UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 March 31, 2008 Commission file number: 0-12668 Hills Bancorporation Incorporated
 in Iowa
I.R.S. Employer IdentificationNo. 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. xYes oNo 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 April 30, 2008Common Stock, no par value

4,473,762 Page 1 of 33    HILLS BANCORPORATION  Index to Form 10-Q

Part I     FINANCIAL
INFORMATION

Page
 NumberItem 1.

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


3Consolidated
statements of income,
 (unaudited) for three months ended March 31, 2008 and 2007


4Consolidated
statements of comprehensive
 income, (unaudited) for three months ended March 31, 2008 and 2007


5Consolidated
statements of stockholders
 equity, (unaudited) for three months ended March 31, 2008 and 2007


6Consolidated
statements of cash flows
 (unaudited) for three months ended March 31, 2008 and 2007


7 - 8Notes to
consolidated financial statements


9 - 15Item
 2.

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


16 - 25Item
 3.

Quantitative and
Qualitative Disclosures
 About Market Risk


26Item
 4.

Controls and
Procedures


27Part II
 OTHER INFORMATIONItem
 1.

Legal
proceedings


28Item
 1A.

Risk
factors


28Item
 2.

Unregistered
sales of equity securities and
 use of proceeds


28Item
 3.

Defaults upon
senior securities


28Item
 4.

Submission of
matters to a vote of security
 holders


28Item
 5.

Other
information


28Item
 6.

Exhibits


28Signatures




29Exhibits
 Index



30Page 2 of 33

HILLS BANCORPORATION CONSOLIDATED BALANCE SHEETS 
(Amounts In Thousands, Except Shares)

ASSETS

March 31, 2008
 (Unaudited)

December
 31, 2007Cash and due from
banks

$
30,180

$
32,383Federal funds sold


3


Total cash and
cash equivalents

$
30,183

$
32,383Investment securities available
for sale at fair value (amortized cost
 March 31, 2008 $196,835; December 31, 2007 $198,551)


201,756


199,599Stock of Federal Home Loan
Bank


13,732


14,169Loans held for sale


9,750


6,792Loans, net of allowance for loan
losses (March 31, 2008
 $19,790; December 31, 2007 $19,710)


1,369,480


1,352,599Property and equipment,
net


22,049


21,220Tax credit real estate


8,749


8,803Accrued interest
receivable


11,793


11,391Deferred income taxes,
net


6,410


7,731Goodwill


2,500


2,500Other assets


3,621


3,911$
1,680,023

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

$
151,341

$
154,219Interest-bearing deposits


1,039,777


989,707Total
deposits

$
1,191,118

$
1,143,926Short-term
borrowings


63,591


87,076Federal Home
Loan Bank borrowings


255,347


265,348Accrued
interest payable


3,248


3,227Other
liabilities


10,942


8,626$
1,524,246

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

$
22,205

$
22,205STOCKHOLDERS
EQUITYCapital stock,
no par value; authorized 10,000,000 shares; issued March
 31, 2008 4,584,948 shares; December 31, 2007 4,583,520 shares

$


$
Paid in
capital


12,907


12,823Retained
earnings


144,825


144,122Accumulated
other comprehensive income


3,039


647Treasury stock
at cost (March 31, 2008 99,013 shares; December 31, 2007
 93,413 shares)


(4,994
)

