UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 Commission file number: 0-12668 Hills Bancorporation Incorporated
 in Iowa

I.R.S. Employer Identification
 No. 42-1208067 131 MAIN STREET, HILLS, IOWA 52235 Telephone number: (319) 679-2291 Indicate by
checkmark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 x Yes o No
 Indicate by
checkmark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or smaller reporting company. See definition of  large accelerated filer, accelerated filer and small reporting company
in Rule 12b-2 of the Exchange Act. Large
 accelerated filer
o

Accelerated
 Filer
xNon-accelerated
 filer
o

Small
 Reporting Company
o Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practical date. CLASS

SHARES OUTSTANDING 
 At July 31, 2008Common Stock, no par value

4,467,742 Page 1 of 42    HILLS BANCORPORATION 
Index to Form 10-Q

Part I
FINANCIAL INFORMATION

Page     
 NumberItem 1.

Financial StatementsConsolidated
balance sheets, June 30, 2008
 (unaudited)
 and December 31, 2007


3Consolidated
statements of income
 (unaudited) for three and six 
 months ended June 30, 2008 and 2007


4Consolidated
statements of comprehensive
 income (loss) (unaudited) for 
 three and six months ended June 30, 2008 and 2007


5Consolidated
statements of stockholders
 equity (unaudited)
 for six months ended June 30, 2008 and 2007


6Consolidated
statements of cash flows
 (unaudited) for six 
 months ended June 30, 2008 and 2007


7 - 8Notes to consolidated financial statements


9 - 17Item 2.

Managements Discussion and Analysis of
 Financial Condition 
 and Results of Operations


18 - 32Item 3.

Quantitative and Qualitative Disclosures About Market
Risk


33Item 4.

Controls and Procedures


34Part II 
 OTHER INFORMATIONItem 1.

Legal proceedings


35Item 1A.

Risk factors


35Item 2.

Unregistered sales of equity securities and use of
proceeds


35Item 3.

Defaults upon senior securities


35Item 4.

Submission of matters to a vote of security
holders


36Item 5.

Other information


36Item 6.

Exhibits


36Signatures




37Exhibits Index


38Page 2 of 42

HILLS BANCORPORATIONCONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Shares)

ASSETS

June 30, 2008
 (Unaudited)

December
 31, 2007Cash and due from
banks

$
27,768

$
32,383Federal funds sold


1


Total cash and
cash equivalents

$
27,769

$
32,383Investment securities available
for sale at fair value (amortized
 cost June 30, 2008 $201,532; December 31, 2007 $198,551)


202,484


199,599Stock of Federal Home Loan
Bank


14,247


14,169Loans held for sale


5,239


6,792Loans, net of allowance for loan
losses (June 30, 2008 $24,550;
 December 31, 2007 $19,710)


1,400,501


1,352,599Property and equipment,
net


21,495


21,220Tax credit real estate


8,661


8,803Accrued interest
receivable


11,337


11,391Deferred income taxes,
net


9,868


7,731Goodwill


2,500


2,500Other assets


2,843


3,911$
1,706,944

$
1,661,098LIABILITIES AND
STOCKHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits

$
162,071

$
154,219Interest-bearing deposits


1,006,304


989,707Total
deposits

$
1,168,375

$
1,143,926Short-term
borrowings


105,564


87,076Federal Home
Loan Bank borrowings


265,348


265,348Accrued
interest payable


2,885


3,227Other
liabilities


10,516


8,626$
1,552,688

$
1,508,203Redeemable Common Stock Held by
Employee Stock Ownership Plan (ESOP)

$
22,425

$
22,205STOCKHOLDERS
EQUITYCapital stock,
no par value; authorized 10,000,000 shares; issued
 June 30, 2008 4,585,941 shares; December 31, 2007 4,583,520 shares

$


$
Paid in
capital


12,963


12,823Retained
earnings


146,675


144,122Accumulated
other comprehensive income


588


647Treasury stock
at cost (June 30, 2008 117,399 shares; December 31,
 2007 93,413 shares)


(5,970
)

(4,697
)$
154,256

$
152,895Less maximum
cash obligation related to ESOP shares


22,425


22,205$
131,831

$
130,690$
1,706,944

$
1,661,098See Notes to Consolidated
Financial Statements.

Page 3 of 42

HILLS BANCORPORATIONCONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)

Three Months Ended
 June 30,

Six Months Ended
 June 30,2008

2007

2008

2007Interest income:Loans,
including fees

$
22,010

$
21,888

$
44,492

$
43,262Investment
securities:Taxable


1,236


1,202


2,486


2,241Nontaxable


832


776


1,673


1,539Federal funds
sold


14


142


14


250Total
interest income

$
24,092

$
24,008

$
48,665

$
47,292Interest expense:Deposits

$
7,340

$
8,925

$
15,644

$
17,443Short-term
borrowings


374


484


922


989FHLB
borrowings


3,151


2,987


6,369


5,930Total
interest expense

$
10,865

$
12,396

$
22,935

$
24,362Net
interest income

$
13,227

$
11,612

$
25,730

$
22,930Provision for loan
losses


5,172


954


5,759


1,486Net
interest income after provision for loan losses

$
8,055

$
10,658

$
19,971

$
21,444Other income:Net gain on
sale of loans

$
386

$
326

$
710

$
527Trust
fees


1,006


960


2,017


1,888Service charges
and fees


1,973


2,020


3,867


3,731Rental revenue
on tax credit real estate


228


190


506


306Other
noninterest income


655


640


1,458


1,313$
4,248

$
4,136

$
8,558

$
7,765Other expenses:Salaries and
employee benefits

$
5,091

$
4,832

$
10,097

$
9,648Occupancy


588


585


1,206


1,163Furniture and
equipment


894


891


1,808


1,723Office supplies
and postage


336


321


664


639Advertising and
business development


403


454


764


815Outside
services


1,353


1,272


2,622


2,428Rental expenses
on tax credit real estate


288


240


593


491Other
noninterest expense


1,139


326


1,591


626$
10,092

$
8,921

$
19,345

$
17,533Income
before income taxes

$
2,211

$
5,873

$
9,184

$
11,676Income taxes


361


1,806


2,545


3,604Net
income

$
1,850

$
4,067

$
6,639

$
8,072Earnings per share:Basic

$
0.41

$
0.90

$
1.48

$
1.79Diluted


0.41


0.90


1.47


1.78See Notes to Consolidated
Financial Statements.

Page 4 of 42

HILLS BANCORPORATIONCONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)(Amounts In Thousands)

Three Months Ended
 June 30,

Six Months Ended
 June 30,2008

2007

2008

2007Net income

$
1,850

$
4,067

$
6,639

$
8,072Other comprehensive
loss:Unrealized
holding losses arising during
 the period,

$
(3,969
)
$
(1,491
)
$
(96
)
$
(1,159
)Income tax
effect of unrealized losses


1,518


570


37


443Other comprehensive
loss:

$
(2,451
)
$
(921
)
$
(59
)
$
(716
)Comprehensive income
(loss)

$
(601
)
$
3,146

$
6,580

$
7,356See Notes to Consolidated
Financial Statements.

Page 5 of 42

HILLS BANCORPORATIONCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited) 
(Amounts In Thousands, Except Share Amounts)

Paid In
 Capital

Retained
 Earnings

Accumulated
 Other
 Comprehensive
 Income (Loss)

Maximum
 Cash
 Obligation
 Related
 To ESOP
 Shares

Treasury
 Stock

TotalBalance, December 31,
2006

$
12,364

$
131,852

$
(1,265
)
$
(20,940
)
$
(3,372
)
$
118,639Issuance of
8,487 shares of common stock


188














188Forfeiture of
476 shares of common stock


(20
)













(20
)Share-based
compensation


18














18Income tax
benefit related to share-based
 compensation


93














93Change related
to ESOP shares











(826
)




(826
)Net
income





8,072











8,072Cash dividends
($.86 per share)





(3,873
)










(3,873
)Purchase of
14,628 shares of common stock














(751
)

(751
)Other
comprehensive loss








(716
)







(716
)Balance, June 30, 2007

$
12,643

$
136,051

$
(1,981
)
$
(21,766
)
$
(4,123
)
$
120,824Balance, December 31,
2007

$
12,823

$
144,122

$
647

$
(22,205
)
$
(4,697
)
$
130,690Issuance of
3,166 shares of common stock


157














157Forfeiture of
745 shares of common stock


(32
)













(32
)Share-based
compensation


11














11Income tax
benefit related to share-based
 compensation


4














4Change related
to ESOP shares











(220
)




(220
)Net
income





6,639











6,639Cash dividends
($.91 per share)





(4,086
)










(4,086
)Purchase of
23,986 shares of common stock














(1,273
)

(1,273
)Other
comprehensive loss








(59
)







(59
)Balance, June 30,
2008

$
12,963

$
146,675

$
588

$
(22,425
)
$
(5,970
)
$
131,831See Notes to Consolidated
Financial Statements.

