Hills Bancorporation
11/10/2025 | Press release | Distributed by Public on 11/10/2025 16:20
Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)
| Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following is management's discussion and analysis of the financial condition of Hills Bancorporation ("Hills Bancorporation" or "the Company") and its banking subsidiary Hills Bank and Trust Company ("the Bank") for the dates and periods indicated. The discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying footnotes.
Special Note Regarding Forward Looking Statements
This report contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Actual results may differ materially from those included in the forward-looking statements. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the following:
•The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. This includes current concerns related to implementation of tariffs, inflation, rising energy prices, the Russia-Ukraine war, Middle East conflicts, and supply chain imbalances.
•The effects of recent financial market disruptions and/or an economic recession, and monetary and other governmental actions designed to address such disruptions, recession, or pandemics.
•The financial strength of the counterparties with which the Company or the Company's customers do business and as to which the Company has investment or financial exposure.
•The credit quality and credit agency ratings of the securities in the Company's investment securities portfolio, a deterioration or downgrade of which could lead to recognition of an allowance for credit losses on the affected securities and the recognition of a credit loss.
•The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company, including, but not limited to, potential changes in U.S. tax laws and regulations.
•The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System.
•The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector.
•The ability of the Company to obtain new customers and to retain existing customers.
•The timely development and acceptance of products and services, including products and services offered through alternative electronic delivery channels.
•Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
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•The ability of the Company to develop and maintain secure and reliable technology systems, including to detect and prevent the occurrence of fraudulent activity, breaches, or failures of our information security controls or cyber-security related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools.
•The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner.
•Consumer spending and saving habits which may change in a manner that affects the Company's business adversely.
•The economic impact of natural disasters, diseases and/or pandemics, and terrorist attacks and military actions.
•Business combinations and the integration of acquired businesses and assets which may be more difficult or expensive than expected.
•The costs, effects and outcomes of existing or future litigation.
•Changes in accounting policies and practices that may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.
•The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.
Economic Environment
Economic data for the third quarter from the Midwest, as reported in the Federal Reserve System's "Beige Book," shows flat employment in the region over the most recently completed period, with slight decrease anticipated by employers operating in the region over the next 12 months, with the manufacturing sector continuing to experience the most difficulty in filling open positions. Prices rose modestly in the Midwest in late August and September, with a similar pace of growth anticipated over the next 12 months. The manufacturing sector in particular faces heightened uncertainty about both input costs and selling prices attributed primarily to uncertainties surrounding changing tariff policies. In the retail sector, retailers are trying to hold off passing tariff-related cost increases on to consumers for as long as possible, though several smaller retailers reported already raising prices because of tariffs. Despite this outlook, consumer spending increased modestly over the reporting period, continuing the growth from earlier in the year from consumers hoping to buy ahead of the increase in costs on higher ticket consumer goods anticipated for later in the year. Conversely, business spending declined slightly in late August and September, with many sectors anticipating hesitancy in capital purchases over the foreseeable future due to increased uncertainty surrounding tariffs and the economic outlook. On the agricultural front, income expectations from growers and other producers for 2025 have remained largely unchanged for the remainder of 2025. However, increased concerns about higher input costs for 2026 and lack of clarity on the economic outlook was negatively impacting capital investment.
Our credit administration continues to closely monitor and analyze the higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors. Based on the Company's capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, senior management is cautiously optimistic that the Company is positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the economy and remain adequately capitalized. However, the Company may be required to make additional credit loss provisions as warranted by the extremely fluid economic conditions and continued migration in the loan portfolio towards the special mention and substandard risk rating categories.
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Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policies to be those which are related to the allowance for credit losses. Information about our critical accounting policies is included under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 14, 2025, and there have been no material changes in these critical accounting policies since December 31, 2024.
Overview
This overview highlights selected information and may not contain all of the information that is important to you in understanding our performance during the period. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources, and critical accounting estimates, you should carefully read this entire report.
The Company is a holding company engaged in the business of commercial banking. The Company's subsidiary is Hills Bank and Trust Company, Hills, Iowa (the "Bank"), which is wholly-owned. The Bank was formed in Hills, Iowa in 1904. The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion, Washington and Williamsburg, Iowa. At September 30, 2025, the Bank has nineteen full-service locations.
Net income for the nine month period ended September 30, 2025 was $45.99 million compared to $36.58 million for the same nine months of 2024, an increase of $9.41 million or 25.72%. The principal factors in the increase in net income for the first nine months of 2025 were an increase in net interest income of $24.62 million offset by an increase in credit loss expense of $8.36 million, a decrease in noninterest income of $2.05 million primarily due to a loss on sale of securities, and an increase in noninterest expenses of 2.91 million.
The Company achieved a return on average assets of 1.26% and a return on average equity of 11.42% for the twelve months ended September 30, 2025, compared to the twelve months ended September 30, 2024, which were 1.01% and 9.33%, respectively. The return on average assets and return on average equity for the nine months ended September 30, 2025 were 1.35% and 7.91%, respectively, compared to the nine months ended September 30, 2024, which were 1.12% and 10.35%, respectively. Dividends of $1.15 per share were paid in January 2025 to 2,681 shareholders. The dividend paid in January 2024 was $1.10 per share.