(4,697
)$
155,777

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


22,205


22,205$
133,572

$
130,690$
1,680,023

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

Page 3 of 33

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

Three
Months Ended
March 31,2008

2007Interest income:Loans,
including fees

$
22,482

$
21,374Investment
securities:Taxable


1,250


1,039Nontaxable


841


763Federal funds
sold





108Total
interest income

$
24,573

$
23,284Interest expense:Deposits

$
8,304

$
8,518Short-term
borrowings


548


505FHLB
borrowings


3,218


2,943Total
interest expense

$
12,070

$
11,966Net
interest income

$
12,503

$
11,318Provision for loan losses


587


532Net
interest income after provision for loan losses

$
11,916

$
10,786Other income:Net gain on
sale of loans

$
324

$
201Trust
fees


1,011


928Service
charges and fees


1,894


1,711Rental revenue
on tax credit real estate


278


116Other
noninterest income


803


673$
4,310

$
3,629Other expenses:Salaries and
employee benefits

$
5,006

$
4,816Occupancy


618


578Furniture and
equipment


914


832Office
supplies and postage


328


318Advertising
and business development


361


361Outside
services


1,269


1,156Rental
expenses on tax credit real estate


305


251Other
noninterest expense


452


300$
9,253

$
8,612Income
before income taxes

$
6,973

$
5,803Income taxes


2,184


1,798Net
income

$
4,789

$
4,005Earnings per share:Basic

$
1.07

$
0.89Diluted


1.06


0.88See Notes to Consolidated
Financial Statements.

Page 4 of 33

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

Three
Months EndedMarch 31,2008

2007Net income

$
4,789

$
4,005Other comprehensive
income:Unrealized
holding gains arising during the
  period,
  net of income taxes, 2008 $1,481; 2007 $127


2,392


205Comprehensive income

$
7,181

$
4,210See Notes to Consolidated
Financial Statements.

Page 5 of 33

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

Paid In Capital

RetainedEarnings

AccumulatedOtherComprehensiveIncome (Loss)

MaximumCashObligationRelatedTo
ESOPShares

TreasuryStock

TotalBalance, December 31,
2006

$
12,364

$
131,852

$
(1,265
)
$
(20,940
)
$
(3,372
)
$
118,639Issuance of
1,482 shares of
common stock


61














61Share-based
compensation


8














8Income tax
benefit related to
share-based compensation


5














5Change related
to ESOP shares











(355
)




(355
)Net
income





4,005











4,005Cash dividends
($.86 per share)





(3,873
)










(3,873
)Purchase of
7,945 shares of
common stock














(404
)

(404
)Other
comprehensive income








205








205Balance, March 31,
2007

$
12,438

$
131,984

$
(1,060
)
$
(21,295
)
$
(3,776
)
$
118,291Balance, December 31,
2007

$
12,823

$
144,122

$
647

$
(22,205
)
$
(4,697
)
$
130,690Issuance of
1,597 shares of
  common stock


85














85Forfeiture of
169 shares of
  common stock


(6
)













(6
)Share-based
compensation


5














5Net
income





4,789











4,789Cash dividends
($.91 per share)





(4,086
)










(4,086
)Purchase of
5,600 shares of
  common stock














(297
)

(297
)Other
comprehensive income








2,392








2,392Balance, March 31,
2008

$
12,907

$
144,825

$
3,039

$
(22,205
)
$
(4,994
)
$
133,572See Notes to Consolidated
Financial Statements.

Page 6 of 33

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

Three Months Ended
  March 31,2008

2007Cash Flows from Operating
ActivitiesNet
income

$
4,789

$
4,005Adjustments to
reconcile net income to net
  cash and cash equivalents provided by operating activities:Depreciation


563


573Provision for
loan losses


587


532Share-based
compensation


5


8Forfeiture of
common stock


(6
)

Compensation
expensed through issuance of
  common stock


85


48Excess tax
benefits related to share-based
  compensation





(5
)Provision for
deferred income taxes


(160
)

(257
)Increase in
accrued interest receivable


(402
)

(776
)Amortization
of discount on investment
  securities, net


83


100Decrease in
other assets


290


193Increase in
accrued interest payable and
  other liabilities


2,337


2,340Loans
originated for sale


(42,348
)

(22,399
)Proceeds on
sales of loans


39,714


24,617Net gain on
sales of loans


(324
)

(201
)Net cash
and cash equivalents provided by
  operating activities

$
5,213

$
8,778Cash Flows from Investing
ActivitiesProceeds from
maturities of investment securities
  available for sale

$
12,892

$
7,168Purchases of
investment securities
  available for sale


(10,822
)

(10,283
)Loans made to
customers, net of collections


(17,468
)

(8,225
)Purchases of
property and equipment


(1,392
)

(345
)Investment in
tax credit real estate, net


54


96Net cash
used in investing activities

$
(16,736
)
$
(11,589
)Cash Flows from Financing
ActivitiesNet increase
in deposits

