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| Incorporated in Iowa |   | I.R.S. Employer Identification                          No. 42-1208067 |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Large accelerated filer  o      | Accelerated Filer                    þ |
|--------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| Non-accelerated filer    o                     | Small Reporting Company     o                                                                                          |

|  CLASS                      |   | SHARES OUTSTANDING |
|----------------------------------|--------|--------------------|
|                             |   | At July 31, 2010   |
|                             |   |               |
| Common Stock, no par value  |   | 4,400,367          |

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HILLS BANCORPORATION

|                     |                                                                                                                          |   |  Page Number  |
|--------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|
|                     |                                                                                                                          |   |                         |   |
|                     |                                                                                                                          |   |                         |   |
| Item 1.                  | Financial Statements                                                                                                          |   |                         |   |
|                     |                                                                                                                          |   |                         |   |
|                     |                                                                                                                          |   |                         |   |
|                     | Consolidated balance sheets, June 30, 2010 (unaudited) and December 31, 2009                                                  |   |                         | 3 |
|                     | Consolidated statements of income (unaudited) for three and six months ended June 30, 2010 and 2009                      |   |                         | 4 |
|                     | Consolidated statements of comprehensive income (loss) (unaudited) for three and six months ended June 30, 2010 and 2009 |   |                         | 5 |
|                     | Consolidated statements of stockholders' equity (unaudited) for six months ended June 30, 2010 and 2009                  |   |                         | 6 |
|                     | Consolidated statements of cash flows (unaudited) for six months ended June 30, 2010 and 2009                            |   |                         | 7 - 8 |
|                     | Notes to consolidated financial statements                                                                                    |   |                         | 9 - 16 |
|                     |                                                                                                                          |   |                         |   |
| Item 2.                  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                    |   |                         | 17 - 40 |
|                     |                                                                                                                          |   |                         |   |
| Item 3.                  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |   |                         | 40 - 41 |
|                     |                                                                                                                          |   |                         |   |
| Item 4.                  | Controls and Procedures                                                                                                       |   |                         | 41 |
|                     |                                                                                                                          |   |                         |   |
|                     |                                                                                                                          |   |                         |   |
| Part IIOTHER INFORMATION |
|                     |                                                                                                                          |   |                         |   |
| Item 1.                  | Legal proceedings                                                                                                             |   |                         | 42 |
|                     |                                                                                                                          |   |                         |   |
| Item 1A.                 | Risk factors                                                                                                                  |   |                         | 42 - 47 |
|                     |                                                                                                                          |   |                         |   |
| Item 2.                  | Unregistered sales of equity securities and use of proceeds                                                                   |   |                         | 48 |
|                     |                                                                                                                          |   |                         |   |
| Item 3.                  | Defaults upon senior securities                                                                                               |   |                         | 48 |
|                     |                                                                                                                          |   |                         |   |
| Item 4.                  | Reserved                                                                                                                      |   |                         | 48 |
|                     |                                                                                                                          |   |                         |   |
| Item 5.                  | Other information                                                                                                             |   |                         | 48 |
|                     |                                                                                                                          |   |                         |   |
| Item 6.                  | Exhibits                                                                                                                      |   |                         | 48 |
|                     |                                                                                                                          |   |                         |   |
| Signatures               |                                                                                                                          |   | 49                           |
|                     |                                                                                                                          |   |                         |   |
| Exhibits Index           |                                                                                                                          |   | 50                           |

----

Index

CONSOLIDATED BALANCE SHEE

|                                                                                                                                 |   | June 30, 2010 |      |   |              |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------|--------|-------------------|--------|
| ASSETS                                                                                                                               |   | (Unaudited)   |      |   | December 31, 2009 |   |
|                                                                                                                                 |   |          |      |   |              |   |
| Cash and cash equivalents                                                                                                            |   | $             | 25,533    |   |              | $      | 24,095 |   |
| Investment securities available for sale at fair value (amortized cost June 30, 2010 $194,363; December 31, 2009 $194,844)           |   |          | 200,852   |   |              |   | 201,645 |   |
| Stock of Federal Home Loan Bank                                                                                                      |   |          | 11,119    |   |              |   | 12,453 |   |
| Loans held for sale                                                                                                                  |   |          | 9,883     |   |              |   | 7,976 |   |
| Loans, net of allowance for loan losses (June 30, 2010 $28,350; December 31, 2009 $29,160)                                           |   |          | 1,513,082 |   |              |   | 1,503,981 |   |
| Property and equipment, net                                                                                                          |   |          | 25,764    |   |              |   | 26,417 |   |
| Tax credit real estate                                                                                                               |   |          | 21,590    |   |              |   | 18,777 |   |
| Accrued interest receivable                                                                                                          |   |          | 9,402     |   |              |   | 9,677 |   |
| Deferred income taxes, net                                                                                                           |   |          | 8,894     |   |              |   | 8,892 |   |
| Other real estate owned and repossessed assets                                                                                       |   |          | 3,829     |   |              |   | 3,227 |   |
| Goodwill                                                                                                                             |   |          | 2,500     |   |              |   | 2,500 |   |
| Prepaid FDIC insurance                                                                                                               |   |          | 6,004     |   |              |   | 6,947 |   |
| Other assets                                                                                                                         |   |          | 3,827     |   |              |   | 4,039 |   |
|                                                                                                                                 |   | $             | 1,842,279 |   |              | $      | 1,830,626 |   |
|                                                                                                                                 |   |          |      |   |              |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                 |   |          |      |   |              |   |   |   |
|                                                                                                                                 |   |          |      |   |              |   |   |   |
| Liabilities                                                                                                                          |   |          |      |   |              |   |   |   |
| Noninterest-bearing deposits                                                                                                         |   | $             | 181,542   |   |              | $      | 184,158 |   |
| Interest-bearing deposits                                                                                                            |   |          | 1,220,560 |   |              |   | 1,163,269 |   |
| Total deposits                                                                                                                       |   | $             | 1,402,102 |   |              | $      | 1,347,427 |   |
| Short-term borrowings                                                                                                                |   |          | 44,212    |   |              |   | 68,534 |   |
| Federal Home Loan Bank borrowings                                                                                                    |   |          | 195,000   |   |              |   | 225,000 |   |
| Accrued interest payable                                                                                                             |   |          | 2,057     |   |              |   | 2,341 |   |
| Other liabilities                                                                                                                    |   |          | 17,356    |   |              |   | 12,649 |   |
|                                                                                                                                 |   | $             | 1,660,727 |   |              | $      | 1,655,951 |   |
|                                                                                                                                 |   |          |      |   |              |   |   |   |
| Redeemable Common Stock Held by Employee Stock Ownership Plan (ESOP)                                                            |   | $             | 23,790    |   |              | $      | 22,900 |   |
|                                                                                                                                 |   |          |      |   |              |   |   |   |
| STOCKHOLDERS' EQUITY                                                                                                                 |   |          |      |   |              |   |   |   |
| Capital stock, no par value; authorized 10,000,000 shares; issued June 30, 2010 4,618,871 shares; December 31, 2009 4,618,962 shares |   | $             | -         |   |              | $      | - |   |
| Paid in capital                                                                                                                      |   |          | 14,588    |   |              |   | 14,582 |   |
| Retained earnings                                                                                                                    |   |          | 174,202   |   |              |   | 166,120 |   |
| Accumulated other comprehensive income                                                                                               |   |          | 4,007     |   |              |   | 4,200 |   |
| Treasury stock at cost (June 30, 2010 215,419 shares;  December 31, 2009 196,688 shares)                                        |   |          | (11,245   | )      |              |   | (10,227 | ) |
|                                                                                                                                 |   | $             | 181,552   |   |              | $      | 174,675 |   |
| Less maximum cash obligation related to ESOP shares                                                                                  |   |          | 23,790    |   |              |   | 22,900 |   |
|                                                                                                                                 |   | $             | 157,762   |   |              | $      | 151,775 |   |
|                                                                                                                                 |   | $             | 1,842,279 |   |              | $      | 1,830,626 |   |
| See Notes to Consolidated Financial Statements.                                                                                      |   |          |      |   |              |   |   |   |