The Company's net interest income is the largest component of revenue and it is primarily a function of the average earning assets and the net interest margin percentage. The Company achieved a net interest margin on a tax-equivalent basis of 3.41% for the nine months ended September 30, 2025 compared to 2.74% for the same nine months of 2024. Average earning assets were $4.444 billion year to date in 2025 and $4.257 billion in 2024.
Highlights noted on the balance sheet as of September 30, 2025 for the Company included the following:
•Total assets were $4.653 billion, an increase of $65.23 million since December 31, 2024.
•Cash and cash equivalents were $47.20 million, a decrease of $76.20 million since December 31, 2024 reflecting the growth in loans since December 31, 2024.
•Net loans were $3.501 billion, an increase of $109.34 million since December 31, 2024, primarily due to increases in the following loan segments: commercial and financial, 1 to 4 family first lien mortgages, 1 to 4 family junior lien mortgages and commercial real estate mortgages. Loans held for sale decreased $0.35 million since December 31, 2024.
•Deposits increased $32.13 million since December 31, 2024.
Refer to Note 7 for a discussion of fair value measurements which relate to methods used by the Company in recording assets and liabilities on its financial statements.
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Financial Condition
Loan demand has stabilized and grown through the first three quarters of 2025 and loan demand is expected to remain consistent throughout the remainder of 2025.
The following table sets forth the composition of the loan portfolio as of September 30, 2025 and December 31, 2024:
| September 30, 2025 | December 31, 2024 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| (Amounts In Thousands) | (Amounts In Thousands) | ||||||||||||||||||||||
| Agricultural | $ | 117,482 | 3.30 | % | $ | 118,678 | 3.45 | % | |||||||||||||||
| Commercial and financial | 308,028 | 8.66 | 298,917 | 8.69 | |||||||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Construction, 1 to 4 family residential | 84,901 | 2.39 | 79,451 | 2.31 | |||||||||||||||||||
| Construction, land development and commercial | 292,304 | 8.22 | 279,589 | 8.13 | |||||||||||||||||||
| Mortgage, farmland | 272,917 | 7.67 | 275,768 | 8.02 | |||||||||||||||||||
| Mortgage, 1 to 4 family first liens | 1,248,020 | 35.10 | 1,174,083 | 34.15 | |||||||||||||||||||
| Mortgage, 1 to 4 family junior liens | 145,245 | 4.08 | 141,550 | 4.12 | |||||||||||||||||||
| Mortgage, multi-family | 494,382 | 13.90 | 492,762 | 14.33 | |||||||||||||||||||
| Mortgage, commercial | 518,140 | 14.57 | 498,078 | 14.49 | |||||||||||||||||||
| Loans to individuals | 32,471 | 0.91 | 35,301 | 1.03 | |||||||||||||||||||
| Obligations of state and political subdivisions | 42,126 | 1.18 | 43,994 | 1.28 | |||||||||||||||||||
| $ | 3,556,016 | 100.00 | % | $ | 3,438,171 | 100.00 | % | ||||||||||||||||
| Net unamortized fees and costs | 290 | 290 | |||||||||||||||||||||
| $ | 3,556,306 | $ | 3,438,461 | ||||||||||||||||||||
| Less allowance for credit losses | 59,097 | 50,940 | |||||||||||||||||||||
| $ | 3,497,209 | $ | 3,387,521 | ||||||||||||||||||||
The Bank has an established formal loan origination policy. In general, the loan origination policy attempts to reduce the risk of credit loss to the Company by requiring, among other things, maintenance of minimum loan to value ratios, evidence of appropriate levels of insurance carried by borrowers and documentation of appropriate types and amounts of collateral and sources of expected payment. The collateral relied upon in the loan origination policy is generally the property being financed by the Company. The source of expected payment is generally the income produced from the property being financed. Personal guarantees are required of individuals owning or controlling at least 20% of the ownership of an entity. Limited or proportional guarantees may be accepted in circumstances if approved by the Company's Board of Directors. Financial information provided by the borrower is verified as considered necessary by reference to tax returns, or audited, reviewed or compiled financial statements. The Company does not originate subprime loans. In order to modify, restructure or otherwise change the terms of a loan, the Company's policy is to evaluate each borrower situation individually. Modifications, restructures, extensions and other changes are done to improve the Company's position and to protect the Company's capital. If a borrower is not current with its payments, any additional loans to such borrowers are evaluated on an individual borrower basis.
The Company has not experienced any significant time lapses in recognizing the required provisions for collateral dependent loans, nor has the Company delayed appropriate charge offs. When an updated appraisal value has been obtained, the Company has used the appraisal amount in determining the appropriate charge off or required reserve. The Company also evaluates any changes in the financial condition of the borrower and guarantors (if applicable), economic conditions, and the Company's loss experience with the type of property in question. Any information utilized in addition to the appraisal is intended to identify additional charge offs or provisions, not to override the appraised value.
