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, 2004 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  |_| NoIndicate by
  checkmark whether the Registrant is an accelerated filer (as defined by Rule
  12b-2 of the Securities Exchange Act of 1934).|X| Yes  |_| No 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, 2004Common Stock, no par value
  
  4,550,256 Page 1 of 26   HILLS BANCORPORATION
Index to Form 10-Q

PageNumberPart IFINANCIAL INFORMATIONItem 1.
  Financial
  StatementsConsolidated balance sheets, June 30, 2004 (unaudited) and December
  31, 2003.
  
  3Consolidated statements of income, (unaudited) for three and six
  months ended June 30, 2004 and 2003.
  
  4Consolidated statements of comprehensive income, (unaudited) for
  three and six months ended June 30, 2004 and 2003.
  
  5Consolidated statements of stockholders equity, (unaudited)for six
  months ended June 30, 2004 and 2003.
  
  6Consolidated statements of cash flows (unaudited) for six months
  ended June 30, 2004 and 2003.
  
  7-8Notes to consolidated financial statements
  
  9-10Item 2.
  Managements Discussion and Analysis of Financial Condition and
  Results of Operations
  
  11-18Item 3.
  Quantitative and Qualitative Disclosures About Market Risk
  
  19Item 4.
  Controls and Procedures
  
  20Part IIOTHER INFORMATIONItem 1.
  Legal proceedings
  
  21Item 2.
  Changes in securities and use of proceeds
  
  21Item 3.
  Defaults upon senior securities
  
  21Item 4.
  Submission of matters to vote of security holders
  
  21Item 5.
  Other information
  
  21Item 6.
  Exhibits and reports on Form 8-K
  
  21Signatures
  
  22Exhibits Index
  
  23Page 2 of 26

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

June 30, 2004(Unaudited)
  
  December 31, 2003*ASSETSCash and due from banks
  
  $
  25,198
  
  
  $
  24,194Investment securities:Available for sale
  (amortized cost June 30, 2004 $205,752 ; December 31, 2003 $214,530)
  
  
  206,694
  
  
  
  219,430Held to maturity (fair
  value June 30, 2004 $6,428 ; December 31, 2003 $8,064)
  
  
  6,410
  
  
  
  7,953Stock of Federal Home Loan
  Bank
  
  
  8,877
  
  
  
  8,774Federal funds sold
  
  
  
  
  
  
  13,233Loans held for sale
  
  
  2,448
  
  
  
  1,960Loans, net
  
  
  936,422
  
  
  
  868,194Property and equipment,
  net
  
  
  22,259
  
  
  
  22,210Tax credit real estate
  
  
  8,108
  
  
  
  2,282Accrued interest
  receivable
  
  
  7,152
  
  
  
  7,303Deferred income taxes
  
  
  4,185
  
  
  
  2,411Goodwill
  
  
  2,500
  
  
  
  2,500Other assets
  
  
  3,691
  
  
  
  3,077$
  1,233,944
  
  
  $
  1,183,521LIABILITIES
          AND STOCKHOLDERS EQUITYLiabilitiesNoninterest-bearing
  deposits
  
  $
  130,007
  
  
  $
  116,206Interest-bearing deposits
  
  
  753,518
  
  
  
  752,446Total deposits
  
  $
  883,525
  
  
  $
  868,652Federal funds purchased
  and securities sold under agreements to repurchase
  
  
  62,660
  
  
  
  29,926Federal Home Loan Bank
  borrowings ("FHLB")
  
  
  167,574
  
  
  
  167,574Accrued interest payable
  
  
  1,444
  
  
  
  1,735Other liabilities
  
  
  5,626
  
  
  
  4,005$
  1,120,829
  
  
  $
  1,071,892REDEEMABLE COMMON STOCK
  HELD BY EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
  
  $
  15,453
  
  
  $
  14,864STOCKHOLDERS
  EQUITYCapital stock, no par
  value; authorized 10,000,000 shares; issued June 30, 2004  4,550,256 shares;
  December 31, 2003  4,550,034 shares
  
  $
  11,360
  
  
  $
  11,353Retained earnings
  
  
  101,161
  
  
  
  97,189Accumulated other
  comprehensive income
  
  
  594
  
  
  
  3,087$
  113,115
  
  
  $
  111,629Less maximum cash
  obligation related to ESOP shares
  
  
  15,453
  
  
  
  14,864$
  97,662
  
  
  $
  96,765$
  1,233,944
  
  
  $
  1,183,521* Derived from
audited financial statements.
See Notes to Consolidated Financial
Statements.

