UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2009 Commission file number: 0-12668 Hills Bancorporation Incorporated
 in Iowa
I.R.S. Employer IdentificationNo. 42-1208067 131 MAIN STREET, HILLS, IOWA 52235 Telephone number: (319) 679-2291 Indicate by
checkmark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. xYesoNo Indicate by
checkmark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or smaller reporting company. See definition
of large accelerated filer, accelerated filer and small reporting company
in Rule 12b-2 of the Exchange Act. Large
 accelerated filer o
Accelerated
 Filer xNon-accelerated
 filer o
Small
 Reporting Company o Indicate by
check mark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No x APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practical date. CLASS


SHARES OUTSTANDING
 At April 30, 2009Common Stock, no par value

4,597,687 Page 1 of 34    HILLS BANCORPORATION
Index to Form 10-Q

Part I
FINANCIAL INFORMATION

Page
 NumberItem 1.
Financial
 StatementsConsolidated
balance sheets, March 31, 2009
 (unaudited) and December 31, 2008


3Consolidated
statements of income,
 (unaudited) for three months ended March 31, 2009 and 2008


4Consolidated
statements of comprehensive
 income, (unaudited) for three months ended March 31, 2009 and 2008


5Consolidated
statements of stockholders
 equity, (unaudited) for three months ended March 31, 2009 and 2008


6Consolidated
statements of cash flows
 (unaudited) for three months ended March 31, 2009 and 2008


7 - 8Notes to
consolidated financial statements


9 - 14Item
 2.
Managements
Discussion and Analysis of
 Financial Condition and Results of Operations


15 - 26Item
 3.
Quantitative and
Qualitative Disclosures
 About Market Risk


27Item
 4.
Controls and
Procedures


28Part
IIOTHER
INFORMATIONItem
 1.
Legal
proceedings


29Item
 1A.
Risk
factors


29Item
 2.
Unregistered
sales of equity securities and
 use of proceeds


29Item
 3.
Defaults upon
senior securities


29Item
 4.
Submission of
matters to a vote of security
 holders


29Item
 5.
Other
information


29Item
 6.
Exhibits


29Signatures


30Exhibits
 Index


31Page 2 of 34

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

ASSETS

March 31, 2009
 (Unaudited)

December
 31,
 2008Cash and due from banks

$
24,655

$
22,575Federal funds sold


76,150


Total cash and cash equivalents

$
100,805

$
22,575Investment securities available for sale at fair value (amortized cost
 March 31, 2009 $195,196; December 31, 2008 $194,402)


201,102


200,312Stock of Federal Home Loan Bank


14,247


14,247Loans held for sale


3,373


8,490Loans, net of allowance for loan losses (March 31, 2009 $28,600;
 December 31, 2008 $27,660)


1,468,050


1,469,840Property and equipment, net


23,953


23,606Tax credit real estate


11,518


12,065Accrued interest receivable


10,627


10,437Deferred income taxes, net


8,878


8,959Other real estate


1,578


5,155Goodwill


2,500


2,500Other assets


2,726


2,607$
1,849,357

$
1,780,793LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits

$
162,199

$
169,299Interest-bearing deposits


1,207,323


1,068,587Total deposits

$
1,369,522

$
1,237,886Short-term borrowings


36,039


99,937Federal Home Loan Bank borrowings


265,000


265,000Accrued interest payable


2,886


2,914Other liabilities


13,343


11,879$
1,686,790

$
1,617,616Redeemable Common Stock Held by Employee Stock Ownership Plan
(ESOP)

$
23,815

$
23,815STOCKHOLDERS EQUITYCapital stock, no par value; authorized 10,000,000
shares; issued
 March 31, 2009 4,597,877 shares; December 31, 2008 4,597,427 shares

$


$
Paid in capital


13,476


13,447Retained earnings


154,124


154,176Accumulated other comprehensive income


3,647


3,649Treasury stock at cost (March 31, 2009 167,512
shares; December 31,
 2008 156,882 shares)


(8,680
)

(8,095
)$
162,567

$
163,177Less maximum cash obligation related to ESOP
shares


23,815


23,815$
138,752

$
139,362$
1,849,357

$
1,780,793See Notes to Consolidated
Financial Statements.

Page 3 of 34

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

Three Months Ended
 March 31,2009

2008Interest income:Loans, including fees

$
22,057

$
22,482Investment securities:Taxable


954


1,250Nontaxable


853


841Federal funds sold


4


Total interest income

$
23,868

$
24,573Interest expense:Deposits

$
6,562

$
8,304Short-term borrowings


223


548FHLB borrowings


3,173


3,218Total interest expense

$
9,958

$
12,070Net interest income

$
13,910

$
12,503Provision for loan losses


2,436


587Net interest income after provision for
 loan losses

$
11,474

$
11,916Other income:Net gain on sale of loans

$
1,180

$
324Trust fees


830


1,011Service charges and fees


1,816


1,894Rental revenue on tax credit real estate


308


278Other noninterest income


592


803$
4,726

$
4,310Other expenses:Salaries and employee benefits

$
5,201

$
5,006Occupancy


773


618Furniture and equipment


929


914Office supplies and postage


340


328Advertising and business development


451


361Outside services


1,457


1,269Rental expenses on tax credit real estate


413


305FDIC insurance assessment


525


179Other noninterest expense


755


273$
10,844

$
9,253Income before income taxes

$
5,356

$
6,973Income taxes


1,367


2,184Net income

$
3,989

$
4,789Earnings per share:Basic

$
0.90

$
1.07Diluted


0.90


1.06See Notes to
Consolidated Financial Statements.

Page 4 of 34

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

Three Months Ended
 March 31,2009

2008Net income

$
3,989

$
4,789Other comprehensive income (loss):Unrealized holding gains (losses) arising during the
period, net of
 income taxes, 2009 ($2); 2008 $1,481


(2
)

2,392Comprehensive income

$
3,987

$
7,181See Notes to
Consolidated Financial Statements.

Page 5 of 34

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

Paid In
 Capital

Retained
 Earnings

Accumulated
 Other
 Comprehensive
 Income (Loss)

Maximum
 Cash
 Obligation
 Related
 To ESOP
 Shares

Treasury
 Stock

TotalBalance, December 31, 2007

$
12,823

$
144,122

$
647

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


85














85Forfeiture of 169 shares of common stock


(6
)













(6
)Share-based compensation


5














5Net income





4,789











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





(4,086
)










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














(297
)

(297
)Other comprehensive income








2,392








2,392Balance, March 31, 2008

$
12,907

$
144,825

$
3,039

$
(22,205
)
$
(4,994
)
$
133,572Balance, December 31, 2008

$
13,447

$
154,176

$
3,649

$
(23,815
)
$
(8,095
)
$
139,362Issuance of 607 shares of common stock


33














33Forfeiture of 157 shares of common stock


(8
)













(8
)Share-based compensation


4














4Net income





3,989











3,989Cash dividends ($.91 per share)





(4,041
)










(4,041
)Purchase of 10,630 shares of common stock














(585
)

(585
)Other comprehensive loss








(2
)







(2
)Balance, March 31, 2009

$
13,476

$
154,124

$
3,647

$
(23,815
)
$
(8,680
)
$
138,752See Notes to Consolidated
Financial Statements.