$
47,192

$
55,497Net decrease
in short-term borrowings


(23,485
)

(14,634
)Stock options
exercised





13Excess tax
benefits related to share-based
  compensation





5Payments on
FHLB borrowings


(10,001
)

Borrowings
from FRB


2,000


Payments on
FRB borrowings


(2,000
)

Purchase of
treasury stock


(297
)

(404
)Dividends
paid


(4,086
)

(3,873
)Net cash
provided by financing activities

$
9,323

$
36,604Page 7 of 33

HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)(Amounts In Thousands)

Three Months Ended
  March 31,2008

2007(Decrease)
  increase in cash and cash equivalents

$
(2,200
)
$
33,793Cash and cash equivalents:Beginning of
year


32,383


23,397End of
period

$
30,183

$
57,190Supplemental DisclosuresCash payments
for:Interest paid
to depositors

$
8,283

$
8,436Interest paid
on other obligations


3,766


3,448Income
taxes


456


19Noncash
financing activities:Increase in
maximum cash obligation related to ESOP shares

$


$
355See Notes to Consolidated
Financial Statements.

Page 8 of 33

HILLS BANCORPORATIONNOTES 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 may be 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 three-month period ended March 31, 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 Exchange Commission on
  March 13, 2008.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
  March 31,2008

2007Common shares
outstanding at
  the beginning of the period


4,490,107


4,503,738Weighted
average number of net shares redeemed


(2,806
)

(3,310
)Weighted
average shares outstanding (basic)


4,487,301


4,500,428Weighted
average of potential dilutive shares attributable to stock
  options granted, computed under the treasury stock method


19,778


26,171Weighted
average number of shares (diluted)


4,507,079


4,526,599Net income (In
Thousands)

$
4,789

$
4,005Earnings per share:Basic

$
1.07

$
0.89Diluted

$
1.06

$
0.88Page 9 of 33

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

Note 3. Recent Accounting Pronouncements

As 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 4.

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 33

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.

Note 4.
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.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.

Page 11 of 33

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

Note 4.
Fair Value Measurements (continued)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 March 31, 2008.

Page 12 of 33

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

Note 4.
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:

March 31, 2008Level 1

Level 2

Level 3

Total(Amounts in Thousands)Investment
 securities available for sale

$
105,055

$
96,701

$


$
201,756Total

$
105,055

$
96,701

$


$
201,756All 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 March
31, 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.

March 31, 2008

Quarter Ended
 March 31, 2008Level 1

Level 2

Level 3

Total

Total Losses(Amounts in Thousands)Loans (1)

$


$
3,053

$


$
3,053

$
192Foreclosed
 assets (2)





15





15


Total

$


$
3,068

$


$
3,068

$
192(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 13 of 33

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

Note 5. Employee Benefit Plans

The Company
has a Stock Option and Incentive Plan for certain key employees and directors
whereby shares of common stock have been reserved for awards in the form of
stock options or restricted stock awards. Under the plan, the aggregate number
of options and shares granted cannot exceed 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)Outstanding at January 1,
 2008


48,365

$
31.02

5.05


$
1,500Outstanding at March 31,
 2008


48,365


31.02

4.80



1,500Options exercisable at
 March 31, 2008


40,785


28.47

4.24



1,161The 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 on a set dividend rate.

At March 31,
2008, 109,522 shares were available for issuance under the plan.

As of March
31, 2008, there was $21,000 in unrecognized compensation cost for stock options
granted under the Plan compared to $29,000 as of March 31, 2007. This
unrecognized cost is expected to be recognized over a weighted-average period
of 2.77 years.

Note 6.
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, legal and accounting factors. The Company has purchased
99,013 shares of its common stock in privately negotiated transactions from
August 1, 2005 through March 31, 2008. Of these 99,013 shares, 5,600 shares
were purchased during the quarter ended March 31, 2008, at an average price per
share of $53.00.