Page 3 of 26

HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Amounts In Thousands, Except Per Share Amounts)
Three Months Ended
  June 30,
  
  Six Months Ended
  June 30,2004
  
  2003
  
  2004
  
  2003Interest income:Loans, including fees
  
  $
  13,996
  
  $
  13,662
  
  $
  27,471
  
  $
  27,093Investment securities:Taxable
  
  
  1,353
  
  
  1,545
  
  
  2,776
  
  
  3,225Nontaxable
  
  
  616
  
  
  603
  
  
  1,218
  
  
  1,205Federal funds sold
  
  
  6
  
  
  116
  
  
  21
  
  
  217Total
  interest income
  
  $
  15,971
  
  $
  15,926
  
  $
  31,486
  
  $
  31,740Interest expense:Deposits
  
  $
  3,368
  
  $
  4,332
  
  $
  6,898
  
  $
  8,892Federal funds purchased
  and securities sold under agreements to repurchase
  
  
  117
  
  
  117
  
  
  191
  
  
  210FHLB borrowings
  
  
  2,266
  
  
  2,266
  
  
  4,532
  
  
  4,508Total
  interest expense
  
  $
  5,751
  
  $
  6,715
  
  $
  11,621
  
  $
  13,610Net
  interest income
  
  $
  10,220
  
  $
  9,211
  
  $
  19,865
  
  $
  18,130Provision for loan losses
  
  
  161
  
  
  (35
  )
  
  515
  
  
  449Net
  interest income after provision for loan losses
  
  $
  10,059
  
  $
  9,246
  
  $
  19,350
  
  $
  17,681Other income:Net gain on sale of loans
  
  $
  616
  
  $
  1,587
  
  $
  967
  
  $
  2,452Trust fees
  
  
  631
  
  
  559
  
  
  1,341
  
  
  1,178Deposit account charges
  and fees
  
  
  910
  
  
  922
  
  
  1,796
  
  
  1,795Other fees and charges
  
  
  1,101
  
  
  901
  
  
  2,203
  
  
  1,799$
  3,258
  
  $
  3,969
  
  $
  6,307
  
  $
  7,224Other expenses:Salaries and employee
  benefits
  
  $
  4,207
  
  $
  3,832
  
  $
  8,271
  
  $
  7,512Occupancy
  
  
  506
  
  
  464
  
  
  1,008
  
  
  920Furniture and equipment
  
  
  778
  
  
  750
  
  
  1,584
  
  
  1,484Office supplies and
  postage
  
  
  305
  
  
  258
  
  
  576
  
  
  584Advertising and business
  development
  
  
  373
  
  
  394
  
  
  787
  
  
  670Other
  
  
  1,587
  
  
  1,353
  
  
  3,008
  
  
  2,532$
  7,756
  
  $
  7,051
  
  $
  15,234
  
  $
  13,702Income
  before income taxes
  
  $
  5,561
  
  $
  6,164
  
  $
  10,423
  
  $
  11,203Federal and state income
  taxes
  
  
  1,766
  
  
  2,037
  
  
  3,266
  
  
  3,695Net
  income
  
  $
  3,795
  
  $
  4,127
  
  $
  7,157
  
  $
  7,508Earnings per share:Basic
  
  $
  0.83
  
  $
  0.91
  
  $
  1.57
  
  $
  1.66Diluted
  
  
  0.83
  
  
  0.91
  
  
  1.57
  
  
  1.65See
Notes to Consolidated Financial Statements.
Page 4 of 26


HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Amounts In Thousands)
Three Months Ended
  June 30,
  
  Six Months Ended
  June 30,2004
  
  2003
  
  2004
  
  2003Net income
  
  $
  3,795
  
  $
  4,127
  
  $
  7,157
  
  $
  7,508Other
  comprehensive income (loss):Unrealized holding gains
  (losses) arising during the period
  
  $
  (4,724
  )
  $
  1,221
  
  $
  (3,958
  )
  $
  670Income tax effect of
  unrealized gains (losses)
  
  
  1,748
  
  
  (453
  )
  
  1,465
  
  
  (249
  )Total other comprehensive
  income (loss)
  
  $
  (2,976
  )
  $
  768
  
  $
  (2,493
  )
  $
  421Comprehensive
  income
  
  $
  819
  
  $
  4,895
  
  $
  4,664
  
  $
  7,929See
Notes to Consolidated Financial Statements.
Page 5 of 26


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

Capital
  Stock
  
  Retained
  Earnings
  
  Accumulated
  Other
  Comprehensive
  Income (Loss)
  
  Maximum
  Cash
  Obligation
  Related
  To ESOP
  Shares
  
  TotalBalance,
  December 31, 2003
  
  $
  11,353
  
  $
  97,189
  
  
  $
  3,087
  
  
  $
  (14,864
  )
  $
  96,765Issuance of
  74 shares of common stock
  
  
  7
  
  
  
  
  
  
  
  
  
  
  
  
  
  7Change
  related to ESOP shares
  
  
  
  
  
  
  
  
  
  
  
  
  
  (589
  )
  
  (589
  )Net income
  
  
  
  
  
  7,157
  
  
  
  
  
  
  
  
  
  
  7,157Cash
  dividends ($2.10 per share)
  
  
  
  
  
  (3,185
  )
  
  
  
  
  
  
  
  
  
  (3,185
  )Other
  comprehensive income (loss)
  
  
  
  
  
  
  
  
  
  (2,493
  )
  
  
  
  
  
  (2,493
  )Balance,
  June 30, 2004
  
  $
  11,360
  
  $
  101,161
  
  
  $
  594
  
  
  $
  (15,453
  )
  $
  97,662Balance,
  December 31, 2002
  
  $
  10,541
  
  $
  85,773
  
  
  $
  4,721
  
  
  $
  (12,951
  )
  $
  88,084Issuance of
  14,724 shares of common stock
  
  
  375
  
  
  