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In accordance with Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues, and Staff Accounting Bulletin No. 119, which aligns the staff's guidance with FASB ASC Topic 326, or CECL, the Company determines and assigns ratings to loans using factors that include the following: an assessment of the financial condition of the borrower; a realistic determination of the value and adequacy of underlying collateral; the condition of the local economy and the condition of the specific industry of the borrower; an analysis of the levels and trends of loan categories; and a review of delinquent and classified loans.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If the Company determines a loan amount or portion thereof, is uncollectible, the loan's credit risk rating may be downgraded and the uncollectible amount charged-off or recorded as a specific allowance for losses. The Company's credit and legal departments undertake a thorough and ongoing analysis to determine if additional specific reserves and/or charge-offs are appropriate and to begin a workout plan for the loan to minimize actual losses.
The following table presents the allowance for credit losses as of September 30, 2025 and December 31, 2024 by loan category, the percentage of the allowance for each category to the total allowance, and the percentage of all loans in each category to total loans:
| September 30, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||||||||
| Amount |
% of Total Allowance |
% of Loans to Total Loans |
Amount |
% of Total Allowance |
% of Loans to Total Loans |
||||||||||||||||||||||||||||||
| (In Thousands) | (In Thousands) | ||||||||||||||||||||||||||||||||||
| Agricultural | $ | 785 | 1.33 | % | 3.30 | % | $ | 674 | 1.32 | % | 3.45 | % | |||||||||||||||||||||||
| Commercial and financial | 10,905 | 18.45 | 8.66 | 10,217 | 20.06 | 8.69 | |||||||||||||||||||||||||||||
| Real estate: | |||||||||||||||||||||||||||||||||||
| Construction, 1 to 4 family residential | 322 | 0.54 | 2.39 | 280 | 0.55 | 2.31 | |||||||||||||||||||||||||||||
| Construction, land development and commercial | 2,613 | 4.42 | 8.22 | 2,113 | 4.15 | 8.13 | |||||||||||||||||||||||||||||
| Mortgage, farmland | 3,410 | 5.77 | 7.67 | 3,252 | 6.38 | 8.02 | |||||||||||||||||||||||||||||
| Mortgage, 1 to 4 family first liens | 22,406 | 37.92 | 35.10 | 18,210 | 35.75 | 34.15 | |||||||||||||||||||||||||||||
| Mortgage, 1 to 4 family junior liens | 5,254 | 8.89 | 4.08 | 4,719 | 9.26 | 4.12 | |||||||||||||||||||||||||||||
| Mortgage, multi-family | 3,225 | 5.46 | 13.90 | 2,828 | 5.55 | 14.33 | |||||||||||||||||||||||||||||
| Mortgage, commercial | 9,294 | 15.73 | 14.57 | 7,525 | 14.77 | 14.49 | |||||||||||||||||||||||||||||
| Loans to individuals | 871 | 1.47 | 0.91 | 1,109 | 2.18 | 1.03 | |||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | 12 | 0.02 | 1.18 | 13 | 0.03 | 1.28 | |||||||||||||||||||||||||||||
| $ | 59,097 | 100.00 | % | 100.00 | % | $ | 50,940 | 100.00 | % | 100.00 | % | ||||||||||||||||||||||||
The allowance for credit losses (ACL) totaled $59.10 million at September 30, 2025 compared to the allowance of $50.94 million at December 31, 2024. The percentage of the allowance to outstanding loans was 1.66% and 1.48% at September 30, 2025 and December 31, 2024, respectively. The allowance was based on management's consideration of a number of factors, including composition of the loan portfolio, loans with higher credit risks and the overall amount of loans outstanding. The changes in the ACL in 2025 compared to December 31, 2024 is the result of the following factors: changes in the economic factors used, specifically management's Iowa unemployment forecast which resulted in an increase, increase in loan volume which resulted in an increase; changes in prepayment and curtailment rates resulting in an increase; no change in the
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individually analyzed loans reserve; changes in qualitative factors determined necessary by management which resulted in an increase, and an increase due to net charge-offs, primarily in the first and third quarters, leading to higher loss rates.
The adequacy of the allowance is reviewed quarterly and adjusted as appropriate after consideration has been given to the impact of economic conditions on the borrowers' ability to repay, loan collateral values, past collection experience, the risk characteristics of the loan portfolio and such other factors that deserve current recognition. The growth of the loan portfolio and the trends in nonperforming loans are significant elements in the determination of the allowance for credit losses. Quantitative factors include the Company's historical loss experience, which is then adjusted for levels and trends in past due, levels and trends in charged-off and recovered loans, trends in volume growth, trends in nonperforming loans, trends in modified loans, local economic trends and conditions, and industry and other conditions.
Management has determined that the allowance for credit losses was adequate at September 30, 2025, and that the loan portfolio is diversified and secured, without undue concentration in any specific risk area. This process involves a high degree of management judgment; however, the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company's loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry data. This review encompasses levels of total collateral-dependent loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs.
Investment securities available for sale held by the Company increased by $18.63 million from December 31, 2024 to September 30, 2025. The fair value of securities available for sale was $12.06 million less than the amortized cost of such securities as of September 30, 2025. At December 31, 2024, the fair value of the securities available for sale was $35.72 million less than the amortized cost of such securities.