Page 6 of 34

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

Three Months Ended
 March 31,2009

2008Cash Flows
 from Operating ActivitiesNet
income

$
3,989

$
4,789Adjustments to
reconcile net income to net
 cash and cash equivalents provided by operating activities:Depreciation


602


563Provision for
loan losses


2,436


587Share-based
compensation


4


5Forfeiture of
common stock


(8
)

(6
)Compensation
expensed through issuance of
 common stock


33


85Provision for
deferred income taxes


83


(160
)Net loss on
sale of other real estate owned
 and other repossessed assets


464


18Increase in
accrued interest receivable


(190
)

(402
)Amortization of
discount on investment
 securities, net


147


83(Increase)
decrease in other assets


(119
)

317Increase in
accrued interest payable and
 other liabilities


1,436


2,337Loans
originated for sale


(88,232
)

(42,348
)Proceeds on
sales of loans


94,529


39,714Net gain on
sales of loans


(1,180
)

(324
)Net cash
and cash equivalents provided by
 operating activities

$
13,994

$
5,258Cash Flows
 from Investing ActivitiesProceeds from
maturities of investment
 securities available for sale

$
10,770

$
12,892Purchases of
investment securities
 available for sale


(11,711
)

(10,822
)Loans made to
customers, net of collections


(1,305
)

(17,772
)Proceeds on
sale of other real estate owned
 and other repossessed assets


3,772


259Purchases of
property and equipment


(949
)

(1,392
)Investment in
tax credit real estate, net


547


54Net cash
provided by (used in) investing
 activities

$
1,124

$
(16,781
)Cash Flows
 from Financing ActivitiesNet increase in
deposits

$
131,636

$
47,192Net decrease in
short-term borrowings


(63,898
)

(23,485
)Payments on
FHLB borrowings





(10,001
)Borrowings from
FRB





2,000Payments on FRB
borrowings





(2,000
)Purchase of
treasury stock


(585
)

(297
)Dividends
paid


(4,041
)

(4,086
)Net cash
provided by financing activities

$
63,112

$
9,323(Continued)

Page 7 of 34

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

Three Months Ended
 March 31,2009

2008Increase (decrease) in cash and cash equivalents

$
78,230

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


22,575


32,383End of
period

$
100,805

$
30,183Supplemental
 DisclosuresCash payments
for:Interest paid
to depositors

$
6,590

$
8,283Interest paid
on other obligations


3,396


3,766Income
taxes


1,079


456Noncash
financing activities:Transfers to
other real estate owned

$
659

$
304See Notes to
Consolidated Financial Statements.

Page 8 of 34

HILLS BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Basis of PresentationThe
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial reporting and with instructions for Form 10-Q
and Regulation S-X. These financial statements include all adjustments
(consisting of normal recurring accruals) which in the opinion of management
are considered necessary for the fair presentation of the financial position
and results of operations for the periods shown. Certain prior year amounts may
be reclassified to conform to the current year presentation. The Company
considers that it operates as one business segment, a commercial bank.

Operating
results for the three-month period ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2009. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Form 10-K Annual Report of
Hills Bancorporation and subsidiary (the Company) for the year ended December
31, 2008 filed with the Securities Exchange Commission on March 11, 2009.

The allowance
for loan losses in an estimate, and as such, events may occur in the future
which affect its accuracy. Actual default and loss rates may differ materially
from levels assumed by the Company. Management will continue to closely monitor
its portfolio.

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

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

Three months ended
 March 31,2009

2008Common shares outstanding at the
beginning of the period


4,440,545


4,490,107Weighted average number of net
shares redeemed


(2,673
)

(2,806
)Weighted average shares
outstanding (basic)


4,437,872


4,487,301Weighted average of potential
dilutive shares attributable to stock
 options granted, computed under the treasury stock method


15,457


19,778Weighted average number of
shares (diluted)


4,453,329


4,507,079Net income (In Thousands)

$
3,989

$
4,789Earnings per share:Basic

$
0.90

$
1.07Diluted

$
0.90

$
1.06Page 9 of 34

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

Note 3.
Recent Accounting PronouncementsAs of January
1, 2009, the Company adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities  an
amendment of FASB Statement No. 133 (FAS 161). The standard
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments, and disclosures about credit-risk related
contingent features in derivative agreements. The adoption of FAS 161 did not
have a significant effect on the Companys consolidated financial statements.

In April 2009,
the FASB issued FASB Staff Position FAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating
fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume
and level of activity for the asset or liability have significantly decreased.
FSP FAS 157-4 also provides guidance on identifying circumstances that indicate
a transaction is not orderly. FSP FAS 157-4 is effective for financial
statements issued after June 15, 2009. Early adoption is permitted for periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 will not have a
significant effect on the Companys consolidated financial statements.

In April 2009,
the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS
124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 does
not amend existing recognition and measurement guidance related to
other-than-temporary impairment of equity securities. FSP FAS 115-2 and FAS
124-2 is effective for financial statements issued after June 15, 2009. Early adoption
is permitted for periods ending after March 15, 2009. The adoption of FSP FAS
115-2 and FAS 124-2 will not have a significant effect on the Companys
consolidated financial statements.

In April 2009,
the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB
28-1 amends FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP FAS
107-1 and APB 28-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. FSP FAS 107-1
and APB 28-1 is effective for financial statements issued after June 15, 2009.
Early adoption is permitted for periods ending after March 15, 2009. The
adoption of FSP FAS 107-1 and APB 28-1 will not have a significant effect on
the Companys consolidated financial statements.

Note 4.
Fair Value MeasurementsThe Company
adopted FASB Statement No. 157, Fair Value
Measurements (FAS 157), in its entirety on January 1, 2008. FAS
157 provides a single definition for fair value, a framework for measuring fair
value and expanded disclosures concerning fair value. Fair value is defined
under FAS 157 as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.

Page 10 of 34

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

Note 4.
Fair Value Measurements (continued)The Company
determines the fair market value of its financial instruments based on the fair
value hierarchy established in FAS 157. There are three levels of inputs that
may be used to measure fair value as follows:

Level 1
Valuations
 for assets and liabilities traded in active markets for identical assets or
 liabilities. Level 1 includes securities purchased from the Federal Home Loan
 Bank (FHLB), Federal Home Loan Mortgage Corporation (FHLMC) and Federal
 National Mortgage Association (FNMA) that are traded by dealers or brokers
 in active markets. Valuations are obtained from readily available pricing
 sources for market transactions involving identical assets or liabilities.Level 2
Valuations
 for assets and liabilities traded in less active dealer or broker markets.
 Level 2 includes securities issued by state and political subdivisions.
 Valuations are obtained from third party pricing services for identical or
 comparable assets or liabilities.Level 3
Valuations
 for assets and liabilities that are derived from other valuation
 methodologies, including discounted cash flow models and similar techniques,
 and not based on market exchange, dealer or broker traded transactions. Level
 3 valuations incorporate certain assumptions and projections in determining
 the fair value assigned to such assets and liabilities. Level 3 assets and
 liabilities include financial instruments whose value is determined using
 pricing models, discounted cash flow methodologies, or similar techniques, as
 well as instruments for which the determination of fair value requires
 significant management judgment or estimation. The Company does not have any
 Level 3 assets or liabilities.It is the
Companys policy to maximize the use of observable inputs and minimize the use
of unobservable inputs when developing fair value measurements. Recent market
conditions have led to diminished, and in some cases, non-existent trading in
certain of the financial asset classes. The Company is required to use
observable inputs, to the extent available, in the fair value estimation
process unless that data results from forced liquidations or distressed sales.
Despite the Companys best efforts to maximize the use of relevant observable
inputs, the current market environment has diminished the observability of
trades and assumptions that have historically been available.