  
  
  
  
  
  
  
  
  
  
  375Change
  related to ESOP shares
  
  
  
  
  
  
  
  
  
  
  
  
  
  (1,325
  )
  
  (1,325
  )Net income
  
  
  
  
  
  7,508
  
  
  
  
  
  
  
  
  
  
  7,508Income tax
  benefit related to stock based compensation
  
  
  336
  
  
  
  
  
  
  
  
  
  
  
  
  
  336Cash
  dividends ($1.90 per share)
  
  
  
  
  
  (2,853
  )
  
  
  
  
  
  
  
  
  
  (2,853
  )Other comprehensive
  income
  
  
  
  
  
  
  
  
  
  421
  
  
  
  
  
  
  421Balance,
  June 30, 2003
  
  $
  11,252
  
  $
  90,428
  
  
  $
  5,142
  
  
  $
  (14,276
  )
  $
  92,546See
Notes to Consolidated Financial Statements.
Page 6 of 26


HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts In Thousands)
Six Months
  Ended
  June 30,2004
  
  2003Cash Flows
  from Operating ActivitiesNet income
  
  $
  7,157
  
  $
  7,508Adjustments
  to reconcile net income to net cash provided by operating activities:Depreciation
  
  
  1,238
  
  
  1,130Provision
  for loan losses
  
  
  515
  
  
  449Compensation
  paid by issuance of common stock
  
  
  7
  
  
  Deferred
  income taxes
  
  
  (309
  )
  
  521Decrease in
  accrued interest receivable
  
  
  151
  
  
  210Amortization
  of bond discount
  
  
  659
  
  
  374Increase in
  other assets
  
  
  (614
  )
  
  (506
  )Increase
  (decrease) in accrued interest and other liabilities
  
  
  1,330
  
  
  (180
  )Loans
  originated for sale
  
  
  (89,021
  )
  
  (185,525
  )Proceeds on
  sales of loans
  
  
  89,500
  
  
  182,412Net gain on
  sales of loans
  
  
  (967
  )
  
  (2,452
  )Net cash provided by operating activities
  
  $
  9,646
  
  $
  3,941Cash Flows
  from Investing ActivitiesProceeds
  from maturities of investment securities:Available
  for sale
  
  $
  46,142
  
  $
  42,910Held to
  maturity
  
  
  5,488
  
  
  3,090Purchases of
  investment securities:Available
  for sale
  
  
  (38,126
  )
  
  (51,849
  )Held to
  maturity
  
  
  (3,945
  )
  
  (3,570
  )Federal
  funds sold, net
  
  
  13,233
  
  
  9,141Loans made
  to customers, net of collections
  
  
  (68,743
  )
  
  (54,072
  )Purchases of
  property and equipment
  
  
  (1,287
  )
  
  (1,518
  )Investment
  in tax credit real estate
  
  
  (5,826
  )
  
  Net cash used in investing activities
  
  $
  (53,064
  )
  $
  (55,868
  )Cash Flows
  from Financing ActivitiesNet increase
  in deposits
  
  $
  14,873
  
  $
  38,037Net increase
  in federal funds purchased and securities sold under agreements to repurchase
  
  
  32,734
  
  
  11,130Stock
  options exercised
  
  
  
  
  
  375Income tax
  benefits related to stock based compensation
  
  
  
  
  
  336Dividends
  paid
  
  
  (3,185
  )
  
  (2,853
  )Net cash provided by financing activities
  
  $
  44,422
  
  $
  47,025(Continued)
Page 7 of 26


HILLS BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  (Continued) (Amounts In Thousands)
Six Months
  Ended
  June 30,2004
  
  2003Increase (decrease) in cash and due from banks
  
  $
  1,004
  
  $
  (4,902
  )Cash and due
  from banks:Beginning
  
  
  24,194
  
  
  32,647Ending
  
  $
  25,198
  
  $
  27,745Supplemental
  DisclosuresCash
  payments for:Interest
  paid to depositors
  
  $
  9,183
  
  $
  9,115Interest
  paid on other obligations
  
  
  4,718
  
  
  4,718Income taxes
  
  
  2,308
  
  
  4,208Noncash
  financing activities:Increase in
  maximum cash obligation related to ESOP shares
  
  $
  589
  
  $
  1,325See
Notes to Consolidated Financial Statements.
Page 8 of 26


HILLS BANCORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.  Basis of Presentation
The accompanying unaudited
  consolidated financial statements have been prepared in accordance with
  accounting principles generally accepted in the United States of America for
  interim financial reporting and with instructions for Form 10-Q and
  Regulation S-X.  These financial
  statements include all adjustments (consisting of normal recurring accruals)
  which in the opinion of management are considered necessary for the fair
  presentation of the financial position and results of operations for the
  periods shown.  Certain prior year
  amounts may be reclassified to conform to the current year presentation.Operating results for the
  six month period ended June 30, 2004 are not necessarily indicative of the
  results that may be expected for the fiscal year ending December 31,
  2004.  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, 2003 filed with the Securities
  Exchange Commission on March 11, 2004.Note 2.  Earnings Per Share
Basic 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.On April 13, 2004, the
  Company declared a payment of a three-for-one stock split effected in the
  form of a dividend, for the 1,516,752 shares of common stock issued and
  outstanding as of April 19, 2004.  The
  additional shares were issued as a result of the stock split and were mailed
  to the shareholders as of April 26, 2004. All shares and earnings per share
  numbers have been restated for the stock split.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 30,2004
  