Deposits increased $32.13 million in the first nine months of 2025. In the opinion of the Company's management, the Company continues to have sufficient liquidity resources available to fund expected additional loan growth.
Brokered deposits are included in total deposits and totaled $35.07 million as of September 30, 2025 with an average rate of 4.51%. Brokered deposits were $34.75 million as of December 31, 2024 with an average interest rate of 4.51%. As of September 30, 2025 and December 31, 2024, brokered deposits were 1.04% and 1.04% of total deposits, respectively.
There were $76.58 million and $127.05 million of Federal Home Loan Bank (FHLB) borrowings as of September 30, 2025 and December 31, 2024, respectively. There were $588.74 million of Federal Funds purchased as of September 30, 2025 and $437.64 million as of December 31, 2024. Total funds purchased from the Bank Term Funding program was none as of September 30, 2025, and $109.00 million as of December 31, 2024. It is expected that the FHLB and Federal Funds funding sources will be considered in the future if loan growth exceeds core deposit increases and the interest rates on funds borrowed from the FHLB and Federal Funds are favorable compared to other funding alternatives.
Dividends and Equity
In January 2025, Hills Bancorporation paid a dividend of $10.32 million or $1.15 per share. The dividend paid in January 2024 was $1.10 per share. After payment of the dividend and the adjustment for accumulated other comprehensive income (loss), stockholders' equity as of September 30, 2025 totaled $531.23 million.
The Company elected to use the Community Bank Leverage Ratio (CBLR) framework as provided for in the Economic Growth, Regulatory Relief and Consumer Protection Act. Under the CBLR framework, the Company is required to maintain a CBLR of greater than 9%, as measured by dividing the Bank's Tier 1 capital by its average total consolidated assets. As of September 30, 2025 and December 31, 2024, the Company had regulatory capital in excess of the Federal Reserve's minimum and well-capitalized definition requirements. The actual amounts and capital ratios as of September 30, 2025 and December 31, 2024 are presented below (amounts in thousands):
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| Actual | |||||||||||
| Amount of Tier 1 Capital | Ratio | ||||||||||
| As of September 30, 2025: | |||||||||||
| Company: | |||||||||||
| Community Bank Leverage ratio | $ | 591,071 | 12.82 | % | |||||||
| Bank: | |||||||||||
| Community Bank Leverage ratio | 590,905 | 12.82 | |||||||||
| Actual | |||||||||||
| Amount of Tier 1 Capital | Ratio | ||||||||||
| As of December 31, 2024: | |||||||||||
| Company: | |||||||||||
| Community Bank Leverage ratio | $ | 565,744 | 12.69 | % | |||||||
| Bank: | |||||||||||
| Community Bank Leverage ratio | 566,359 | 12.71 | |||||||||
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Discussion of operations for the nine months ended September 30, 2025 and 2024
Net Income Overview
Total net income was $45.99 million in 2025 and $36.58 million in the comparable period in 2024, an increase of $9.41 million or 25.72%. The change in net income in 2025 from the first nine months of 2024 was primarily the result of the following:
•Net interest income before credit loss expense increased by $24.62 million or 28.93%.
•For the nine months ended September 30, 2025, credit loss expense was $10.98 million. This represents an increase in expense of $8.36 million from the credit loss expense of $2.62 million for the nine months ended September 30, 2024.
•Noninterest income decreased by $2.05 million, or 8.92%.
•Noninterest expenses increased by $2.91 million, or 4.92%.
For the nine month period ended September 30, 2025 and September 30, 2024 basic earnings per share was $5.17 and $4.03, respectively. Diluted earnings per share was $5.16 for the nine months ended September 30, 2025 compared to $4.03 for the same period in 2024.
The Company's net income for the period was driven primarily by three primary factors. The first factor affecting the Company's net income is the interaction between changes in net interest margin and changes in average volumes of the Company's earnings assets. Net interest income of $109.71 million for the first nine months of 2025 was derived from the Company's $4.444 billion of average earning assets during that period and its tax-equivalent net interest margin of 3.41%. Average earning assets in the nine months ended September 30, 2024 were $4.257 billion and the tax-equivalent net interest margin was 2.74%. Net interest income for the Company increased primarily as a result of increased interest income from higher interest rates on real estate and commercial loans and investments as well as higher volume of investments. Also, overall interest expense was slightly lower than the same period in 2024 due to favorable rate variances. The Company expects net interest margin compression to impact earnings for the foreseeable future due to competition for loans and deposits. The Company believes growth in net interest income will be contingent on the growth of the Company's earning assets, increasing yield on loans and the ongoing interest rate stance of the Federal Reserve Board.
The second factor is credit loss expense. The majority of the Company's interest-earning assets are in loans outstanding, which amounted to more than $3.501 billion at September 30, 2025. Credit loss expense was $10.98 million in 2025 compared to $2.62 million in 2024. The increase in expense when compared to the same period in 2024 is primarily attributable to the following: changes in the economic factors used, specifically management's Iowa unemployment forecast which resulted in an increase, increase in loan volume which resulted in an increase; changes in prepayment and curtailment rates resulting in an increase; no change in the individually analyzed loans reserve; changes in qualitative factors determined necessary by management which resulted in an increase, and an increase due to net charge-offs, primarily in the first and third quarters, leading to higher loss rates.The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions and asset quality.