The following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value and for estimating fair value for assets or liabilities
not recorded at fair value.

ASSETS

Investment securities available for sale:
Investment securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If a quoted price is not available, the fair value is obtained from
benchmarking the security against similar securities. Level 1 securities
include securities from the FHLB, FHLMC and FNMA. Level 2 securities include
securities issued by state or political subdivisions.

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

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

Page 11 of 34

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

Note 4.
Fair Value Measurements (continued)Foreclosed assets: Foreclosed assets consist
mainly of other real estate owned but may include other types of assets
repossessed by the Company. Foreclosed assets are adjusted to the lower of
carrying value or fair value less the cost of disposal upon transfer of the
loans to foreclosed assets. Fair value is generally based upon independent
market prices or appraised values of the collateral. The value of foreclosed
assets is evaluated periodically. Foreclosed assets are classified as Level 2.

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

LIABILITIES

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

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

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

Valuation
methodologies have not changed during the quarter ended March 31, 2009.

Assets and Liabilities Recorded at Fair Value
on a Recurring Basis

The table
below represents the balances of assets and liabilities measured at fair value
on a recurring basis:

March 31, 2009Level 1

Level 2

Level 3

Total(Amounts in Thousands)Investment
 securities available for sale

$
98,457

$
102,645

$


$
201,102Total

$
98,457

$
102,645

$


$
201,102All securities
from the FHLB, FHLMC and FNMA are included in Level 1.

Page 12 of 34

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

Note 4.
Fair Value Measurements (continued)Assets and Liabilities Recorded at Fair Value
on a Nonrecurring Basis

The Company is
required to measure certain assets at fair value on a nonrecurring basis in
accordance with GAAP. These adjustments to fair value usually result from
application of lower-of-cost-or-market accounting or write-downs of individual
assets. The valuation methodologies used to measure these fair value
adjustments are described above. For assets measured at fair value on a
nonrecurring basis in 2009 that were still held on the balance sheet at March
31, 2009, the following table provides the level of valuation assumptions used
to determine the adjustment and the carrying value of the related individual
assets at quarter end.

March 31, 2009

Quarter Ended
 March 31, 2009Level 1

Level 2

Level 3

Total

Total Losses(Amounts in
 Thousands)Loans (1)

$


$
4,742

$


$
4,742

$
376Total

$


$
4,742

$


$
4,742

$
376(1)
Represents
 carrying value after 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.Note 5.
Stock Repurchase ProgramIn July of
2005, the Companys Board of Directors authorized a program to repurchase up to
a total of 750,000 shares of the Companys common stock (the 2005 Stock
Repurchase Program). This authorization was previously set to expire on
December 31, 2009. At its January 2009 meeting, the Companys Board of
Directors extended the expiration date of the 2005 Stock Repurchase Program to
December 31, 2013. The Company expects the purchases pursuant to the 2005 Stock
Repurchase Program to be made from time to time in private transactions at a
price equal to the most recent quarterly independent appraisal of the shares of
the Companys common stock and with the Board reviewing the overall results of
the 2005 Stock Repurchase Program on a quarterly basis. The amount and timing
of stock repurchases will be based on various factors, such as the Boards
assessment of the Companys capital structure and liquidity, the amount of
interest shown by shareholders in selling shares of stock to the Company at
their appraised value, and applicable regulatory, legal and accounting factors.
The Company has purchased 167,512 shares of its common stock in privately
negotiated transactions from August 1, 2005 through March 31, 2009. Of these
167,512 shares, 10,630 shares were purchased during the quarter ended March 31,
2009, at an average price per share of $55.00.

Page 13 of 34

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

Note 6.
Commitments and ContingenciesThe Companys
subsidiary, Hills Bank and Trust (the Bank) is a party to financial
instruments with off-balancesheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit, credit card participations and standby letters of
credit. These instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the consolidated balance sheets.

The Banks
exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit, credit card
participations and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. A summary of the Banks commitments at March 31, 2009 and December
31, 2008 is as follows:

March 31, 2009

December 31, 2008(Amounts In Thousands)Firm loan commitments and unused portion of
 lines of credit:Home equity loans

$
39,477

$
38,519Credit cards


41,096


35,407Commercial, real estate and home
 construction


72,664


86,073Commercial lines and real estate purchase
 loans


158,983


149,306Outstanding
 letters of credit


11,135


12,365Note 7.
Income TaxesFederal income
tax expense for the three months ended March 31, 2009 and 2008 was computed
using the consolidated effective federal tax rate. The Company also recognized
income tax expense pertaining to state franchise taxes payable individually by
the subsidiary bank. On January 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes.
The evaluation was performed for those tax years which remain open to audit.
The Company files a consolidated tax return for federal purposes and separate
tax returns for State of Iowa purposes. The tax years ended December 31, 2008,
2007 and 2006, remain subject to examination by the Internal Revenue Service.
For state tax purposes, the tax years ended December 31, 2008, 2007 and 2006,
remain open for examination. As a result of the implementation of FIN 48, the
Company did not recognize any increase or decrease for unrecognized tax
benefits. There were no material unrecognized tax benefits on December 31, 2008
and March 31, 2009. No interest or penalties on these unrecognized tax benefits
has been recorded. As of March 31, 2009, the Company does not anticipate any
significant increase or decrease in unrecognized tax benefits during the
twelve-month period ending March 31, 2010.

Income taxes
as a percentage of income before taxes were 25.52% in 2009 and 31.32% in 2008.
The decrease in the effective tax rate is due to tax-exempt interest income and
income tax credits and the relationship to total income before income taxes.
For the first three months of 2008, tax-exempt interest income was $841,000, or
12.06% of income before income taxes resulting in a 4.22% decrease in the
effective tax rate. For the first three months of 2009, tax-exempt interest
income was $853,000, or 15.93% of income before income taxes. This decreased
the effective tax rate an additional 1.35% for a total reduction in the
effective tax rate of 5.57% in 2009. Also, tax credits increased $183,000 for
the three months ended March 31, 2009 as compared to the same period in 2008,
reducing the 2009 effective tax rate an additional 4.18% compared to 2008. Tax
credits totaled $360,000 for the three months ended March 31, 2009 and resulted
in a reduction in the effective tax rate of 6.72% compared to a reduction of
2.54% in the comparable period in 2008.

