 182 | | — | | — | | — | | — | | 19,886 | | 20,843 | |
| Special Mention | — | | — | | — | | — | | — | | — | | 38 | | 38 | |
| Substandard | — | | 105 | | — | | — | | — | | — | | 114 | | 219 | |
| Total | $ | 3,059 | | $ | 615 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 88,734 | | $ | 92,408 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Construction, Land Development and Commercial |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 375 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 127 | | $ | 1,424 | | $ | 1,926 | |
| Good | 2,383 | | 958 | | 947 | | — | | — | | 221 | | 18,349 | | 22,858 | |
| Satisfactory | 23,004 | | 7,222 | | 1,191 | | 311 | | 251 | | 828 | | 90,511 | | 123,318 | |
| Monitor | 8,121 | | 4,788 | | 119 | | 6 | | 33 | | 71 | | 27,551 | | 40,689 | |
| Special Mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | 7,043 | | 191 | | 53 | | — | | — | | — | | 162 | | 7,449 | |
| Total | $ | 40,926 | | $ | 13,159 | | $ | 2,310 | | $ | 317 | | $ | 284 | | $ | 1,247 | | $ | 137,997 | | $ | 196,240 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Farmland |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 4,058 | | $ | 58 | | $ | 261 | | $ | 68 | | $ | — | | $ | 4 | | $ | 115 | | $ | 4,564 | |
| Good | 24,552 | | 13,966 | | 7,541 | | 1,582 | | 846 | | 917 | | 7,034 | | 56,438 | |
| Satisfactory | 47,617 | | 41,878 | | 20,908 | | 3,628 | | 5,258 | | 8,184 | | 11,927 | | 139,400 | |
| Monitor | 24,754 | | 5,803 | | 5,440 | | 3,478 | | 887 | | 1,221 | | 8,992 | | 50,575 | |
| Special Mention | 4,284 | | 96 | | 112 | | — | | — | | 15 | | — | | 4,507 | |
| Substandard | 539 | | — | | — | | 60 | | 307 | | 180 | | — | | 1,086 | |
| Total | $ | 105,804 | | $ | 61,801 | | $ | 34,262 | | $ | 8,816 | | $ | 7,298 | | $ | 10,521 | | $ | 28,068 | | $ | 256,570 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, 1 to 4 Family First Liens |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 1,507 | | $ | 450 | | $ | 352 | | $ | — | | $ | 6 | | $ | 360 | | $ | — | | $ | 2,675 | |
| Good | 23,270 | | 5,522 | | 8,346 | | 1,342 | | 2,391 | | 10,401 | | 4,688 | | 55,960 | |
| Satisfactory | 369,706 | | 201,488 | | 142,417 | | 52,727 | | 47,736 | | 124,754 | | 14,992 | | 953,820 | |
| Monitor | 29,274 | | 20,868 | | 19,766 | | 3,624 | | 4,546 | | 10,638 | | 6,823 | | 95,539 | |
| Special Mention | 903 | | 1,216 | | 2,058 | | 1,048 | | 952 | | 2,844 | | 463 | | 9,484 | |
| Substandard | 1,756 | | 2,086 | | 2,419 | | 833 | | 1,690 | | 3,980 | | 747 | | 13,511 | |
| Total | $ | 426,416 | | $ | 231,630 | | $ | 175,358 | | $ | 59,574 | | $ | 57,321 | | $ | 152,977 | | $ | 27,713 | | $ | 1,130,989 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, 1 to 4 Family Junior Liens |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 23 | | $ | — | | $ | 7 | | $ | — | | $ | — | | $ | — | | $ | 32 | | $ | 62 | |
| Good | 493 | | 189 | | 465 | | 91 | | — | | 527 | | 2,023 | | 3,788 | |
| Satisfactory | 15,543 | | 10,915 | | 7,921 | | 4,523 | | 4,822 | | 7,024 | | 64,649 | | 115,397 | |
| Monitor | 248 | | 244 | | 507 | | 83 | | 286 | | 188 | | 2,442 | | 3,998 | |
| Special Mention | 114 | | 134 | | 214 | | 37 | | 12 | | 120 | | 72 | | 703 | |
| Substandard | 122 | | 69 | | 198 | | 87 | | 57 | | 47 | | 423 | | 1,003 | |
| Total | $ | 16,543 | | $ | 11,551 | | $ | 9,312 | | $ | 4,821 | | $ | 5,177 | | $ | 7,906 | | $ | 69,641 | | $ | 124,951 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Multi-Family |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 6,162 | | $ | 3,123 | | $ | 3,018 | | $ | — | | $ | — | | $ | 292 | | $ | — | | $ | 12,595 | |
| Good | 14,175 | | 23,485 | | 26,302 | | — | | — | | 8,538 | | 1,362 | | 73,862 | |
| Satisfactory | 97,449 | | 85,441 | | 26,513 | | 2,355 | | 471 | | 14,295 | | 10,604 | | 237,128 | |
| Monitor | 44,719 | | 26,633 | | 26,252 | | 169 | | — | | 1,201 | | 6,219 | | 105,193 | |
| Special Mention | 8,174 | | — | | — | | — | | — | | — | | — | | 8,174 | |
| Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 170,679 | | $ | 138,682 | | $ | 82,085 | | $ | 2,524 | | $ | 471 | | $ | 24,326 | | $ | 18,185 | | $ | 436,952 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate: Mortgage, Commercial |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 1,946 | | $ | 576 | | $ | 21,269 | | $ | — | | $ | — | | $ | 1,145 | | $ | — | | $ | 24,936 | |
| Good | 19,682 | | 23,000 | | 14,286 | | 2,026 | | 1,271 | | 4,413 | | 11,689 | | 76,367 | |
| Satisfactory | 61,055 | | 61,844 | | 38,772 | | 10,590 | | 8,255 | | 14,568 | | 21,933 | | 217,017 | |
| Monitor | 22,542 | | 13,111 | | 21,909 | | 3,318 | | 1,515 | | 8,212 | | 7,089 | | 77,696 | |
| Special Mention | — | | 3,298 | | 779 | | — | | — | | — | | 689 | | 4,766 | |
| Substandard | 259 | | 513 | | 927 | | 75 | | 190 | | 96 | | — | | 2,060 | |
| Total | $ | 105,484 | | $ | 102,342 | | $ | 97,942 | | $ | 16,009 | | $ | 11,231 | | $ | 28,434 | | $ | 41,400 | | $ | 402,842 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans to Individuals |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | 24 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 24 | |
| Good | 47 | | — | | — | | 16 | | — | | — | | 2 | | 65 | |
| Satisfactory | 14,053 | | 6,091 | | 2,647 | | 869 | | 335 | | 11,722 | | 133 | | 35,850 | |