The third factor affecting the Company's net income is noninterest income, primarily the increase in trust fees and other noninterest income. Trust fees were $12.54 million and $11.23 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of 11.71%. This is primarily driven by the increase in assets under management of $0.270 billion from $2.955 billion as of September 30, 2024 to $3.225 billion as of September 30, 2025 with increased market activity and performance compared to the prior year period. Additionally, the Company recognized $4.29 million and $0 of loss on sale of investment securities for the nine months ended September 30, 2025 and 2024, respectively. Other noninterest income was $1.69 million and $0.36 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of 374.44%, primarily due to incentive and marketing bonuses from the VISA payment network growth agreement.
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Net Interest Income
Net interest income is the excess of the interest and fees earned on interest-earning assets over the interest expense of the interest-bearing liabilities. Net interest income on a tax equivalent basis increased $25.70 million for the nine months ended September 30, 2025 compared to the comparable period in 2024. The increase was primarily as a result of increased interest income from higher interest rates on real estate and commercial loans and investments as well as higher volume of loans and investments. Also, overall interest expense was slightly lower than the same period in 2024 due to favorable rate variances. The net interest margin for the first nine months of 2025 was 3.41% compared to 2.74% in 2024 for the same period. The measure is shown on a tax-equivalent basis using a tax rate of 21% to make the interest earned on taxable and non-taxable assets more comparable. The change in average balances and average rates between periods and the effect on the net interest income on a tax equivalent basis for the nine months ended in 2025 compared to the comparable period in 2024 are shown in the following table:
| Increase (Decrease) in Net Interest Income | |||||||||||||||||||||||||||||
|
Change in Average Balance |
Change in Average Rate |
Volume Changes | Rate Changes | Net Change | |||||||||||||||||||||||||
| (Amounts in Thousands) | |||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||
| Loans, net | $ | 49,908 | 0.38 | % | $ | 1,789 | $ | 9,506 | 11,295 | ||||||||||||||||||||
| Taxable securities | 61,252 | 1.85 | 4,257 | 5,152 | 9,409 | ||||||||||||||||||||||||
| Nontaxable securities | 91,327 | 0.56 | 2,324 | 1,672 | 3,996 | ||||||||||||||||||||||||
| Interest-bearing bank balances | (16,084) | (1.56) | (721) | (137) | (858) | ||||||||||||||||||||||||
| $ | 186,403 | $ | 7,649 | $ | 16,193 | $ | 23,842 | ||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | (13,970) | (0.16) | % | $ | 195 | $ | 1,073 | $ | 1,268 | |||||||||||||||||||
| Savings deposits | 90,605 | 0.28 | (2,145) | (645) | (2,790) | ||||||||||||||||||||||||
| Time deposits | (29,025) | (0.60) | 989 | 3,939 | 4,928 | ||||||||||||||||||||||||
| Other short-term borrowings | (52,447) | (0.47) | 938 | 1,957 | 2,895 | ||||||||||||||||||||||||
| FHLB Borrowings | 168,628 | (0.86) | (6,836) | 2,391 | (4,445) | ||||||||||||||||||||||||
| $ | 163,791 | $ | (6,859) | $ | 8,715 | $ | 1,856 | ||||||||||||||||||||||
| Change in net interest income | $ | 790 | $ | 24,908 | $ | 25,698 | |||||||||||||||||||||||
Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Interest on nontaxable securities and loans is shown on a tax-equivalent basis.
A summary of the net interest spread and margin is as follows:
| (Tax Equivalent Basis) | 2025 | 2024 | ||||||||||||
| Yield on average interest-earning assets | 5.31 | % | 4.78 | % | ||||||||||
| Rate on average interest-bearing liabilities | 2.49 | 2.68 | ||||||||||||
| Net interest spread | 2.82 | % | 2.10 | % | ||||||||||
| Effect of noninterest-bearing funds | 0.59 | 0.64 | ||||||||||||
| Net interest margin (tax equivalent net interest income divided by average interest-earning assets) | 3.41 | % | 2.74 | % | ||||||||||
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In pricing loans and deposits, the Company considers the U.S. Treasury indexes as benchmarks in determining interest rates. The Federal Open Market Committee met six times during the first nine months of 2025. The federal funds target rate decreased to 4.25% as of September 30, 2025 from 5.00% as of the same period in 2024. Interest rates on loans are generally affected by the federal funds target rate since interest rates for the U.S. Treasury market normally increase or decrease when the Federal Reserve Board raises or lowers the federal funds rate. As of September 30, 2025, the rate indexes for the one, three and five year indexes were 3.65%, 3.63% and 3.74%, respectively. The one year index decreased 6.41% from 3.90% at September 30, 2024, the three year index increased 4.01% and the five year index increased 6.86%. The three year index was 3.49% and the five year index was 3.50% at September 30, 2024.