Page 14 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of OperationsThe following
is managements discussion and analysis of the financial condition of Hills
Bancorporation (Hills Bancorporation or the Company) and its banking
subsidiary Hills Bank and Trust Company (the Bank) for the dates and periods
indicated. The discussion should be read in conjunction with the consolidated
financial statements and the accompanying footnotes.

Special Note Regarding Forward Looking
Statements

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

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


The strength of the United States economy
 in general and the strength of the local economies in which the Company
 conducts its operations which may be less favorable than expected and may
 result in, among other things, a deterioration in the credit quality and
 value of the Companys assets.
The effects of 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.
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.Page 15 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)
Technological changes implemented by the
 Company and by other parties, including third party vendors, which may be
 more difficult or more expensive than anticipated or which may have
 unforeseen consequences to the Company and its customers.
The ability of the Company to develop and
 maintain secure and reliable electronic systems.
The ability of the Company to retain key
 executives and employees and the difficulty that the Company may experience
 in replacing key executives and employees in an effective manner.
Consumer spending and saving habits which
 may change in a manner that affects the Companys business adversely.
The economic impact of natural disasters,
 terrorist attacks and military actions.
Business combinations and the integration
 of acquired businesses and assets which may be more difficult or expensive
 than expected.
The costs, effects and outcomes of existing
 or future litigation.
Changes in accounting policies and
 practices, as may be adopted by state and federal regulatory agencies and the
 Financial Accounting Standards Board.
The ability of the Company to manage the
 risks associated with the foregoing as well as anticipated.These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Additional
information concerning the Company and its business, including other factors
that could materially affect the Companys financial results, is included in
the Companys filings with the Securities and Exchange Commission.

Critical Accounting Policies

The Companys
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The financial information
contained within these statements is, to a significant extent, financial
information that is based on approximate measures of the financial effects of
transactions and events that have already occurred. Based on its consideration
of accounting policies that involve the most complex and subjective decisions
and assessments, management has identified its most critical accounting
policies to be those which are related to the allowance for loan losses. The
Companys allowance for loan loss methodology incorporates a variety of risk
considerations, both quantitative and qualitative in establishing an allowance
for loan losses that management believes is appropriate at each reporting date.
Quantitative factors include the Companys historical loss experience,
delinquency and charge-off trends, collateral values, changes in non-performing
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Companys markets, including economic conditions throughout
the Midwest and in particular, the state of certain industries. Size and
complexity of individual loans in relation to loan structure, existing loan
policies and pace of portfolio growth are other qualitative factors that are
considered in the methodology. As the Company adds new products and increases
the complexity of its loan portfolio, it will enhance its methodology
accordingly. This discussion and analysis should be read in conjunction with
the Companys consolidated financial statements and the accompanying notes
presented elsewhere herein, as well as other relevant portions of Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Although management believes the levels of the allowance as of March 31, 2009
and December 31, 2008 were adequate to absorb probable losses inherent in the
loan portfolio, a decline in local economic conditions, or other factors, could
result in increasing losses that cannot be reasonably predicted at this time.

Page 16 of 34

HILLS BANCORPORATION

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

This overview
highlights selected information and may not contain all of the information that
is important to you in understanding the Companys performance during the
period. For a more complete understanding of trends, events, commitments,
uncertainties, liquidity, capital resources, and critical accounting estimates,
you should carefully read this entire report.

The Company is
a holding company engaged in the business of commercial banking. The Companys
subsidiary is Hills Bank and Trust Company, Hills, Iowa (the Bank), which is
wholly owned. The Bank was formed in Hills, Iowa in 1904. The Bank is a
full-service commercial bank extending its services to individuals, businesses,
governmental units and institutional customers primarily in the communities of
Hills, Iowa City, Coralville, North Liberty, Mount Vernon, Kalona, Wellman,
Cedar Rapids and Marion, Iowa. At March 31, 2009, the Bank has fourteen full
service locations and a trust and wealth management location.

Net income for
the period ended March 31, 2009 was $3.99 million compared to $4.79 million for
the first quarter of 2008, a decrease of 16.70%. The $800,000 decline in net
income was caused by a number of factors. The principal factors were increases
of $1,849,000 in the provision for loan losses, $346,000 in FDIC insurance
assessments and $482,000 in other noninterest expense. The increase in these
and some other expenses was partially offset by items including a $1,407,000
increase in net interest income and an increase of $856,000 in net gain on sale
of loans. Return on average equity was 11.32% for the three months ended March
31, 2009, compared to 14.32% for the same period in 2008. Return on average
assets was 0.89% in 2009 compared to 1.16% in 2008. Return on average assets
and return on average equity are calculated based on annualized first quarter
results for both periods presented. Dividends of $.91 per share were paid in
January 2009 to 1,635 shareholders. The 2009 dividend was the same dividend per
share as paid in January 2008.

The Banks net
interest income is the largest component of revenue and it is a function of the
average earnings assets and the net interest margin percentage. For the period
ended March 31, 2009, the Bank achieved a net interest margin on a
tax-equivalent basis of 3.45% compared to 3.34% in 2008. Average earning assets
were $1.698 billion in 2009 and $1.572 billion in 2008.

Highlights
noted on the balance sheet as of March 31, 2009 for the Company included the
following:


Total assets are $1.849 billion, an
 increase of $68.56 million since December 31, 2008.
Cash and cash equivalents are $100.81
 million, an increase of $78.23 million since December 31, 2008.
Net loans are $1.471 billion, a decrease of
 $6.91 million since December 31, 2008.
Deposit growth of $131.64 million since
 December 31, 2008.
Short-term
 borrowings decreased $63.90 million since December 31, 2008.Reference is
made to Note 4 for a discussion of fair value measurements which relate to
methods used by the Company in recording assets and liabilities on its
financial statements.

A detailed
discussion of the financial position and results of operations follows this
overview.

In pricing
loans and deposits, the Bank considers the U.S. Treasury indexes as benchmarks
in determining interest rates. The Federal Open Market Committee met twice
during the first quarter of 2009. The target rate remains unchanged since
December 31, 2008 at 0.25%. Interest rates on loans are generally affected by
the target rate since interest rates for the U.S. Treasury market normally
increase or decrease when the Federal Reserve Board raises or lowers the
federal funds rate. As of March 31, 2009, the average rate indexes for the one,
three and five year indexes were 0.57%, 1.15% and 1.67%, respectively. The one
year index decreased 63.23% from 1.55% at March 31, 2008, the three year index
decreased 35.75% and the five year index decreased 32.11%. The three year index
was 1.79% and the five year index was 2.46% at March 31, 2008. During this same
period, the average federal funds rate decreased from 2.25% in 2008 to 0.25% in
2009.