----

Index

CONSOLIDATED STATEMENTS OF INCOME (Unaudited

|                                                                     |   | Three Months Ended |   |   | Six Months Ended |   |
|--------------------------------------------------------------------------|--------|--------------------|--------|--------|------------------|--------|
|                                                                     |   | June 30,           |   |   | June 30,         |   |
|                                                                     |   | 2010               |   |   | 2009             |   |   | 2010 |   |   | 2009 |   |
| Interest income:                                                         |   |               |   |   |             |   |   |   |   |   |   |   |
| Loans, including fees                                                    |   | $                  | 22,193 |   |             | $      | 22,274 |   |   | $ | 43,992 |   |   | $ | 44,331 |   |
| Investment securities:                                                   |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                  |   |               | 850    |   |             |   | 948 |   |   |   | 1,725 |   |   |   | 1,914 |   |
| Nontaxable                                                               |   |               | 828    |   |             |   | 840 |   |   |   | 1,652 |   |   |   | 1,681 |   |
| Federal funds sold                                                       |   |               | 26     |   |             |   | 13 |   |   |   | 28 |   |   |   | 17 |   |
| Total interest income                                                    |   | $                  | 23,897 |   |             | $      | 24,075 |   |   | $ | 47,397 |   |   | $ | 47,943 |   |
| Interest expense:                                                        |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                 |   | $                  | 4,882  |   |             | $      | 6,772 |   |   | $ | 9,980 |   |   | $ | 13,334 |   |
| Short-term borrowings                                                    |   |               | 120    |   |             |   | 169 |   |   |   | 263 |   |   |   | 402 |   |
| FHLB borrowings                                                          |   |               | 2,005  |   |             |   | 2,795 |   |   |   | 4,068 |   |   |   | 5,968 |   |
| Total interest expense                                                   |   | $                  | 7,007  |   |             | $      | 9,736 |   |   | $ | 14,311 |   |   | $ | 19,704 |   |
| Net interest income                                                      |   | $                  | 16,890 |   |             | $      | 14,339 |   |   | $ | 33,086 |   |   | $ | 28,239 |   |
| Provision for loan losses                                                |   |               | 853    |   |             |   | 3,481 |   |   |   | 2,918 |   |   |   | 5,917 |   |
| Net interest income after provision for loan losses                      |   | $                  | 16,037 |   |             | $      | 10,858 |   |   | $ | 30,168 |   |   | $ | 22,322 |   |
| Other income:                                                            |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net gain on sale of loans                                                |   | $                  | 496    |   |             | $      | 1,466 |   |   | $ | 1,041 |   |   | $ | 2,646 |   |
| Trust fees                                                               |   |               | 1,042  |   |             |   | 830 |   |   |   | 2,002 |   |   |   | 1,660 |   |
| Service charges and fees                                                 |   |               | 2,101  |   |             |   | 1,950 |   |   |   | 4,023 |   |   |   | 3,766 |   |
| Rental revenue on tax credit real estate                                 |   |               | 404    |   |             |   | 213 |   |   |   | 866 |   |   |   | 521 |   |
| Other noninterest income                                                 |   |               | 545    |   |             |   | 590 |   |   |   | 1,624 |   |   |   | 1,182 |   |
|                                                                     |   | $                  | 4,588  |   |             | $      | 5,049 |   |   | $ | 9,556 |   |   | $ | 9,775 |   |
| Other expenses:                                                          |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                           |   | $                  | 5,563  |   |             | $      | 5,544 |   |   | $ | 11,005 |   |   | $ | 10,745 |   |
| Occupancy                                                                |   |               | 755    |   |             |   | 718 |   |   |   | 1,516 |   |   |   | 1,491 |   |
| Furniture and equipment                                                  |   |               | 1,000  |   |             |   | 892 |   |   |   | 2,015 |   |   |   | 1,821 |   |
| Office supplies and postage                                              |   |               | 346    |   |             |   | 350 |   |   |   | 691 |   |   |   | 690 |   |
| Advertising and business development                                     |   |               | 449    |   |             |   | 389 |   |   |   | 806 |   |   |   | 840 |   |
| Outside services                                                         |   |               | 1,543  |   |             |   | 1,480 |   |   |   | 3,435 |   |   |   | 2,937 |   |
| Rental expenses on tax credit real estate                                |   |               | 710    |   |             |   | 187 |   |   |   | 1,222 |   |   |   | 600 |   |
| FDIC insurance assessment                                                |   |               | 271    |   |             |   | 1,321 |   |   |   | 1,045 |   |   |   | 1,846 |   |
| Loss on extinguishment of debt - Federal Home Loan Bank borrowings       |   |               | -      |   |             |   | 584 |   |   |   | - |   |   |   | 584 |   |
| Net loss on sale of other real estate owned and other repossessed assets |   |               | 42     |   |             |   | 168 |   |   |   | 183 |   |   |   | 632 |   |
| Other noninterest expense                                                |   |               | 414    |   |             |   | 236 |   |   |   | 731 |   |   |   | 517 |   |
|                                                                     |   | $                  | 11,093 |   |             | $      | 11,869 |   |   | $ | 22,649 |   |   | $ | 22,703 |   |
| Income before income taxes                                               |   | $                  | 9,532  |   |             | $      | 4,038 |   |   | $ | 17,075 |   |   | $ | 9,394 |   |
| Income taxes                                                             |   |               | 2,811  |   |             |   | 1,108 |   |   |   | 4,969 |   |   |   | 2,475 |   |
| Net income                                                               |   | $                  | 6,721  |   |             | $      | 2,930 |   |   | $ | 12,106 |   |   | $ | 6,919 |   |
|                                                                     |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share:                                                      |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                    |   | $                  | 1.52   |   |             | $      | 0.66 |   |   | $ | 2.74 |   |   | $ | 1.56 |   |
| Diluted                                                                  |   |               | 1.52   |   |             |   | 0.66 |   |   |   | 2.73 |   |   |   | 1.56 |   |
|                                                                     |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Financial Statements.                          |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |

----

Index

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Amounts In Thousands)

|                                                        |   | Three Months Ended |   |   | Six Months Ended |   |
|-------------------------------------------------------------|--------|--------------------|--------|--------|------------------|--------|
|                                                        |   | June 30,           |   |   | June 30,         |   |
|                                                        |   | 2010               |   |   | 2009             |   |   | 2010 |   |   | 2009 |   |
|                                                        |   |               |   |   |             |   |   |   |   |   |   |   |
| Net income                                                  |   | $                  | 6,721  |   |             | $      | 2,930 |   |   | $ | 12,106 |   |   | $ | 6,919 |   |
|                                                        |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss):                          |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising during the period |   | $                  | 346    |   |             | $      | (310 | ) |   | $ | (312 | ) |   | $ | (314 | ) |
| Income tax effect of unrealized gains (losses)              |   |               | (132   | )      |             |   | 119 |   |   |   | 119 |   |   |   | 121 |   |
| Other comprehensive income (loss)                           |   | $                  | 214    |   |             | $      | (191 | ) |   | $ | (193 | ) |   | $ | (193 | ) |
|                                                        |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income                                        |   | $                  | 6,935  |   |             | $      | 2,739 |   |   | $ | 11,913 |   |   | $ | 6,726 |   |
|                                                        |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Financial Statements.             |   |               |   |   |             |   |   |   |   |   |   |   |   |   |   |   |