Credit Loss Expense
Credit loss expense was $10.98 million for the nine months ended September 30, 2025 compared to $2.62 million in 2024, an increase of expense of $8.36 million. Credit loss expense is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Company's loan portfolio.
A significant component of the Company's approach to estimating expected credit losses are economic forecasts such as Iowa unemployment and National real gross domestic product (National GDP). For the allowance for credit losses as of September 30, 2025, the key loss drivers were Iowa unemployment and National GDP. The increase in expense when compared to the same period in 2024 is primarily attributable to the following: changes in the economic factors used, specifically management's Iowa unemployment forecast which resulted in an increase, increase in loan volume which resulted in an increase; changes in prepayment and curtailment rates resulting in an increase; no change in the individually analyzed loans reserve; changes in qualitative factors determined necessary by management which resulted in an increase, and an increase due to net charge-offs, primarily in the first and third quarters, leading to higher loss rates.The Company believes that credit loss expense is expected to be dependent on the Company's loan growth, local economic conditions and asset quality.
The allowance for credit losses balance is impacted by charge-offs, net of recoveries, for the periods presented. For the nine months ended September 30, 2025 and 2024, recoveries were $2.63 million and $2.63 million, respectively; and charge-offs were $4.51 million in 2025 and $5.20 million in 2024. The allowance for credit losses totaled $59.10 million at September 30, 2025 compared to $50.94 million as of December 31, 2024. The allowance represented 1.66% and 1.48% of loans held for investment at September 30, 2025 and December 31, 2024.
Noninterest Income
The following table sets forth the various categories of noninterest income for the nine months ended September 30, 2025 and 2024.
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Net gain on sale of loans | $ | 1,113 | $ | 1,774 | $ | (661) | (37.26) | % | |||||||||||||||
| Trust fees | 12,543 | 11,228 | 1,315 | 11.71 | |||||||||||||||||||
| Service charges and fees | 9,851 | 9,590 | 261 | 2.72 | |||||||||||||||||||
| Other noninterest income | 1,689 | 356 | 1,333 | 374.44 | |||||||||||||||||||
| Loss on sale of investment securities | (4,294) | - | (4,294) | - | |||||||||||||||||||
| $ | 20,902 | $ | 22,948 | $ | (2,046) | (8.92) | |||||||||||||||||
Trust fees were $12.54 million and $11.23 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of 11.71%. This is primarily driven by the increase in assets under management of $0.270 billion from $2.955 billion as of September 30, 2024 to $3.225 billion as of September 30, 2025 with increased market activity and performance compared to the prior year period.
Other noninterest income was $0.49 million and $0.36 million for the nine months ended September 30, 2025 and 2024, respectively, an increase of 374.44%, primarily due to annual incentive and marketing bonuses from the VISA payment network growth agreement.
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Net gain on sale of loans was $1.11 million and $1.77 million for the nine months ended September 30, 2025 and 2024, respectively, a decrease of 37.26%. This is primarily driven by decreased activity compared to the same period in 2024.
During the quarter, the Company sold available-for-sale securities generating total sales proceeds of $39.73 million. These transactions resulted in gross realized losses of $4.29 million, reflecting market conditions and strategic portfolio repositioning efforts to increase average yield on the securities portfolio.
Other noninterest income categories experienced marginal period-to-period fluctuations for the nine months ended September 30, 2025.
Noninterest Expenses
The following table sets forth the various categories of noninterest expenses for the nine months ended September 30, 2025 and 2024.
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 33,951 | $ | 33,295 | $ | 656 | 1.97 | % | |||||||||||||||
| Occupancy | 3,347 | 3,226 | 121 | 3.75 | |||||||||||||||||||
| Furniture and equipment | 5,504 | 5,046 | 458 | 9.08 | |||||||||||||||||||
| Office supplies and postage | 1,538 | 1,517 | 21 | 1.38 | |||||||||||||||||||
| Advertising and business development | 2,293 | 2,080 | 213 | 10.24 | |||||||||||||||||||
| Outside services | 11,581 | 10,278 | 1,303 | 12.68 | |||||||||||||||||||
| FDIC insurance assessment | 1,506 | 1,440 | 66 | 4.58 | |||||||||||||||||||
| Other noninterest expense | 2,349 | 2,279 | 70 | 3.07 | |||||||||||||||||||
| $ | 62,069 | $ | 59,161 | $ | 2,908 | 4.92 | |||||||||||||||||
In the nine months ended September 30, 2025, outside services expense increased $1.30 million due to an increase in professional fees of $0.46 million from increased audit, legal and other professional expenses and OREO related loss and expenses of $0.43 million from increased OREO volume compared to the same period in 2024.
Other noninterest expense categories experienced marginal period-to-periods fluctuations for the nine months ended September 30, 2025.
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Discussion of operations for the three months ended September 30, 2025 and 2024
Net Income Overview
Net income increased $0.74 million for the three months ended September 30, 2025 compared to the same period in 2024. Total net income was $12.91 million in 2025 and $12.17 million in the comparable period in 2024, an increase of 6.04%. For the three month periods ended September 30, 2025 and 2024 basic earnings per share was $1.46 and $1.35, respectively. Diluted earnings per share was $1.46 for the three months ended September 30, 2025 compared to $1.35 for the same period in 2024.