Page 17 of 34

HILLS BANCORPORATION

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

The tables
below set forth the composition of the loan portfolio as of March 31, 2009 and
December 31, 2008 (dollars in thousands), along with changes in the allowance
for loan losses and non-performing loan information:

March 31, 2009

December 31, 2008Amount

Percent

Amount

Percent(Amounts In Thousands)

(Amounts In Thousands)Agricultural

$
61,075


4.08
%
$
64,198


4.29
%Commercial and financial


162,655


10.87


162,170


10.83Real estate:Construction


138,862


9.28


140,349


9.37Mortgage


1,101,044


73.56


1,095,742


73.17Loans to individuals


33,014


2.21


35,041


2.34$
1,496,650


100.00
%
$
1,497,500


100.00
%Less allowance for loan losses


28,600





27,660$
1,468,050




$
1,469,840The Bank has
an established formal loan origination policy. In general, the loan origination
policy attempts to reduce the risk of credit loss to the Bank by requiring
that, among other things, maintenance of minimum loan to value ratios, evidence
of appropriate levels of insurance carried by borrowers and documentation of
appropriate types and amounts of collateral and sources of expected payment.

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

Three Months Ended
 March 31,2009

2008(Amounts In Thousands)Balance,
 beginning

$
27,660

$
19,710Provision charged to expenses


2,436


587Recoveries


225


170Loans charged off


(1,721
)

(677
)Balance,
 ending

$
28,600

$
19,790Page 18 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)Non-performing
loan information at March 31, 2009 and December 31, 2008, was as follows:

March 31, 2009

December 31, 2008(Amounts
 in thousands)Non-accrual loans

$
3,084

$
2,535Accruing loans past due ninety days or more


11,202


5,049Restructured loans


4,465


4,478Non-performing loans (includes non-accrual and restructured
loans)


69,454


52,186Loans held for investment


1,496,650


1,497,500Ratio of allowance for loan losses to loans held for
investment


1.91
%

1.85
%Ratio of allowance for loan losses to non-performing loans


41.18


53.00Non-performing
loans increased $17.3 million from December 31, 2008 to March 31, 2009.
Non-performing loans include any loan that has been placed on non-accrual
status and restructured loans. Non-performing loans also include loans that
based on managements evaluation of current information and events, the Bank
expects to be unable to collect in full according to the contractual terms of
the original loan agreement. These loans are also considered impaired loans.
Non-performing loans were 4.64% of loans held for investment as of March 31,
2009 and 3.48% as of December 31, 2008. The increase in non-performing loans is
due to the deterioration of credit quality related to multiple borrowers
including one large agricultural production operation with an aggregate loan
balance of $4.4 million as of March 31, 2009, one commercial real estate
borrower with an aggregate balance of $1.7 million, one land development
borrower with an aggregate balance of $1.7 million, and three unrelated
borrowers with multi-family real estate loans with an aggregate balance of $4.2
million. The remainder of the increase in non-performing loans is related to
borrower relationships of less than $1.0 million and the continued
deterioration in economic conditions. Non-performing loans includes $16.6
million of loans related to the June 2008 floods in the Banks trade area. Most
of the non-performing loans are secured by real estate and are believed to be
adequately collateralized.

Loans 90 days
past due that are still accruing interest increased $6.2 million in the first
quarter of 2009. This increase is due mainly to three loans to one borrower
with an aggregate balance of $4.6 million as of March 31, 2009. These three
loans are secured by commercial real estate and are believed to be adequately
collateralized.

The Company
believes that the allowance for loan losses is at a level commensurate with the
overall risk exposure of the loan portfolio. However, if economic conditions
continue to deteriorate, certain borrowers may experience difficulty and the
level of nonperforming loans, chargeoffs and delinquencies could continue to
rise and require increases in the provision for loan losses. The Company will
continue to monitor the adequacy of the allowance on a quarterly basis and will
consider the impact of economic conditions on the borrowers ability to repay,
loan collateral values, past collection experience, the risk characteristics of
the loan portfolio and such other factors that deserve current recognition.

Overall credit
quality may continue to deteriorate in 2009. Such a deterioration could cause
increases in nonperforming loans, allowance for loan loss provision expense and
net chargeoffs. Management will monitor changing market conditions as a part of
its allowance for loan loss methodology.

Page 19 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition
 And Results of Operations (continued)The Bank
restructured loans totaling $4.5 million during 2008. These loans related to
two customers. The first customer relationship consisted of six loans totaling
$1.2 million and are flood related. The Bank would have recorded $16,000 in interest
income during the first quarter of 2009 related to these loans if the loans had
been current in accordance with their original terms. For the first customer
relationship, no interest income related to the restructured loans was included
in net income for the first quarter of 2009 as the loans are currently on
non-accrual status. The Bank loaned an additional $164,000 to the borrower
after the completion of the restructuring of the loans. In addition, the Bank
has committed to lend an additional $243,000 to the customer. The second
restructured customer relationship consisted of four loans totaling $3.3
million. This restructure was completed as of the end of 2008. The Bank would
have recorded $44,000 in interest income during the first quarter of 2009
related to these loans if the loans had been current in accordance with their
original terms. Instead, the Bank recorded $35,000 of interest for the three
months ended March 31, 2009, a loss of interest income of $9,000 due to the
restructure of the second borrower relationship. The Bank loaned an additional
$34,000 to the borrower after the completion of the restructuring of the loans.
One of the restructured loans related to the second borrower is a line of
credit for $1.4 million. Currently, the borrower could advance an additional
$640,000 on the line of credit. The Bank does not have any other commitments to
lend the customer additional funds.

Investment
securities available for sale held by the Company increased by $0.8 million
from December 31, 2008 to March 31, 2009. The fair value of securities
available for sale was $5.9 million more than the amortized cost of such
securities as of March 31, 2009. The fair value of the securities in excess of
amortized cost is unchanged from December 31, 2008. The carrying values of
investment securities at March 31, 2009 and December 31, 2008 are summarized in
the following table (dollars in thousands):

March 31, 2009

December 31, 2008Amount

Percent

Amount

PercentSecurities available for saleState and
 political subdivisions

$
102,645


51.04
%
$
100,463


50.15
%Other
 securities (FHLB, FHLMC and FNMA)


98,457


48.96


99,849


49.85Total
 securities available for sale

$
201,102


100.00
%
$
200,312


100.00
%Deposit growth
was $131.6 million in the first quarter of 2009 and included a $44.0 million
increase in public funds that are temporary deposits. This large increase due
to public funds is consistent with the first quarter of 2008 when they
increased $31.5 million. As a result of this deposit growth, federal funds
purchased included in short-term borrowings at December 31, 2008 were reduced
$53.4 million to zero. In the opinion of the Companys management, the Company
and the Bank continue to have sufficient liquidity resources available to fund
the Banks expected loan growth.

Brokered
deposits totaled $37.5 million as of March 31, 2009 with an average rate of
1.86%. Brokered deposits were $10.4 million as of December 31, 2008 with an
average rate of 3.28%.

Page 20 of 34

HILLS BANCORPORATION

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

In January
2009, Hills Bancorporation paid a dividend of $4,041,000 or $.91 per share. The
dividend was also $.91 per share in January 2008. After payment of the dividend
and the adjustment for accumulated other comprehensive income, stockholders
equity as of March 31, 2009 totaled $138.8 million. Under risk-based capital
rules, the total amount of risk-based capital as of March 31, 2009, was 12.26%
of risk-adjusted assets, and is in excess of the required minimum of 8.00%. Risk-based
capital was 12.93% and 12.64% as of March 31, 2008 and December 31, 2008,
respectively. As of March 31, 2009, the most recent notifications from the
Federal Reserve System categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Companys category.