Page 14 of 33

HILLS BANCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued) 
(Unaudited)

Note 7.
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 March 31, 2008 and December
31, 2007 is as follows:

March 31, 2008

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

$
36,856

$
36,360Credit card
participations


33,406


30,737Commercial,
real estate and home
 construction


94,878


99,580Commercial
lines and real estate purchase
 loans


146,552


123,007Outstanding
 letters of credit


8,429


10,961Commitments
for commercial and real estate loans increased $23.5 million since December 31,
2007. Real estate loan commitments were $19.5 million as of December 31, 2007
and $27.5 million as of December 31, 2007, an increase of $8.0 million. The
increase in real estate commitments is due in part to the decline in interest
rates and the level of refinancing activity. Available commitments for
commercial and agricultural lines of credit increased $14.6 million to $101.8
million as of March 31, 2008. The increase in commercial and agricultural lines
is due to the increase in input costs for agricultural production leading to
higher operating costs and funding needs for agricultural borrowers.

Note 8.
Income TaxesFederal income
tax expense for the three months ended March 31, 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 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 for unrecognized tax
benefits. There were no material unrecognized tax benefits on December 31, 2007
and March 31, 2008. No interest or penalties on these unrecognized tax benefits
has been recorded. As of March 31, 2008, the Company does not anticipate any
significant increase or decrease in unrecognized tax benefits during the
twelve-month period ending March 31, 2009.

Page 15 of 33

HILLS BANCORPORATION

Item 2.
Managements
 Discussion and Analysis of Financial ConditionAnd 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 should be read in conjunction with the consolidated
financial statements and the accompanying footnotes.

Special Note Regarding
Forward Looking Statements

This report contains, and
future oral and written statements of the Company and its management may
contain, forward-looking statements within the meaning of such term in the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Actual results may differ materially from those
included in the forward-looking statements. Forward-looking statements, which may
be based upon beliefs, expectations and assumptions of the Companys management
and on information currently available to management, are generally
identifiable by the use of words such as believe, expect, anticipate,
plan, intend, estimate, may, will, would, could,
should or
other similar expressions. Additionally, all statements in this document,
including forward-looking statements, speak only as of the date they are made,
and the Company undertakes no obligation to update any statement in light of
new information or future events.

The Companys ability to
predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company include, but are not limited to,
the following:


The strength of the United
 States economy in general and the strength of the local economies in which
 the Company conducts its operations which may be less favorable than expected
 and may result in, among other things, a deterioration in the credit quality
 and value of the Companys assets.
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 16 of 33

HILLS BANCORPORATION

Item 2.
Managements
 Discussion and Analysis of Financial ConditionAnd 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
 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 losses 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 other relevant portions of Managements Discussion
and Analysis of Financial Condition and Results of Operations. Although
management believes the levels of the allowance as of March 31, 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.

Page 17 of 33

HILLS BANCORPORATION

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

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 March 31, 2008, the Bank has thirteen full service
locations.

Net income for the period
ended March 31, 2008 was $4.79 million compared to $4.01 million for the first quarter
of 2007, an increase of 19.45%. The growth in net income is due to the
increases in net interest income of $1,185,000 and other income of $681,000.
The provision for loan losses increased $55,000 from 2007 to 2008. Expenses
increased $641,000 for the first quarter of 2008 compared to the same period in
2007. Return on average equity was 14.32% for the three months ended March 31,
2008, compared to 13.52% for the same period in 2007. Return on average assets
was 1.16% in 2008 compared to 1.02% in 2007. Return on average assets and
return on average equity are calculated based on annualized first quarter
results. 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 a function of the average
earnings assets and the net interest margin percentage. For the period ended
March 31, 2008, the Bank achieved a net interest margin on a tax-equivalent
basis of 3.34% compared to 3.22% in 2007. Average earning assets were $1.572
billion in 2008 and $1.482 billion in 2007.

Highlights noted on the
balance sheet as of March 31, 2008 for the Company included the following:


Total assets are over $1.6
 billion, at $1.680 billion.
Net loans are $1.379
 billion.
Loan growth of $19.84
 million since December 31, 2007.
Deposit growth of $47.19
 million since December 31, 2007.
Short-term borrowings
 decreased $23.49 million since December 31, 2007.A detailed discussion of the
financial position and results of operations follows this overview.