| Monitor | 253 | | 146 | | 49 | | 5 | | 24 | | — | | 1 | | 478 | |
| Special Mention | 88 | | 34 | | 5 | | 9 | | — | | — | | — | | 136 | |
| Substandard | 45 | | 36 | | 3 | | 2 | | 4 | | 30 | | 2 | | 122 | |
| Total | $ | 14,510 | | $ | 6,307 | | $ | 2,704 | | $ | 901 | | $ | 363 | | $ | 11,752 | | $ | 138 | | $ | 36,675 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of State and Political Subdivisions |
| December 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | |
| Grade: | | | | | | | | |
| Excellent | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 4,816 | | $ | — | | $ | 4,816 | |
| Good | — | | — | | 1,870 | | — | | — | | 8,342 | | — | | 10,212 | |
| Satisfactory | 2,224 | | 820 | | 1,961 | | 1,492 | | 573 | | 15,677 | | 8,848 | | 31,595 | |
| Monitor | 344 | | — | | 830 | | 181 | | 99 | | 136 | | — | | 1,590 | |
| Special Mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 2,568 | | $ | 820 | | $ | 4,661 | | $ | 1,673 | | $ | 672 | | $ | 28,971 | | $ | 8,848 | | $ | 48,213 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Past due loans as of March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30 - 59 Days
Past Due | | 60 - 89 Days
Past Due | | 90 Days
or More
Past Due | | Total Past
Due | | Current | | Total
Loans
Receivable | | Accruing Loans
Past Due 90
Days or More |
| | (Amounts In Thousands) |
| March 31, 2023 | | | | | | | | | | | | | |
| Agricultural | $ | 396 | | | $ | 121 | | | $ | 312 | | | $ | 829 | | | $ | 104,487 | | | $ | 105,316 | | | $ | 12 | |
| Commercial and financial | 1,182 | | | 646 | | | 96 | | | 1,924 | | | 269,860 | | | 271,784 | | | — | |
| Real estate: | | | | | | | | | | | | | |
| Construction, 1 to 4 family residential | 4,950 | | | 1,049 | | | 105 | | | 6,104 | | | 85,422 | | | 91,526 | | | — | |
| Construction, land development and commercial | 387 | | | — | | | 191 | | | 578 | | | 235,687 | | | 236,265 | | | — | |
| Mortgage, farmland | 704 | | | 180 | | | 60 | | | 944 | | | 267,861 | | | 268,805 | | | — | |
| Mortgage, 1 to 4 family first liens | 8,226 | | | 1,375 | | | 1,759 | | | 11,360 | | | 1,151,636 | | | 1,162,996 | | | — | |
| Mortgage, 1 to 4 family junior liens | 368 | | | 74 | | | 21 | | | 463 | | | 129,716 | | | 130,179 | | | 14 | |
| Mortgage, multi-family | 5,797 | | | — | | | — | | | 5,797 | | | 435,193 | | | 440,990 | | | — | |
| Mortgage, commercial | 784 | | | — | | | 74 | | | 858 | | | 404,298 | | | 405,156 | | | — | |
| Loans to individuals | 161 | | | 131 | | | — | | | 292 | | | 37,645 | | | 37,937 | | | — | |
| Obligations of state and political subdivisions | — | | | — | | | — | | | — | | | 47,588 | | | 47,588 | | | — | |
| | $ | 22,955 | | | $ | 3,576 | | | $ | 2,618 | | | $ | 29,149 | | | $ | 3,169,393 | | | $ | 3,198,542 | | | $ | 26 | |
| | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | |
| Agricultural | $ | 314 | | | $ | — | | | $ | — | | | $ | 314 | | | $ | 112,391 | | | $ | 112,705 | | | $ | — | |
| Commercial and financial | 421 | | | 132 | | | 6 | | | 559 | | | 269,009 | | | 269,568 | | | — | |
| Real estate: | | | | | | | | | | | | | |
| Construction, 1 to 4 family residential | — | | | — | | | 105 | | | 105 | | | 92,303 | | | 92,408 | | | — | |
| Construction, land development and commercial | — | | | 1,183 | | | 191 | | | 1,374 | | | 194,866 | | | 196,240 | | | — | |
| Mortgage, farmland | 24 | | | 162 | | | 60 | | | 246 | | | 256,324 | | | 256,570 | | | — | |
| Mortgage, 1 to 4 family first liens | 3,421 | | | 45 | | | 3,029 | | | 6,495 | | | 1,124,494 | | | 1,130,989 | | | 553 | |
| Mortgage, 1 to 4 family junior liens | 473 | | | 19 | | | 8 | | | 500 | | | 124,451 | | | 124,951 | | | — | |
| Mortgage, multi-family | — | | | — | | | — | | | — | | | 436,952 | | | 436,952 | | | — | |
| Mortgage, commercial | 247 | | | — | | | 75 | | | 322 | | | 402,520 | | | 402,842 | | | — | |
| Loans to individuals | 314 | | | 53 | | | — | | | 367 | | | 36,308 | | | 36,675 | | | — | |
| Obligations of state and political subdivisions | — | | | — | | | — | | | — | | | 48,213 | | | 48,213 | | | — | |
| | $ | 5,214 | | | $ | 1,594 | | | $ | 3,474 | | | $ | 10,282 | | | $ | 3,097,831 | | | $ | 3,108,113 | | | $ | 553 | |
The Company does not have a material amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Certain nonaccrual and TDR loan information by loan type at March 31, 2023 and December 31, 2022, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Non-accrual
loans (1) | | | | Accruing loans
past due 90 days
or more | | TDR loans | | Non-
accrual
loans (1) | | Accruing loans
past due 90 days
or more | | TDR loans |
| | (Amounts In Thousands) | | (Amounts In Thousands) |
| Agricultural | $ | 300 | | | | | $ | 12 | | | $ | 16 | | | $ | — | | | $ | — | | | $ | 20 | |
| Commercial and financial | 353 | | | | | — | | | 1,059 | | | 265 | | | — | | | 1,124 | |
| Real estate: | | | | | | | | | | | | | |
| Construction, 1 to 4 family residential | 105 | | | | | — | | | — | | | 105 | | | — | | | — | |
| Construction, land development and commercial | 190 | | | | | — | | | — | | | 191 | | | — | | | — | |
| Mortgage, farmland | 82 | | | | | — | | | 1,537 | | | 623 | | | — | | | 1,039 | |
| Mortgage, 1 to 4 family first liens | 5,054 | | | | | — | | | 1,140 | | | 4,550 | | | 553 | | | 1,156 | |
| Mortgage, 1 to 4 family junior liens | 171 | | | | | 14 | | | 19 | | | 175 | | | — | | | 19 | |