In 2008, the Bank opted to participate in both programs
under the FDICs Temporary Liquidity Guarantee Program (TLGP). The
first program was the Transaction Account Guarantee Program under which,
through December 31, 2009, all non-interest bearing transaction accounts are
fully guaranteed by the FDIC for the entire amount of the account. Coverage
under the Transaction Account Guarantee Program is in addition to and separate
from the coverage available under the FDICs general deposit insurance rules.
The second TLGP program in which the Bank elected to participate was the Debt
Guarantee Program. The Debt Guarantee Program guarantees certain newly issued
senior, unsecured debt of participating financial institutions. Under the
FDICs Final Rule adopted on November 21, 2008, certain senior, unsecured debt
issued before June 30, 2009, with a maturity of greater than 30 days that
matures on or prior to June 30, 2012, is automatically included in the program.
The fees associated with this program range from 50 to 100 basis points on an
annualized basis and vary according to the maturity of the debt issuance. On February
10, 2009, it was announced that, for an additional premium, the FDIC will
extend the Debt Guarantee Program through October 2009. The Company did not
have any senior unsecured debt as of March 31, 2009.

In response to
the financial crisis affecting the banking system, financial markets,
investment banks and other financial institutions, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law.
Pursuant to the EESA, the United States Department of the Treasury (the
Treasury) has the authority to, among other things, make equity investments
in certain financial institutions and purchase mortgage-backed and other
securities from financial institutions for an aggregate amount of up to $700
billion. The Treasury exercised its authority to make such equity investments
by developing the Capital Purchase Program. Under the terms of the Capital
Purchase Program as they relate to companies other than S corporations, the
Treasury may purchase preferred shares and warrants issued by such companies.
Additional preferred shares are issued to the Treasury upon exercise of the
Warrants. An investment by the Treasury subjects participants to a number of
restrictions, including the need to obtain the Treasurys consent to increase
common stock dividends or repurchase common stock. The Company elected not to
apply for the capital available under the Treasurys Capital Purchase Program.
The Company and the Bank are well capitalized with capital ratios that exceed
regulatory requirements.

Net Income Overview

Net income
decreased $800,000 or 16.70% for the quarter ended March 31, 2009 compared to
the first quarter of 2008. Total net income was $3,989,000 in the 2009 quarter
and $4,789,000 in the comparable 2008 quarter. The changes from the first
quarter in 2008 were principally the result of the following:


Net interest
 income increased $1,407,000.
The
 provision for loan losses increased $1,849,000.
Other income
 increased $416,000.
Other
 expenses increased $1,591,000.
Income taxes
 decreased $817,000.Page 21 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And Results of Operations (continued)For the
three-month periods ended March 31, 2009 and 2008, basic earnings per share
were $0.90 and $1.07, respectively. Diluted earnings per share were $0.90 for
the three months ended March 31, 2009 compared to $1.06 for the same period in
2008.

Quarterly
fluctuations in the Companys net income continue to be driven primarily by
three important factors. The first important factor is the interaction between
changes in net interest margin and changes in average earning assets. Net
interest income of $13.9 million for the first three months of 2009 was derived
from the Companys $1.698 billion of average earning assets and its net
interest margin of 3.45%. Average earning assets in 2008 were $1.572 billion
and the net interest margin was 3.34%. The importance of net interest margin is
illustrated by the fact that a decrease in the net interest margin of 10 basis
points to 3.35% would have resulted approximately in a $419,000 decrease in
income before income taxes for the three-month period ended March 31, 2009.
Similarly, an increase in the net interest margin of 10 basis points to 3.55%
would have resulted approximately in a $419,000 increase in interest income
before taxes. Net interest income for the Company increased due to the increase
in average earning assets over the similar three-month period in 2008 and the
increase in the net interest margin of 11 basis points.

The second
significant factor affecting the Companys net income is the provision for loan
losses. The majority of the Companys interest-earning assets are in loans
outstanding, which amounted to more than $1.471 billion at March 31, 2009. The
provision is computed on a quarterly basis and is a result of managements
determination of the quality of the loan portfolio. The provision reflects a
number of factors including the size of the loan portfolio, loan
concentrations, the level of non-performing loans (which includes non-accrual
loans) and loans past due 90 days or more. The provision for loan losses was
$2,436,000 in 2009 compared to $587,000 in 2008. The $1,849,000 increase in the
provision is due to the deterioration of overall credit quality of the
Companys loans outstanding.

The amount of
mortgage loans sold on the secondary market is the third factor that can cause
fluctuations in net income. Loans originated in the first three months of 2009
totaled $88.2 million compared to $42.3 million in the same period in 2008, an
increase of 109%. In the three months ended March 31, 2009 and 2008, the net
gain on sale of loans was $1,180,000 and $324,000, respectively. The sale of
loans is influenced by the real estate market and interest rates. The amount of
the net gain on sale of secondary market mortgage loans in each year can vary
significantly. The volume of activity in these types of loans is directly
related to the level of interest rates. During the three months ended March 31,
2009, secondary market rates were favorable resulting in the increase in the
volume of loans sold. The servicing of the loans sold into the secondary market
is not retained by the Company so these loans do not provide an ongoing stream
of income.

Page 22 of 34

HILLS BANCORPORATION

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

Net interest
income is the excess of the interest and fees received on interest-earning
bearing assets over the interest expense of the interest-bearing liabilities.
The factors that have the greatest impact on net interest income are the volume
of average earning assets and the net interest margin. The net interest margin
for the first three months of 2009 was 3.45% compared to 3.34% in 2008 for the
same period. The measure is shown on a tax-equivalent basis using a tax rate of
35% to make the interest earned on taxable and non-taxable assets more
comparable. The change in average balances and average rates between years and
the effect on the net interest income on a tax equivalent basis for the three
months ended March 31, 2009 compared to the comparable period in 2008 are shown
in the following table:

Change in
 Average Balance

Change in
 Average Rate

Increase (Decrease) in Net Interest IncomeVolume Changes

Rate Changes

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

$
113,102


(0.58
)%
$
1,684

$
(2,109
)
$
(425
)Taxable securitities


(7,711
)

(0.78
)

(83
)

(213
)

(296
)Nontaxable securities


5,043


(0.20
)

68


(50
)

18Federal funds sold


15,614


(5.24
)

4





4$
126,048





$
1,673

$
(2,372
)
$
(699
)Interest expense:Interest-bearing demand deposits

$
29,286


(0.44
)
$
(74
)
$
217

$
143Savings deposits


27,470


(0.60
)

(164
)

504


340Time deposits


54,641


(1.16
)

(564
)

1,823


1,259Short-term borrowings


(11,700
)

(1.56
)

93


232


325FHLB borrowings


5,868


(0.12
)

(36
)

81


45$
105,565





$
(745
)
$
2,857

$
2,112Change in net interest income







$
928

$
485

$
1,413Rate/volume
variances are allocated on a consistent basis using the absolute values of
changes in volume compared to the absolute values of the changes in rates.
Loans fees included in interest income are not material. Interest on nontaxable
securities and loans is shown on a tax-equivalent basis.