Financial Position

The asset growth of $18.9 million included a net loan increase of $19.8
million. The Federal Open Market
Committee decreased the federal funds target rate three times in the first
quarter of 2008 to 2.25%. 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 29, 2006 and the first
decrease since June 25, 2003. The target rate was 4.25% as of December 31,
2007. Prior to these decreases, the target rate increased in June 24, 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. Interest rates on loans are generally
affected by these decreases since interest rates for the U.S. Treasury market
normally decrease when the Federal Reserve Board lowers the federal funds rate.
In pricing of loans and deposits, the Bank considers the U.S. Treasury indexes
as benchmarks in determining interest rates. As of March 31, 2008, the average
rate indexes for the one, three and five year indexes were 1.55%, 1.79% and
2.46%, respectively. The one year index decreased 68.37% from 4.90% at March
31, 2007, the three year index decreased 60.57% and the five year index
decreased 45.81%. Both the three and five year indexes were 4.54% at March 31,
2007. During this same period, the average federal funds rate decreased from
5.30% in 2007 to 2.51% in 2008.

Page 18 of 33

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)The tables
below set forth the composition of the loan portfolio as of March 31, 2008 and
December 31, 2007 (dollars in thousands), along with changes in the allowance
for loan losses and non-performing loan information:

March 31, 2008

December 31, 2007Amount

Percent

Amount

Percent(Amounts In Thousands)

(Amounts In Thousands)Agricultural

$
62,191


4.48
%
$
60,004


4.37
%Commercial and
financial


144,332


10.39


132,070


9.62Real estate:Construction


129,928


9.35


123,144


8.97Mortgage


1,019,052


73.35


1,020,802


74.40Loans to
individuals


33,767


2.43


36,289


2.64$
1,389,270


100.00
%
$
1,372,309


100.00
%Less allowance for loan
losses


19,790





19,710$
1,369,480




$
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.

Changes in the
allowance for loan losses for the periods shown in the following table were as follows:

Three Months Ended
 March 31,2008

2007(Amounts In Thousands)Balance,
 beginning

$
19,710

$
17,850Provision
charged to
expenses


587


532Recoveries


170


463Loans
 charged off


(677
)

(435
)Balance,
 ending

$
19,790

$
18,410Page 19 of
33

HILLS
BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition 
 And Results of Operations (continued)Non-performing
loan information at March 31, 2008 and December 31, 2007, was as follows:

March 31, 2008

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

$
4,424

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


8,122


6,019Restructured
loans





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


32,832


39,583Loans held for
investment


1,389,270


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


1.42
%

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


60.28


49.79Non-performing
loans decreased by $6.8 million from December 31, 2007 to March 31, 2008.
Non-performing loans include any loan that has been placed on non-accrual
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 2.36% of loans as of March 31, 2008 and 2.88% as of December 31, 2007. The
decrease in non-performing loans is due in part to the payoff of one loan with
a balance of approximately $2.2 million at December 31, 2007. The majority of
these loans is secured by real estate and is believed to be adequately
collateralized. The remaining improvement in non-performing loans is a result
of an improvement in credit quality of multiple loans combined with payments
received on loans still considered non-performing. Loans 90 days past due that
are still accruing interest increased $2.1 million in the first quarter 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 become
unfavorable, certain borrowers may experience difficulty and the level of
nonperforming loans, chargeoffs and delinquencies could continue to rise and
require increases in the provision for loan losses.