| Mortgage, multi-family | — | | | | | — | | | 616 | | | — | | | — | | | 620 | |
| Mortgage, commercial | 704 | | | | | — | | | 2,087 | | | 906 | | | — | | | 1,927 | |
| Loans to individuals | — | | | | | — | | | — | | | — | | | — | | | — | |
| Obligations of state and political subdivisions | — | | | | | — | | | — | | | — | | | — | | | — | |
| | $ | 6,959 | | | | | $ | 26 | | | $ | 6,474 | | | $ | 6,815 | | | $ | 553 | | | $ | 5,905 | |
(1)There were $0.99 million and $1.75 million of TDR loans included within nonaccrual loans as of March 31, 2023 and December 31, 2022, respectively.
Loans 90 days or more past due that are still accruing interest decreased $0.53 million from December 31, 2022 to March 31, 2023. As of March 31, 2023, there were two accruing loans past due 90 days or more with an average loan balance of $0.01 million. There were 4 accruing loans past due 90 days or more as of December 31, 2022 with an average loan balance of $0.14 million. The accruing loans past due 90 days or more balances are believed to be adequately collateralized and the Company expects to collect all principal and interest as contractually due under these loans. There was no interest income recognized on nonaccrual loans for the three months ended March 31, 2023 and year ended December 31, 2022.
The Company may modify the terms of a loan to maximize the collection of amounts due. Such a modification was considered a troubled debt restructuring (“TDR”) prior to adoption of ASU 2022-02 on January 1, 2023. In most cases, the modification is either 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 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 March 31, 2023, 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 15 loans, totaling $6.7 million. As of December 31, 2022, there were 16 loans, totaling $7.3 million that met the requirements and were not considered TDRs.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As of March 31, 2023 and December 31, 2022, COVID-19 related payment deferrals were approximately 0.02% and 0.03% of total loans, respectively.
Below is a summary of information for TDR loans as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Number
of
contracts | | Recorded
investment | | Commitments
outstanding | | Number
of
contracts | | Recorded
investment | | Commitments
outstanding |
| | | | (Amounts In Thousands) | | | | (Amounts In Thousands) |
| Agricultural | 1 | | | $ | 16 | | | $ | 170 | | | 1 | | | $ | 20 | | | $ | 100 | |
| Commercial and financial | 16 | | | 1,292 | | | 19 | | | 11 | | | 1,379 | | | 49 | |
| Real estate: | | | | | | | | | | | |
| Construction, 1 to 4 family residential | 1 | | | 105 | | | — | | | 1 | | | 105 | | | — | |
| Construction, land development and commercial | 1 | | | 191 | | | — | | | 1 | | | 191 | | | — | |
| Mortgage, farmland | 5 | | | 1,536 | | | — | | | 4 | | | 1,578 | | | — | |
| Mortgage, 1 to 4 family first liens | 12 | | | 1,140 | | | — | | | 8 | | | 1,156 | | | — | |
| Mortgage, 1 to 4 family junior liens | 1 | | | 19 | | | — | | | 1 | | | 19 | | | — | |
| Mortgage, multi-family | 1 | | | 616 | | | — | | | 1 | | | 620 | | | — | |
| Mortgage, commercial | 10 | | | 2,550 | | | — | | | 9 | | | 2,584 | | | — | |
| Loans to individuals | — | | | — | | | — | | | — | | | — | | | — | |
| Obligations of state and political subdivisions | — | | | — | | | — | | | — | | | — | | | — | |
| | 48 | | | $ | 7,465 | | | $ | 189 | | | 37 | | | $ | 7,652 | | | $ | 149 | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a summary of TDR loans that were modified during the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2022 | |
| | | | | | Number
of
contracts | | Pre-modification
recorded
investment | | Post-modification
recorded
investment | | | | | |
| | | | | | | | | | |
| Agricultural | | | | | | — | | | $ | — | | | $ | — | | | | | | |
| Commercial and financial | | | | | | 1 | | | 371 | | | 371 | | | | | | |
| Real estate: | | | | | | | | | | | | | | | |
| Construction, 1 to 4 family residential | | | | | | 1 | | | 105 | | | 105 | | | | | | |
| Construction, land development and commercial | | | | | | 1 | | | 191 | | | 191 | | | | | | |
| Mortgage, farmland | | | | | | — | | | — | | | — | | | | | | |
| Mortgage, 1 to 4 family first lien | | | | | | — | | | — | | | — | | | | | | |
| Mortgage, 1 to 4 family junior liens | | | | | | — | | | — | | | — | | | | | | |
| Mortgage, multi-family | | | | | | — | | | — | | | — | | | | | | |
| Mortgage, commercial | | | | | | 1 | | | 274 | | | 274 | | | | | | |
| Loans to individuals | | | | | | | | | | | | | | | |
| Obligations of state and political subdivisions | | | | | | | | | | | | | | | |
| | | | | | | 4 | | | $ | 941 | | | $ | 941 | | | | | | |
The Company has allocated $0.06 million of allowance for TDR loans and the Company had commitments to lend $0.19 million in additional borrowings to restructured loan customers as of March 31, 2023. The Company had commitments to lend $0.15 million in additional borrowings to restructured loan customers as of December 31, 2022. These commitments were in the normal course of business. The additional borrowings were not used to facilitate payments on these loans. The modifications of the terms of loans performed during the three months ended March 31, 2022 included extensions of the maturity date.