Page 6 of 42

HILLS BANCORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 
(Amounts In Thousands)

Six Months Ended
 June 30,2008

2007Cash Flows from Operating
ActivitiesNet
income

$
6,639

$
8,072Adjustments to
reconcile net income to net cash and cash equivalents
 provided by operating activities:Depreciation


1,127


1,146Provision for
loan losses


5,759


1,486Share-based
compensation


11


18Forfeiture of
common stock


(32
)

(20
)Compensation
expensed through issuance of common stock


147


92Excess tax
benefits from share-based compensation


(4
)

(93
)Provision for
deferred income taxes


(2,100
)

(434
)Loss on
disposal of property and equipment


355


Decrease
(increase) in accrued interest receivable


54


(1,249
)Amortization of
discount on investment securities, net


182


176Decrease
(increase) in other assets


1,072


(249
)Increase in
accrued interest and other liabilities


1,548


1,374Loans
originated for sale


(80,300
)

(61,286
)Proceeds on
sales of loans


82,563


60,233Net gain on
sales of loans


(710
)

(527
)Net cash
and cash equivalents provided by operating
 activities

$
16,311

$
8,739Cash Flows from Investing
ActivitiesProceeds from
maturities of investment securities:Available for
sale

$
24,738

$
18,462Held to
maturity





45Purchases of
investment securities available for sale


(27,979
)

(29,120
)Loans made to
customers, net of collections


(53,661
)

(15,264
)Purchases of
property and equipment


(1,757
)

(686
)Investment in
tax credit real estate, net


142


171Net cash
used in investing activities

$
(58,517
)
$
(26,392
)Cash Flows from Financing
ActivitiesNet increase in
deposits

$
24,449

$
21,351Net increase
(decrease) in short-term borrowings


18,488


(6,048
)Stock options
exercised


10


96Excess tax
benefits related to share-based compensation


4


93Borrowings from
FHLB


20,000


30,000Payments on
FHLB borrowings


(20,000
)

(20,000
)Borrowings from
FRB


1,650


8,000Payments on FRB
borrowings


(1,650
)

Purchase of
treasury stock


(1,273
)

(751
)Dividends
paid


(4,086
)

(3,873
)Net cash
provided by financing activities

$
37,592

$
28,868Page 7 of 42

HILLS BANCORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)(Continued)(Amounts In Thousands)Six Months Ended
 June 30,2008

2007(Decrease)
 increase in cash and cash equivalents

$
(4,614
)
$
11,215Cash and cash equivalents:Beginning of
year


32,383


23,397End of
period

$
27,769

$
34,612Supplemental DisclosuresCash payments
for:Interest paid
to depositors

$
15,986

$
17,410Interest paid
on other obligations


7,290


6,919Income taxes
paid


4,973


3,980Noncash financing
 activities:Increase in
maximum cash obligation related to
ESOP shares

$
220

$
826See Notes to Consolidated Financial
 Statements.Page 8 of 42

HILLS BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Basis of
 PresentationThe 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. Certain prior year amounts have been reclassified to
conform to the current year presentation. The Company considers that it
operates as one business segment, a commercial bank.

Operating results for the
six month period ended June 30, 2008 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2008. 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,
2007 filed with the Securities and Exchange Commission on March 13, 2008.

The allowance for loan
losses is an estimate, and as such, events may occur in the future which affect
its accuracy. Actual default and loss rates may differ materially from levels
assumed by the Company. Given the short period of time that has elapsed since
the floods (as discussed in Note 4), it is difficult to make a determination
regarding individual credit relationships at this stage. The Company
anticipates that additional information will be gathered in the coming quarters
which may require an adjustment to the allowance for loan losses for
flood-related issues. Management will continue to closely monitor its
portfolio.

Note 2.
Earnings
 Per ShareBasic earnings per share
amounts are computed by dividing net income (the numerator) by the weighted
average number of common shares outstanding (the denominator) during the
period. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock equivalents unless the effect is to reduce the
loss or increase the income per common share from continuing operations.

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

Three months ended
 June 30,

Six months ended
 June 30,2008

2007

2008

2007Common shares outstanding at the
beginning of the period


4,485,935


4,497,275


4,490,107


4,503,738Weighted average number of net
shares issued (redeemed)


(11,887
)

1,994


(9,433
)

270Weighted
average shares outstanding (basic)


4,474,048


4,499,269


4,480,674


4,504,008Weighted average of potential
dilutive shares attributable to stock
 options granted, computed under the treasury stock method


20,024


26,945


19,987


27,130Weighted
average number of shares (diluted)


4,494,072


4,526,214


4,500,661


4,531,138Net income (In
Thousands)

$
1,850

$
4,067

$
6,639

$
8,072Earnings per share:Basic

$
0.41

$
0.90

$
1.48

$
1.79Diluted

$
0.41

$
0.90

$
1.47

$
1.78Page 9 of 42

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 3.
Recent
 Accounting PronouncementsAs of January 1, 2008, the
Company adopted FASB Statement No. 157, Fair
Value Measurements in its entirety. The Statement provides a single
definition of fair value, a framework for measuring fair value and expanded
disclosures concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements that prescribe fair
value as the relevant measure of value, except FAS 123R and related
interpretation and pronouncements that require or permit measurement similar to
fair value but are not intended to measure fair value. See Note 5.

In February 2007, the FASB
issued FASB Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115 (FAS 159). FAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. The objective of FAS 159 is to provide opportunities to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions.
FAS 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Statement was
effective for financial statements issued for the year beginning after November
15, 2007. As the fair value option was not elected for any financial assets or
liabilities, the adoption of this Statement did not have a significant effect
on the Companys consolidated financial statements.

In November 2007, the SEC
issued Staff Accounting Bulletin No. 109, Written
Loan Commitments Recorded at Fair Value Through Earnings (SAB
109). SAB 109 provides interpretive guidance on the accounting for written
loan commitments recorded at fair value through earnings under generally
accepted accounting principles. SAB 109 revises and rescinds portions of Staff
Accounting Bulletin No. 105, Application of Accounting Principles to Loan
Commitments. The SEC staff belief is that the expected net future cash flows
related to the associated servicing of a loan should be included in the
measurement of derivative and other written loan commitments that are accounted
for at fair value through earnings. SAB 109 was effective for financial
statements issued for the year beginning after December 15, 2007. The adoption
of SAB 109 did not have a significant effect on the Companys consolidated
financial statements.

In December 2007, the FASB
issued FASB Statement No. 141 (revised), Business
Combinations (FAS 141R). The standard changes the accounting for
business combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment
of acquisition related transaction costs and the recognition of changes in the
acquirers income tax valuation allowance. FAS 141R is effective for financial
statements issued for the year beginning after December 15, 2008. The adoption
of this Statement will not have a significant effect on the Companys
consolidated financial statements.

In December 2007, the FASB
issued FASB Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(FAS 160). The standard changes the accounting for noncontrolling (minority)
interests in consolidated financial statements including the requirements to
classify noncontrolling interests as a component of consolidated stockholders
equity, and the elimination of minority interest accounting in results of
operations with earnings attributable to noncontrolling interests reported as
part of consolidated earnings. Additionally, FAS 160 revises the accounting for
both increases and decreases in a parents controlling ownership interest. FAS
160 is effective for financial statements issued for the year beginning after
December 15, 2008. The adoption of this Statement will not have a significant
effect on the Companys consolidated financial statements.

Page 10 of 42

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 3.
Recent
 Accounting Pronouncements (continued)In January 2008, the SEC
issued Staff Accounting Bulletin No. 110,Certain Assumptions Used in Valuation Methods (SAB 110) which
amends Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). SAB 110 allows for the continued use, under
certain circumstances, of the simplified method in developing an estimate of
expected term of so-called plain vanilla stock options accounted for under
FAS 123R. SAB 110 amends SAB 107 to permit the use of the simplified method
beyond December 31, 2007. The adoption of SAB 110 did not have a significant
effect on the Companys consolidated financial statements.

In March 2008, the FASB
issued FASB Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities  an amendment of FASB
Statement No. 133 (FAS 161). The standard requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk related contingent features in
derivative agreements. FAS 161 is effective for financial statements issued
after November 15, 2008. The adoption of FAS 161 will not have a significant
effect on the Companys consolidated financial statements.

In May 2008, the FASB issued
FASB Statement No. 162, The Hierarchy of
Generally Accepted Accounting Principles (FAS 162). The standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements that are
presented in conformity with generally accepted accounting principles in the
United States of America. FAS 162 will be effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles. The
adoption of FAS 162 will not have a significant effect on the Companys
consolidated financial statements.

In June 2008, the Emerging
Issues Task Force (EITF) issued EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock (EITF No. 07-5). EITF
No. 07-5 defines when adjustment features within contracts are considered to be
equity-indexed. EITF No. 07-5 is effective for financial statements issued
after December 15, 2008. The adoption of EITF No. 07-5 will not have a
significant effect on the Companys consolidated financial statements.

In June 2008, the EITF
issued EITF Issue No. 08-3, Accounting by
Lessees for Maintenance Deposits under LeaseAgreements (EITF No. 08-3). EITF No. 08-3 states that lessees
should account
for nonrefundable maintenance deposits as deposit assets if it is probable that
maintenance activities will occur and the deposit is therefore realizable.
Amounts on deposit that are not probable of being used to fund future
maintenance activities should be charged to expense. EITF No. 08-3 is effective
for financial statements issued after December 15, 2008. The adoption of EITF
No. 08-3 will not have a significant effect on the Companys consolidated
financial statements.

In June 2008, the FASB
issued FASB Staff Position FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 states
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities as defined in
EITF 03-6, Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings Per Share,
and therefore should be included in computing earnings per share using the
two-class method. FSP EITF 03-6-1 is effective for financial statements issued
after December 15, 2008. The adoption of FSP EITF 03-6-1 will not have a
significant effect on the Companys consolidated financial statements.