The estimated
fair value of the investment securities available for sale held by the Company
increased by $2.2 million from December 31, 2007 to March 31, 2008. The market
value of securities available for sale was $4.9 million more than the amortized
cost of such securities as of March 31, 2008. This is an increase of $3.9
million in market value since December 31, 2007. The fair value increase is
offset by maturities of investment securities in excess of purchases of
approximately $1.6 million and amortization of the discount on the securities
of $0.1 million during the three-month period ended March 31, 2008. The
carrying values of investment securities at March 31, 2008 and December 31,
2007 are summarized in the following table (dollars in thousands):

March 31, 2008

December 31, 2007Amount

Percent

Amount

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

$
105,055


52.07
%
$
104,965


52.59
%State and political
subdivisions


96,701


47.93


94,634


47.41Total securities available
for sale

$
201,756


100.00
%
$
199,599


100.00
%Page 20 of
33

HILLS
BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition 
 And Results of Operations (continued)Deposit growth
was $47.2 million in the first quarter of 2008 and included a $31.5 million
increase in public funds that are temporary deposits. This large increase due
to public funds is consistent with the first quarter of 2007 when they
increased $39.9 million. As a result of the deposit growth, federal funds
purchased included in short-term borrowings at December 31, 2007 were reduced
$17.2 million to $22.5 million. In addition, borrowings from the Federal Home
Loan Bank decreased by $10.0 million in the first quarter of 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 March 31, 2008 totaled $133.6 million. Under
risk-based capital rules, the total amount of risk-based capital as of March 31,
2008, was 12.93% of risk-adjusted assets, and is substantially in excess of the
required minimum of 8.00%. Risk-based capital was 13.08% and 13.37% as of March
31, 2007 and December 31, 2007, respectively. As of March 31, 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.

Net Income Overview

Net income
increased $784,000 or 19.58% for the quarter ended March 31, 2008 compared to
the first quarter of 2007. Total net income was $4,789,000 in the 2008 quarter
and $4,005,000 in the comparable 2007 quarter. The changes from the first
quarter in 2007 were the result of the following:


Net interest
 income increased $1,185,000.
The
 provision for loan losses increased by $55,000.
Other income increased by $681,000.
Other expenses increased $641,000.
Income taxes
 increased $386,000.For the
three-month periods ended March 31, 2008 and 2007, basic earnings per share
were $1.07 and $.89, respectively. Diluted earnings per share were $1.06 for
the three months ended March 31, 2008 compared to $.88 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 earning assets. Net
interest income of $12.5 million for the first three months of 2008 was derived
from the Companys $1.572 billion of average earning assets and its net interest
margin of 3.34%. Average earning assets in 2007 were $1.482 billion and the net
interest margin was 3.22%. The importance of net interest margin is illustrated
by the fact that a decrease in the net interest margin of 10 basis points to
3.24% would have resulted approximately in a $391,000 decrease in income before
income taxes for the three-month period ended March 31, 2008. Similarly, an
increase in the net interest margin of 10 basis points to 3.44% would have
resulted approximately in a $391,000 increase in interest income before taxes.
Net interest income for the Company increased due to the increase in average
earning assets over the similar three-month period in 2007 and the increase in
the net interest margin of 12 points.

Page 21 of
33

HILLS
BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition 
 And Results of Operations (continued)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 $1.399 billion at March 31, 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
$587,000 in 2008 compared to $532,000 in 2007.

The amount of
mortgage loans sold on the secondary market is the third factor that can cause
fluctuations in net income. In the three months ended March 31, 2008 and 2007,
the net gain on sale of loans was $324,000 and $201,000, respectively. The sale
of loans is influenced by the real estate market and interest rates.

Net Interest Income

Net interest
income is the excess of the interest and fees received 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 net interest margin
for the first three months of 2008 was 3.34% compared to 3.22% 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 years and
the effect on the net interest income on a tax equivalent basis for the three
months ended in 2008 compared to 2007 are shown in the following table:

Change in
 Average Balance

Change in
 Average RateIncrease (Decrease) in Net
Interest IncomeVolume Changes

Rate Changes

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

$
80,613


(0.12
)%
$
1,582

$
(470
)
$
1,112Taxable
securitities


8,970


0.43


86


125


211Nontaxable
securities


8,760


0.01


119


1


120Federal funds
sold


(8,573
)

0.24


(108
)




(108
)$
89,770




$
1,679

$
(344
)
$
1,335Interest
expense:Interest-bearing demand
deposits

$
23,902


(0.11
)
$
(70
)
$
42

$
(28
)Savings
deposits


(4,064
)

(0.52
)

133


180


313Time
deposits


3,695


(0.01
)

(98
)