There were no TDR loans that were in payment default (defined as past due 90 days or more) during the period ended March 31, 2023 and the year ended December 31, 2022.
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (numbers in thousands):
| | | | | | | | | | | | | | |
| Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| | | | |
| | Term Extension |
| | Amortized Cost Basis at March 31, 2023 | | % of Total Class of Financing Receivable |
| Loan Type | | | | |
| Mortgage, Farmland | | $ | 1,236 | | | 0.46% |
| Agricultural | | 176 | | | 0.17% |
| Total | | $ | 1,412 | | | |
| | | | |
| | | | |
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
| | | | | | | | | | |
| Term Extension | | |
| Loan Type | | Financial Effect | | |
| Mortgage, Farmland | | Added a weighted-average 4.6 years to the life of loans. | | |
| Agricultural | | Added a weighted-average 0.5 year to the life of loans. | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
There were no financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months (numbers in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Payment Status (Amortized Cost Basis) |
| | Current | | 30-89 Days Past Due | | 90+ Days Past Due |
| Loan Type | | | | | | |
| Mortgage, Farmland | | $ | 1,236 | | | $ | — | | | $ | — | |
| Agricultural | | 176 | | | — | | | — | |
| | $ | 1,412 | | | $ | — | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary Type of Collateral |
| Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation |
| (Amounts In Thousands) |
| March 31, 2023 | | | | | | | | | | | |
| Agricultural | $ | 504 | | | $ | — | | | $ | — | | | $ | — | | | $ | 504 | | | $ | — | |
| Commercial and financial | 2,113 | | | — | | | 64 | | | — | | | 2,177 | | | 460 | |
| Real estate: | | | | | | | | | | | |
| Construction, 1 to 4 family residential | 105 | | | — | | | — | | | — | | | 105 | | | 55 | |
| Construction, land development and commercial | 191 | | | — | | | — | | | — | | | 191 | | | — | |
| Mortgage, farmland | 2,685 | | | — | | | 169 | | | — | | | 2,854 | | | — | |
| Mortgage, 1 to 4 family first liens | 6,195 | | | — | | | — | | | — | | | 6,195 | | | 43 | |
| Mortgage, 1 to 4 family junior liens | 202 | | | — | | | — | | | — | | | 202 | | | 2 | |
| Mortgage, multi-family | 616 | | | — | | | — | | | — | | | 616 | | | — | |
| Mortgage, commercial | 2,791 | | | — | | | — | | | — | | | 2,791 | | | — | |
| Loans to individuals | — | | | — | | | — | | | — | | | — | | | — | |
| Obligations of state and political subdivisions | — | | | — | | | — | | | — | | | — | | | — | |
| $ | 15,402 | | | $ | — | | | $ | 233 | | | $ | — | | | $ | 15,635 | | | $ | 560 | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary Type of Collateral |
| Real Estate | | Accounts Receivable | | Equipment | | Other | | Total | | ACL Allocation |
| (Amounts In Thousands) |
| December 31, 2022 | | | | | | | | | | | |
| Agricultural | $ | 197 | | | $ | — | | | $ | — | | | $ | — | | | $ | 197 | | | $ | — | |
| Commercial and financial | 1,385 | | | — | | | 74 | | | — | | | 1,459 | | | 4 | |
| Real estate: | | | | | | | | | | | |
| Construction, 1 to 4 family residential | 382 | | | — | | | — | | | — | | | 382 | | | 105 | |
| Construction, land development and commercial | 191 | | | — | | | — | | | — | | | 191 | | | — | |
| Mortgage, farmland | 1,482 | | | — | | | 180 | | | — | | | 1,662 | | | — | |
| Mortgage, 1 to 4 family first liens | 6,012 | | | — | | | — | | | — | | | 6,012 | | | 44 | |
| Mortgage, 1 to 4 family junior liens | 193 | | | — | | | — | | | — | | | 193 | | | 1 | |
| Mortgage, multi-family | 620 | | | — | | | — | | | — | | | 620 | | | — | |
| Mortgage, commercial | 2,833 | | | — | | | — | | | — | | | 2,833 | | | 1 | |
| Loans to individuals | 30 | | | — | | | — | | | — | | | 30 | | | 29 | |
| Obligations of state and political subdivisions | — | | | — | | | — | | | — | | | — | | | — | |
| $ | 13,325 | | | $ | — | | | $ | 254 | | | $ | — | | | $ | 13,579 | | | $ | 184 | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The changes in the ACL in 2023 compared to December 31, 2022 is the result of the following factors: slight increase in forecasted Iowa unemployment used in the ACL calculation which resulted in an increase of $0.39 million; increase in loan volume which resulted in an increase of $0.54 million; changes in prepayment and curtailment rates resulting in a decrease of $0.40 million; increase in the individually analyzed loans reserve of $0.38 million; decreases in qualitative factors determined necessary by management which resulted in a decrease of $1.60 million and other changes of $0.32 million. The increase in the allowance for credit losses on off-balance sheet credit exposures is primarily a result of the increased outstanding unfunded commitments as of March 31, 2023.