----

Index

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (

|                                                   |   |    |   |   |     |   |    |          |   |   | Maximum    |   |   |     |    |   |   |   |
|--------------------------------------------------------|--------|---------|--------|--------|----------|--------|---------|---------------|--------|--------|------------|--------|--------|----------|---------|--------|--------|--------|
|                                                   |   |    |   |   |     |   |    |          |   |   | Cash       |   |   |     |    |   |   |   |
|                                                   |   |    |   |   |     |   |    | Accumulated   |   |   | Obligation |   |   |     |    |   |   |   |
|                                                   |   |    |   |   |     |   |    | Other         |   |   | Related    |   |   |     |    |   |   |   |
|                                                   |   | Paid In |   |   | Retained |   |    | Comprehensive |   |   | To ESOP    |   |   | Treasury |    |   |   |   |
|                                                   |   | Capital |   |   | Earnings |   |    | Income (Loss) |   |   | Shares     |   |   | Stock    |    |   | Total  |   |
|                                                   |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |
| Balance, December 31, 2008                             |   | $       | 13,447 |   |     | $      | 154,176 |          |   | $      | 3,649      |   |   | $        | (23,815 | )      |   | $      | (8,095 | ) |   | $ | 139,362 |   |
| Issuance of 1,767 shares of common stock               |   |    | 68     |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 68 |   |
| Forfeiture of 502 shares of common stock               |   |    | (24    | )      |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | (24 | ) |
| Share-based compensation                               |   |    | 8      |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 8 |   |
| Income tax benefit related to share-based compensation |   |    | 10     |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 10 |   |
| Change related to ESOP shares                          |   |    | -      |   |     |   | -       |          |   |   | -          |   |   |     | 1,412   |   |   |   | - |   |   |   | 1,412 |   |
| Net income                                             |   |    | -      |   |     |   | 6,919   |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 6,919 |   |
| Dividends ($.91 per share)                             |   |    | -      |   |     |   | (4,041  | )             |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | (4,041 | ) |
| Purchase of 24,305 shares of common stock              |   |    | -      |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | (1,311 | ) |   |   | (1,311 | ) |
| Other comprehensive loss                               |   |    | -      |   |     |   | -       |          |   |   | (193       | )      |   |     | -       |   |   |   | - |   |   |   | (193 | ) |
| Balance, June 30, 2009                                 |   | $       | 13,509 |   |     | $      | 157,054 |          |   | $      | 3,456      |   |   | $        | (22,403 | )      |   | $      | (9,406 | ) |   | $ | 142,210 |   |
|                                                   |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |   |   |   |   |   |   |
|                                                   |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2009                             |   | $       | 14,582 |   |     | $      | 166,120 |          |   | $      | 4,200      |   |   | $        | (22,900 | )      |   | $      | (10,227 | ) |   | $ | 151,775 |   |
| Issuance of 302 shares of common stock                 |   |    | 16     |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 16 |   |
| Forfeiture of 393 shares of common stock               |   |    | (18    | )      |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | (18 | ) |
| Share-based compensation                               |   |    | 8      |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 8 |   |
| Income tax benefit related to share-based compensation |   |    | -      |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | - |   |
| Change related to ESOP shares                          |   |    | -      |   |     |   | -       |          |   |   | -          |   |   |     | (890    | )      |   |   | - |   |   |   | (890 | ) |
| Net income                                             |   |    | -      |   |     |   | 12,106  |          |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | 12,106 |   |
| Dividends ($.91 per share)                             |   |    | -      |   |     |   | (4,024  | )             |   |   | -          |   |   |     | -       |   |   |   | - |   |   |   | (4,024 | ) |
| Purchase of 18,731 shares of common stock              |   |    | -      |   |     |   | -       |          |   |   | -          |   |   |     | -       |   |   |   | (1,018 | ) |   |   | (1,018 | ) |
| Other comprehensive loss                               |   |    | -      |   |     |   | -       |          |   |   | (193       | )      |   |     | -       |   |   |   | - |   |   |   | (193 | ) |
| Balance, June 30, 2010                                 |   | $       | 14,588 |   |     | $      | 174,202 |          |   | $      | 4,007      |   |   | $        | (23,790 | )      |   | $      | (11,245 | ) |   | $ | 157,762 |   |
|                                                   |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |   |   |   |   |   |   |
| See Notes to Consolidated Financial Statements.        |   |    |   |   |     |   |    |          |   |   |       |   |   |     |    |   |   |   |   |   |   |

----

Index

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Amounts In Thousands)

|                                                                                                   |   | Six Months Ended |    |
|--------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                   |   | June 30,         |    |
|                                                                                                   |   | 2010             |    |   | 2009 |   |
| Cash Flows from Operating Activities                                                                   |   |             |    |   |   |   |
| Net income                                                                                             |   | $                | 12,106  |   |   | $ | 6,919 |   |
| Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |   |             |    |   |   |   |   |   |
| Depreciation                                                                                           |   |             | 1,351   |   |   |   | 1,203 |   |
| Provision for loan losses                                                                              |   |             | 2,918   |   |   |   | 5,917 |   |
| Share-based compensation                                                                               |   |             | 8       |   |   |   | 8 |   |
| Forfeiture of common stock                                                                             |   |             | (18     | ) |   |   | (24 | ) |
| Compensation expensed through issuance of common stock                                                 |   |             | 16      |   |   |   | 42 |   |
| Excess tax benefits from share-based compensation                                                      |   |             | -       |   |   |   | (10 | ) |
| Provision for deferred income taxes                                                                    |   |             | 117     |   |   |   | (993 | ) |
| Net loss on sale of other real estate owned and other repossessed assets                               |   |             | 183     |   |   |   | 632 |   |
| Decrease in accrued interest receivable                                                                |   |             | 275     |   |   |   | 133 |   |
| Amortization of discount on investment securities, net                                                 |   |             | 432     |   |   |   | 343 |   |
| Decrease in prepaid FDIC insurance                                                                     |   |             | 943     |   |   |   | - |   |
| Decrease (increase) in other assets                                                                    |   |             | 212     |   |   |   | (457 | ) |
| Increase in accrued interest and other liabilities                                                     |   |             | 4,423   |   |   |   | 2,682 |   |
| Loans originated for sale                                                                              |   |             | (80,489 | ) |   |   | (197,861 | ) |
| Proceeds on sales of loans                                                                             |   |             | 79,623  |   |   |   | 199,314 |   |
| Net gain on sales of loans                                                                             |   |             | (1,041  | ) |   |   | (2,646 | ) |
| Net cash and cash equivalents provided by operating activities                                         |   | $                | 21,059  |   |   | $ | 15,202 |   |
|                                                                                                   |   |             |    |   |   |   |   |   |
| Cash Flows from Investing Activities                                                                   |   |             |    |   |   |   |   |   |
| Proceeds from maturities of investment securities available for sale                                   |   | $                | 28,344  |   |   | $ | 32,120 |   |
| Purchases of investment securities available for sale                                                  |   |             | (26,961 | ) |   |   | (33,484 | ) |
| Loans made to customers, net of collections                                                            |   |             | (14,158 | ) |   |   | 2,998 |   |
| Proceeds on sale of other real estate owned and other repossessed assets                               |   |             | 1,354   |   |   |   | 3,996 |   |
| Purchases of property and equipment                                                                    |   |             | (698    | ) |   |   | (1,542 | ) |
| Investment in tax credit real estate, net                                                              |   |             | (2,813  | ) |   |   | 561 |   |
| Net cash (used in) provided by investing activities                                                    |   | $                | (14,932 | ) |   | $ | 4,649 |   |
|                                                                                                   |   |             |    |   |   |   |   |   |
| Cash Flows from Financing Activities                                                                   |   |             |    |   |   |   |   |   |
| Net increase in deposits                                                                               |   | $                | 54,675  |   |   | $ | 119,572 |   |
| Net decrease in short-term borrowings                                                                  |   |             | (24,322 | ) |   |   | (70,085 | ) |
| Stock options exercised                                                                                |   |             | -       |   |   |   | 26 |   |
| Excess tax benefits related to share-based compensation                                                |   |             | -       |   |   |   | 10 |   |
| Borrowings from FHLB                                                                                   |   |             | 10,000  |   |   |   | - |   |
| Payments on FHLB borrowings                                                                            |   |             | (40,000 | ) |   |   | (40,000 | ) |
| Purchase of treasury stock                                                                             |   |             | (1,018  | ) |   |   | (1,311 | ) |
| Dividends paid                                                                                         |   |             | (4,024  | ) |   |   | (4,041 | ) |
| Net cash (used in) provided by financing activities                                                    |   | $                | (4,689  | ) |   | $ | 4,171 |   |
|                                                                                                   |   |             |    |   |   |   |   |   |
| (Continued)                                                                                            |   |             |    |   |   |   |   |   |

----

Index

HILL

|                                                                        |   | Six Months Ended |   |
|-----------------------------------------------------------------------------|--------|------------------|--------|
|                                                                        |   | June 30,         |   |
|                                                                        |   | 2010             |   |   | 2009 |   |
|                                                                        |   |             |   |   |   |   |
| Increase in cash and cash equivalents                                       |   | $                | 1,438  |   |   | $ | 24,022 |   |
|                                                                        |   |             |   |   |   |   |   |   |
| Cash and cash equivalents:                                                  |   |             |   |   |   |   |   |   |
| Beginning of year                                                           |   |             | 24,095 |   |   |   | 22,575 |   |
| End of period                                                               |   | $                | 25,533 |   |   | $ | 46,597 |   |
|                                                                        |   |             |   |   |   |   |   |   |
| Supplemental Disclosures                                                    |   |             |   |   |   |   |   |   |
| Cash payments for:                                                          |   |             |   |   |   |   |   |   |
| Interest paid to depositors                                                 |   | $                | 10,264 |   |   | $ | 13,368 |   |
| Interest paid on other obligations                                          |   |             | 4,331  |   |   |   | 6,350 |   |
| Income taxes paid                                                           |   |             | 2,874  |   |   |   | 3,989 |   |
|                                                                        |   |             |   |   |   |   |   |   |
| Noncash financing activities:                                               |   |             |   |   |   |   |   |   |
|  Increase (decrease) in maximum cash obligation related to ESOP shares |   | $                | 890    |   |   | $ | (1,412 | ) |
| Transfers to other real estate owned                                        |   |             | 2,139  |   |   |   | 2,026 |   |
|                                                                        |   |             |   |   |   |   |   |   |
| See Notes to Consolidated Financial Statements.                             |   |             |   |   |   |   |   |   |