Net Interest Income
Net interest income is the excess of the interest and fees earned on interest-earning bearing assets over the interest expense of the interest-bearing liabilities. Net interest income on a tax equivalent basis increased $9.92 million for the three months ended September 30, 2025 compared to the comparable period in 2024. The increase was a result of higher loan and investments volume and interest rates as well as favorable rates on time deposits and borrowings. The net interest margin for the three months ended September 30, 2025 was 3.54% compared to 2.82% in 2024 for the same period. The measure is shown on a tax-equivalent basis using a tax rate of 21% to make the interest earned on taxable and non-taxable assets more comparable. The change in average balances and average rates between periods and the effect on the net interest income on a tax equivalent basis for the three months ended in 2025 compared to the comparable period in 2024 are shown in the following table:
| Increase (Decrease) in Net Interest Income | |||||||||||||||||||||||||||||
|
Change in Average Balance |
Change in Average Rate |
Volume Changes | Rate Changes | Net Change | |||||||||||||||||||||||||
| (Amounts in Thousands) | |||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||
| Loans, net | $ | 98,799 | 0.40 | % | $ | 1,350 | $ | 3,441 | $ | 4,791 | |||||||||||||||||||
| Taxable securities | 64,516 | 1.79 | 1,542 | 1,608 | 3,150 | ||||||||||||||||||||||||
| Nontaxable securities | 81,839 | 0.49 | 731 | 473 | 1,204 | ||||||||||||||||||||||||
| Interest-bearing bank balances | (18,686) | (1.72) | (277) | (29) | (306) | ||||||||||||||||||||||||
| $ | 226,468 | $ | 3,346 | $ | 5,493 | $ | 8,839 | ||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | (62,212) | (0.35) | % | $ | 256 | $ | 744 | $ | 1,000 | |||||||||||||||||||
| Savings deposits | 126,112 | 0.40 | (878) | (339) | (1,217) | ||||||||||||||||||||||||
| Time deposits | (68,012) | (0.91) | 711 | 2,117 | 2,828 | ||||||||||||||||||||||||
| Other short-term borrowings | 40,992 | (0.44) | (1,031) | 915 | (116) | ||||||||||||||||||||||||
| FHLB Borrowings | 153,788 | (0.63) | (2,031) | 620 | (1,411) | ||||||||||||||||||||||||
| $ | 190,668 | $ | (2,973) | $ | 4,057 | $ | 1,084 | ||||||||||||||||||||||
| Change in net interest income | $ | 373 | $ | 9,550 | $ | 9,923 | |||||||||||||||||||||||
Rate/volume variances are allocated on a consistent basis using the absolute values of changes in volume compared to the absolute values of the changes in rates. Interest on nontaxable securities and loans is shown on a tax-equivalent basis.
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A summary of the net interest spread and margin is as follows:
| (Tax Equivalent Basis) | 2025 | 2024 | ||||||||||||
| Yield on average interest-earning assets | 5.44 | % | 4.90 | % | ||||||||||
| Rate on average interest-bearing liabilities | 2.48 | 2.73 | ||||||||||||
| Net interest spread | 2.96 | % | 2.17 | % | ||||||||||
| Effect of noninterest-bearing funds | 0.58 | 0.65 | ||||||||||||
| Net interest margin (tax equivalent net interest income divided by average interest-earning assets) | 3.54 | % | 2.82 | % | ||||||||||
Credit Loss Expense
Credit loss expense was $5.98 million for the three months ended September 30, 2025 compared to a credit loss expense of $2.31 million in 2024, an increase of expense of $3.67 million. The increase in credit loss expense compared to the prior year period is primarily due to shifts in economic factors, including Iowa unemployment increasing, loan volume increasing increases due to qualitative factors, and smaller changes from prepayment and curtailment rates. Credit loss expense is the amount necessary to adjust the allowance for credit losses to the level considered by management to appropriately account for the estimated current expected credit losses within the Bank's loan portfolio.
The allowance for credit losses balance is impacted by charge-offs, net of recoveries, for the periods presented. For the three months ended September 30, 2025 and 2024, recoveries were $1.03 million and $0.89 million, respectively; and charge-offs were $1.81 million in 2025 and $2.61 million in 2024.
Noninterest Income
The following table sets forth the various categories of noninterest income for the three months ended September 30, 2025 and 2024.
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Net gain on sale of loans | $ | 410 | $ | 732 | $ | (322) | (43.99) | % | |||||||||||||||
| Trust fees | 4,238 | 3,842 | 396 | 10.31 | |||||||||||||||||||
| Service charges and fees | 3,403 | 3,242 | 161 | 4.97 | |||||||||||||||||||
| Other noninterest income | 490 | 64 | 426 | 665.63 | |||||||||||||||||||
| Gain on sale of investment securities | (4,294) | - | (4,294) | - | |||||||||||||||||||
| $ | 4,247 | $ | 7,880 | $ | (3,633) | (46.10) | |||||||||||||||||
Net gain on sale of loans were $0.41 million and $0.73 million for the three months ended September 30, 2025 and 2024, respectively, a decrease of 43.99%. This is primarily driven by decreased activity compared to the same period in 2024.