Page 11 of 42

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4.
2008
 FloodsIn June 2008, severe
flooding occurred throughout southeastern Iowa. Two of the Companys thirteen
offices were damaged by the floods. The damaged offices are the Cedar Rapids
downtown office located at 240 3rd Avenue SE and the Iowa City office
located at 1401 South Gilbert Street. Both damaged offices are temporarily
closed. The Companys operations center located in Hills, Iowa was not
affected. Access to customer accounts was unaffected by the floods. The
Companys employees were relocated to other offices. No employees were laid off
by the Company.

Financial Impact

The impact of the floods has
decreased the Companys earnings for 2008. Net income for the six months ended
June 30, 2008 included $2,751,000 of flood-related expenses, net of tax. The
primary effect was from potential loan losses related to the floods. Based on
an evaluation of the allowance for loan losses, the Company recorded an
additional provision for loan losses of $3,790,000 in the second quarter of
2008. Other expenses increased $665,000. A tax benefit of $1,704,000 was
recorded as a result of the $4,455,000 in additional expenses. Both basic and
diluted earnings per share were reduced $0.61 because of the flood-related
expenses. The Company does not have insurance to cover the flood-related
expenses.

Provision
for Loan Losses

Due to the wide-spread
damage caused by the floods, the Company performed a review of its loan
portfolio for impacted customers. Management of the Company analyzed the
affected properties and businesses, flood insurance coverage, impact on sources
of repayment and underlying collateral, and customer repayment capability.

The portfolio was considered
in two categories by loan type. The first category included all 1-to-4 family,
owner occupied mortgage loans. The second category included construction,
1-to-4 family non-owner occupied, multi-family real estate, commercial real
estate and commercial operating loans. The Company evaluated the 1-to-4 family
owner-occupied mortgage loans based on the address of where the collateral is
located. Collateral addresses were matched to flooded areas. This listing was
reviewed by management and it was determined that an additional provision of
$931,000 was needed in the second quarter of 2008 for 1-to-4 family owner
occupied mortgage loans. Loans in the second category of construction, 1-to-4
family non-owner occupied, multi-family, commercial real estate and commercial
operating loans were evaluated for potential losses based on individual credit
relationships. This evaluation included a determination of whether a customer
business and/or loan collateral was located in a flooded area. Individual
credit relationships for which asset quality was downgraded based on this
review resulted in a provision of $2,859,000.

Other
Expenses

The Company recognized a
loss of $355,000 in the second quarter of 2008 on the net book value of
property and equipment at its two damaged locations. This loss is included in
other expenses on the income statement.

The Company has recorded
$310,000 of expenses related to the floods. These expenses are included in
other expenses on the income statement. The expenses include approximately
$183,000 for decontaminating, drying and demolishing the two flooded offices.
This expense also includes drying of a minimal amount of the Companys records.
In addition, the Company incurred $55,000 in expenses related to the evacuation
of the two damaged locations. The remaining expense of $72,000 includes various
items including meals, sandbagging and other supplies and extra mileage due to
road closings and relocation of offices.

Page 12 of 42

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 4.
2008
 Floods (continued)Office Locations

The Company is currently
operating a 2,000 square foot temporary location at 1210 South Gilbert Street
in Iowa City, Iowa. This temporary space is being leased on a month-to-month
basis. Rents, including common area charges and real estate taxes, total $2,650
per month.

In the third quarter of
2008, the Company intends to open two additional temporary locations. The
Companys Trust Department will be located at a 6,600 square foot building at
2771 Oakdale Boulevard in Coralville, Iowa with rent of $6,600 per month. The
lease term for the Coralville location will be one year. The Company will also
lease an 800 square foot space in downtown Cedar Rapids for $1,025 a month. The
Cedar Rapids space will be at 240 3rd Avenue SE, located on the
second floor of the Companys damaged office. The lease term for the Cedar
Rapids location will be three months. The rents for both of these locations
include common area charges and real estate taxes. The Company intends to open
the two locations in August 2008.

The Company intends to
rebuild both offices affected by the floods. No contracts have been signed for
the construction but the Company estimates remodeling costs in Cedar Rapids of
$525,000 and in Iowa City of $1,045,000, for a total of $1,570,000. Additional
costs of $425,000 are estimated to replace equipment and ATMs at the locations.
Total costs are estimated to be $760,000 for Cedar Rapids and $1,235,000 for
Iowa City, for a total of $1,995,000.

Note 5.
Fair
 Value MeasurementsThe Company adopted FASB
Statement No. 157, Fair Value Measurements
(FAS 157), in its entirety on January 1, 2008. FAS 157 provides a single
definition for fair value, a framework for measuring fair value and expanded
disclosures concerning fair value. Fair value is defined under FAS 157 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 FAS 157. There are three levels of inputs that may be
used to measure fair value as follows:

Level 1
Valuations for assets and
 liabilities traded in active markets for identical assets or liabilities.
 Level 1 includes securities purchased from the Federal Home Loan Bank
 (FHLB), Federal Home Loan Mortgage Corporation (FHLMC) and Federal
 National Mortgage Association (FNMA) that are traded by dealers or brokers
 in active markets. Valuations are obtained from readily available pricing
 sources for market transactions involving identical assets or liabilities.Level 2
Valuations for assets and
 liabilities traded in less active dealer or broker markets. Level 2 includes
 securities issued by state and political subdivisions. Valuations are
 obtained from third party pricing services for identical or comparable assets
 or liabilities.Level 3
Valuations for assets and
 liabilities that are derived from other valuation methodologies, including
 discounted cash flow models and similar techniques, and not based on market
 exchange, dealer or broker traded transactions. Level 3 valuations
 incorporate certain assumptions and projections in determining the fair value
 assigned to such assets and liabilities. 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. The Company does not have any Level 3
 assets or liabilities.Page 13 of 42

HILLS BANCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)(Unaudited)Note 5.
Fair
 Value Measurements (continued)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 following is a
description of valuation methodologies used for assets and liabilities recorded
at fair value and for estimating fair value for assets or liabilities not
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. Level 1 securities
include securities from the FHLB, FHLMC and FNMA. Level 2 securities include
securities issued by state or political subdivisions.

Loans
held for sale: Loans
held for sale are carried at historical cost. The carrying amount is a
reasonable estimate of fair value because of the short time between origination
of the loan and its sale on the secondary market.

Loans: The Company does not record loans at fair
value on a recurring basis. The Company does record nonrecurring fair value
adjustments to loans to reflect (1) partial write-downs that are based on the
observable market price or appraised value of the collateral or (2) the full
charge-off of the loan carrying value.

Foreclosed
assets: 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 upon transfer of the loans to foreclosed
assets. Fair value is generally based upon independent market prices or
appraised values of the collateral. Foreclosed assets are classified as Level
2.

Non-marketable
equity investments:
Non-marketable equity investments are recorded under the cost or equity method
of accounting. There are generally restrictions on the sale and/or liquidation
of these investments, including stock of the Federal Home Loan Bank. The
carrying value of stock of the Federal Home Loan Bank approximates fair value.

LIABILITIES

Deposit
liabilities: Deposit
liabilities are carried at historical cost. The fair value of demand deposits,
savings accounts and certain money market account deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities. If the fair value of the fixed
maturity certificates of deposit is calculated at less than the carrying
amount, the carrying value of these deposits is reported as the fair value.

Short-term
borrowings:
Short-term borrowings are carried at historical cost and include federal funds
purchased and securities sold under agreements to repurchase. The carrying
amount is a reasonable estimate of fair value because of the relatively short
time between the origination of the liability and its expected realization.

Long-term
borrowings: Long-term
borrowings are recorded at historical cost. The fair values of the Companys
long-term borrowings are estimated using discounted cash flow analyses, based
on the Companys current incremental borrowing rates for similar types of
borrowing arrangements.

Valuation methodologies have
not changed during the quarter ended June 30, 2008.

Page 14 of 42

HILLS BANCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)(Unaudited)Note 5.
Fair
 Value Measurements (continued)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:

June 30, 2008Level 1

Level 2

Level 3

Total(Amounts
 in Thousands)Investment securities
 available for sale

$
104,219

$
98,265

$


$
202,484Total

$
104,219

$
98,265

$


$
202,484All securities from the
FHLB, FHLMC and FNMA are included in Level 1.

Assets and Liabilities Recorded at Fair Value on a
Nonrecurring Basis

The Company is required to
measure certain assets at fair value on a nonrecurring basis in accordance with
GAAP. These adjustments to fair value usually result from application of
lower-of-cost-or-market accounting or write-downs of individual assets. The
valuation methodologies used to measure these fair value adjustments are
described above. For assets measured at fair value on a nonrecurring basis in
2008 that were still held on the balance sheet at June 30, 2008, the following
table provides the level of valuation assumptions used to determine the
adjustment and the carrying value of the related individual assets at quarter
end.