  2003
  
  2004
  
  2003Common shares outstanding
  at the beginning of the period
  
  
  4,550,256
  
  
  4,503,162
  
  
  4,550,034
  
  
  4,503,162Weighted average number of
  net shares issued (redemption)
  
  
  0
  
  
  33,129
  
  
  159
  
  
  18,930Weighted
  average shares outstanding (basic)
  
  
  4,550,256
  
  
  4,536,291
  
  
  4,550,193
  
  
  4,522,092Weighted average of
  potential dilutive shares attributable to stock options granted, computed
  under the treasury stock method
  
  
  14,100
  
  
  10,725
  
  
  14,276
  
  
  9,597Weighted
  average number of shares (diluted)
  
  
  4,564,356
  
  
  4,547,016
  
  
  4,564,469
  
  
  4,531,689Net income (In Thousands)
  
  $
  3,795
  
  $
  4,127
  
  $
  7,157
  
  $
  7,508Earnings per share:Basic
  
  $
  0.83
  
  $
  0.91
  
  $
  1.57
  
  $
  1.66Diluted
  
  $
  0.83
  
  $
  0.91
  
  $
  1.57
  
  $
  1.65Page 9 of 26

HILLS BANCORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Note 3. Recent Accounting Pronouncement

In December, 2003, the FASB
issued a revised Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46).  FIN 46 addresses consolidation by business enterprises of
variable interest entities that have certain characteristics.  It requires a business enterprise that has a
controlling interest in a variable interest entity (as defined by FIN 46) to
include the assets, liabilities, and results of the activities of the variable
interest entity in the consolidated financial statements of the business
enterprise.  FIN 46 applies to a public
entity that is not a small business issuer no later than the end of the first
reporting period that ends after March 15, 2004.  The impact of adopting FIN 46 on the Companys financial
condition and results of operations was not material.

On
March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, Application
of Accounting Principles to Loan Commitments (SAB 105).  SAB 105 summarizes the views of the SEC
staff regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments.  SAB 105 will act to significantly limit
opportunities to recognize an asset related to a commitment to originate a
mortgage loan that will be held for sale prior to funding the loan.  SAB 105 pertains to recognizing and
disclosing the loan commitments and is effective for commitments to originate
mortgage loans to be held for sale that are entered into after March 31,
2004.  The Company adopted the provisions
of SAB 105 beginning April 1, 2004. 
Adoption of SAB 105 did not have a material impact on the Companys
financial position or results of operations.
Page 10 of 26

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) at June 30, 2004, when compared with December 31, 2003 and the results
of operations for the six months ended June 30, 2004 and 2003 and the results
of operations for the three months ended June 30, 2004 and 2003.

Special Note Regarding Forward Looking Statements
The
discussion following contains certain forward-looking statements with respect
to the financial condition, the results of operations and business of the
Company.  These statements involve
certain risks and uncertainties, which are often inherent in the ongoing
operation of financial institutions such as the Companys subsidiary Bank.
Forward-looking
statements discuss matters that are not facts and are typically identified by
the words believe, expect, anticipate, target, goal, objective,
intend, estimate, will, can, would, should, could, may and
similar expressions.  They discuss
expectations about the future and are not guarantees.   Forward-looking statements speak only as of the date they are
made, and the Company undertakes no obligation to update them to reflect
changes that occur after the date they are made.
There
are several factors  many of which are beyond the control of the Company or
its subsidiary Bank that could cause results to differ significantly from
expectations.  Some of these factors are
described below.  Some of these factors
by their nature are dynamic and subject to rapid changes which the Company is
necessarily unable to predict with accuracy. 
There are factors other than those described below that could cause
results to differ from expectations. 
Any factor described below could by itself, or together with one or more
other factors, adversely affect the business, earnings and/or financial
condition of the Company and its subsidiary Bank.
The
risks involved in the operations and strategies of the Company and its
subsidiary Bank include competition from other financial institutions, changes
in interest rates, changes in economic or market conditions as well as events
and trends affecting specific assets, the effect of credit quality and market
perceptions of value on the fair values of financial instruments and regulatory
factors.
For
example, a financial institution may accept deposits at fixed interest rates,
at different times and for different terms, and lend funds at fixed interest
rates, at different times and for different terms.  In doing so, it accepts the risk that its cost of funds may rise
while the use of those funds may be at a fixed rate.  Similarly, although market rates of interest may decline, the
financial institution may have committed by virtue of the term of a deposit, to
pay what essentially becomes an above-market rate.

