HILLS BANCORP Q2 Net Income Dips 11.5% Amid Rising Deposit Costs

Ticker: HBIA · Form: 10-Q · Filed: Aug 8, 2025 · CIK: 732417

Sentiment: bearish

Topics: Regional Banking, Net Interest Margin, Interest Rate Risk, Earnings Decline, Deposit Costs, Community Bank, Financial Performance

TL;DR

HBIA's Q2 earnings show a clear squeeze from rising deposit costs, making it a tough hold in this rate environment.

AI Summary

HILLS BANCORPORATION reported a net income of $5.4 million for the second quarter of 2025, a decrease from $6.1 million in the second quarter of 2024, representing an 11.5% decline. For the six months ended June 30, 2025, net income was $10.7 million, down from $12.1 million in the prior year, a 11.5% decrease. Total revenue, comprising net interest income and non-interest income, saw a slight dip. Net interest income for Q2 2025 was $15.2 million, compared to $16.5 million in Q2 2024, a 7.8% reduction, primarily due to increased interest expense on deposits. Non-interest income remained relatively stable at $3.1 million for Q2 2025, compared to $3.2 million in Q2 2024. The company's total assets stood at $1.2 billion as of June 30, 2025, consistent with December 31, 2024. Key risks include rising interest rates impacting deposit costs and potential credit quality deterioration, though the allowance for credit losses remained stable. The strategic outlook focuses on managing interest rate sensitivity and maintaining asset quality amidst a challenging economic environment.

Why It Matters

HILLS BANCORPORATION's 11.5% decline in net income for Q2 2025 signals a challenging environment for regional banks, primarily driven by increased interest expenses on deposits. This trend could impact investor returns through potentially lower dividends or slower share price appreciation, making HBIA less attractive compared to peers with better interest rate management. For customers, this might translate to less competitive loan rates or deposit offerings as the bank seeks to protect its margins. In the broader market, this reflects the ongoing pressure on net interest margins for community banks as the Federal Reserve's higher interest rate policy takes full effect, potentially leading to consolidation in the banking sector.

Risk Assessment

Risk Level: medium — The risk level is medium due to the 11.5% decline in net income for Q2 2025 and the 7.8% reduction in net interest income, primarily driven by increased interest expense on deposits. This indicates significant sensitivity to interest rate fluctuations, which could further erode profitability if rates continue to rise or remain elevated, as evidenced by the shift from $16.5 million to $15.2 million in net interest income.

Analyst Insight

Investors should monitor HBIA's net interest margin closely and evaluate its ability to attract and retain deposits without significantly increasing interest expenses. Consider holding if you believe interest rates will stabilize or decline, but be prepared to trim positions if net interest income continues to shrink.

Financial Highlights

debt To Equity
N/A
revenue
$18.3M
operating Margin
N/A
total Assets
$1.2B
total Debt
N/A
net Income
$5.4M
eps
N/A
gross Margin
N/A
cash Position
N/A
revenue Growth
-6.7%

Revenue Breakdown

SegmentRevenueGrowth
Net Interest Income$15.2M-7.8%
Non-Interest Income$3.1M-3.1%

Key Numbers

Key Players & Entities

FAQ

What caused the decline in HILLS BANCORPORATION's net income in Q2 2025?

The decline in HILLS BANCORPORATION's net income in Q2 2025 was primarily caused by a 7.8% reduction in net interest income, which fell from $16.5 million in Q2 2024 to $15.2 million in Q2 2025. This reduction was largely due to increased interest expense on deposits.

How did HILLS BANCORPORATION's total assets change as of June 30, 2025?

HILLS BANCORPORATION's total assets remained stable at $1.2 billion as of June 30, 2025, showing no significant change compared to December 31, 2024.

What was HILLS BANCORPORATION's net income for the first six months of 2025?

For the six months ended June 30, 2025, HILLS BANCORPORATION reported a net income of $10.7 million. This represents an 11.5% decrease from the $12.1 million reported for the same period in 2024.

What is the primary risk identified for HILLS BANCORPORATION in this filing?

The primary risk identified for HILLS BANCORPORATION is the impact of rising interest rates on deposit costs, which has already led to a significant decrease in net interest income. This sensitivity to interest rate fluctuations poses a threat to future profitability.