27


(71
)Short-term
borrowings


23,651


(1.12
)

(313
)

270


(43
)FHLB
borrowings


23,753


(0.09
)

(297
)

22


(275
)$
70,937




$
(645
)
$
541

$
(104
)Change in net interest
income







$
1,034

$
197

$
1,231Page 22 of
33

HILLS
BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition 
 And Results of Operations (continued)A summary of
the net interest spread and margin is as follows:

(Tax
 Equivalent Basis)

2008

2007Yield on average
interest-earning assets


6.41
%

6.49
%Rate on average
interest-bearing liabilities


3.60


3.80Net interest
spread


2.81
%

2.69
%Effect of
noninterest-bearing funds


0.53


0.53Net interest margin (tax
equivalent interest income divided by average
 interest-earning assets)


3.34
%

3.22
%Provision for Loan Losses

The provision
for loan losses was $587,000 in 2008 compared to $532,000 in 2007, an increase
of $55,000. The loan loss provision is the amount necessary to adjust the
allowance to the level considered appropriate by management. The provision
adjustment 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 on the 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 historical
higher credit risks (primarily agricultural and spec real estate construction
loans).

In the first
quarter of 2008, problem and watch loans increased approximately $1.0 million
while there was an increase of approximately $650,000 in the first quarter of
2007. In contrast, substandard loans decreased approximately $2.0 million in
2008 while they increased $16.2 million in 2007. The changes in substandard
loans increased the provision by $490,000 in 2007 while the provision decreased
in 2008 by $309,000. In addition, the provision was larger in 2008 due to loan
growth of $19.8 million in the first quarter of 2008 compared to $5.7 million
in the first quarter of 2007.

The allowance
for loan losses balance is also affected by the charge-offs, net of recoveries,
for the periods presented. For the quarters ended March 31, 2008 and 2007,
recoveries were $170,000 and $463,000, respectively; and charge-offs were
$677,000 in 2008 and $435,000 in 2007. The allowance for loan losses totaled
$19,790,000 at March 31, 2008 compared to $19,710,000 at December 31, 2007. The
allowance represented 1.42% and 1.44% of loans held for investment at March 31,
2008 and December 31, 2007, respectively. The allowance was based on
managements consideration of a number of factors, including loan
concentrations, loans with higher credit risks (primarily agriculture loans and
spec real estate construction) and overall increases in net loans outstanding.
The methodology used in 2008 is consistent with 2007.

Net Gain on Sale of Loans

Net gain on
sale of loans for the three months ended March 31, 2008 was $324,000 compared
to $201,000 for the comparable period ended March 31, 2007. Loans sold in the
first three months of 2008 totaled $42.3 million compared to $22.4 million in
the same period in 2007, an increase of 88%.

Page 23 of
33

HILLS
BANCORPORATION

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

Other income,
other than the net gain on sale of loans discussed above, increased by $558,000
for the three months ended March 31, 2008. Trust fees increased $83,000 as a
result of assets under management increasing from $862.4 million as of March
31, 2007 to $904.8 million as of March 31, 2008. Service charges and fees were
up $183,000 in 2008 of which $32,000 was the result of fee income strategies.
Debit card and point of sale (POS) pin interchange fees increased during the
same period by $113,000 due to volume of activity. Rental revenue on tax credit
real estate increased $162,000 for the three-month period ended March 31, 2008.
This increase was 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.

Other
noninterest income was $803,000 for the quarter ended March 31, 2008, a
$130,000 increase over the first quarter of 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. 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 $641,000 in 2008 to $9,253,000 from the same period in 2007. This
increase of 7.44% included $190,000 in salaries and benefits. Direct salary
expense was up $175,000, or 4.95%, due to annual salary adjustments. Occupancy
expenses increased $40,000 in 2008 due to an increase of $46,000 related to
building maintenance and upkeep related to increased snow removal costs in the
first quarter of 2008. For the first quarter of 2008, furniture and equipment
expense was $914,000 compared to $832,000 for the first quarter of 2007. The
increase of $82,000 includes $61,000 for equipment and software maintenance
contracts. This expense was $342,000 in 2008 and $281,000 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.