The extent to which collateral secures collateral-dependent loans is provided in the previous individually analyzed loans table and changes in the extent to which collateral secures its collateral-dependent loans are described below. Collateral-dependent loans increased $2.06 million from December 31, 2022 to March 31, 2023. Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more, TDR loans and loans made to borrowers with financial difficulties. Collateral-dependent loans also include loans that, based on management’s evaluation of current information and events, the Company expects to be unable to collect in full according to the contractual terms of the original loan agreement. Collateral-dependent loans were 0.49% of loans held for investment as of March 31, 2023 and 0.44% as of December 31, 2022. The increase in collateral-dependent loans is due to an increase in loans facing financial difficulties of $1.41 million, an increase in loans with a specific reserve of $0.48 million, an increase in nonaccrual loans of $0.14 million, a decrease in 90 days or more accruing loans of $0.53 million and a decrease in TDR loans of $0.18 million from December 31, 2022 to March 31, 2023. There were no significant changes noted in the extent to which collateral secures collateral-dependent loans.
The Company regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans share common risk characteristics for which expected credit loss is measured on a pool basis or if the loans do not share common risk characteristics and therefore expected credit loss is measured on an individual loan basis. If the loans are assessed for credit losses on an individual basis, the Company determines if a specific allowance is appropriate. In addition, the Company's management also reviews and, where determined necessary, provides allowances for particular loans based upon (1) reviews of specific borrowers and (2) management’s assessment of areas that management considers are of higher credit risk, including loans that have been restructured or modified to a borrower experiencing financial difficulties. Loans that are determined not to be collateral-dependent and for which there are no specific allowances are classified into one or more risk categories and expected credit loss is measured on a pool basis. See Note 1 for further discussion of the allowance for credit losses for loans held for investment.
Specific allowances for credit losses on loans assessed individually are established if the loan balances exceed the net present value of the relevant future cash flows or the fair value of the relevant collateral based on updated appraisals and/or updated collateral analysis for the properties if the loan is collateral dependent. The Company may recognize a charge off or record a specific allowance related to an individually analyzed loan if there is a collateral shortfall or it is unlikely the borrower can make all principal and interest payments as contractually due.
For loans that are collateral-dependent, losses are evaluated based on the portion of a loan that exceeds the fair market value of the collateral. In general, this is the amount that the carrying value of the loan exceeds the related appraised value less estimated costs to sell the collateral. Generally, it is the Company’s policy not to rely on appraisals that are older than one year prior to the date the credit loss is being measured. The most recent appraisal values may be adjusted if, in the Company’s judgment, experience and other market data indicate that the property’s value, use, condition, exit market or other variables affecting its value may have changed since the appraisal was performed. The charge off or loss adjustment supported by an appraisal is considered the minimum charge off. Any adjustments made to the appraised value are to provide an additional charge off or specific reserve based on the applicable facts and circumstances. In instances where there is an estimated decline in value, a specific reserve may be provided or a charge off taken pending confirmation of the amount of the loss from an updated appraisal. Upon receipt of the new appraisals, an additional specific reserve may be provided or charge off taken based on the appraised value of the collateral. On average, appraisals are obtained within one month of order.
Note 6.Leases
The Bank leases certain of its branch offices, parking facilities and certain equipment under operating leases. The leases have remaining lease terms of 1 year to 11 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.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
For the three months ended March 31, 2023 and 2022, total operating lease expense was $0.14 million and $0.14 million respectively, and is included in occupancy expenses in the consolidated statements of income. Included in this for the three months ended March 31, 2023 and 2022 were $0.12 million and $0.12 million, respectively, of operating lease costs, $0.01 million and $0.01 million, respectively, of short term lease costs, and $0.01 million and $0.01 million, respectively, of variable lease costs.
For the three months ended March 31, 2023 and 2022, cash paid for amounts included in the measurement of operating lease liabilities was $0.12 million and $0.12 million, respectively.
As of March 31, 2023 and December 31, 2022, operating lease right-of-use assets included in other assets was $2.02 million and $2.11 million respectively. Operating lease liabilities included in other liabilities were $2.11 million and $2.19 million as of March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, the weighted average remaining lease term for operating leases was 9.66 years and 9.72 years, respectively, and the weighted average discount rate for operating leases was 3.55% and 3.54%, respectively. Discount rates used were determined from FHLB borrowing rates for comparable terms.
As of March 31, 2023, maturities of lease liabilities were as follows:
| | | | | |
| Year ending December 31: | (Amounts In Thousands) |
| 2023 (excluding the three months ended March 31, 2023) | $ | 225 | |
| 2024 | 260 | |
| 2025 | 263 | |
| 2026 | 266 | |
| 2027 | 264 | |
| Thereafter | 1,239 | |
| Total lease payments | 2,517 | |
| Less imputed interest | (407) | |