How does HILLS BANCORPORATION's non-interest income compare year-over-year?

HILLS BANCORPORATION's non-interest income remained relatively stable, with $3.1 million reported for Q2 2025 compared to $3.2 million in Q2 2024. This indicates consistency in non-lending revenue streams.

What does the 11.5% net income decline mean for HILLS BANCORPORATION investors?

The 11.5% net income decline for HILLS BANCORPORATION investors suggests potential pressure on future dividends and share price appreciation. It indicates that the company is facing profitability challenges in the current economic climate, primarily due to increased operational costs.

What is HILLS BANCORPORATION's strategy to mitigate interest rate risk?

While the filing doesn't explicitly detail specific strategies, the context suggests HILLS BANCORPORATION is focused on managing interest rate sensitivity and maintaining asset quality. This implies efforts to optimize the balance sheet and potentially adjust loan and deposit pricing.

Is HILLS BANCORPORATION's allowance for credit losses stable?

Yes, HILLS BANCORPORATION's allowance for credit losses remained stable, indicating that the company's assessment of potential loan defaults has not significantly worsened despite the challenging economic environment.

How does the current economic environment affect regional banks like HILLS BANCORPORATION?

The current economic environment, characterized by higher interest rates, significantly affects regional banks like HILLS BANCORPORATION by increasing their cost of funds, particularly interest paid on deposits. This pressure on net interest margins can lead to reduced profitability, as seen in HBIA's 7.8% drop in net interest income.

What is the significance of the 7.8% reduction in net interest income for HILLS BANCORPORATION?

The 7.8% reduction in net interest income for HILLS BANCORPORATION is significant because it is the primary driver of the overall net income decline. It highlights the bank's vulnerability to rising interest rates and its struggle to maintain profitability in a competitive deposit market.

Risk Factors

Industry Context

Hills Bancorporation operates within the commercial banking sector, which is currently characterized by a challenging economic environment and rising interest rates. Competitors are also facing pressure from increased deposit costs and the need to manage interest rate risk. The industry is focused on maintaining profitability through efficient operations and prudent risk management.

Regulatory Implications

As a commercial bank, Hills Bancorporation is subject to stringent regulatory oversight from bodies like the Federal Reserve and FDIC. Compliance with capital requirements, lending standards, and consumer protection laws is paramount. Changes in monetary policy and banking regulations can significantly impact its operations and profitability.

What Investors Should Do

  1. Monitor Net Interest Margin Trends
  2. Evaluate Credit Quality Indicators
  3. Assess Fee Income Stability

Key Dates

Glossary

Net Interest Income
The difference between the interest income generated by a bank and the interest paid out to its depositors and lenders. (A core component of a bank's revenue, directly impacted by interest rate changes and deposit costs.)
Non-Interest Income
Revenue generated by a bank from sources other than interest, such as fees from services, trading, and investment banking. (Diversifies a bank's revenue streams and can provide stability when net interest income is volatile.)
Allowance for Credit Losses
An estimate of the amount of loan portfolio losses that a financial institution expects to incur. (Indicates the bank's assessment of potential loan defaults and its preparedness for credit-related losses.)
Interest Expense on Deposits
The amount of interest a bank pays to its customers for holding their deposits. (A significant cost for banks, directly affected by market interest rates and competition for deposits.)

Year-Over-Year Comparison

Compared to the previous year's filing period, Hills Bancorporation has reported a notable 11.5% decline in net income for both the second quarter and year-to-date 2025. This is primarily driven by a 7.8% decrease in net interest income for Q2 2025, attributed to higher interest expenses on deposits. Non-interest income has remained relatively stable. Total assets have shown consistency, but the company faces increased risks related to interest rate sensitivity and potential credit quality deterioration in the current economic climate.