----

Index

NOTES TO CONSOLIDATED FINANCIAL STATE

| Note 1. | Basis of Presentation |
|---------|-----------------------|

| Note 2. | Earnings Per Share |
|---------|--------------------|

|                                                                                                                               |   | Three months ended |      |   | Six months ended |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------|------------------|--------|
|                                                                                                                               |   | June 30,           |      |   | June 30,         |   |
|                                                                                                                               |   | 2010               |      |   | 2009             |   |   | 2010 |   |   | 2009 |   |
|                                                                                                                               |   |               |      |   |             |   |   |   |   |   |   |   |
| Common shares outstanding at the beginning of the period                                                                           |   |               | 4,416,683 |   |             |   | 4,430,365 |   |   |   | 4,422,274 |   |   |   | 4,440,545 |   |
| Weighted average number of net shares (redeemed)                                                                                   |   |               | (3,200    | )      |             |   | (3,345 | ) |   |   | (5,828 | ) |   |   | (8,099 | ) |
| Weighted average shares outstanding (basic)                                                                                        |   |               | 4,413,483 |   |             |   | 4,427,020 |   |   |   | 4,416,446 |   |   |   | 4,432,446 |   |
| Weighted average of potential dilutive shares attributable to stock options granted, computed under the treasury stock method |   |               | 13,143    |   |             |   | 15,195 |   |   |   | 13,236 |   |   |   | 14,679 |   |
| Weighted average number of shares                                                                                                  |   |               | 4,426,626 |   |             |   | 4,442,215 |   |   |   | 4,429,682 |   |   |   | 4,447,125 |   |
|                                                                                                                               |   |               |      |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Net income (In Thousands)                                                                                                          |   | $                  | 6,721     |   |             | $      | 2,930 |   |   | $ | 12,106 |   |   | $ | 6,919 |   |
|                                                                                                                               |   |               |      |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share:                                                                                                                |   |               |      |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                              |   | $                  | 1.52      |   |             | $      | 0.66 |   |   | $ | 2.74 |   |   | $ | 1.56 |   |
| Diluted                                                                                                                            |   | $                  | 1.52      |   |             | $      | 0.66 |   |   | $ | 2.73 |   |   | $ | 1.56 |   |
|                                                                                                                               |   |               |      |   |             |   |   |   |   |   |   |   |   |   |   |   |

----

Index

| Note 3. | Recent Accounting Pronouncements and Recent Legislative Developments |
|---------|----------------------------------------------------------------------|

----

Index

| Note 3.  | Recent Accounting Pronouncements and Recent Legislative Developments (continued) |
|---------------|----------------------------------------------------------------------------------|

----

Index

| Note 4. | Fair Value Measurements |
|---------|-------------------------|

|                              |   | June 30, 2010          |      |   | December 31, 2009 |   |
|-----------------------------------|--------|------------------------|-----------|--------|-------------------|--------|
|                              |   | Carrying               |      |   | Estimated         |   |   | Carrying |   |   | Estimated |   |
|                              |   | Amount                 |      |   | Fair Value        |   |   | Amount |   |   | Fair Value |   |
|                              |   | (Amounts In Thousands) |      |
|                              |   |                   |      |   |              |   |   |   |   |   |   |   |
| Cash and due from banks           |   | $                      | 25,533    |   |              | $      | 25,533 |   |   | $ | 24,095 |   |   | $ | 24,095 |   |
| Investment securities             |   |                   | 211,971   |   |              |   | 211,971 |   |   |   | 214,098 |   |   |   | 214,098 |   |
| Loans                             |   |                   | 1,522,965 |   |              |   | 1,536,189 |   |   |   | 1,511,957 |   |   |   | 1,515,351 |   |
| Accrued interest receivable       |   |                   | 9,402     |   |              |   | 9,402 |   |   |   | 9,677 |   |   |   | 9,677 |   |
| Deposits                          |   |                   | 1,402,102 |   |              |   | 1,402,830 |   |   |   | 1,347,427 |   |   |   | 1,350,881 |   |
| Short-term borrowings             |   |                   | 44,212    |   |              |   | 44,212 |   |   |   | 68,534 |   |   |   | 68,534 |   |
| Federal Home Loan Bank borrowings |   |                   | 195,000   |   |              |   | 211,186 |   |   |   | 225,000 |   |   |   | 242,562 |   |
| Accrued interest payable          |   |                   | 2,057     |   |              |   | 2,057 |   |   |   | 2,341 |   |   |   | 2,341 |   |
|                              |   |                   |      |   |              |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |                   |      |   |              |   |   |   |   |   |   |   |   |   |   |   |
|                              |   | Face Amount            |      |   |              |   |   |   | Face Amount |   |   |   |   |   |
|                              |   |                   |      |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Off-balance sheet instruments:    |   |                   |      |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Loan commitments                  |   | $                      | 276,069   |   |              | $      | - |   |   | $ | 289,927 |   |   | $ | - |   |
| Letters of credit                 |   |                   | 7,430     |   |              |   | - |   |   |   | 9,724 |   |   |   | - |   |
|                              |   |                   |      |   |              |   |   |   |   |   |   |   |   |   |   |   |

| 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. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

| Note 4. | Fair Value Measurements (continued) |
|---------|-------------------------------------|

| 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. |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

| Note 4. | Fair Value Measurements (continued) |
|---------|-------------------------------------|

|                                     |   | June 30, 2010          |   |
|------------------------------------------|--------|------------------------|--------|
|                                     |   | Level 1                |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
|                                     |   | (Amounts in Thousands) |   |
|                                     |   |                   |   |   |   |   |   |   |   |   |   |   |
| Investment securities available for sale |   | $                      | 98,820 |   |   | $ | 102,032 |   |   | $ | - |   |   | $ | 200,852 |   |
| Total                                    |   | $                      | 98,820 |   |   | $ | 102,032 |   |   | $ | - |   |   | $ | 200,852 |   |
|                                     |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

Index

| Note 4.  | Fair Value Measurements (continued) |
|---------------|-------------------------------------|

|                  |   |                   |   |   |           |   |   |          |   |   |          |   |   | Quarter Ended |   |   | Quarter Ended |   |   | Six Months Ended |   |
|-----------------------|--------|------------------------|--------|--------|----------------|--------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|------------------|--------|
|                  |   | June 30, 2010          |   |   | March 31, 2010 |   |   | June 30, 2010 |   |   | June 30, 2010 |   |
|                  |   | Level 1                |   |   | Level 2        |   |   | Level 3       |   |   | Total         |   |   | Total Losses  |   |   | Total Losses  |   |   | Total Losses     |   |
|                  |   | (Amounts in Thousands) |   |   |           |   |   |          |   |   |          |   |
|                  |   |                   |   |   |           |   |   |          |   |   |          |   |   |          |   |   |          |   |   |             |   |
| Loans (1)             |   | $                      | -      |   |           | $      | 7,328  |          |   | $      | -             |   |   | $             | 7,328  |   |          | $      | 19     |             |   | $ | 1,031 |   |   | $ | 1,050 |   |
| Foreclosed assets (2) |   |                   | -      |   |           |   | 728    |          |   |   | -             |   |   |          | 728    |   |          |   | 144    |             |   |   | 123 |   |   |   | 267 |   |
| Total                 |   | $                      | -      |   |           | $      | 8,056  |          |   | $      | -             |   |   | $             | 8,056  |   |          | $      | 163    |             |   | $ | 1,154 |   |   | $ | 1,317 |   |
|                  |   |                   |   |   |           |   |   |          |   |   |          |   |   |          |   |   |          |   |   |             |   |   |   |   |   |   |   |   |

| (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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

| Note 6. | Commitments and Contingencies |
|---------|-------------------------------|

|                                                         |   | June 30, 2010          |    |   | December 31, 2009 |   |
|--------------------------------------------------------------|--------|------------------------|---------|--------|-------------------|--------|
|                                                         |   | (Amounts In Thousands) |    |
| Firm loan commitments and unused portion of lines of credit: |   |                   |    |   |              |   |
| Home equity loans                                            |   | $                      | 37,559  |   |              | $      | 37,705 |   |
| Credit card participations                                   |   |                   | 44,135  |   |              |   | 43,658 |   |
| Commercial, real estate and home construction                |   |                   | 70,228  |   |              |   | 78,783 |   |
| Commercial lines and real estate purchase loans              |   |                   | 124,147 |   |              |   | 129,781 |   |
| Outstanding letters of credit                                |   |                   | 7,430   |   |              |   | 9,724 |   |

| Note 7. | Income Taxes |
|---------|--------------|

----

Index

| Item 2. |    Management’s Discussion and Analysis of Financial Condition And Results of Operations |
|--------------|---------------------------------------------------------------------------------------------------------------|

| ·   | 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 recent financial market disruptions and the current global economic recession, and monetary and other governmental actions designed to address such disruptions and recession. |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| —   | The financial strength of the counterparties with which the Company or the Company’s customers do business and as to which the Company had investment or financial exposure. |
|---------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| —   | The credit quality and credit agency ratings of the securities in the Company’s investment portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the affected securities and the recognition of impairment loss. |
|---------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The effects of, and changes in, laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters as well as any laws otherwise affecting the Company.  See Note 3 regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