| Total operating lease liabilities | $ | 2,110 | |
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7.Fair Value Measurements
The carrying value and estimated fair values of the Company's financial instruments as of March 31, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Carrying
Amount | | Estimated Fair
Value | | Readily
Available
Market
Prices(1) | | Observable
Market
Prices(2) | | Company
Determined
Market
Prices(3) |
| | (Amounts In Thousands) |
| Financial instrument assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 146,605 | | | $ | 146,605 | | | $ | 146,605 | | | $ | — | | | $ | — | |
| Investment securities | 778,026 | | | 778,026 | | | 435,202 | | | 342,824 | | | — | |
| Loans held for sale | 2,991 | | | 2,991 | | | — | | | 2,991 | | | — | |
| Loans, net of allowance for credit losses | | | | | | | | | |
| Agricultural | 103,160 | | | 102,314 | | | — | | | — | | | 102,314 | |
| Commercial and financial | 266,221 | | | 261,697 | | | — | | | — | | | 261,697 | |
| Real estate: | | | | | | | | | |
| Construction, 1 to 4 family residential | 90,412 | | | 90,645 | | | — | | | — | | | 90,645 | |
| Construction, land development and commercial | 232,649 | | | 226,217 | | | — | | | — | | | 226,217 | |
| Mortgage, farmland | 265,954 | | | 249,347 | | | — | | | — | | | 249,347 | |
| Mortgage, 1 to 4 family first liens | 1,151,712 | | | 1,083,680 | | | — | | | — | | | 1,083,680 | |
| Mortgage, 1 to 4 family junior liens | 127,044 | | | 122,302 | | | — | | | — | | | 122,302 | |
| Mortgage, multi-family | 436,059 | | | 414,245 | | | — | | | — | | | 414,245 | |
| Mortgage, commercial | 400,390 | | | 380,359 | | | — | | | — | | | 380,359 | |
| Loans to individuals | 37,007 | | | 35,562 | | | — | | | — | | | 35,562 | |
| Obligations of state and political subdivisions | 47,180 | | | 45,983 | | | — | | | — | | | 45,983 | |
| Accrued interest receivable | 17,381 | | | 17,381 | | | — | | | 17,381 | | | — | |
| Total financial instrument assets | $ | 4,102,791 | | | $ | 3,957,354 | | | $ | 581,807 | | | $ | 363,196 | | | $ | 3,012,351 | |
| Financial instrument liabilities | | | | | | | | | |
| Deposits | | | | | | | | | |
| Noninterest-bearing deposits | $ | 627,784 | | | $ | 627,784 | | | $ | — | | | $ | 627,784 | | | $ | — | |
| Interest-bearing deposits | 2,816,297 | | | 2,817,233 | | | — | | | 2,817,233 | | | — | |
| | | | | | | | | |
| Federal Home Loan Bank borrowings | 220,000 | | | 220,000 | | | — | | | 220,000 | | | — | |
| | | | | | | | | |
| Accrued interest payable | 1,875 | | | 1,875 | | | — | | | 1,875 | | | — | |
| Total financial instrument liabilities | $ | 3,665,956 | | | $ | 3,666,892 | | | $ | — | | | $ | 3,666,892 | | | $ | — | |
| | | | | | | | | |
| | Face Amount | | | | | | | | |
| Financial instrument with off-balance sheet risk: | | | | | | | | | |
| Loan commitments | $ | 732,930 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Letters of credit | 6,291 | | | — | | | — | | | — | | | — | |
| Total financial instrument liabilities with off-balance-sheet risk | $ | 739,221 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
(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 (continued)
(Unaudited)
The carrying value and estimated fair values of the Company's financial instruments as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Carrying
Amount | | Estimated Fair
Value | | Readily
Available
Market
Prices(1) | | Observable
Market
Prices(2) | | Company
Determined
Market
Prices(3) |
| | (Amounts In Thousands) |
| Financial instrument assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 36,641 | | | $ | 36,641 | | | $ | 36,641 | | | $ | — | | | $ | — | |
| Investment securities | 782,565 | | | 782,565 | | | 445,392 | | | 337,173 | | | — | |
| Loans held for sale | 1,663 | | | 1,663 | | | — | | | 1,663 | | | — | |
| Loans, net of allowance for credit losses | | | | | | | | | |
| Agricultural | 110,163 | | | 108,992 | | | — | | | — | | | 108,992 | |
| Commercial and financial | 263,309 | | | 259,500 | | | — | | | — | | | 259,500 | |
| Real estate: | | | | | | | | | |
| Construction, 1 to 4 family residential | 91,297 | | | 91,279 | | | — | | | — | | | 91,279 | |
| Construction, land development and commercial | 193,162 | | | 188,726 | | | — | | | — | | | 188,726 | |
| Mortgage, farmland | 253,581 | | | 237,849 | | | — | | | — | | | 237,849 | |
| Mortgage, 1 to 4 family first liens | 1,120,150 | | | 1,055,091 | | | — | | | — | | | 1,055,091 | |
| Mortgage, 1 to 4 family junior liens | 121,890 | | | 118,279 | | | — | | | — | | | 118,279 | |
| Mortgage, multi-family | 432,517 | | | 411,092 | | | — | | | — | | | 411,092 | |
| Mortgage, commercial | 397,861 | | | 377,753 | | | — | | | — | | | 377,753 | |
| Loans to individuals | 35,278 | | | 36,934 | | | — | | | — | | | 36,934 | |
| Obligations of state and political subdivisions | 47,773 | | | 45,653 | | | — | | | — | | | 45,653 | |
| Accrued interest receivable | 15,782 | | | 15,782 | | | — | | | 15,782 | | | — | |
| Total financial instrument assets | $ | 3,903,632 | | | $ | 3,767,799 | | | $ | 482,033 | | | $ | 354,618 | | | $ | 2,931,148 | |
| Financial instrument liabilities: | | | | | | | | | |
| Deposits | | | | | | | | | |
| Noninterest-bearing deposits | $ | 647,450 | | | $ | 647,450 | | | $ | — | | | $ | 647,450 | | | $ | — | |
| Interest-bearing deposits | 2,709,917 | | | 2,711,088 | | | — | | | 2,711,088 | | | — | |
| Other borrowings | 82,061 | | | 82,061 | | | — | | | 82,061 | | | — | |
| Federal Home Loan Bank borrowings | 40,000 | | | 40,000 | | | — | | | 40,000 | | | — | |
| | | | | | | | | |
| Accrued interest payable | 1,394 | | | 1,394 | | | — | | | 1,394 | | | — | |
| Total financial instrument liabilities | $ | 3,480,822 | | | $ | 3,481,993 | | | $ | — | | | $ | 3,481,993 | | | $ | — | |
| | | | | | | | | |
| | Face Amount | | | | | | | | |
| Financial instrument with off-balance sheet risk: | | | | | | | | | |
| Loan commitments | $ | 701,729 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Letters of credit | 6,618 | | | — | | | — | | | — | | | — | |
| Total financial instrument liabilities with off-balance-sheet risk | $ | 708,347 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Considered Level 1 under ASC 820.
(1)Considered Level 2 under ASC 820.