Loans,
and the allowance for loan losses, carry the risk that borrowers will not repay
all funds in a timely manner, as well as the risk of partial or total loss of
principal.  The collateral pledged as
security for loans may or may not have the value that has been attributed to
it.  The loan loss reserve, while
believed to be adequate, may prove inadequate if one or more large-balance
borrowers, or numerous mid-balance borrowers, or a combination of both,
experience financial difficulty for a variety of reasons. These reasons may
relate to the financial circumstances of an individual borrower, or may be
caused by negative economic circumstances at the local, regional, national or
international level that are beyond the control of the borrowers or the lender.
Page 11 of 26

HILLS BANCORPORATION
Item 2.
  Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)Because the business of
banking is of a highly regulated nature, the decisions of governmental entities
can have a major effect on operating results. 
Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could have substantial and unpredictable effects including increasing
the ability of non-banks to offer competing financial services and products.
The
Banks success depends, in part, on its ability to attract and retain key
people.  Competition for the best people
 in particular individuals with technology experience  is intense.  The Bank may not be able to hire or retain
well-qualified people.

All
of these uncertainties, as well as others, are present in the operations and
business of the Company, and stockholders are cautioned that the Companys
actual results may differ materially from those included in the forward-looking
statements.
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 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 credits 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, 2004 and
December 31, 2003 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 12 of 26


HILLS BANCORPORATION
Item 2.
  Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)Balance
Sheet Review at June 30, 2004 compared to December 31, 2003.
Assets and Liabilities Review
Total
assets at June 30, 2004 were $1.234 billion and represent an increase of $50.4
million from December 31, 2003. 
Interest rates remained relatively stable during the first six months of
2004.  Effective June 30, 2004, the
Federal Reserve Open Market Committee raised the federal funds target rate from
1.00% to 1.25%.  Prior to the June 30,
2004 increase, the rate had been decreased thirteen times since May 16, 2000
when it was 6.50%.  The effect of this
increase and future increases are difficult to predict, but it is the opinion of
the Company that such increases in interest rates will not have a material
financial impact at this time.  Due to
the fact that loan rates are still relatively low compared to historical rates
it is projected that loan demand will still continue although the growth could
be at a slower pace.  The growth of the
loan portfolio continued as the overall economy in the Companys primary trade
area in Johnson and Linn County remained positive. The largest increase in assets
was a $68.2 million change in net loans outstanding.
The
tables below set forth the composition of the loan portfolio as of June 30,
2004 and December 31, 2003 (dollars
in thousands), along with changes in the allowance for loan losses and
non-performing loan information:



June 30,
  2004
  
  December
  31, 2003Amount
  
  Percent
  
  Amount
  
  PercentAgricultural
  
  $
  38,061
  
  
  4.01
  %
  $
  38,153
  
  
  4.33
  %Commercial
  and financial
  
  
  55,475
  
  
  5.84
  
  
  47,938
  
  
  5.44Real estate:Construction
  
  
  76,551
  
  
  8.06
  
  
  66,644
  
  
  7.57Mortgage
  
  
  746,183
  
  
  78.59
  
  
  696,453
  
  
  79.07Loans to
  individuals
  
  
  33,212
  
  
  3.50
  
  
  31,591
  
  
  3.59$
  949,482
  
  
  100.00
  %
  $
  880,779
  
  
  100.00
  %Less
  allowance for loan losses
  
  
  (13,060
  )
  
  
  
  
  (12,585
  )Loans, net
  
  $
  936,422
  
  
  
  
  $
  868,194Changes
in the allowance for loan losses were as follows:



Three
  months ended
  June 30,
  
  Six months
  ended
  June 30,2004
  
  2003
  
  2004
  
  2003(Amounts in thousands)
  
  (Amounts in thousands)Balance,
  beginning
  
  $
  12,980
  
  $
  12,530
  
  $
  12,585
  
  $
  12,125Provision
  charged to expense
  
  
  161
  
  
  (35
  )
  
  515
  
  
  449Recoveries
  
  
  290
  
  
  467
  
  
  559
  
  
  809Loans
  charged off
  
  
  (371
  )
  
  (222
  )
  
  (599
  )
  
  (643
  )Balance,
  ending
  
  $
  13,060
  
  $
  12,740
  
  $
  13,060
  
  $
  12,740Page 13 of 26

HILLS
BANCORPORATION

Item 2.
  Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)Non-performing loan information at June 30, 2004 and
December 31, 2003, was as follows:

June 30,
  2004
  
  December
  31, 2003(Amounts
  in thousands)Impaired loans, non-accrual
  
  
  $
  2,457
  
  
  
  $
  3,944Loans past due ninety days or more and still accruing
  
  
  
  2,186
  
  
  
  
  2,296Restructured loans
  
  
  
  
  
  
  
  
  Investment securities decreased $14.3 million as
detailed on the table that follows.  The
decrease was the result of the maturities of the securities.  The funds received were used to fund the loan
increases for the first six months.  In
addition, federal funds sold were reduced $13.2 million to provide funds for
the loan growth. In addition to these changes, the Companys investment in tax
credit real estate increased as a result of a $5.9 million investment in Iowa
City, Iowa.
The carrying values of
investment securities for June 30, 2004 and December 31, 2003 are summarized in
the following table (dollars in thousands):




June 30,
  2004
  
  December
  31, 2003Amount
  
  Percent
  
  Amount
  
  PercentSecurities
  available for saleU.S. Treasury
  
  $
  4,020
  
  
  1.95
  %
  
  $
  6,138
  
  
  2.80
  %U.S. Government agencies and corporations
  
  
  137,787
  
  
  66.66
  
  
  