Index

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

| ·   | The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------|

| ·   | The economic impact of natural disasters. |
|--------------------|-------------------------------------------|

| ·   | 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. |
|--------------------|-------------------------------------------------------------------|

| ·   | The ability of the Company to manage the risks associated with the foregoing as well as anticipated. |
|--------------------|------------------------------------------------------------------------------------------------------|

----

Index

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

| Ÿ   | Total assets were $1.84 billion, an increase of $11.7 million since December 31, 2009. |
|--------------------|----------------------------------------------------------------------------------------|

| Ÿ   | Net loans were $1.52 billion, an increase of $11.0 million since December 31, 2009. |
|--------------------|-------------------------------------------------------------------------------------|

| Ÿ   | Deposit growth of $54.68 million since December 31, 2009. |
|--------------------|-----------------------------------------------------------|

| Ÿ   | Short-term borrowings decreased $24.32 million since December 31, 2009. |
|--------------------|-------------------------------------------------------------------------|

| Ÿ   | Federal Home Loan Bank borrowings decreased $30.0 million since December 31, 2009. |
|--------------------|------------------------------------------------------------------------------------|

----

Index

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

|                                            |   | June 30, 2010          |      |   | December 31, 2009      |   |
|-------------------------------------------------|--------|------------------------|-----------|--------|------------------------|--------|
|                                            |   | Amount                 |      |   | Percent                |   |   | Amount |   |   | Percent |   |
|                                            |   | (Amounts In Thousands) |      |   | (Amounts In Thousands) |   |
|                                            |   |                   |      |   |                   |   |   |   |   |   |   |   |
| Agricultural                                    |   | $                      | 64,914    |   |                   |   | 4.21 | % |   | $ | 64,598 |   |   |   | 4.21 | % |
| Commercial and financial                        |   |                   | 148,372   |   |                   |   | 9.62 |   |   |   | 153,997 |   |   |   | 10.04 |   |
| Real estate:                                    |   |                   |      |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Construction, 1 to 4 family residential         |   |                   | 21,877    |   |                   |   | 1.42 |   |   |   | 25,821 |   |   |   | 1.68 |   |
| Construction, land development and commercial   |   |                   | 85,830    |   |                   |   | 5.57 |   |   |   | 95,955 |   |   |   | 6.26 |   |
| Mortgage, farmland                              |   |                   | 81,673    |   |                   |   | 5.30 |   |   |   | 87,300 |   |   |   | 5.70 |   |
| Mortgage, 1 to 4 family first liens             |   |                   | 496,741   |   |                   |   | 32.23 |   |   |   | 470,328 |   |   |   | 30.68 |   |
| Mortgage, 1 to 4 family junior liens            |   |                   | 114,631   |   |                   |   | 7.44 |   |   |   | 114,742 |   |   |   | 7.48 |   |
| Mortgage, multi-family                          |   |                   | 193,084   |   |                   |   | 12.53 |   |   |   | 190,180 |   |   |   | 12.40 |   |
| Mortgage, commercial                            |   |                   | 298,588   |   |                   |   | 19.37 |   |   |   | 295,070 |   |   |   | 19.25 |   |
| Loans to individuals                            |   |                   | 23,959    |   |                   |   | 1.55 |   |   |   | 25,405 |   |   |   | 1.66 |   |
| Obligations of state and political subdivisions |   |                   | 11,763    |   |                   |   | 0.76 |   |   |   | 9,745 |   |   |   | 0.64 |   |
|                                            |   | $                      | 1,541,432 |   |                   |   | 100.00 | % |   | $ | 1,533,141 |   |   |   | 100.00 | % |
| Less allowance for loan losses                  |   |                   | 28,350    |   |                   |   |   |   |   |   | 29,160 |   |   |   |   |   |
|                                            |   | $                      | 1,513,082 |   |                   |   |   |   |   | $ | 1,503,981 |   |   |   |   |   |

----

Index

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

|                                          |   | Three Months Ended     |   |   | Six Months Ended       |   |
|-----------------------------------------------|--------|------------------------|--------|--------|------------------------|--------|
|                                          |   | June 30,               |   |   | June 30,               |   |
|                                          |   | 2010                   |   |   | 2009                   |   |   | 2010 |   |   | 2009 |   |
|                                          |   | (Amounts In Thousands) |   |   | (Amounts In Thousands) |   |
|                                          |   |                   |   |   |                   |   |   |   |   |   |   |   |
| Balance, beginning                            |   |                   | 29,840 |   |                   | $      | 28,600 |   |   |   | 29,160 |   |   | $ | 27,660 |   |
| Charge-offs:                                  |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Agricultural                                  |   |                   | -      |   |                   |   | 2 |   |   |   | 8 |   |   |   | 2 |   |
| Commercial and financial                      |   |                   | 937    |   |                   |   | 1,338 |   |   |   | 1,821 |   |   |   | 2,023 |   |
| Real estate:                                  |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Construction, 1 to 4 family residential       |   |                   | 20     |   |                   |   | 1 |   |   |   | 44 |   |   |   | 1 |   |
| Construction, land development and commercial |   |                   | 556    |   |                   |   | 125 |   |   |   | 688 |   |   |   | 125 |   |
| Mortgage, farmland                            |   |                   | 26     |   |                   |   | - |   |   |   | 39 |   |   |   | - |   |
| Mortgage, 1 to 4 family first liens           |   |                   | 644    |   |                   |   | 179 |   |   |   | 825 |   |   |   | 528 |   |
| Mortgage, 1 to 4 family junior liens          |   |                   | 384    |   |                   |   | 250 |   |   |   | 621 |   |   |   | 613 |   |
| Mortgage, multi-family                        |   |                   | -      |   |                   |   | - |   |   |   | 19 |   |   |   | 95 |   |
| Mortgage, commercial                          |   |                   | 348    |   |                   |   | 186 |   |   |   | 517 |   |   |   | 236 |   |
| Loans to individuals                          |   |                   | 126    |   |                   |   | 101 |   |   |   | 207 |   |   |   | 281 |   |
|                                          |   |                   | 3,041  |   |                   |   | 2,182 |   |   |   | 4,789 |   |   |   | 3,904 |   |
|                                          |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Recoveries:                                   |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Agricultural                                  |   |                   | 3      |   |                   |   | 3 |   |   |   | 5 |   |   |   | 6 |   |
| Commercial and financial                      |   |                   | 288    |   |                   |   | 53 |   |   |   | 439 |   |   |   | 156 |   |
| Real estate:                                  |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Construction, 1 to 4 family residential       |   |                   | 1      |   |                   |   | - |   |   |   | 2 |   |   |   | - |   |
| Mortgage, farmland                            |   |                   | -      |   |                   |   | - |   |   |   | - |   |   |   | 1 |   |
| Mortgage, 1 to 4 family first liens           |   |                   | 228    |   |                   |   | 23 |   |   |   | 262 |   |   |   | 38 |   |
| Mortgage, 1 to 4 family junior liens          |   |                   | 61     |   |                   |   | 74 |   |   |   | 111 |   |   |   | 110 |   |
| Mortgage, commercial                          |   |                   | 48     |   |                   |   | - |   |   |   | 79 |   |   |   | - |   |
| Loans to individuals                          |   |                   | 69     |   |                   |   | 78 |   |   |   | 163 |   |   |   | 146 |   |
|                                          |   |                   | 698    |   |                   |   | 231 |   |   |   | 1,061 |   |   |   | 457 |   |
| Net charge-offs                               |   |                   | 2,343  |   |                   |   | 1,951 |   |   |   | 3,728 |   |   |   | 3,447 |   |
| Provision charged to expense                  |   |                   | 853    |   |                   |   | 3,481 |   |   |   | 2,918 |   |   |   | 5,917 |   |
| Balance, ending                               |   | $                      | 28,350 |   |                   | $      | 30,130 |   |   | $ | 28,350 |   |   | $ | 30,130 |   |
|                                          |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |

----

Index

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

|                                                                        |   | June 30, 2010          |      |   | December 31, 2009 |   |
|-----------------------------------------------------------------------------|--------|------------------------|-----------|--------|-------------------|--------|
|                                                                        |   | (Amounts in thousands) |      |
|                                                                        |   |                   |      |   |              |   |
| Non-accrual loans                                                           |   | $                      | 5,523     |   |              | $      | 5,360 |   |
| Accruing loans past due 90 days or more                                     |   |                   | 5,030     |   |              |   | 7,009 |   |
| Restructured loans                                                          |   |                   | 23,982    |   |              |   | 15,135 |   |
| Total non-performing loans (1)                                              |   |                   | 34,535    |   |              |   | 27,504 |   |
| Other real estate                                                           |   |                   | 3,829     |   |              |   | 3,227 |   |
| Non-performing assets (includes non-performing loans and other real estate) |   |                   | 38,364    |   |              |   | 30,731 |   |
| Loans held for investment                                                   |   |                   | 1,541,432 |   |              |   | 1,533,141 |   |
| Ratio of allowance for loan losses to loans held for investment             |   |                   | 1.84      | %      |              |   | 1.90 | % |
| Ratio of allowance for loan losses to non-performing loans                  |   |                   | 82.09     |   |              |   | 106.02 |   |
| Ratio of non-performing loans to total loans held for investment            |   |                   | 2.24      |   |              |   | 1.79 |   |
| Ratio of non-performing assets to total assets                              |   |                   | 2.08      |   |              |   | 1.68 |   |

----

Index

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

|                                          |   | June 30, 2010          |   |   | December 31, 2009      |   |
|-----------------------------------------------|--------|------------------------|--------|--------|------------------------|--------|
|                                          |   |                   |   |   | Accruing loans         |   |   |   |   |   |   |   |   | Accruing loans |   |   |   |   |
|                                          |   | Non-accrual            |   |   | past due               |   |   | Restructured |   |   | Non-accrual |   |   | past due |   |   | Restructured |   |
|                                          |   | loans                  |   |   | 90 days                |   |   | loans |   |   | loans |   |   | 90 days |   |   | loans |   |
|                                          |   | (Amounts In Thousands) |   |   | (Amounts In Thousands) |   |
|                                          |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture                                   |   | $                      | -      |   |                   | $      | 432 |   |   | $ | - |   |   | $ | - |   |   | $ | 8 |   |   | $ | - |   |
| Commercial and financial                      |   |                   | 579    |   |                   |   | 790 |   |   |   | 3,220 |   |   |   | 958 |   |   |   | 280 |   |   |   | 3,134 |   |
| Real estate:                                  |   |                   |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction, 1 to 4 family residential       |   |                   | 620    |   |                   |   | - |   |   |   | - |   |   |   | - |   |   |   | 260 |   |   |   | - |   |
| Construction, land development and commercial |   |                   | 944    |   |                   |   | - |   |   |   | 1,805 |   |   |   | 2,645 |   |   |   | 1,202 |   |   |   | 2,442 |   |
| Mortgage, farmland                            |   |                   | -      |   |                   |   | - |   |   |   | - |   |   |   | - |   |   |   | 172 |   |   |   | - |   |
| Mortgage, 1 to 4 family first liens           |   |                   | 1,053  |   |                   |   | 3,406 |   |   |   | 1,614 |   |   |   | 1,534 |   |   |   | 3,528 |   |   |   | 1,672 |   |
| Mortgage, 1 to 4 family junior liens          |   |                   | 102    |   |                   |   | 218 |   |   |   | 977 |   |   |   | - |   |   |   | 140 |   |   |   | 613 |   |
| Mortgage, multi-family                        |   |                   | 1,855  |   |                   |   | - |   |   |   | 4,821 |   |   |   | - |   |   |   | 906 |   |   |   | 4,867 |   |
| Mortgage, commercial                          |   |                   | 370    |   |                   |   | 179 |   |   |   | 11,545 |   |   |   | 223 |   |   |   | 469 |   |   |   | 2,407 |   |
| Loans to individuals                          |   |                   | -      |   |                   |   | 5 |   |   |   | - |   |   |   | - |   |   |   | 44 |   |   |   | - |   |
|                                          |   | $                      | 5,523  |   |                   | $      | 5,030 |   |   | $ | 23,982 |   |   | $ | 5,360 |   |   | $ | 7,009 |   |   | $ | 15,135 |   |

----

Index

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

----

Index

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

----

Index

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

|                                            |   | June 30, 2010  |   |   | December 31, 2009 |   |
|-------------------------------------------------|--------|----------------|--------|--------|-------------------|--------|
|                                            |   |           |   |   | % of              |   |   | % of |   |   |   |   |   | % of |   |   | % of |   |
|                                            |   |           |   |   | Total             |   |   | Loans to |   |   |   |   |   | Total |   |   | Loans to |   |
|                                            |   | Amount         |   |   | Allowance         |   |   | Total Loans |   |   | Amount |   |   | Allowance |   |   | Total Loans |   |
|                                            |   | (In Thousands) |   |   |              |   |   |   |   |   | (In Thousands) |   |   |   |   |   |   |   |
| Agricultural                                    |   | $              | 3,020  |   |              |   | 10.65 | % |   |   | 4.21 |   |   | $ | 2,967 |   |   |   | 10.17 | % |   |   | 4.21 | % |
| Commercial and financial                        |   |           | 6,793  |   |              |   | 23.96 |   |   |   | 9.62 |   |   |   | 7,090 |   |   |   | 24.31 |   |   |   | 10.04 |   |
| Real estate:                                    |   |           |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction, 1 to 4 family residential         |   |           | 683    |   |              |   | 2.41 |   |   |   | 1.42 |   |   |   | 836 |   |   |   | 2.87 |   |   |   | 1.68 |   |
| Construction, land development and commercial   |   |           | 3,011  |   |              |   | 10.62 |   |   |   | 5.57 |   |   |   | 3,975 |   |   |   | 13.63 |   |   |   | 6.26 |   |
| Mortgage, farmland                              |   |           | 1,486  |   |              |   | 5.24 |   |   |   | 5.30 |   |   |   | 1,417 |   |   |   | 4.86 |   |   |   | 5.69 |   |
| Mortgage, 1 to 4 family first liens             |   |           | 6,356  |   |              |   | 22.42 |   |   |   | 32.23 |   |   |   | 6,091 |   |   |   | 20.89 |   |   |   | 30.68 |   |
| Mortgage, 1 to 4 family junior liens            |   |           | 1,453  |   |              |   | 5.13 |   |   |   | 7.44 |   |   |   | 1,393 |   |   |   | 4.78 |   |   |   | 7.49 |   |
| Mortgage, multi-family                          |   |           | 1,751  |   |              |   | 6.18 |   |   |   | 12.53 |   |   |   | 1,723 |   |   |   | 5.91 |   |   |   | 12.40 |   |
| Mortgage, commercial                            |   |           | 3,221  |   |              |   | 11.36 |   |   |   | 19.37 |   |   |   | 3,019 |   |   |   | 10.36 |   |   |   | 19.25 |   |
| Loans to individuals                            |   |           | 563    |   |              |   | 1.98 |   |   |   | 1.55 |   |   |   | 639 |   |   |   | 2.19 |   |   |   | 1.66 |   |
| Obligations of state and political subdivisions |   |           | 13     |   |              |   | 0.05 |   |   |   | 0.76 |   |   |   | 10 |   |   |   | 0.03 |   |   |   | 0.64 |   |
|                                            |   | $              | 28,350 |   |              |   | 100.00 | % |   |   | 100.00 | % |   | $ | 29,160 |   |   |   | 100.00 | % |   |   | 100.00 | % |