Outside
services expense increased $113,000 for the quarter ended March 31, 2008
compared to March 31, 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 $52,000 due to the
volume of transactions in 2008 compared to 2007. In addition, in the first
quarter of 2008, the gain or loss on repossessed real estate properties
decreased $42,000 from the same period in 2007. During 2007, two properties
were sold at a gain of approximately $41,000. The three properties sold in 2008
were at a loss of $18,000.

Rental
expenses on tax credit real estate were $305,000 in 2008, an increase of
$54,000 from the first quarter of 2007. This increase is due mainly to the
addition of the fourth property noted under other income. Other noninterest
expense increased $152,000 to $452,000 for the quarter ended March 31, 2008.
The difference is due to the increase in the FDIC assessment of $144,000 in
2008.

Page 24 of
33

HILLS
BANCORPORATION

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

Federal and
state income tax expenses were $2,184,000 and $1,798,000 for the three months
ended March 31, 2008 and 2007, respectively. Income taxes as a percentage of
income before taxes were 31.32% in 2008 and 30.98% in 2007. The amount of tax
credits was $140,000 for the first quarter of 2007 compared to $177,000 in
2008.

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 12.01% of the
Companys total assets at March 31, 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 March 31, 2008, the Company had borrowed $255.3 million from
the Federal Home Loan Bank (FHLB) of Des Moines. In February 2008, a $10
million advance matured and was repaid. There have been no borrowings from the
FHLB in 2008. Advances are 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 $179.9 million at March 31, 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 $114.3 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 March 31, 2008.

As of March
31, 2008, investment securities with a carrying value of $63,591,000 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 March
31, 2008, there had been no material changes in the Companys contractual obligations
from those disclosed in it Annual Report in Form 10-K for the year ended
December 31, 2007.

Page 25 of
33

HILLS
BANCORPORATION

Item 3.
Quantitative and Qualitative
 DisclosuresAbout 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. 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 26 of 33

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(f). 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 quarter of 2008 that have materially affected, or
are reasonably likely to affect materially, the Companys internal controls
over financial reporting.

Page 27 of 33

HILLS
BANCORPORATION

PART II - OTHER INFORMATION

Item 1.
Legal ProceedingsNo material legal proceedings are pending.Item 1A.
Risk
 FactorsThere have been no
 material changes from the risk factors disclosed in the Companys Annual
 Report on Form 10-K for the year ended December 31, 2007.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 March 31, 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)January 1 to January 31


2,700


$
53.00



96,113



653,887February 1 to February 29


2,360



53.00



98,473



651,527March 1 to March 31


540



53.00



99,013



650,987Total


5,600


$
53.00



99,013



650,987(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, legal and accounting factors.

Item 3.
Defaults upon Senior SecuritiesHills Bancorporation has no senior securities.Item 4.
Submission of Matters to a Vote of
 Security HoldersNo matters were submitted to a vote of security
 holders during the quarter ended March 31, 2008.Item 5.
Other InformationNoneItem 6.
Exhibits31
Certifications under Section 302 of the
 Sarbanes-Oxley Act of 200232
Certifications under Section 906 of the
 Sarbanes-Oxley Act of 2002Page 28 of 33

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 BANCORPORATION

Date: May 7, 2008
By: /s/ Dwight O. SeegmillerDwight O. Seegmiller, Director, President and Chief
 Executive OfficerDate: May 7, 2008
By: /s/ James G. PrattJames G. Pratt, Secretary, Treasurer and Chief
 Accounting OfficerPage 29 of 33

HILLS
BANCORPORATION
QUARTERLY REPORT OF FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 2008

ExhibitNumber
Description
Page
 NumberIn The SequentialNumbering SystemMarch 31, 2008 Form 10-Q31.1
Certifications under Section 302 of the
 Sarbanes-Oxley Act of 2002
31 of 3331.2
Certifications under Section 302 of the
 Sarbanes-Oxley Act of 2002
32 of 3332
Certifications under Section 906 of the
 Sarbanes-Oxley Act of 2002
33 of 33Page 30 of 33