A summary of
the net interest spread and margin is as follows:

(Tax
 Equivalent Basis)

2009

2008Yield on average interest-earning assets


5.81
%

6.41
%Rate on average interest-bearing liabilities


2.78


3.60Net interest spread


3.03
%

2.81
%Effect of noninterest-bearing funds


0.42


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


3.45
%

3.34
%Page 23 of 34

HILLS BANCORPORATION

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

The provision
for loan losses was $2,436,000 in 2009 compared to $587,000 in 2008, an
increase of $1,849,000. The loan loss provision is the amount necessary to
adjust the allowance to the level considered appropriate by management. The provision
adjustment is computed on a quarterly basis and is a result of managements
determination of the quality of the loan portfolio. The provision reflects a
number of factors, including the size of the loan portfolio, loan
concentrations, the impact on the borrowers ability to repay, loan collateral
values, the level of impaired loans and loans past due ninety days or more. In
addition, management considers the credit quality of the loans based on
managements review of problem and watch loans, including loans with historical
higher credit risks (primarily agricultural and spec real estate construction
loans).

In the first
quarter of 2009, problem and watch loans decreased $1.4 million while there was
an increase of $11.5 million in substandard loans in the same period. These
asset quality changes increased the provision $1.6 million. In the first
quarter of 2008, problem and watch loans increased $1.0 million and substandard
loans decreased $2.0 million. The 2008 asset quality changes increased the provision
expense by $0.5 million. In addition, loan growth was $19.8 million in the
first quarter of 2008, increasing the provision for loan losses by $0.4
million. In the first quarter of 2009, loan balances declined $6.9 million
which decreased the provision for loan losses by $0.6 million

The allowance
for loan losses balance is also affected by the charge-offs, net of recoveries,
for the periods presented. For the quarters ended March 31, 2009 and 2008,
recoveries were $225,000 and $170,000, respectively; and charge-offs were
$1,721,000 in 2009 and $677,000 in 2008. The allowance for loan losses totaled
$28,600,000 at March 31, 2009 compared to $27,660,000 at December 31, 2008. The
allowance represented 1.91% and 1.85% of loans held for investment at March 31,
2009 and December 31, 2008, respectively. The allowance was based on
managements consideration of a number of factors, including loan
concentrations, loans with higher credit risks (primarily agriculture loans and
spec real estate construction) and overall increases in net loans outstanding.
As of March 31, 2009, the allowance includes $4,200,000 in flood-related
provisions. The methodology used in 2009 is consistent with 2008.

Net Gain on Sale of Loans

Net gain on
sale of loans for the three months ended March 31, 2009 was $1,180,000 compared
to $324,000 for the comparable period ended March 31, 2008. Loans originated in
the first three months of 2009 totaled $88.2 million compared to $42.3 million
in the same period in 2008, an increase of 109%. The amount of the net gain on
sale of secondary market mortgage loans in each year can vary significantly.
The volume of activity in these types of loans is directly related to the level
of interest rates. During the three months ended March 31, 2009, secondary
market rates were favorable resulting in the increase in the volume of loans
sold. The servicing of the loans sold into the secondary market is not retained
by the Company so these loans do not provide an ongoing stream of income.

Other Income

Other income,
other than the net gain on sale of loans discussed above, decreased by $440,000
for the three months ended March 31, 2009. Trust fees decreased $181,000 as a
result of assets under management decreasing from $904.8 million as of March
31, 2008 to $760.2 million as of March 31, 2009. Service charges and fees
decreased $78,000 in the 2009 quarter from their level in the 2008 quarter. The
principal reason for this decrease was a reduction of $138,000 in service fees
on deposit accounts as a result of diminished results from fee income
strategies. Debit card and point of sale (POS) pin interchange fees are also
included in service charges and fees, and that component increased during the
same period by $67,000 due to volume of activity.

Page 24 of 34

HILLS BANCORPORATION

Item 2.
Managements Discussion and Analysis of Financial Condition And
 Results of Operations (continued)Other
noninterest income was $592,000 for the quarter ended March 31, 2009, a
$211,000 decrease from the first quarter of 2008. Included in the 2008 first
quarter other noninterest income were amounts related to Visa, Inc. (Visa).
The Company received $114,000 in proceeds from the redemption of shares as a
part of the Visa IPO. In conjunction with the IPO, Visa created a litigation
escrow which is to be used to pay the litigation settlement payments. As a
result, the Company recorded a receivable equal to the $50,000 reserve during
the first quarter of 2008. This receivable was recorded as a contra-liability
to the reserve. Both the liability and receivable are reflected in other
liabilities on the Companys consolidated financial statements. The economic
benefit of the receivable was recorded in other noninterest income in 2008. In
addition, rental income decreased $78,000 in the first quarter of 2009 compared
to the same period in 2008. The decrease is due to the expiration of an ATM
rental contract which was not renewed in late 2008. The monthly rental income
is recorded in 2008 but was not received in 2009.

Other Expenses

Other expenses
increased $1,591,000 in 2009 to $10,844,000 from the same period in 2008. This
increase of 17.19% included an increase of $195,000 in salaries and benefits.
Direct salary expense increased $234,000, or 6.23%, due to annual salary
adjustments and an increase in the number of employees.

Occupancy
expenses increased $155,000 in 2009 due mainly to increases related to
operating two additional locations in 2009. The Company leases an additional
location at a cost of $6,600 per month. Building depreciation has increased due
to the addition of certain leasehold improvements at the new leased location
which are being depreciated over the term of the four-year term of the lease.
The Company also opened a modular temporary office on the site of its fourteenth
location. Rents for the temporary office are $1,700 a month. Rent expense for
the Companys ATM locations is also included in occupancy expense. ATM rent
expense increased $39,000 in the first quarter of 2009 compared to the same
period in 2008. This increase is related to placement of additional ATMs in the
Companys trade area.

Advertising
and business development expense were $451,000 for the quarter ended March 31,
2009, a $90,000 increase over the same period in 2008. The increase is related to
the timing of office promotions expenses incurred in 2009 when compared to the
prior year.

Outside
services expense increased $188,000 for the quarter ended March 31, 2009
compared to March 31, 2008. Outside services include professional fees, courier
services and ATM fees, and processing charges for the merchant credit card
program, retail credit cards and other data processing services. Credit card,
debit card and merchant card processing expenses increased $25,000 due to an
increase in the volume of transactions in 2009 compared to 2008. Professional
fees were $463,000 for the three months ended March 31, 2009, an increase of
$96,000 over the same period in 2008. This increase includes $95,000 in
attorney fees and is due to credit-related matters.

Rental
expenses on tax credit real estate were $413,000 in 2009, an increase of
$108,000 from the first quarter of 2008. This increase is due mainly to the
addition of a fifth tax credit property late in 2008.

FDIC insurance
assessment expense was $525,000 for the three-months ended March 31, 2009. This
is an increase of $346,000 when compared to the same period in 2008. This
increase is due in part to an additional 10 basis point assessment related to
Transaction Account Guarantee Program. This Program increased insurance
coverage for non-interest bearing deposit accounts in excess of $250,000. In
addition, the FDIC has raised assessment rates for all banks as part of its
restoration plan for the deposit insurance fund.