----

Index

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

|                                            |   | June 30, 2010 |    |   | December 31, 2009 |   |
|-------------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
|                                            |   | Amount        |    |   | Percent           |   |   | Amount |   |   | Percent |   |
| Securities available for sale                   |   |          |    |   |              |   |   |   |   |   |   |   |
|                                            |   |          |    |   |              |   |   |   |   |   |   |   |
| Obligations of state and political subdivisions |   | $             | 102,032 |   |              |   | 50.80 | % |   | $ | 102,555 |   |   |   | 50.86 | % |
|                                            |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Other securities (FHLB, FHLMC and FNMA)         |   |          | 98,820  |   |              |   | 49.20 |   |   |   | 99,090 |   |   |   | 49.14 |   |
|                                            |   |          |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Total securities available for sale             |   | $             | 200,852 |   |              |   | 100.00 | % |   | $ | 201,645 |   |   |   | 100.00 | % |

|                                    |   |      |    |   | Gross      |   |   | Gross      |   |   | Estimated |   |
|-----------------------------------------|--------|-----------|---------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|
|                                    |   | Amortized |    |   | Unrealized |   |   | Unrealized |   |   | Fair      |   |
|                                    |   | Cost      |    |   | Gains      |   |   | (Losses)   |   |   | Value     |   |
|                                    |   |      |    |
| June 30, 2010:                          |   |      |    |   |       |   |   |       |   |   |      |   |
| Other securities (FHLB, FHLMC and FNMA) |   | $         | 95,616  |   |       | $      | 3,204  |       |   | $      | -         |   |   | $ | 98,820 |   |
| State and political subdivisions        |   |      | 98,747  |   |       |   | 3,440  |       |   |   | (155      | )      |   |   | 102,032 |   |
| Total                                   |   | $         | 194,363 |   |       | $      | 6,644  |       |   | $      | (155      | )      |   | $ | 200,852 |   |
|                                    |   |      |    |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2009:                      |   |      |    |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Other securities (FHLB, FHLMC and FNMA) |   | $         | 95,745  |   |       | $      | 3,355  |       |   | $      | (10       | )      |   | $ | 99,090 |   |
| State and political subdivisions        |   |      | 99,099  |   |       |   | 3,562  |       |   |   | (106      | )      |   |   | 102,555 |   |
| Total                                   |   | $         | 194,844 |   |       | $      | 6,917  |       |   | $      | (116      | )      |   | $ | 201,645 |   |

----

Index

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

|                                   |   | Amortized |    |   | Fair   |   |
|----------------------------------------|--------|-----------|---------|--------|--------|--------|
|                                   |   | Cost      |    |   | Value  |   |
|                                   |   |      |    |
|                                   |   |      |    |   |   |   |
| Due in one year or less                |   | $         | 34,528  |   |   | $      | 35,073 |   |
| Due after one year through five years  |   |      | 113,364 |   |   |   | 117,983 |   |
| Due after five years through ten years |   |      | 46,101  |   |   |   | 47,396 |   |
| Due over ten years                     |   |      | 370     |   |   |   | 400 |   |
| Total                                  |   | $         | 194,363 |   |   | $      | 200,852 |   |

|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |
|--------------------------------------------|--------|---------------------|--------|--------|-------------------|------------|--------|------------|--------|------------|--------|--------|--------|--------|--------|--------|------------|--------|------------|------------|--------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|                                       |   | Less than 12 months |   |   | 12 months or more |       |   | Total      |   |
| June 30, 2010                              |   |                |   |   |              |       |   | Unrealized |   |       |   |   |   |   |   |   |       |   |       | Unrealized |   |   |   |   |       |   |   |   |       |   |   | Unrealized |   |   |   |   |
| Description                                |   | #                   |   |   | Fair Value        |       |   | Loss       |   |       | %      |   |   | #      |   |   | Fair Value |   |       | Loss       |   |   | %      |   |       | #      |   |   | Fair Value |   |   | Loss       |   |   | %      |   |
| of Securities                              |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |
| Other securities                           |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |
| (FHLB, FHLMC and FNMA)                     |   |                | -      |   |              | $          | -      |       |   | $          | -      |   |   |   | -      |   |       |   | -          |       |   | $      | -      |   |       | $      | -      |   |       |   | -      |       |   |   | -      |   |   | $ | - |   |   | $ | - |   |   |   | - |   |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and political subdivisions           |   |                | 39     |   |              |       | 10,012 |       |   |       | (133   | )      |   |   | 1.33   | %      |       |   | 5          |       |   |   | 1,014  |   |       |   | (22    | )      |       |   | 2.17   | %          |   |   | 44     |   |   |   | 11,026 |   |   |   | (155 | ) |   |   | 1.41 | % |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total temporarily impaired securities |   |                | 39     |   |              | $          | 10,012 |       |   | $          | (133   | )      |   |   | 1.33   | %      |       |   | 5          |       |   | $      | 1,014  |   |       | $      | (22    | )      |       |   | 2.17   | %          |   |   | 44     |   |   | $ | 11,026 |   |   | $ | (155 | ) |   |   | 1.41 | % |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   | Less than 12 months |   |   | 12 months or more |       |   | Total      |   |
| December 31, 2009                          |   |                |   |   |              |       |   |       |   | Unrealized |   |   |   |   |   |   |       |   |       |       |   |   |   |   | Unrealized |   |   |   |       |   |   |       |   |   |   |   |   |   |   | Unrealized |   |   |   |   |   |
| Description                                |   |                | #      |   |              | Fair Value |   |       | Loss   |       |   | %      |   |   |   | #      |       |   | Fair Value |       |   | Loss   |   |   | %          |   |   |   | #          |   |   | Fair Value |   |   | Loss   |   |   | % |   |
| of Securities                              |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other securities                           |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (FHLB, FHLMC and FNMA)                     |   |                | 1      |   |              | $          | 996    |       |   | $          | (10    | )      |   |   | 1.00   | %      |       |   | -          |       |   | $      | -      |   |       | $      | -      |   |       |   | -      |       |   |   | 1      |   |   | $ | 996 |   |   | $ | (10 | ) |   |   | 1.00 | % |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State and political subdivisions           |   |                | 35     |   |              |       | 7,929  |       |   |       | (106   | )      |   |   | 1.34   | %      |       |   | -          |       |   |   | -      |   |       |   | -      |   |       |   | -      |       |   |   | 35     |   |   |   | 7,929 |   |   |   | (106 | ) |   |   | 1.34 | % |
|                                       |   |                |   |   |              |       |   |       |   |       |   |   |   |   |   |   |       |   |       |       |   |   |   |   |       |   |   |   |       |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total temporarily impaired securities |   |                | 36     |   |              | $          | 8,925  |       |   | $          | (116   | )      |   |   | 1.30   | %      |       |   | -          |       |   | $      | -      |   |       | $      | -      |   |       |   | -      |       |   |   | 36     |   |   | $ | 8,925 |   |   | $ | (116 | ) |   |   | 1.30 | % |

----

Index

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

----

Index

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

| Ÿ   | Net interest income increased by $4,847,000. |
|--------------------|----------------------------------------------|

| Ÿ   | The provision for loan losses decreased by $2,999,000. |
|--------------------|--------------------------------------------------------|

| Ÿ   | Net gain on sale of loans decreased by $1,605,000. |
|--------------------|----------------------------------------------------|

| Ÿ   | Income taxes increased $2,494,000. |
|--------------------|------------------------------------|

----

Index

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

|                             |   | Change in              |    |   | Change in    |   |   | Increase (Decrease) in Net Interest Income |   |
|----------------------------------|--------|------------------------|---------|--------|--------------|--------|--------|--------------------------------------------|--------|
|                             |   | Average Balance        |    |   | Average Rate |   |   | Volume Changes                             |   |   | Rate Changes |   |   | Net Change |   |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
|                             |   | (Amounts in Thousands) |    |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
| Interest income:                 |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
| Loans, net                       |   | $                      | 31,015  |   |         |   | (0.17  | ) %                                        |   | $ | 924 |   |   | $ | (1,240 | ) |   | $ | (316 | ) |
| Taxable securities               |   |                   | (4,572  | )      |         |   | (0.21  | )                                          |   |   | (35 | ) |   |   | (154 | ) |   |   | (189 | ) |
| Nontaxable securities            |   |                   | (649    | )      |         |   | (0.06  | )                                          |   |   | (17 | ) |   |   | (28 | ) |   |   | (45 | ) |
| Federal funds sold               |   |                   | (16,188 | )      |         |   | 0.17   |                                       |   |   | 11 |   |   |   | - |   |   |   | 11 |   |
|                             |   | $                      | 9,606   |   |         |   |   |                                       |   | $ | 883 |   |   | $ | (1,422 | ) |   | $ | (539 | ) |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand deposits |   | $                      | 10,748  |   |         |   | (0.17  | ) %                                        |   | $ | (35 | ) |   | $ | 196 |   |   | $ | 161 |   |
| Savings deposits                 |   |                   | 65,882  |   |         |   | (0.53  | )                                          |   |   | (420 | ) |   |   | 1,019 |   |   |   | 599 |   |
| Time deposits                    |   |                   | (19,483 | )      |         |   | (0.73  | )                                          |   |   | 327 |   |   |   | 2,267 |   |   |   | 2,594 |   |
| Short-term borrowings            |   |                   | 278     |   |         |   | (0.56  | )                                          |   |   | 2 |   |   |   | 137 |   |   |   | 139 |   |
| FHLB borrowings                  |   |                   | (55,810 | )      |         |   | (0.59  | )                                          |   |   | 1,332 |   |   |   | 568 |   |   |   | 1,900 |   |
|                             |   | $                      | 1,615   |   |         |   |   |                                       |   | $ | 1,206 |   |   | $ | 4,187 |   |   | $ | 5,393 |   |
| Change in net interest income    |   |                   |    |   |         |   |   |                                       |   | $ | 2,089 |   |   | $ | 2,765 |   |   | $ | 4,854 |   |