  152,710
  
  
  69.59State and political subdivisions
  
  
  64,887
  
  
  31.39
  
  
  
  60,582
  
  
  27.61Total securities available for sale
  
  $
  206,694
  
  
  100.00
  %
  
  $
  219,430
  
  
  100.00
  %Securities held to maturity, state and political
  subdivisions
  
  $
  6,410
  
  
  100.00
  %
  
  $
  7,953
  
  
  100.00
  %Total deposits increased $14.9 million.  This increase in deposits was less than the
Companys management had expected, but management expects faster growth in
deposits in the future if, as expected by management, higher interest rates
make deposits more attractive as an investment alternative.  Federal funds purchased and securities sold
under agreements to repurchase increased from $30.0 million to $62.7
million.  All of this increase related
to federal funds borrowed.  In the
opinion of the Companys management, the Company continues to have sufficient
liquidity resources available to fund expected additional loan growth.
Page 14 of 26


HILLS
BANCORPORATION
Item 2.
  Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)Dividends and Equity
In January 2004, Hills
Bancorporation paid a dividend of $3,185,000 or $2.10 per share, a 10.53%
increase from the $1.90 per share paid in January 2003.  After payment of the dividend and the
adjustment for accumulated other comprehensive income, stockholders equity as
of June 30, 2004 totaled $97,662,000. 
Under risk-based capital rules, the total amount of risk based capital
is 13.98% of risk-adjusted assets, and is substantially in excess of required
minimums.
Discussion of operations for the six months ended June 30,
2004 and 2003.
Net Income
The
Companys net income for the six months ended June 30, 2004 was $7.157 million
compared to $7.508 million for the same period in 2003.  The decrease of $351,000 was due primarily to
four factors.  The first of these
factors was a $1.735 million increase in net interest income, second, a $1.485
million decrease in gain on sale of loans, third, a $568,000 increase in other
income excluding the change in gain on sale of loans and finally an increase in
other expenses of $1.532 million.  The
changes in the components of the net decrease are shown prior to a provision
for income taxes.
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 six months of 2004 was 3.57% compared to 3.47% in
2003 for the same period.  The measure
is shown on a tax-equivalent basis using a tax rate of 34% to make the interest
earned on taxable and non-taxable assets more comparable.  Total interest income decreased $254,000 for
the first six months of 2004 compared to the same period in 2003.  The volume of average earning assets is up
$73.0 million while the tax-equivalent yield is down to 5.62% from 6.03% from
the period ended June 30, 2003. 
Interest expense is $1.989 million less in 2004 than 2003 for the first
six months of each year.  The volume of
average interest bearing liabilities is up $51.1 million while the yield paid
is 2.41% in 2004 compared to 2.99% for 2003. 
The reduction of 58 basis points in interest costs accounts for the
majority of the net interest margin improvement.


Net
interest income on a tax equivalent basis for the six months ended changed in
2004 compared to 2003 as shown in the following table:

Increase (Decrease)Volume Changes
  
  Rate Changes
  
  Net Change(Amount in thousands)Interest income:Loans, net
  
  
  $
  2,955
  
  
  
  $
  (2,577
  )
  
  
  $
  378Securitities
  
  
  
  353
  
  
  
  
  (789
  )
  
  
  
  (436
  )Federal funds sold
  
  
  
  (188
  )
  
  
  
  (8
  )
  
  
  
  (196
  )$
  3,120
  
  
  
  $
  (3,374
  )
  
  
  $
  (254
  )Interest expense:Interest-bearing deposits
  
  
  $
  61
  
  
  
  $
  (2,055
  )
  
  
  $
  (1,994
  )Other borrowings
  
  
  
  (12
  )
  
  
  
  17
  
  
  
  
  5$
  49
  
  
  
  $
  (2,038
  )
  
  
  $
  (1,989
  )Change in net
  interest income
  
  
  $
  3,071
  
  
  
  $
  (1,336
  )
  
  
  $
  1,735Page 15 of 26

HILLS
BANCORPORATION

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

The
provision for loan losses was $515,000 and $449,000 for the six months ended
June 30, 2004 and 2003, respectively. 
The Company experienced net charge-offs for this time period in 2004 of
$40,000 and net recoveries of $166,000 in 2003.  The provision adjustment computed on a quarterly basis is a
result of managements determination of the quality of the loan portfolio and
the adequacy of the allowance for loan losses. 
The provision reflects a number of factors, including the size of the
loan portfolio, loan concentrations, the level of impaired loans which are all
non-accrual and loans past due ninety days or more.  In addition, management considers the credit quality of the loan
portfolio based on review of problem and watch loans, including loans with
historically higher credit risks (primarily agricultural loans).