Other
noninterest expense increased $482,000 in the first quarter of 2009 to
$755,000. The majority of this increase is due to the loss on repossessed real
estate property, which increased $446,000 in the first three months of 2009
when compared the same period in 2008. During the quarter ended March 31, 2008,
three properties were sold at a loss of approximately $18,000. The nine
properties sold in 2009 were sold at a loss of $464,000.

Page 25 of 34

HILLS BANCORPORATION

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

Federal and
state income tax expenses were $1,367,000 and $2,184,000 for the three months
ended March 31, 2009 and 2008, respectively. Income taxes as a percentage of
income before taxes were 25.52% in 2009 and 31.32% in 2008.

The decrease
in the effective tax rate is due to an increase in the percentage of income
before income taxes represented by tax-exempt interest income and an increase
in tax credits. For the first three months of 2008, tax-exempt interest income
was $841,000, or 12.06% of income before income taxes resulting in a 4.22%
decrease in the effective tax rate. For the first three months of 2009,
tax-exempt interest income increased to $853,000, or 15.93% of income before
income taxes, which decreased the effective tax rate an additional 1.35% as
compared to the same period in 2008, for a total reduction in the effective tax
rate that was attributable to the increase in tax-exempt income of 5.57% in
2009. Also, tax credits increased $183,000 to $360,000 for the three months
ended March 31, 2009 as compared to $177,000 the same period in 2008, reducing
the 2009 effective tax rate an additional 4.18% compared to 2008. The
additional tax credits that were available in 2009 resulted in a reduction in
the effective tax rate of 6.72% compared to a reduction of 2.54% in the
comparable period in 2008.

Liquidity

The Company
actively monitors and manages its liquidity position with the objective of
maintaining sufficient cash flows to fund operations, meet client commitments,
take advantage of market opportunities and provide a margin against
unforeseeable liquidity needs. Federal funds sold and investment securities
available for sale are readily marketable assets. Maturities of all investment
securities are managed to meet the Companys normal liquidity needs, to respond
to market changes or to adjust the Companys interest rate risk position.
Federal funds sold and investment securities available for sale comprised
14.99% of the Companys total assets at March 31, 2009, compared to 11.25% at
December 31, 2008.

The Company
has historically maintained a stable deposit base and a relatively low level of
large deposits, which has mitigated the volatility in the Companys liquidity
position. As of March 31, 2009, the Company had borrowed $265.0 million from
the Federal Home Loan Bank (FHLB) of Des Moines. There have been no new
borrowings from the FHLB in 2009. Advances are used as a means of providing
both long and short-term, fixed-rate funding for certain assets and for
managing interest rate risk. The Company had additional borrowing capacity
available from the FHLB of approximately $131.9 million at March 31, 2009.

As additional
sources of liquidity, the Company has the ability to borrow up to $10 million
from the Federal Reserve Bank of Chicago, and has lines of credit with two
banks totaling $142.2 million. Those two lines of credit require the pledging
of investment securities when drawn upon. The combination of high levels of
potentially liquid assets, low dependence on volatile liabilities and
additional borrowing capacity provided sources of liquidity for the Company
which management considered sufficient at March 31, 2009.

As of March
31, 2009, investment securities with a carrying value of $36,039,000 were
pledged to collateralize public and trust deposits, short-term borrowings and
for other purposes, as permitted by law. As of December 31, 2008, investment
securities with a carrying value of $99,937,000 were pledged.

Contractual Obligations

The Company
will be constructing its fourteenth office location during 2009. The Company
signed a contract for the construction of the office in April 2009 with costs
of construction not to exceed $3.0 million.

Page 26 of 34

HILLS BANCORPORATION

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

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

Asset/Liability Management

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

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

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

Page 27 of 34

HILLS BANCORPORATION

Item 4.
Controls and ProceduresThe Company
carried out an evaluation, under the supervision and with the participation of
the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as defined in the Securities
Exchange Act of 1934 Rule 13a-15(f). Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports it files with the Securities and
Exchange Commission. There have been no changes in the Companys internal
controls over financial reporting during the first quarter of 2009 that have
materially affected, or are reasonably likely to affect materially, the
Companys internal controls over financial reporting.

Page 28 of 34

HILLS BANCORPORATION
PART II - OTHER INFORMATION

Item 1.
Legal ProceedingsNo material
legal proceedings are pending.

Item 1A.
Risk FactorsThere have
been no material changes from the risk factors disclosed in the Companys
Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2.
Unregistered Sales of Equity Securities and Use of ProceedsThe following
table sets forth information about the Companys stock purchases, all of which
were made pursuant to the 2005 Stock Repurchase Program, for the three months
ended March 31, 2009:

Period


Total number of shares
 purchased


Average price paid per
 share


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


Maximum number of
 shares that may yet be
 purchased under the
 plans or programs (1)January 1 to January 31



765


$
55.00



157,647



592,353February 1 to February 28



2,300



55.00



159,947



590,053March 1 to March 31



7,565



55.00



167,512



582,488Total



10,630


$
55.00



167,512



582,488(1) On July
26, 2005, the Companys Board of Directors authorized a program to repurchase
up to 750,000 shares of the Companys common stock (the 2005 Stock Repurchase
Program). This authorization was previously set to expire on December 31,
2009. At its January 2009 meeting, the Companys Board of Directors extended
the expiration date of the 2005 Stock Repurchase Program to December 31, 2013.
The Company expects the purchases pursuant to the 2005 Stock Repurchase Program
to be made from time to time in private transactions at a price equal to the
most recent quarterly independent appraisal of the shares of the Companys
common stock and with the Board reviewing the overall results of the 2005 Stock
Repurchase Program on a quarterly basis. All purchases made pursuant to the
2005 Stock Repurchase Program since its inception have been made on that basis.
The amount and timing of stock repurchases will be based on various factors,
such as the Boards assessment of the Companys capital structure and
liquidity, the amount of interest shown by shareholders in selling shares of stock
to the Company at their appraised value, and applicable regulatory, legal and
accounting factors.

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

Item 4.
Submission of Matters to a Vote of Security HoldersNo matters
were submitted to a vote of security holders during the quarter ended March 31,
2009.

Item 5.
Other InformationNone

Item 6.
Exhibits31
Certifications
 under Section 302 of the Sarbanes-Oxley Act of 200232
Certifications
 under Section 906 of the Sarbanes-Oxley Act of 2002Page 29 of 34

SIGNATURES

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

HILLS BANCORPORATION

Date:
 May 8, 2009

By:
 /s/ Dwight O. SeegmillerDwight
 O. Seegmiller, Director, President and Chief Executive OfficerDate:
 May 8, 2009

By:
 /s/ James G. PrattJames
 G. Pratt, Secretary, Treasurer and Chief Accounting OfficerPage 30 of 34

HILLS BANCORPORATION
QUARTERLY REPORT OF FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 2009

Exhibit
 Number

Description

Page Number
 In The Sequential
 Numbering System
 March 31, 2009 Form 10-Q31

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

32 - 33 of 3432

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

34 of 34Page 31 of 34