| (Tax Equivalent Basis)                                                                               |   | 2010   |   |   | 2009   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                                 |   |   |   |   |   |   |
| Yield on average interest-earning assets                                                             |   |   | 5.63   | %      |   |   | 5.72 | % |
| Rate on average interest-bearing liabilities                                                         |   |   | 1.95   |   |   |   | 2.70 |   |
| Net interest spread                                                                                  |   |   | 3.68   | %      |   |   | 3.02 | % |
| Effect of noninterest-bearing funds                                                                  |   |   | 0.29   |   |   |   | 0.41 |   |
| Net interest margin (tax equivalent interest income divided by average interest-earning assets) |   |   | 3.97   | %      |   |   | 3.43 | % |

----

Index

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

----

Index

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

----

Index

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

----

Index

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

|                             |   | Change in              |    |   | Change in    |   |   | Increase (Decrease) in Net Interest Income |   |
|----------------------------------|--------|------------------------|---------|--------|--------------|--------|--------|--------------------------------------------|--------|
|                             |   | Average Balance        |    |   | Average Rate |   |   | Volume Changes                             |   |   | Rate Changes |   |   | Net Change |   |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
|                             |   | (Amounts in Thousands) |    |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
| Interest income:                 |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |
| Loans, net                       |   | $                      | 31,483  |   |         |   | (0.17  | ) %                                        |   | $ | 481 |   |   | $ | (547 | ) |   | $ | (66 | ) |
| Taxable securities               |   |                   | (3,463  | )      |         |   | (0.26  | )                                          |   |   | (13 | ) |   |   | (85 | ) |   |   | (98 | ) |
| Nontaxable securities            |   |                   | (562    | )      |         |   | (0.06  | )                                          |   |   | (7 | ) |   |   | (11 | ) |   |   | (18 | ) |
| Federal funds sold               |   |                   | (21,970 | )      |         |   | 0.17   |                                       |   |   | 13 |   |   |   | - |   |   |   | 13 |   |
|                             |   | $                      | 5,488   |   |         |   |   |                                       |   | $ | 474 |   |   | $ | (643 | ) |   | $ | (169 | ) |
|                             |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                |   |                   |    |   |         |   |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand deposits |   | $                      | 6,050   |   |         |   | (0.17  | ) %                                        |   | $ | (10 | ) |   | $ | 128 |   |   | $ | 118 |   |
| Savings deposits                 |   |                   | 60,084  |   |         |   | (0.53  | )                                          |   |   | (186 | ) |   |   | 523 |   |   |   | 337 |   |
| Time deposits                    |   |                   | (29,904 | )      |         |   | (0.73  | )                                          |   |   | 249 |   |   |   | 1,186 |   |   |   | 1,435 |   |
| Short-term borrowings            |   |                   | 2,547   |   |         |   | (0.60  | )                                          |   |   | (11 | ) |   |   | 60 |   |   |   | 49 |   |
| FHLB borrowings                  |   |                   | (40,222 | )      |         |   | (0.59  | )                                          |   |   | 478 |   |   |   | 312 |   |   |   | 790 |   |
|                             |   | $                      | (1,445  | )      |         |   |   |                                       |   | $ | 520 |   |   | $ | 2,209 |   |   | $ | 2,729 |   |
| Change in net interest income    |   |                   |    |   |         |   |   |                                       |   | $ | 994 |   |   | $ | 1,566 |   |   | $ | 2,560 |   |

----

Index

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

| (Tax Equivalent Basis)                                                                               |   | 2010   |   |   | 2009   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                                                 |   |   |   |   |   |   |
| Yield on average interest-earning assets                                                             |   |   | 5.58   | %      |   |   | 5.64 | % |
| Rate on average interest-bearing liabilities                                                         |   |   | 1.88   |   |   |   | 2.62 |   |
| Net interest spread                                                                                  |   |   | 3.70   | %      |   |   | 3.02 | % |
| Effect of noninterest-bearing funds                                                                  |   |   | 0.28   |   |   |   | 0.39 |   |
| Net interest margin (tax equivalent interest income divided by average interest-earning assets) |   |   | 3.98   | %      |   |   | 3.41 | % |

----

Index

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

----

Index

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

----

Index

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

----

Index

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

| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
|--------------|------------------------------------------------------------|

----

Index

| Item 3.  | Quantitative and Qualitative Disclosures About Market Risk (continued) |
|---------------|------------------------------------------------------------------------|

Item 4.

----

Index

| Item 1.     | Legal Proceedings |
|---------------------------------|-------------------|

| Item 1A. | Risk Factors |
|----------|--------------|

----

Index

| Item 1A. | Risk Factors (continued) |
|----------|--------------------------|

----

Index

| Item 1A.  | Risk Factors (continued) |
|----------------|--------------------------|

----

Index

| Item 1A.     | Risk Factors (continued) |
|----------------------------------|--------------------------|

----

Index

| Item 1A. | Risk Factors (continued) |
|----------|--------------------------|

----

Index

| Item 1A.  | Risk Factors (continued) |
|----------------|--------------------------|

----

Index

| Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds |
|---------------|-------------------------------------------------------------|

| Period              |   | Total number of shares purchased |   |   | Average price paid per share |   |   | Total number of shares purchased as part of publicly announced plans or programs |   |   | Maximum number of shares that may yet be purchased under the plans or programs (1) |   |
|---------------------|--------|----------------------------------|--------|--------|------------------------------|--------|--------|----------------------------------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------|--------|
| April 1 to April 30 |   |                             | 711    |   |                         | $      | 54.00  |                                                                             |   |   | 203,042                                                                            |   |   |   | 546,958 |   |
| May 1 to May 31     |   |                             | 1,277  |   |                         |   | 54.84  |                                                                             |   |   | 204,319                                                                            |   |   |   | 545,681 |   |
| June 1 to June 30   |   |                             | 11,100 |   |                         |   | 55.00  |                                                                             |   |   | 215,419                                                                            |   |   |   | 534,581 |   |
| Total               |   |                             | 13,088 |   |                         | $      | 54.93  |                                                                             |   |   | 215,419                                                                            |   |   |   | 534,581 |   |

| Item 3.   | Defaults upon Senior Securities |
|---------------------|---------------------------------|

| Item 4. | Reserved |
|---------|----------|

| Item 5. | Other Information |
|---------|-------------------|

| Item 6. | Exhibits |
|---------|----------|

| 31  | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 |
|----------|--------------------------------------------------------------------|

| 32  | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 |
|----------|--------------------------------------------------------------------|

----

Index

SIGNATURES

| HILLS BANCORPORATION            |   |
|---------------------------------|--------|
|                            |   |   |   |
|                            |   |   |   |
| Date:  August 6, 2010 |   | By:  /s/ Dwight O. Seegmiller |   |
|                            |   | Dwight O. Seegmiller, Director, President and Chief Executive Officer |   |
|                            |   |   |   |
| Date:  August 6, 2010 |   | By:  /s/ James G. Pratt |   |
|                            |   | James G. Pratt, Secretary, Treasurer and Chief Accounting Officer |   |

----

Index

|    |                                                               | Page Number                                                                                                                                                                                                          |
|---------|--------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                               | In The Sequential                                                                                                                                                                                                    |
| Exhibit |                                                               | Numbering System                                                                                                                                                                                                     |
| Number  | Description                                                        | June 30, 2010 Form 10-Q                                                                                                                                                                                              |
|    |                                                               |                                                                                                                                                                                                                 |
| 31      | Certifications under Section 302 of the Sarbanes-Oxley Act of 2002 | 51- 52                                                                                                                                                                                                               |
|    |                                                               |                                                                                                                                                                                                                 |
| 32      | Certifications under Section 906 of the Sarbanes-Oxley Act of 2002 |                                    53 |
|    |                                                               |                                                                                                                                                                                                                 |

----