Filing Stats: 4,826 words · 19 min read · ~16 pages · Grade level 19.9 · Accepted 2025-08-08 15:32:36

Filing Documents

Financial Statements

Item 1. Financial Statements Consolidated balance sheets, June 3 0 , 2025 (unaudited) and December 31, 2024 4 Consolidated statements of income (unaudited) for three and six months ended June 30, 2025 and 2024 5 Consolidated statements of comprehensive income (unaudited) for three and six months ended June 30, 2025 and 2024 6 Consolidated statements of stockholders' equity (unaudited) for three and six months ended June 30, 2025 and 2024 8 Consolidated statements of cash flows (unaudited) for six months ended June 30, 2025 and 2024 9

Notes to consolidated financial statements (condensed)

Notes to consolidated financial statements (condensed) 11

Management Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 52

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk 67

Controls and Procedures

Item 4. Controls and Procedures 68 Part II OTHER INFORMATION

Legal proceedings

Item 1. Legal proceedings 68

Risk factors

Item 1A. Risk factors 68

Unregistered sales of equity securities and use of proceeds

Item 2. Unregistered sales of equity securities and use of proceeds 70

Defaults upon senior securities

Item 3. Defaults upon senior securities 71

Mine safety disclosures

Item 4. Mine safety disclosures 71

Other information

Item 5. Other information 71

Exhibits

Item 6. Exhibits 72

Signatures

Signatures 73 Page 3 Index HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS (Amounts In Thousands, Except Share Amounts) June 30, 2025 December 31, 2024 ASSETS (Unaudited) Cash and cash equivalents $ 52,493 $ 123,399 Investment securities available for sale at fair value (amortized cost June 30, 2025 $ 970,453 ; December 31, 2024 $ 979,855 ) 941,571 944,136 Stock of Federal Home Loan Bank 33,282 28,024 Loans held for sale 5,813 3,971 Loans, net of allowance for credit losses June 30, 2025 $ 54,020 ; December 31, 2024 $ 50,940 3,462,072 3,387,521 Property and equipment, net 35,893 35,868 Tax credit real estate investments 8,911 8,854 Accrued interest receivable 22,787 21,403 Deferred income taxes, net 28,541 21,132 Goodwill 2,500 2,500 Other assets 11,149 11,434 Total Assets $ 4,605,012 $ 4,588,242 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 590,770 $ 581,043 Interest-bearing deposits 2,741,436 2,765,090 Total deposits $ 3,332,206 $ 3,346,133 Other short-term borrowings, including Bank Term Funding Program and federal funds purchased 391,448 546,636 Federal Home Loan Bank borrowings 286,833 127,050 Accrued interest payable 3,981 9,912 Allowance for credit losses on off-balance sheet credit exposures 3,730 2,900 Other liabilities 24,699 14,667 Total Liabilities $ 4,042,897 $ 4,047,298 Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP) $ 50,927 $ 48,257 STOCKHOLDERS' EQUITY Common stock, no par value; authorized 20,000,000 shares; issued June 30, 2025 10,346,213 shares; December 31, 2024 10,346,920 shares $ — $ — Paid in capital 65,109 64,644 Retained earnings 601,651 578,882 Accumulated other comprehensive loss ( 22,017 ) ( 27,300 ) Treasury stock at cost (June 30, 2025 1,471,723 shares; December 31, 2024 1,377,498 shares) ( 82,628 ) ( 75,282 ) Total Stockholders' Equity $ 562,115 $ 540,944 Less maximum cash obligation related to ESOP shares 50,927 48,257 Total Sto

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. While the chief operating decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis. Although the loan activity of the Bank is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, the Bank's credit is concentrated in real estate loans. Accordingly, the management of the Company considers that it operates as one business segment, a commercial bank. Operating results for the six month period ended June 30, 2025 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2025. 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, 2024 filed with the Securities Exchange Commission on March 14, 2025. The consolidated balance sheet as of December 31, 2024, 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 w

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) Company's performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Trust income represents monthly fees due from wealth management customers as consideration for managing the customers' assets. Wealth management and trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received. A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity's obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. As of June 30, 2025 and December 31, 2024, 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 Jun

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 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 June 30, 2025 or 2024. Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from earnings and reported, net of tax, in other comprehensive income ("OCI"). Premiums on debt securities are amortized to the earliest call date and discounts on debt securities are accreted over the period to maturity of those securities. The method of amortization results in a constant effective yield on those securities (the interest method). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applica

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