(2)Considered Level 3 under ASC 820 and are based on valuation models that use significant assumptions that are not observable in an active market.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Fair value of financial instruments: FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) provides a single definition for fair value, a framework for measuring fair value and expanded disclosures concerning fair value. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company determines the fair market value of its financial instruments based on the fair value hierarchy established in ASC 820. There are three levels of inputs that may be used to measure fair value as follows:
| | | | | | | | |
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| | | | | | | | |
| Level 2 | Observable inputs other than quoted prices included within Level 1. Observable inputs include the quoted prices for similar assets or liabilities in markets that are not active and inputs other than quoted prices that are observable for the asset or liability. |
| | | | | | | | |
| Level 3 | Unobservable inputs supported by little or no market activity for financial instruments. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company is required to use observable inputs, to the extent available, in the fair value estimation process unless that data results from forced liquidations or distressed sales.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
ASSETS
Investment securities available for sale: Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If a quoted price is not available, the fair value is obtained from benchmarking the security against similar securities. U.S. Treasury securities are considered Level 1 with the remaining securities considered Level 2.
The pricing for investment securities is obtained from an independent source. There are no Level 3 investment securities owned by the Company. The Company obtains an understanding of the independent source’s valuation methodologies used to determine fair value by level of security. The Company validates assigned fair values on a sample basis using an additional third-party provider pricing service to determine if the fair value measurement is reasonable. Due to the nature of our investment portfolio, we do not expect significant and unusual fluctuations as fair value changes primarily relate to interest rate changes. No unusual fluctuations were identified during the three months ended March 31, 2023. If a fluctuation requiring investigation was identified, the Company would research the change with the independent source or other available information.
Individually analyzed loans under ASC 326 CECL: See Note 1 for further discussion of individually analyzed loans under CECL.
A loan is considered to be non-performing when it is probable that all of the principal and interest due may not be collected according to its contractual terms. Generally, when a loan is considered non-performing, the amount of reserve is measured based on the fair value of the underlying collateral. The Company makes such measurements on all material loans deemed non-performing using the fair value of the collateral for collateral dependent loans or based on the present value of the estimated future cash flows of interest and principal discounted at the loans effective interest rate or the fair value of the loan if determinable. The fair value of collateral used by the Company is determined by obtaining an observable market price or by obtaining an appraised value from an independent, licensed or certified appraiser, using observable market data. This data includes information such as selling price of similar properties and capitalization rates of similar properties sold within the market, expected future cash flows or earnings of the subject property based on current market expectations, and other relevant factors. All appraised values are adjusted for market-related trends based on the Company's experience in sales and other appraisals of similar property types as well as estimated selling costs. These loans are considered Level 3 as the instruments used to determine fair market value require significant management judgment and estimation.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Foreclosed assets: The Company does not record foreclosed assets at fair value on a recurring basis. Foreclosed assets consist mainly of other real estate owned but may include other types of assets repossessed by the Company. Foreclosed assets are adjusted to the lower of carrying value or fair value less the cost of disposal. Fair value is generally based upon independent market prices or appraised values of the collateral, and may include a marketability discount as deemed necessary by management based on its experience with similar types of real estate. The value of foreclosed assets is evaluated periodically as a nonrecurring fair value adjustment. Foreclosed assets are classified as Level 3.
Off-balance sheet instruments: Fair values for outstanding letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the outstanding letters of credit is not significant. Unfunded loan commitments are not valued since the loans are generally priced at market at the time of funding (Level 2).
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below represents the balances of assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Readily
Available
Market
Prices(1) | | Observable
Market Prices(2) | | Company
Determined
Market
Prices(3) | | Total at Fair
Value |
| Securities available for sale | (Amounts In Thousands) |
| U.S. Treasury | $ | 435,202 | | | $ | — | | | $ | — | | | $ | 435,202 | |
| State and political subdivisions | — | | | 247,277 | | | — | | | 247,277 | |
| Mortgage-backed securities and collateralized mortgage obligations | — | | | 49,597 | | | — | | | 49,597 | |
| Other securities (FHLB, FHLMC and FNMA) | — | | | 32,365 | | | — | | | 32,365 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 435,202 | | | $ | 329,239 | | | $ | — | | | $ | 764,441 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Readily
Available
Market
Prices(1) | | Observable
Market Prices(2) | | Company
Determined
Market
Prices(3) | | Total at Fair
Value |
| Securities available for sale | (Amounts In Thousands) |
| U.S. Treasury | $ | 445,392 | | | $ | — | | | $ | — | | | $ | 445,392 | |
| State and political subdivisions | — | | | 248,582 | | | — | | | 248,582 | |
| Mortgage-backed securities and collateralized mortgage obligations | — | | | 50,196 | | | — | | | 50,196 | |
| Other securities (FHLB, FHLMC and FNMA) | — | | | 31,934 | | | — | | | 31,934 | |
| | | | | | | |
| | | | | | | |
| Total | $ | 445,392 | | | $ | 330,712 | | | $ | — | | | $ | 776,104 | |
(1)Considered Level 1 under ASC 820.
(2)Considered Level 2 under ASC 820.
(3)Considered Level 3 under ASC 820 and are based on valuation models that use significant assumptions that are not observable in an active market.