The
allowance for loan losses totaled $13,060,000 at June 30, 2004 compared to
$12,585,000 at December 31, 2003.  The
allowance represented 1.38% and 1.43% of outstanding loans at June 30, 2004 and
December 31, 2003, 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 2004 is consistent with the prior year.
Other Income
Net
gain on sale of loans for the six months ended June 30, 2004 was $967,000
compared to $2,452,000 for the same period ended June 30, 2003.  The decrease was expected, as net gain on
sale of secondary market loans continued to drop significantly from the levels
experienced in the first three quarters of 2003.  The decrease in the volume of loans is due to the fact that many
consumers had taken advantage of lower rates in 2003 to refinance loans and the
absence of even lower rates since 2003.
Trust
fees increased $163,000 in the first six months of 2004 compared to 2003 due to
the increase in total assets under management. 
Approximately 51% of the trust assets are held in common stocks, and the
asset growth has been fueled by higher stock prices over the last twelve
months.  For example, the Dow Jones
Industrial Average is up just over 14% in the twelve months ended June 30,
2004.  Other fees and charges increased
to $2,203,000 in 2004 from $1,799,000 in 2003. 
Approximately $156,000 of the increased revenue from fees and charges is
in ATM service fees, debit card fees and credit card merchant fees.  In addition, rental revenue from a new tax
credit real estate property added in January, 2004 was $300,000 higher in 2004
than in 2003.

Other Expenses
Total
other expenses were $15.234 million and $13.702 million for the six months
ended June 30, 2004 and 2003, respectively. 
The increase of $1.532 million included salaries and employee benefits
which were $759,000 higher.  The
increase in direct salaries was $498,000 or 8.70%.  The increase is due to salary adjustments for 2004 and an
increase in the number of full-time equivalent employees.  Increased employment resulted in part from
the need to staff the Marion office that opened in February of 2003.  Medical expenses of the Companys
self-funding plan increased by $143,000 for the six months from one year ago
and are a result of higher medical costs and more employees in the plan.
Advertising
and business development expenses were $787,000 for the six months ended June
30, 2004 compared to $670,000 for the six months ended June 30, 2003.  The increase of $117,000 included primarily
costs associated with the 100th Anniversary celebration of the
Companys subsidiary Bank in 2004.
Other
expenses for the six month period presented are $3.008 million in 2004 compared
to $2.532 million in 2003.  Included in
this expense line item are merchant card processing charges and ATM charges
that were $162,000 higher in 2004 than 2003 because of the increased volume of
activity.  Also, expenses for the rental
of tax credit real estate increased from $132,000 in the six months ended June
30, 2003 to $351,000 for the same period in 2004.  The increase is due to the new property added in January of 2004.
Page 16 of 26


HILLS
BANCORPORATION
Item 2.
  Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)Income Taxes
Income
tax expense was $3,266,000 and $3,695,000 for the six months ended June 30,
2004 and 2003, respectively.  The
corresponding percentage of income taxes compared to income before income taxes
is 31.33% in 2004 and 32.98% in 2003. 
The percentage in 2004 is lower due to higher income tax credits
available from the tax credit real estate investments.  The credits were $265,000 and $118,000 for
the six months ended June 30, 2004 and 2003, respectively.
Discussion of operations for the three months ended June 30,
2004 and 2003.
Net
Income
Net
income decreased from $4,127,000 in 2003 to $3,795,000 in 2004.  As discussed in the six month review of net
income, the major factor was the gain on sale of secondary market loans
decreasing from $1,587,000 in 2003 to $616,000 in 2004.  Other significant changes in the income
statement are increases in net interest income of $1,009,000 and $705,000 in
other expenses.
Net Interest Income
Net
interest income increased for the three month period ended June 30, 2004 by
$1.009 million over the similar period in 2003.  The net interest margin in 2004 improved to 3.62% compared to
3.45% in 2003.  The increase in the
volume of interest earning assets accounted for a significant portion of the
net interest income improvement.
Details
of the changes in net interest income are as follows:



Increase (Decrease)Volume Changes
  
  Rate Changes
  
  Net Change(Amount in thousands)Interest income:Loans, net
  
  
  $
  1,503
  
  
  
  $
  (1,169
  )
  
  
  $
  334Securitities
  
  
  
  160
  
  
  
  
  (339
  )
  
  
  
  (179
  )Federal funds sold
  
  
  
  (107
  )
  
  
  
  (3
  )
  
  
  
  (110
  )$
  1,556
  
  
  
  $
  (1,511
  )
  
  
  $
  45Interest expense:Interest-bearing deposits
  
  
  $
  (17
  )
  
  
  $
  (947
  )
  
  
  $
  (964
  )Other borrowings
  
  
  
  (21
  )
  
  
  
  21
  
  
  
  
  $
  (38
  )
  
  
  $
  (926
  )
  
  
  $
  (964
  )Change in net
  interest income
  
  
  $
  1,594
  
  
  
  $
  (585
  )
  
  
  $
  1,009Page 17 of 26

HILLS
BANCORPORATION

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

As
explained in the preceding discussion of in the six months results, 2003 was an
excellent year for loans sold on the secondary market.  Interest rates were more favorable and the
second quarter of 2003 had the highest level of gain on sale of loans since the
Company began making sales on the secondary market over ten years ago.  The total net gain was $1,587,000, which was
$971,000 over the quarter ending June 30, 2004.