June 30, 2008

Quarter Ended
 June 30, 2008Level 1

Level 2

Level 3

Total

Total Losses(Amounts in Thousands)Loans (1)

$


$
3,319

$


$
3,319

$
186Foreclosed
 assets (2)





15





15


Total

$


$
3,334

$


$
3,334

$
186(1)
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.(2)
Represents
 the fair value and related losses of foreclosed real estate and other
 collateral owned that were
 measured at fair value subsequent to their initial classification as
 foreclosed assets.Page 15 of 42

HILLS BANCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued)(Unaudited)Note 6.
Employee Benefit PlansThe Company
has a Stock Option and Incentive Plan for certain key employees and directors
whereby shares of common stock have been reserved for awards in the form of
stock options or restricted stock awards. Under the plan, the aggregate number
of options and shares granted cannot exceed 198,000 shares. A Stock Option
Committee may grant options at prices equal to the fair value of the stock at
the date of the grant. Options expire 10 years from the date of the grant.
Director options granted on or before December 31, 2006 may be exercised
immediately. Director options granted on or after January 1, 2007 and officers
rights under the plan vest over a five-year period from the date of the grant.

Information concerning the
issuance of stock options is presented in the following table:

Options

Weighted-Average
 Exercise Price

Weighted-Average Remaining
 Contractual Term (years)

Aggregate
 Intrinsic Value
 (In Thousands)Options outstanding at
 January 1, 2008


48,365

$   31.02


5.05


$   1,500Options outstanding at June
 30, 2008


47,965


31.06


4.56


1,490Options exercisable at June
 30, 2008


40,385


28.49


4.01


1,151The fair value of each
option is estimated as of the date of grant using a Black-Scholes option
pricing model. The expected lives of options granted incorporate historical
employee exercise behavior. The risk-free rate for periods that coincide with
the expected life of the options is based on the annual 10 year interest rate
swap rate as published by the Federal Reserve Bank. Expected volatility is
based on volatility levels of the Companys peers common stock as the
Companys stock has limited trading activity. Expected dividend yield was based
a set dividend rate.

At June 30, 2008, 108,929
shares were available for issuance under the plan. Stock options for 400 shares
with a weighted-average exercise price of $25.67 were exercised during the six
months ended June 30, 2008. The intrinsic value of the options exercised was
$10,268.

As of June 30, 2008, there
was $19,092 in unrecognized compensation cost for stock options granted under
the plan compared to $34,472 as of June 30, 2007. This unrecognized cost is
expected to be recognized over a weighted-average period of 2.52 years.

Note 7.
Stock Repurchase ProgramIn July of
2005, the Companys Board of Directors authorized a program to repurchase up to
a total of 750,000 shares of the Companys common stock (the 2005 Stock
Repurchase Program). This authorization will expire on December 31, 2009. 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. 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 and legal factors. The Company has purchased
117,399 shares of its common stock in privately negotiated transactions from
August 1, 2005 through June 30, 2008. Of these 117,399 shares, 18,386 shares
were purchased during the quarter ended June 30, 2008, at an average price per
share of $53.09. In the six-month period ended June 30, 2008, 23,986 shares
were purchased at an average price per share of $53.07.

Page 16 of 42

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

Note 8.
Commitments and ContingenciesThe Companys
subsidiary, Hills Bank and Trust (the Bank) is a party to financial
instruments with off-balancesheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit, credit card participations and standby letters of
credit. These instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated balance sheets.

The Banks
exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit, credit card participations
and standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. A summary
of the Banks commitments at June 30, 2008 and December 31, 2007 is as follows:

June 30, 2008

December 31, 2007(Amounts In Thousands)Firm loan
 commitments and unused portion of lines of credit:Home equity
loans

$
37,704

$
36,360Credit card
participations


33,899


30,737Commercial,
real estate and home
 construction


102,297


99,580Commercial
lines and real estate purchase
 loans


158,650


123,007Outstanding
 letters of credit


8,906


10,961Commitments
for commercial lines of credit and real estate loans increased $35.6 million
since December 31, 2007. Real estate loan commitments were $19.5 million as of
December 31, 2007 and $43.7 million as of June 30, 2008, an increase of $24.2
million. The increase in real estate commitments is due in part to the decline
in interest rates and the level of refinancing activity. Real estate loan
commitments are generally higher during the summer months when compared to
commitment levels at year-end. Real estate loan commitments were $34.9 million
at June 30, 2007. In addition, commercial lines increased to $74.4 million and
agricultural lines increased to $24.3 million, a change of $11.5 million in
commercial and agricultural lines since December 31, 2007. This change is due
to lines of credit for new customers and increases in lines for existing
customers.

Note 9.
Income TaxesFederal income
tax expense for the six months ended June 30, 2008 and 2007 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. On January 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes.
The evaluation was performed for those tax years which remain open to audit.
The Company files a consolidated tax return for federal purposes and separate
tax returns for the State of Iowa purposes. The tax years ended December 31,
2007, 2006 and 2005, remain subject to examination by the Internal Revenue
Service. For state tax purposes, the tax years ended December 31, 2007, 2006
and 2005, remain open for examination. As a result of the implementation of FIN
48, the Company did not recognize any increase or decrease in unrecognized tax
benefits. There were no material unrecognized tax benefits at December 31, 2007
and June 30, 2008. No interest or penalties on these unrecognized tax benefits
has been recorded. As of June 30, 2008, the Company does not anticipate any
significant increase or decrease in unrecognized tax benefits during the
twelve-month period ending June 30, 2009.

Page 17 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of OperationsThe 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. The severe flooding that occurred in June 2008 in a
large part of the Companys trade area is discussed below in the Overview
section and in various other sections of this report. This flooding caused
significant uncertainties, the outcome of which will impact the Companys
future results. Additional factors which could have a material adverse effect
on the operations and future prospects of the Company include, but are not
limited to, the following:


The strength
 of the United States economy in general and the strength of the local
 economies in which the Company conducts its operations which may be less
 favorable than expected and may result in, among other things, a
 deterioration in the credit quality and value of the Companys assets.
The effects of, and changes in, laws,
 regulations and policies affecting banking, securities, insurance and
 monetary and financial matters as well as any laws otherwise affecting the
 Company.
The effects
 of changes in interest rates (including the effects of changes in the rate of
 prepayments of the Companys assets) and the policies of the Board of
 Governors of the Federal Reserve System.
The ability
 of the Company to compete with other financial institutions as effectively as
 the Company currently intends due to increases in competitive pressures in
 the financial services sector.
The ability
 of the Company to obtain new customers and to retain existing customers.
The timely
 development and acceptance of products and services, including products and
 services offered through alternative delivery channels such as the Internet.
Technological
 changes implemented by the Company and by other parties, including third
 party vendors, which may be more difficult or more expensive than anticipated
 or which may have unforeseen consequences to the Company and its customers.
The ability
 of the Company to develop and maintain secure and reliable electronic
 systems.Page 18 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)
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, 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, as 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.

Critical Accounting Policies

The Companys
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The financial information
contained within these 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 loan losses. The
Companys allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan loss that management believes is appropriate at each reporting date.
Quantitative factors include the Companys historical loss experience,
delinquency and charge-off trends, collateral values, changes in non-performing
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Companys markets, including economic conditions throughout
the Midwest and in particular, the state of certain industries. Size and
complexity of individual loans in relation to loan structure, existing loan
policies and pace of portfolio growth are other qualitative factors that are
considered in the methodology. As the Company adds new products and increases
the complexity of its loan portfolio, it will enhance its methodology
accordingly. This discussion and analysis should be read in conjunction with
the Companys financial statements and the accompanying notes presented
elsewhere herein, as well as the Managements Discussion and Analysis of
Financial Condition and Results of Operation that is included. Although
management believes the levels of the allowance as of June 30, 2008 and
December 31, 2007 were adequate to absorb probable losses inherent in the loan
portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses that cannot be reasonably predicted at this time.
Given the short period of time that has elapsed since the floods (as
discussed in Note 4), it is difficult to make a determination regarding
individual credit relationships at this stage. The Company anticipates that
additional information will be gathered in the coming quarters which may
require an adjustment to the allowance for loan losses for flood-related
issues.

Page 19 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)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, Mount Vernon, Kalona, Wellman,
Cedar Rapids and Marion, Iowa. At June 30, 2008, the Bank has thirteen
full-service locations.

The severe
flooding that occurred in June 2008 impacted a large part of the Companys
trade area and operations. Two of the Banks offices were seriously damaged and
are temporarily closed. The flooding damaged the local economy and
infrastructure. Many homes and businesses were damaged or destroyed. The
flooding affected the Companys loan portfolio by damaging properties pledged
as collateral and by impairing certain borrowers abilities to repay their
loans. The Companys success depends to a great extent on the success of the
local economy, and the 2008 floods have negatively impacted the Companys
earnings. The initial financial effect of the 2008 floods on the Company is
addressed in the analysis that follows and in Note 4.

Net income for
the six month period ended June 30, 2008 was $6.64 million compared to $8.07
million for the same six months of 2007, a decrease of 17.75%. The decline in
net income is due mainly to flood-related expenses. These flood-related
expenses consisted of (1) a $3,790,000 addition to the provision for loan
losses, (2) recognition of a $355,000 loss in the value of property and
equipment and (3) $310,000 of expenses incurred in dealing with the floods.
These flood-related expenses totaled $2,751,000, net of a resulting $1,704,000
tax benefit. The $3,790,000 flood-related addition to the provision for loan
losses was part of an overall increase in the provision for loan losses of
$4,273,000 from 2007 to 2008. The $355,000 loss in the value of property and
equipment and $310,000 of expenses incurred in dealing with the floods were
part of the $1,812,000 increase in other expense for the first six months of
2008 when compared to the same period in 2007. These expense increases were
partially offset by the increases in net interest income of $2,800,000 and
other income of $793,000. Return on average equity was 11.97% for the six
months ended June 30, 2008 compared to 13.49% for the same period in 2007.
Return on average assets was 0.97% in 2008 compared to 1.03% in 2007. Return on
average assets and return on average equity are calculated based on annualized
income based on the first six months of the year. Dividends of $.91 per share
were paid in January 2008 to 1,572 shareholders. The 2008 dividend was a 5.81%
increase over the prior years dividend of $.86 per share.