There were no transfers between Levels 1, 2 or 3 during the three months ended March 31, 2023 and the year ended December 31, 2022.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company is required to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The valuation methodologies used to measure these fair value adjustments are described above. The following tables present the Company’s assets that are measured at fair value on a nonrecurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | | Three Months Ended March 31, 2023 | |
| | Readily
Available
Market
Prices(1) | | Observable
Market
Prices(2) | | Company
Determined
Market
Prices(3) | | Total at
Fair
Value | | | Total Losses | |
| | (Amounts in Thousands) | | | | |
| Loans (4) | | | | | | | | | | | |
| Agricultural | $ | — | | | $ | — | | | $ | 476 | | | $ | 476 | | | | $ | — | | |
| Commercial and financial | — | | | — | | | 1,664 | | | 1,664 | | | | 15 | | |
| Real Estate: | | | | | | | | | | | |
| Construction, 1 to 4 family residential | — | | | — | | | 50 | | | 50 | | | | — | | |
| Construction, land development and commercial | — | | | — | | | 191 | | | 191 | | | | — | | |
| Mortgage, farmland | — | | | — | | | 2,854 | | | 2,854 | | | | — | | |
| Mortgage, 1 to 4 family first liens | — | | | — | | | 6,125 | | | 6,125 | | | | 21 | | |
| Mortgage, 1 to 4 family junior liens | — | | | — | | | 189 | | | 189 | | | | — | | |
| Mortgage, multi-family | — | | | — | | | 616 | | | 616 | | | | — | | |
| Mortgage, commercial | — | | | — | | | 2,737 | | | 2,737 | | | | — | | |
| Loans to individuals | — | | | — | | | — | | | — | | | | — | | |
| Foreclosed assets (5) | — | | | — | | | — | | | — | | | | — | | |
| Total | $ | — | | | $ | — | | | $ | 14,902 | | | $ | 14,902 | | | | $ | 36 | | |
(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 (continued)
(Unaudited)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | Year Ended December 31, 2022 |
| | Readily
Available
Market
Prices(1) | | Observable
Market
Prices(2) | | Company
Determined
Market
Prices(3) | | Total at Fair
Value | | Total Losses |
| | (Amounts in Thousands) | | |
| Loans (4) | | | | | | | | | |
| Agricultural | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Commercial and financial | — | | | — | | | 1,324 | | | 1,324 | | | 225 | |
| Real Estate: | | | | | | | | | |
| Construction, 1 to 4 family residential | — | | | — | | | 277 | | | 277 | | | — | |
| Construction, land development and commercial | — | | | — | | | 191 | | | 191 | | | — | |
| Mortgage, farmland | — | | | — | | | 1,662 | | | 1,662 | | | 123 | |
| Mortgage, 1 to 4 family first liens | — | | | — | | | 5,639 | | | 5,639 | | | 367 | |
| Mortgage, 1 to 4 family junior liens | — | | | — | | | 193 | | | 193 | | | 5 | |
| Mortgage, multi-family | — | | | — | | | 620 | | | 620 | | | 50 | |
| Mortgage, commercial | — | | | — | | | 2,778 | | | 2,778 | | | — | |
| Loans to individuals | — | | | — | | | — | | | — | | | — | |
| Foreclosed assets (5) | — | | | — | | | — | | | — | | | — | |
| Total | $ | — | | | $ | — | | | $ | 12,684 | | | $ | 12,684 | | | $ | 770 | |
(1)Considered Level 1 under ASC 820.
(2)Considered Level 2 under ASC 820.
(3)Considered Level 3 under ASC 820 and are based on valuation models that use significant assumptions that are not observable in an active market.
(4)Represents carrying value and related write-downs of loans for which adjustments are based on the value of the collateral. The carrying value of loans fully-charged off is zero.
(5)Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.
Note 8.Stock Repurchase Program
On July 26, 2005, the Company’s Board of Directors authorized a program to repurchase up to a total of 1,500,000 shares of the Company’s common stock (the “2005 Stock Repurchase Program”). On August 9, 2022, the Company’s Board of Directors authorized the expansion of the 2005 Stock Repurchase Program to allow an additional 750,000 shares for repurchase and the continuation through December 31, 2027. The Company expects the purchases pursuant to the 2005 Stock Repurchase Program to be made from time to time in private transactions at a price equal to the most recent quarterly independent appraisal of the shares of the Company’s common stock and with the Board reviewing the overall results of the 2005 Stock Repurchase Program on a quarterly basis. All purchases made pursuant to the 2005 Stock Repurchase Program since its inception have been made on that basis. The amount and timing of stock repurchases will be based on various factors, such as the Board’s assessment of the Company’s capital structure and liquidity, the amount of interest shown by shareholders in selling shares of stock to the Company at their appraised value, and applicable regulatory, legal and accounting factors. The Company has purchased 1,549,147 shares of its common stock in privately negotiated transactions from August 1, 2005 through March 31, 2023. Of these 1,549,147 shares, 32,682 shares were purchased during the quarter ended March 31, 2023, at an average price per share of $72.00.
HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9. Commitments and Contingencies
Concentrations of credit risk: The Company’s loans, commitments to extend credit, unused lines of credit and outstanding letters of credit have been granted to customers within the Company's market area. Investments in securities issued by state and political subdivisions within the state of Iowa totaled approximately $91.32 million. The concentrations of credit by type of loan are set forth in Note 5 to the Consolidated Financial Statements. Outstanding letters of credit were granted primarily to commercial borrowers. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in Johnson, Linn and Washington Counties, Iowa.
Contingencies: In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions, some of which seek substantial relief or damages. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, after reviewing pending and threatened litigation with counsel, management believes at this time that the outcome of such litigation will not have a material adverse effect on the Company’s business, financial conditions, or results of operations.
Financial instruments with off-balance sheet risk: The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, credit card participations and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, credit card participations and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Company’s commitments at March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (Amounts In Thousands) |
| Firm loan commitments and unused portion of lines of credit: | | | |
| Home equity loans | $ | 83,410 | | | $ | 84,869 | |
| Credit cards | 67,528 | | | 66,535 | |
| Commercial, real estate and home construction | 282,512 | | | 241,983 | |
| Commercial lines and real estate purchase loans | 299,480 | | | 308,342 | |
| Outstanding letters of credit | 6,291 | | | 6,618 | |
Note 10.Income Taxes
Federal income tax expense for the three months ended March 31, 2023 and 2022 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank. The Company files a consolidated tax return for federal purposes and separate tax returns for State of Iowa purposes. The tax years ended December 31, 2022, 2021, and 2020 remain subject to examination by the Internal Revenue Service. For state tax purposes, the tax years ended December 31, 2022, 2021, and 2020 remain open for examination. There were no material unrecognized tax benefits at March 31, 2023 and December 31, 2022 and therefore no interest or penalties on unrecognized tax benefits has been recorded. As of March 31, 2023, the Company does not anticipate any significant increase in unrecognized tax benefits during the twelve-month period ending March 31, 2024. Income taxes as a percentage of income before taxes were 21.15% for the three months ended March 31, 2023 and 20.97% for the same period in 2022.