Trust fees were $4.24 million and $3.84 million for the three months ended September 30, 2025 and 2024, respectively, an increase of 10.31%. This is primarily driven by the increase in assets under management of $0.270 billion from $2.955 billion as of September 30, 2024 to $3.225 billion as of September 30, 2025.
Other noninterest income was $1.69 million and $0.06 million for the three months ended September 30, 2025 and 2024, respectively, an increase of 665.63%, primarily due to annual incentive and marketing bonuses from the VISA payment network growth agreement.
Other noninterest income categories for the three months ended September 30, 2025 experienced marginal period-to-period fluctuations.
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Noninterest Expenses
The following table sets forth the various categories of noninterest expenses for the three months ended September 30, 2025 and 2024.
|
Three Months Ended September 30, |
|||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| (Amounts in thousands) | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 11,335 | $ | 11,045 | $ | 290 | 2.63 | % | |||||||||||||||
| Occupancy | 1,111 | 1,147 | (36) | (3.14) | |||||||||||||||||||
| Furniture and equipment | 1,909 | 1,680 | 229 | 13.63 | |||||||||||||||||||
| Office supplies and postage | 563 | 561 | 2 | 0.36 | |||||||||||||||||||
| Advertising and business development | 658 | 639 | 19 | 2.97 | |||||||||||||||||||
| Outside services | 3,779 | 3,517 | 262 | 7.45 | |||||||||||||||||||
| FDIC insurance assessment | 497 | 473 | 24 | 5.07 | |||||||||||||||||||
| Other noninterest expense | 772 | 569 | 203 | 35.68 | |||||||||||||||||||
| $ | 20,624 | $ | 19,631 | $ | 993 | 5.06 | |||||||||||||||||
In the three months ended September 30, 2025, noninterest expense includes salaries and employee benefits which increase $0.29 million as a result of higher headcount, outside services expense which increased $0.26 million due to an increase in professional fees of $0.11 million from increased audit, legal and other professional expenses and OREO related loss and expenses of $0.33 million from increased OREO volume compared to the same period in 2024.
Other noninterest expense categories experienced marginal period-to-periods fluctuations for the three months ended September 30, 2025.
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Income Taxes
Federal and state income tax expenses were $11.57 million and $9.68 million for the nine months ended September 30, 2025 and 2024, respectively. Income taxes as a percentage of income before taxes were 20.10% in 2025 and 20.92% in 2024.
Liquidity
The Company actively monitors and manages its liquidity position with the objective of maintaining sufficient cash flows to fund operations, meet commitments, take advantage of market opportunities and provide a margin against unforeseeable liquidity needs. Federal funds sold and investment securities available for sale are readily marketable assets. Maturities of all investment securities are managed to meet the Company's normal liquidity needs, to respond to market changes or to adjust the Company's interest rate risk position. Investment securities available for sale comprised 20.69% of the Company's total assets at September 30, 2025 compared to 20.58% at December 31, 2024. As of September 30, 2025, investment securities with a carrying value of $137.13 million were pledged to collateralize public and trust deposits and other borrowings. As of December 31, 2024, investment securities with a carrying value of $250.65 million were pledged.
The Company has historically maintained a stable deposit base and a relatively low level of large deposits, which has mitigated the volatility in the Company's liquidity position. Deposit inflows and outflows can vary widely based on prevailing market interest rates, competition, economic conditions, our business customers' liquidity needs and by recent developments in the financial services industry. Uninsured deposits as of September 30, 2025 and December 31, 2024 were approximately $807.20 million and $719.62 million, respectively, which comprised 23.89% and 21.51% of total deposits.
As of September 30, 2025, the Company had $76.58 million of outstanding borrowings from the Federal Home Loan Bank ("FHLB") of Des Moines compared to $127.05 million as of December 31, 2024. The Company had $588.74 million Fed Funds purchased as of September 30, 2025 compared to $546.64 million of Fed Funds purchased as of December 31, 2024. The Company had no Bank Term Funding Program borrowings as of September 30, 2025 and $109.00 million as of December 31, 2024. These borrowings are used as a means of providing both long and short-term funding for certain assets and for managing interest rate risk.
The Company had additional borrowing capacity available from the FHLB of approximately $974.18 million at September 30, 2025. As additional sources of liquidity, the Company has the ability to borrow up to $100.00 million from the Federal Reserve Bank of Chicago, and has lines of credit with three banks totaling $175.00 million. The borrowings under these credit lines would be secured by the Company's investment securities. In addition, the Company has the option of issuing short-, medium-, and long-term debt, should the Company decide to do so. The combination of high levels of potentially liquid assets, low dependence on volatile liabilities, positive cash flows from operations, and both additional borrowing and brokered deposits capacity provided sources of liquidity for the Company which management considered sufficient at September 30, 2025.
Contractual Obligations
There have been no material changes with regard to contractual obligations disclosed in the Company's Form 10-K for the year ended December 31, 2024.
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Hills Bancorporation published this content on November 10, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 10, 2025 at 22:20 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]