The Banks net
interest income is the largest component of revenue and it is primarily a
function of the average earnings assets and the net interest margin percentage.
The Bank achieved a net interest margin on a tax-equivalent basis of 3.39% in
2008 compared to 3.23% in 2007. Average earning assets were $1.588 billion in
2008 and $1.491 billion in 2007.

Highlights
noted on the balance sheet as of June 30, 2008 for the Company included the
following:


Total assets
 are $1.707 billion.
Net loans
 are $1.406 billion.
Loan growth
 of $46.3 million since December 31, 2007.
Deposit
 growth of $24.4 million since December 31, 2007.
Short-term
 borrowings increased $18.5 million since December 31, 2007.A detailed
discussion of the financial condition and results of operations follows this
overview.

Page 20 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Financial Condition

The asset
growth for the six months ended June 30, 2008 of $45.8 million included a net
loan increase of $46.3 million and an increase in investment securities
available for sale of $2.9 million. These increases were partially offset by a
decrease in cash and cash equivalents of $4.6 million. The Federal Open Market
Committee decreased the federal funds target rate four times in the first six
months of 2008 to 2.00%. The downward movement started on September 18, 2007
when the rate decreased from 5.25% to 4.75%. The September 18, 2007 decrease
was the first change in the target rate since June 20, 2006 and the first
decrease since June 25, 2004 when the rate was increased from 1.00% to 1.25%
and increased 17 times to 5.25% over the two-year period to June 2006. The
Federal Reserve Board did not change the rate at its last meeting on June 25,
2008. Interest rates on loans are generally affected by such decreases since
interest rates for the U.S. Treasury market normally decrease when the Federal
Reserve Board lowers the federal funds target rate. In pricing of loans and
deposits, the Bank considers the U.S. Treasury indexes as benchmarks in
determining interest rates. As of June 30, 2008, the average rate indexes for
one, three and five year indexes were 2.36%, 2.91% and 3.34%, respectively. The
one year index decreased 51.93% from 4.91% at June 30, 2007, the three year
index decreased 40.49% and the five year index decreased 32.11%. The three year
index was at 4.89% and the five year index was at 4.92% at June 30, 2007.
During this same six-month period, the average federal funds rate decreased
from 5.31% in 2007 to 2.47% in 2008.

The tables
below set forth the composition of the loan portfolio as of June 30, 2008 and
December 31, 2007 (dollars in thousands), along with changes in the allowance
for loan losses and non-performing loan information:

June 30, 2008

December 31, 2007Amount

Percent

Amount

Percent(Amounts In Thousands)

(Amounts In Thousands)Agricultural

$
54,747


3.84
%
$
60,004


4.37
%Commercial and
financial


152,340


10.69


132,070


9.62Real estate:Construction


129,524


9.09


123,144


8.97Mortgage


1,054,780


74.02


1,020,802


74.40Loans to individuals


33,660


2.36


36,289


2.64$
1,425,051


100.00
%
$
1,372,309


100.00
%Less allowance for loan
losses


24,550





19,710$
1,400,501




$
1,352,599The Bank has
an established formal loan origination policy. In general, the loan origination
policy attempts to reduce the risk of credit loss to the Bank by requiring
that, 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.

Page 21 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Changes in the
allowance for loan losses for the periods shown in the following table were as
follows:

Three Months Ended
 June 30,

Six Months Ended
 June 30,2008

2007

2008

2007(Amounts In Thousands)

(Amounts In Thousands)Balance, beginning

$
19,790

$
18,410

$
19,710

$
17,850Provision
charged to expense


5,172


954


5,759


1,486Recoveries


232


259


402


723Loans charged
off


(644
)

(773
)

(1,321
)

(1,209
)Balance, ending

$
24,550

$
18,850

$
24,550

$
18,850Non-performing
loan information at June 30, 2008 and December 31, 2007, was as follows:

June 30, 2008

December 31, 2007(Amounts
 in thousands)Non-accrual loans

$
4,314

$
4,948Accruing loans past due ninety
days or more


7,930


6,019Restructured loans





Non-performing loans (includes
non-accrual loans)


41,750


39,583Loans held for
investment


1,425,051


1,372,309Ratio of allowance for loan
losses to loans held for investment


1.72
%

1.44
%Ratio of allowance for loan
losses to non-performing loans


58.80


49.79Non-performing
loans increased by $2.2 million from December 31, 2007 to June 30, 2008.
Non-performing loans include any loan that has been placed on nonaccrual
status. Non-performing loans also include loans that, based on managements
evaluation of current information and events, the Bank expects to be unable to
collect in full according to the contractual terms of the original loan
agreement. These loans are also considered impaired loans. Non-performing loans
were 2.93% of loans held for investment as of June 30, 2008 and 2.88% as of
December 31, 2007. The increase in non-performing loans is due mainly to $10.1
million in flood related loans. This increase was partially offset by several
improvements including the payoff of one loan with a balance of approximately
$2.2 million at December 31, 2007. In addition, one commercial customer with an
aggregate loan balance of approximately $5.7 million at December 31, 2007 was
upgraded during 2008. The majority of the non-performing loans is secured by
real estate and is believed to be adequately collateralized. Loans 90 days past
due that are still accruing interest increased $1.9 million in the first six
months of 2008. This increase is due mainly to six loans to six different
borrowers. These six loans are not concentrated in one industry. The Company
believes that the allowance for loan losses is at a level commensurate with the
overall risk exposure of the loan portfolio. However, if economic conditions
deteriorate, certain borrowers may experience difficulty and the level of
non-performing loans, chargeoffs and delinquencies could continue to rise and
require increases in the provision for loan losses. Given the short period of
time that has elapsed since the floods (as discussed in Note 4), it is
difficult to make a determination regarding individual credit relationships at
this stage. The Company anticipates that additional information will be
gathered in the coming quarters which may require an adjustment to the
allowance for loan losses for flood-related issues.

Page 22 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Investment
securities available for sale held by the Company increased by $2.9 million
from December 31, 2007 to June 30, 2008. The market value of securities
available for sale was $952,000 more than the amortized cost of such securities
as of June 30, 2008. This is a decrease of $96,000 in market value since
December 31, 2007. This decrease in market value of $0.1 million was more than
offset by purchases of investment securities available for sale in excess of
maturities of $3.2 million. There was also a decrease related to amortization
of the discount on the securities of $0.2 million during the six-month period
ended June 30, 2008. The carrying values of investment securities for June 30,
2008 and December 31, 2007 are summarized in the following table (dollars in
thousands):

June 30, 2008

December 31, 2007Amount

Percent

Amount

PercentSecurities available for saleOther
 securities (FHLB, FHLMC and FNMA)

$
104,219


51.47
%
$
104,965


52.59
%State and
 political subdivisions


98,265


48.53


94,634


47.41Total
 securities available for sale

$
202,484


100.00
%
$
199,599


100.00
%Deposit growth
was $24.4 million in the first six months of 2008. Repurchase agreements
decreased $10.4 million in the same period. Short-term borrowings at December
31, 2007 included federal funds purchased that increased $28.9 million to $68.6
million as of June 30, 2008. In the opinion of the Companys management, the
Company continues to have sufficient liquidity resources available to fund
expected additional loan growth.

Dividends and Equity

In January
2008, Hills Bancorporation paid a dividend of $4,086,000 or $.91 per share, a
5.81% increase from the $.86 per share paid in January 2007. After payment of
the dividend and the adjustment for accumulated other comprehensive income,
stockholders equity as of June 30, 2008 totaled $131.8 million. Under
risk-based capital rules, the total amount of risk based capital of the Company
as of June 30, 2008, was 12.76% of risk-adjusted assets, and is substantially
in excess of the required minimum of 8.00%. Risk-based capital was 12.75% and
13.37% as of June 30, 2007 and December 31, 2007, respectively. As of June 30,
2008, the most recent notifications from the Federal Reserve System categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Companys category.

Page 23 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Discussion of operations for the six months
ended June 30, 2008 and 2007

Net Income Overview

Net income
decreased $1,433,000 for the six months ended June 30, 2008 compared to the
first six months of 2007. Total net income was $6,639,000 in 2008 and
$8,072,000 in the comparable period in 2007. The changes in net income in 2008
from the first six months of 2007 were the result of the following:


Net interest
 income increased by $2,800,000.
The
 provision for loan losses increased by $4,273,000.
Other income
 increased by $793,000.
Other
 expenses increased by $1,812,000.
Income taxes
 decreased by $1,059,000.Net income for
the six-month period ended June 30, 2008 was $6.64 million compared to $8.07
million for the same six months of 2007, a decrease of 17.75%. The decline in
net income is due mainly to flood-related expenses. These flood-related
expenses consisted of (1) a $3,790,000 addition to the provision for loan
losses, (2) recognition of a $355,000 loss in the value of property and
equipment and (3) $310,000 of expenses incurred in dealing with the floods.
These flood-related expenses totaled $2,751,000, net of a resulting $1,704,000
tax benefit.