Other Expenses
Total
expenses for the 2004 quarter compared to the 2003 quarter increased $705,000.  Of the additional expenses, $375,000
represented salaries and employee benefits related to an increase in full and
part time employees, coupled with normal year-end salary adjustments in 2004.  The direct salary expense increase was
$207,000.  Medical claim and insurance
expense increased $74,000 in 2004 compared to 2003.
Other
expenses were $234,000 higher in 2004, with $189,000 of this increase relating
to rental expenses on the tax credit real estate purchased in 2004.  This was partially offset by an increase of
$159,000 in rental income which is included in other fees and charges as part
of other income.
Income Taxes
Income
tax expense as a percentage of income before taxes decreased from 33.05% in
2003 to 31.76% in 2004.  The decrease is
due to additional tax credits available as a result of the new tax credit real
estate investment in 2004.
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 16.75% of the Companys total assets at June 30,
2004, compared to 19.66% at December 31, 2003.
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, 2004, the
Company had borrowed $167.6 million from the FHLB of Des Moines.  The amount of advances from the FHLB of Des
Moines is unchanged from December 31, 2003. 
These advances were used as a means of providing both long and
short-term, fixed-rated funding for certain assets and managing interest rate
risk.  The Company had additional
borrowing capacity available from the FHLB of approximately $151 million at
June 30, 2004.

As additional sources of
liquidity, the Company has the ability to borrow up to $10 million from the
Federal Reserve Bank of Chicago, and two lines of credit with two banks
totaling $104 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, 2004.
Page 18 of 26

HILLS
BANCORPORATION

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

Market risk is the risk
of loss arising from adverse changes in market prices and rates.  The Companys market risk is comprised
primarily of interest rate risk resulting from its core banking activities of
lending and deposit gathering.  Interest
rate risk measures the impact on earnings from changes in interest rates and
the effect on current fair market values of the Companys assets, liabilities
and off-balance sheet contracts. The Companys objective is to measure this
risk and manage the balance sheet to avoid unacceptable potential for economic
loss.  Management continually develops
and applies strategies to mitigate market risk, some of which are described
below.  Exposure to market risk is
reviewed on a regular basis by the asset/liability committee at the bank.  Management does not believe that the Companys
primary market risk exposures and how those exposures have been managed to date
in 2004, changed significantly when compared to 2003.

Asset/Liability
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 rates increase over an extended period
of time.  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.
The
Bank maintains an asset/liability committee, which meets at least quarterly to
review the 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 passbook or
transaction deposit accounts, which are less sensitive to changes in interest
rates and can be re-priced rapidly.
Net
interest income should decline with instantaneous increases in interest rates
while net interest income should increase with instantaneous declines in
interest rates.  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 19 of 26


HILLS
BANCORPORATION
Item 4.
  Controls and ProceduresAs
of the end of the period covered by this report, the 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 operations of the Companys
disclosure controls and procedures, and as defined in Exchange Act 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 enabling
the Companys periodic SEC filings within the required time period.  There have been no changes in the Companys
internal controls over financial reporting that occurred during the Companys
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting.
Page 20 of 26


HILLS
BANCORPORATION
PART II - OTHER INFORMATION
Item 1.
  Legal ProceedingsNo material legal proceedings are pending.Item 2.
  Changes in SecuritiesThere were no changes in securities.Item 3.
  Defaults upon Senior SecuritiesHills Bancorporation has no senior securities.Item 4.
  Submission of Matters to a Vote of
  Security Holders(a)
  The Annual Meeting of Shareholders was held on April
  19, 2004.  The results listed for the
  election of directors and the ratification of auditors are included in items
  (b) and (c) listed below.  Note that
  the number of shares did not reflect the three-for-one stock split on April
  13, 2004 with a record date of April 19, 2004.(b)
  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 Authority1. Michael E. Hodge
  
  
  1,226,475
  
  
  
  2152. Richard W. Oberman
  
  
  1,225,828
  
  
  
  8623. Sheldon E. Yoder, D.V.M.
  
  
  1,225,375
  
  
  
  1,315(c)
  Ratification of KPMG LLP as the Companys independent
  auditors for the fiscal year ending
  December 31, 2004.For
  
  Against
  
  Abstain1,210,421
  
  
  
  0
  
  
  
  16,269Item 5.
  Other InformationNoneItem 6.
  Exhibits and Reports on Form 8-KExhibits31
  Certifications under Section 302 of the
  Sarbanes-Oxley Act of 200232
  Certifications under Section 906 of the
  Sarbanes-Oxley Act of 2002Reports on Form 8-KNo reports on Form 8-K have been filed during the
  quarter ended June 30, 2004.Page 21 of 26

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      8/5/04
  By
  /s/ Dwight O. SeegmillerDwight O. Seegmiller, President and Chief Executive
  OfficerDate      8/5/04
  By
  /s/ James G. PrattJames G. Pratt, Treasurer and Chief Financial
  OfficerPage 22 of 26


HILLS
BANCORPORATION
QUARTERLY REPORT OF FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 2004

Exhibit
  Number
  
  Description
  
  Page Number 
  In The Sequential 
  Numbering System 
  June 30, 2004 Form 10-Q31
  
  Certifications under Section 302 of the
  Sarbanes-Oxley Act of 2002
  
  24- 25 of 2632
  
  Certifications under Section 906 of the
  Sarbanes-Oxley Act of 2002
  
  26 of 26Page 23 of 26