For the
six-month periods ended June 30, 2008 and 2007, basic earnings per share were
$1.48 and $1.79, respectively. Diluted earnings per share were $1.47 for the
six months ended June 30, 2008 compared to $1.78 for the same period in 2007.

Quarterly
fluctuations in the Companys net income continue to be driven primarily by
three important factors. The first important factor is the interaction between
changes in net interest margin and changes in average earnings assets. Net
interest income of $25.7 million for the first six months of 2008 was derived
from the Companys $1.588 billion of average earning assets during that period
and its net interest margin of 3.39%. Average earning assets in the six months
ending June 30, 2007 were $1.491 billion and the net interest margin was 3.23%.
The importance of net interest margin is illustrated by the fact that a
decrease in the net interest margin of 10 basis points to 3.29% would have
resulted approximately in a $790,000 decrease in income before income taxes in
the six month period ended June 30, 2008. Similarly, an increase in the net
interest margin of 10 basis points to 3.49% would have resulted in
approximately a $790,000 increase in net interest income before taxes. Net
interest income for the Company increased due to the increase in average
earning assets over the same period in 2007 and the increase in the net
interest margin of 16 basis points.

The second
significant factor affecting the Companys net income is the provision for loan
losses. The majority of the Companys interest-earning assets are in loans
outstanding, which amounted to more than $1.406 billion at June 30, 2008. The
provision is computed on a quarterly basis and is a result of managements
determination of the quality of the loan portfolio. The provision reflects a
number of factors including the size of the loan portfolio, loan
concentrations, the level of non-performing loans (which includes non-accrual
loans) and loans past due 90 days or more. The provision for loan losses was
$5,759,000 in the first six months of 2008 compared to $1,486,000 the same
period in 2007. The increase of $4,273,000 is primarily due to the $3,790,000
of flood-related provision expense.

The amount of
mortgage loans sold on the secondary market is the third factor that can cause
fluctuations in net income. In the six months ended June 30, 2008 and 2007, the
net gain on sale of loans was $710,000 and $527,000 respectively. The sale of
loans is influenced by the real estate market and interest rates.

Page 24 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Discussion of operations for the six months
ended June 30, 2008 and 2007 (continued)

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.
The factors that have the greatest impact on net interest income are the volume
of average earning assets and the net interest margin. The change in interest
not solely due to changes in volume or rate has been allocated in proportion to
the net dollar amounts of the change in each. The net interest margin for the
first six months of 2008 was 3.39% compared to 3.23% in 2007 for the same
period. The measure is shown on a tax-equivalent basis using a tax rate of 35%
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 six months ended
in 2008 compared to the comparable period in 2007 are shown in the following
table:

Increase
(Decrease) in Net Interest IncomeChange
in

Change
inAverage
Balance

Average
Rate

Volume
Changes

Rate
Changes

Net
Change(Amounts
in Thousands)Interest income:Loans, net

$
89,797


(0.29
) %
$
3,479

$
(2,250
)
$
1,229Taxable securities


7,696


0.15


159


86


245Nontaxable securities


8,116


(0.03
)

222


(16
)

206Federal funds sold


(8,624
)

(3.42
)

(236
)




(236
)$
96,985




$
3,624

$
(2,180
)
$
1,444Interest expense:Interest-bearing demand deposits

$
25,785


(0.42
)
$
(179
)
$
367

$
188Savings deposits


(8,057
)

(0.75
)

289


751


1,040Time deposits


5,708


(0.26
)

(155
)

726


571Short-term borrowings


26,209


(1.67
)

(728
)

795


67FHLB borrowings


21,787


(0.11
)

(547
)

108


(439
)$
71,432




$
(1,320
)
$
2,747

$
1,427Change in net interest income







$
2,304

$
567

$
2,871A summary of
the net interest spread and margin is as follows:

(Tax Equivalent Basis)

2008

2007Yield on average interest-earning assets


6.28
%

6.51
%Rate on average interest-bearing liabilities


3.40


3.83Net interest spread


2.88
%

2.68
%Effect of noninterest-bearing funds


0.51


0.55Net interest margin (tax equivalent interest income divided by average
 interest-earning assets)


3.39
%

3.23
%Page 25 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)Discussion of operations for the
six months ended June 30, 2008 and 2007 (continued)

Provision for Loan Losses

The
provision for loan losses was $5,759,000 in 2008 compared to $1,486,000 in
2007, an increase of $4,273,000. The loan loss provision is the amount
necessary to adjust the allowance for loan losses to the level considered
appropriate by management. The provision is computed on a quarterly basis and
is a result of managements determination of the quality of the loan portfolio.
The provision reflects a number of factors, including the size of the loan
portfolio, loan concentrations, the impact of borrowers ability to repay, loan
collateral values, the level of impaired loans and loans past due ninety days
or more. In addition, management considers the credit quality of the loans
based on managements review of problem and watch loans, including loans with
historically higher credit risks (primarily agricultural and spec real estate
construction loans).

Provision
expense increased in 2008 due to the increase in loans classified as potential
watch, watch or problem loans in 2008. Potential watch, watch and problem loans
increased $33.8 million in the six-month period ended June 30, 2008 compared to
an increase of $27.4 million during the same period in 2007. Approximately
$15.4 million of the growth in potential watch, watch and problem loans was due
to loans to customers affected by flooding, accounting for an increase in the
provision of $3.8 million. The additional $18.4 million increase in potential
watch, watch and problem loans resulted in an increased provision of $933,000.
The provision for loan losses was also larger in 2008 due to loan growth of
$46.3 million in the first six months compared to $15.4 million in loan growth
in the same period in 2007.

The
allowance for loan losses balance is also affected by the charge-offs, net of
recoveries, for the periods presented. For the six months ended June 30, 2008
and 2007, recoveries were $402,000 and $723,000, respectively; and charge-offs
were $1,321,000 in 2008 and $1,209,000 in 2007. The allowance for loan losses
totaled $24,550,000 at June 30, 2008 compared to $19,710,000 at December 31,
2007. The allowance represented 1.72% and 1.44% of outstanding loans at June
30, 2008 and December 31, 2007, respectively. Except for determinations
concerning customers affected by flooding as explained in Note 4, the
methodology used in 2008 is consistent with 2007.

Net Gain on Sale of Loans

Net gain on sale of loans
for the six months ended June 30, 2008 was $710,000 compared to $527,000 for
the comparable period ended June 30, 2007. Loans sold in the first six months
of 2008 totaled $82.6 million compared to $60.2 million in the same period in
2007, an increase of 31%.

Other Income

Other income, other than the
net gain on sale of loans discussed above, increased by $610,000 for the six
months ended June 30, 2008. Trust fees increased $129,000 in 2008 although
assets under management decreased from $927.2 million as of June 30, 2007 to
$885.8 million as of June 30, 2008. Assets under management by the Trust
Department decreased due to overall market conditions resulting in a decline in
value of such assets. Service charges and fees were up $136,000 in 2008. Debit
card and point of sale (POS) interchange fees increased during 2008 by $232,000
due to volume of activity. This increase was offset by a decrease of $137,000
from fee income strategies. Rental revenue on tax credit real estate increased
$200,000 for the six-month period ended June 30, 2008. This increase was
partially due to adjustments to income of $50,000 recorded upon receipt of the
2007 audited financial statements for the tax credit properties. In 2007, the
audit adjustments decreased rental revenue on tax credit real estate by
$96,000. In addition, the Company acquired a fourth tax credit real estate
property in December 2007 and the 2008 results reflect amounts related to the
new property.

Page 26 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)Discussion of operations for the
six months ended June 30, 2008 and 2007 (continued)

Other noninterest income was
$1,458,000 for the six months ended June 30, 2008, a $145,000 increase over the
same period in 2007. Included in other noninterest income are amounts related
to Visa, Inc. (Visa). In the first quarter of 2008, Visa completed its initial
public offering (IPO). After the redemption, the Company has 4,210 shares of
Visa Class B Common Stock which is valued at its carryover basis of $0 on the
Companys balance sheet. The sale of the stock is restricted for the longer of
3 years or the end of the litigation noted below. The Company received $114,000
in proceeds from the redemption of shares as a part of the IPO and recorded a
gain. In addition, during the fourth quarter of 2007, the Company recorded a
$50,000 reserve related to the Banks contingent liability, as a member of
Visa, for the Banks portion of settlement payments arising from Visas
litigation with American Express Company and Discover Financial Services. In
conjunction with the IPO, Visa created a litigation escrow which is to be used
to pay the litigation settlement payments. As a result, the Company recorded a
receivable equal to the $50,000 reserve during the first quarter of 2008. This
receivable is recorded as a contra-liability to the reserve. Both the liability
and receivable are reflected in other liabilities on the Companys consolidated
financial statements. The economic benefit of the receivable is recorded in
other noninterest income.

Other Expenses

Other expenses increased
$1,812,000 in 2008 to $19,345,000 from the same period in 2007. This increase
of 10.33% included an increase of $449,000 in salaries and benefits. Direct
salary expense was up $409,000, or 5.75%, due to annual pay adjustments and the
addition of employees in 2008. Occupancy
expenses increased $43,000 in 2008 due to an increase of $56,000 related to
building maintenance and upkeep related to increased snow removal costs in the
first quarter of 2008. For the six months ended June 30, 2008, furniture and
equipment expense was $1,808,000 compared to $1,723,000 for 2007. The increase
of $85,000 includes $44,000 for equipment and software maintenance contracts.
This expense was $640,000 in 2008 and $596,000 one year ago. The change in the
maintenance contract expense is due to increased costs of recurring maintenance
contracts with the Companys core processing system and other existing systems.
Advertising and business development expenses decreased $51,000 in comparing
the first six months of 2008 and 2007. The decrease is due to office promotions
held in 2007 for the retail and commercial areas of the Bank.

Outside
services expense increased $194,000 for the six months ended June 30, 2008
compared to June 30, 2007. Outside services include professional fees, courier
services and ATM fees, and processing charges for the merchant credit card
program, retail credit cards and other data processing services. Credit card,
debit card and merchant card processing expenses increased $99,000 due to the
volume of transactions in 2008 compared to 2007. In addition, during the first
six months of 2008, the gain or loss on repossessed real estate properties
decreased $35,000 from the same period in 2007. During 2007, two properties
were sold at a gain of approximately $41,000. The five properties sold in 2008
were at a net loss of $22,000.

Rental
expenses on tax credit real estate were $593,000 in 2008, an increase of
$102,000 from the six-month period ended June 30, 2007. This increase is due
mainly to the addition of the fourth property noted above under other income.
Other noninterest expense increased $965,000 to $1,591,000 for the six months
ended June 30, 2008. The majority of this increase is due to the $665,000 in
flood-related items detailed in Note 4. Also, there was an increase in the FDIC
assessment of $281,000 in 2008 compared to 2007.

Page 27 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)Discussion of operations for the
six months ended June 30, 2008 and 2007 (continued)

Income Taxes

Federal and state income tax
expenses were $2,545,000 and $3,604,000 for the six months ended June 30, 2008
and 2007, respectively. Income taxes as a percentage of income before taxes
were 27.71% in 2008 and 30.87% in 2007. The amount of tax credits was $353,000
and $280,000 for the six month period ended June 30, 2008 and 2007,
respectively.

The decrease in the
effective tax rate is due mainly to tax-exempt interest income and its
relationship to total income before income taxes. For the first six months of
2007, tax-exempt interest income was $1,700,000, or 15% of income before income
taxes resulting in a 5.10% decrease in the effective tax rate. For the first
six months of 2008, tax-exempt interest income was $1,832,000, or 20% of income
before income taxes. This decreased the effective tax rate an additional 1.88%
for a total reduction in the effective tax rate of 6.98% in 2008. Also, tax
credits increased $73,000 for the six months ended June 30, 2008 as compared to
the same period in 2007, reducing the effective tax rate an additional 1.44%.

Page 28 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)Discussion of operations for the
three months ended June 30, 2008 and 2007 (continued)

Net Income

Net income decreased to
$1,850,000 for the three months ended June 30, 2008 from $4,067,000 for the
same period in 2007, a decrease of 54.51%. Earnings per share, both basic and
diluted, decreased for the three months ended June 30, 2008 compared to the
same period in 2007. For the three-month period ended June 30, 2008, basic and
diluted earnings per share were $0.41. For the three months ended June 30,
2007, basic and diluted earnings per share were $0.90. Return on average equity
was 5.44% for the three months ended June 30, 2008 compared to 13.33%, for the
same period in 2007. Return on average assets was 0.44% in 2008 and 1.03% in
2007. Return on average assets and return on average equity are calculated
based on annualized results for the second quarter.

Net Interest Income

Net interest income
increased for the three month period ended June 30, 2008 by $1,615,000 from the
similar period in 2007. The net interest margin in 2008 was 3.45% compared to
3.24% in 2007. Net interest income changes on a tax-equivalent basis for the
three months ended June 30, 2008 and 2007 are as follows:

Change in
 Average Balance

Change in
 Average Rate

Increase (Decrease) in Net Interest IncomeVolume Changes

Rate Changes

Net Change(Amounts in Thousands)Interest income:Loans,
net

$
98,982


(0.43
)%
$
1,897

$
(1,780
)
$
117Taxable
securities


6,422


(0.12
)

73


(39
)

34Nontaxable
securities


7,472


(0.07
)

102


(16
)

86Federal funds
sold


(8,675
)

(2.93
)

(128
)




(128
)$
104,201




$
1,944

$
(1,835
)
$
109Interest expense:Interest-bearing demand deposits

$
27,668


(0.68
)
$
(109
)
$
325

$
216Savings
deposits


(12,051
)

(1.05
)

157


569


726Time
deposits


9,721


(0.51
)

(114
)

757


643Short-term
borrowings


28,766


(2.21
)

(410
)

520


110FHLB
borrowings


19,821


(0.14
)

(250
)

86


(164
)$
73,925




$
(726
)
$
2,257

$
1,531Change in net interest
income







$
1,218

$
422

$
1,640A
summary of the net interest spread and margin is as follows:

(Tax Equivalent Basis)

2008

2007Yield on average
interest-earning assets


6.16
%

6.54
%Rate on average interest-bearing
liabilities


3.20


3.86Net interest spread


2.96
%

2.68
%Effect of noninterest-bearing
funds


0.49


0.56Net interest margin (tax
equivalent interest income divided by average interest-earning
 assets)


3.45
%

3.24
%Page 29 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Discussion of operations for the three months
ended June 30, 2008 and 2007 (continued)

Provision for Loan Losses

The provision
for loan losses was $5,172,000 for the quarter ended June 30, 2008 compared to
$954,000 for the comparable quarter in 2007, an increase of $4,218,000. As
discussed in connection with the results of operations for the six months, the
allowance for loan losses was increased due to managements analysis of the
outstanding loans at June 30, 2008. Loans classified as potential watch, watch
or problem loans increased $34.7 million in the second quarter of 2008 compared
to a decrease of $0.7 million in these categories during the second quarter of
2007. Approximately $15.4 million of the growth in potential watch, watch and
problem was due to loans to customers affected by flooding, accounting for an
increase in the provision of $3.8 million. The additional $19.3 million
increase in potential watch, watch and problem loans resulted in an increased
provision of $1.4 million. In addition, the provision for loan losses was
larger in the three-month period ended June 30, 2008 due to loan growth of
$31.3 million compared to loan growth of $9.7 million in the same period in
2007.

The allowance
for loan losses balance is also affected by the charge-offs, net of recoveries,
for the periods presented. For the three months ended June 30, 2008 and 2007,
recoveries were $232,000 and $259,000, respectively; and charge-offs were
$644,000 in 2008 and $773,000 in 2007. The allowance for loan losses totaled
$24,550,000 at June 30, 2008 compared to $18,850,000 at June 30, 2007. The
allowance represented 1.72% and 1.44% of outstanding loans at June 30, 2008 and
June 30, 2007, respectively.

Other Income

Total other
income was $4,248,000 and $4,136,000 for the three months ended June 30, 2008
and 2007. Net gain on sale of loans increased by $60,000 in the quarter ended
June 30, 2008 as compared to the same quarter in 2007 due to an increase in the
volume of loans sold in 2008. The trust fees for 2008 were $46,000 higher than
2007 although assets under management declined. Service charges and fees were
down $47,000 in the three months ended June 30, 2008. The decline was mainly
due to a decrease of $169,000 from fee income strategies. These decreases are
offset by an increase of $119,000 in debit card and point of sale (POS) pin
interchange fees. These fees increased due to the volume of activity. Rental
revenue on tax credit real estate increased $38,000 for the three-month period
ended June 30, 2008. As noted in the six-month discussion, the Company acquired
a fourth tax credit real estate property in December 2007 and the 2008 results
reflect amounts related to the new property.

Other Expenses

Total expenses
for the 2008 quarter compared to the 2007 quarter increased $1,171,000 to
$10,092,000. Salaries and employee benefits increased $259,000 for the quarter
ended June 30, 2008 compared to 2007. Direct salary expense was up $234,000, or
6.53%, due to annual pay adjustments and additional employees in 2008.
Advertising and business development expenses decreased $51,000 in comparing
the quarters. The decrease is due to office promotions held in 2007 for the
retail and commercial areas of the Bank. Outside services increased $81,000
from the second quarter of 2007. Credit card, merchants card and debit card
processing charges increased $46,000 for the three-month period ended June 30,
2008 due to volume of card activity. Professional fees increased $61,000 in
2008 due to amounts paid to an outside third party for internal audit services.
The internal audit fees were incurred later in the year during 2007.

Rental
expenses on tax credit real estate were $288,000 in the second quarter of 2008,
an increase of $48,000 from the second quarter of 2007. This increase is due
mainly to the addition of the fourth property noted under other income. Other
noninterest expense increased $813,000 to $1,139,000 for the three months ended
June 30, 2008. The majority of the increase is due to the $665,000 in
flood-related items discussed in Note 4. Also, there was an increase in the
FDIC assessment of $134,000 in 2008.

Page 30 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Discussion of operations for the three months
ended June 30, 2008 and 2007 (continued)

Income Taxes

Income tax
expense as a percentage of income before taxes decreased to 16.33% in 2008 from
30.75% in 2007. Income tax expense was $1,445,000 less in 2008 compared to 2007
primarily due to the $3,662,000 decrease in income before income taxes. The
amount of tax credits was $177,000 for the second quarter of 2008 and $140,000
for the second quarter of 2007. The decrease in the effective tax rate is due
mainly to tax-exempt interest income and its relationship to total income
before income taxes. In the second quarter of 2007, tax-exempt interest income
was $861,000, or 15% of income before income taxes resulting in a 5.13%
decrease in the effective tax rate. In the second quarter of 2008, tax-exempt
interest income was $909,000, or 41% of income before income taxes. This
decreased the effective tax rate an additional 9.26% for a total reduction in
the effective tax rate of 14.39% in 2008. Also, tax credits increased $37,000
for the second quarter of 2008 as compared to the same period in 2007, reducing
the effective tax rate an additional 5.63%.

Page 31 of 42

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Liquidity

The Company
actively monitors and manages its liquidity position with the objective of
maintaining sufficient cash flows to fund operations, meet client 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.
Federal funds sold and investment securities available for sale comprised
11.86% of the Companys total assets at June 30, 2008, compared to 12.02% at
December 31, 2007.

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. As of June 30, 2008, the Company had borrowed $265.4 million from the
Federal Home Loan Bank (FHLB) of Des Moines. Two advances of $10 million each
matured in February and April 2008 and were repaid. There was one new advance in
May 2008 for $20 million at 3.65%. This new advance is due in 2018 but is
callable as early as 2013. These advances were used as a means of providing
both long and short-term, fixed-rate funding for certain assets and for
managing interest rate risk. The Company had additional borrowing capacity
available from the FHLB of approximately $162 million at June 30, 2008.

As additional
sources of liquidity, the Company has the ability to borrow up to $10 million
from the Federal Reserve Bank of Chicago, and has lines of credit with two
banks totaling $73 million. Those two lines of credit require the pledging of
investment securities when drawn upon. The combination of high levels of
potentially liquid assets, low dependence on volatile liabilities and additional
borrowing capacity provided sources of liquidity for the Company which
management considered sufficient at June 30, 2008.

As of June 30,
2008, investment securities with a carrying value of $105,564,000 were pledged
to collateralize public and trust deposits, short-term borrowings and for other
purposes, as permitted by law. As of December 31, 2007, investment securities
with a carrying value of $87,076,000 were pledged.

Contractual Obligations

As of June 30,
2008, there had been no material changes in the Companys contractual
obligations from those disclosed in its Annual Report in Form 10-K for the year
ended December 31, 2007.

Page 32 of 42

HILLS BANCORPORATION

Item 3.
Quantitative and Qualitative Disclosures About Market RiskMarket Risk Management

The Companys
primary market risk exposure is to changes in interest rates. The Companys
asset/liability management, or its management of interest rate risk, is focused
primarily on evaluating and managing net interest income given various risk criteria.
Factors beyond the Companys control, such as market interest rates and
competition, may also have an impact on the Companys interest income and
interest expense. In the absence of other factors, the Companys overall yield
on interest-earning assets will increase, as will its cost of funds on its
interest-bearing liabilities when market interest rates increase over an
extended period of time. Conversely, the Companys yields and cost of funds
will decrease when market rates decline. The Company is able to manage these
swings to some extent by attempting to control the maturity or rate adjustments
of its interest-earning assets and interest-bearing liabilities over given
periods of time.

Asset/Liability Management

The Bank
maintains an asset/liability committee, which meets at least quarterly to
review the Banks interest rate sensitivity position and to review various
strategies as to interest rate risk management. In addition, the Bank uses a
simulation model to review various assumptions relating to interest rate
movement. The model attempts to limit rate risk even if it appears the Banks
asset and liability maturities are perfectly matched and a favorable interest
margin is present.

In order to
minimize the potential effects of adverse material and prolonged increases or
decreases in market interest rates on the Companys operations, management has
implemented an asset/liability program designed to mitigate the Companys
interest rate sensitivity. The program emphasizes the origination of adjustable
rate loans, which are held in the portfolio, the investment of excess cash in
short or intermediate term interest-earning assets, and the solicitation of
savings or transaction deposit accounts, which are less sensitive to changes in
interest rates and can be re-priced rapidly.

Net interest
income should decline as interest rates increase, while net interest income
should increase as interest rates decline. Generally, during periods of
increasing interest rates, the Companys interest rate sensitive liabilities
would re-price faster than its interest rate sensitive assets causing a decline
in the Companys interest rate spread and margin. This would tend to reduce net
interest income because the resulting increase in the Companys cost of funds
would not be immediately offset by an increase in its yield on earning assets.
In times of decreasing interest rates, fixed rate assets could increase in
value and the lag in re-pricing of interest rate sensitive assets could be
expected to have a positive effect on the Companys net interest income.

Page 33 of 42

HILLS BANCORPORATION

Item 4.
Controls and ProceduresThe Company
carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as defined in the Securities
Exchange Act of 1934 Rule 13a-15(e). Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports it files with the Securities and
Exchange Commission. There have been no changes in the Companys internal
controls over financial reporting during the first six months of 2008 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.

Page 34 of 42

HILLS BANCORPORATION PART II - OTHER INFORMATION

Item 1.
Legal ProceedingsNo material
legal proceedings are pending.

Item 1A.
Risk FactorsThe following
risk factor should be considered in addition to those disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007.

A natural disaster could harm the Companys
business.

The severe
flooding that occurred in 2008 affected our loan portfolio by damaging
properties pledged as collateral and by impairing certain borrowers abilities
to repay their loans. As a result of the floods, we made a significant
provision for loan losses in the second quarter of 2008. The after effects of
the floods may continue to affect our loan quality into the future. The
severity and duration of the effects of the flooding will depend on a variety
of factors that are beyond our control, including the amount and timing of
government investment in the area, the pace of rebuilding and economic recovery
in Johnson and Linn Counties and the extent to which any property damage is
covered by insurance. The effects described above are difficult to accurately
predict or quantify at this time. As a result, uncertainties remain regarding
the impact the flooding will have on the financial results of the Company.
Further, the area in which the Company operates may experience flooding and
other natural disasters in the future, and some of those events may have
effects similar to those caused by the 2008 flooding.

Item 2.
Unregistered Sales of Equity Securities and Use of ProceedsThe following
table sets forth information about the Companys stock purchases, all of which
were made pursuant to the 2005 Stock Repurchase Program, for the three months
ended June 30, 2008:

Period

Total number of shares
 purchased

Average price paid per
 share

Total number of shares
 purchased as part of publicly
 announced plans or
 programs

Maximum number of
 shares that may yet be
 purchased under the
 plans or programs (1)April 1 to April 30


13,026


$   53.00


112,039


637,961May 1 to May 31


2,759


53.12


114,798


635,202June 1 to June 30


2,601


53.50


117,399


632,601Total


18,386


$   53.09


117,399


632,601(1) On July
26, 2005, the Companys Board of Directors authorized a program to repurchase
up to 750,000 shares of the Companys common stock (the 2005 Stock Repurchase
Program). This authorization will expire on December 31, 2009. 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 and legal factors.

Item 3.
Defaults upon Senior SecuritiesHills
Bancorporation has no senior securities.

Page 35 of 42

HILLS BANCORPORATION 
PART II - OTHER INFORMATION 
(continued)

Item 4.
Submission of Matters to a Vote of Security HoldersThe Annual
Meeting of Shareholders was held on April 21, 2008. The only matter voted was
for the election of directors. The following individuals were elected to serve
as Directors of the Company for a three year term at the Annual Meeting. The
results of the voting by individuals and those withholding authority are as
follows:

For

Withhold Authority

Term1.   James
 A. Nowak


2,959,700


27,395


3 years to
 20112.   Theodore
 H. Pacha


2,936,803


50,292


3 years to
 20113.   Ann
 Marie Rhodes


2,943,831


43,264


3 years to
 20114.   Ronald
 E. Stutsman


2,887,509


99,586


3 years to
 2011Item 5.
Other InformationNone

  Item
          6.
      Exhibits31.1
      Certifications
          under Section 302 of the Sarbanes-Oxley Act of 200231.2
      Certifications
          under Section 302 of the Sarbanes-Oxley Act of 200232.1
      Certifications
          under Section 906 of the Sarbanes-Oxley Act of 200232.2
      Certifications
          under Section 906 of the Sarbanes-Oxley Act of 2002Page 36 of 42

SIGNATURES

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

HILLS
BANCORPORATIONDate:
 August 8, 2008

By:
 /s/ Dwight O. SeegmillerDwight
 O. Seegmiller, Director, President and Chief Executive OfficerDate:
 August 8, 2008

By:
 /s/ James G. PrattJames
 G. Pratt, Secretary, Treasurer and Chief Accounting OfficerPage 37 of 42

HILLS BANCORPORATIONQUARTERLY REPORT OF FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 2008

Exhibit
 Number

Description

Page Number
 In The Sequential
 Numbering System
 June 30, 2008 Form 10-Q31.1

Certifications
 under Section 302 of the Sarbanes-Oxley Act of 2002

39 of 4231.2

Certifications
 under Section 302 of the Sarbanes-Oxley Act of 2002

40 of 4232.1

Certifications
 under Section 906 of the Sarbanes-Oxley Act of 2002

41 of 4232.2

Certifications
 under Section 906 of the Sarbanes-Oxley Act of 2002

42 of 42Page 38 of 42