UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 1995.     Commission File Number 0-12668.

                              HILLS BANCORPORATION
             (Exact name of Registrant as specified in its charter)

           IOWA                                           42-1208067
-------------------------------                ---------------------------------
(State or Other Jurisdiction of                (IRS Employer Identification No.)
Incorporation or Organization)

  131 Main Street, Hills, Iowa 52235
----------------------------------------
(Address of principal executive offices)

Registrant's telephone number, including area code:  (319) 679-2291

Securities Registered pursuant to Section 12 (b) of the Act:  None

Securities Registered pursuant to Section 12 (g) of the Act:

                            No par value common stock
                            -------------------------
                                 Title of Class

Indicate by check mark 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. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Registrant  S-K (229.405 of this chapter) is not contained  herein,  and will
not be contained to the best of Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]

While  it is  difficult  to  determine  the  market  value  of  shares  owned by
nonaffiliates (within the meaning of such term under the applicable  regulations
of the Securities and Exchange  Commission),  the Registrant  estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 15, 1996 (based upon reports of beneficial  ownership  that  approximately
80%  of  the  shares  are  so  owned  by  nonaffiliates   and  upon  information
communicated informally to the Registrant by various purchasers and sellers that
the  sale  price  for  the  common  stock  is  generally  $100  per  share)  was
$39,029,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
15, 1996 is 487,868 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement dated March 29, 1996, for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  15,  1996  (the  Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.

                                 EXHIBIT INDEX

The exhibits index is on page 51.
<PAGE>


PART I

Item 1.     Business

Hills   Bancorporation   (the   "Registrant")  is  a  one-bank  holding  company
principally  engaged in the  business of banking  through its only  wholly-owned
subsidiary,  Hills  Bank and  Trust  Company,  Hills,  Iowa  (the  "Bank").  The
Registrant was  incorporated  December 12, 1982 and all operations are conducted
within the state of Iowa. The Registrant became owner of 100% of the outstanding
stock of the Bank as of January 23, 1984 when stockholders of the Bank exchanged
their shares for shares of the Registrant.

The  Bank  is  a  full-service   commercial   bank  extending  its  services  to
individuals,  businesses,  governmental units and institutional customers in the
State of Iowa,  the  communities  of  Hills,  Iowa  City,  Coralville  and North
Liberty,  Iowa, and the surrounding area. It currently operates the main bank in
Hills and has office  locations  in Iowa City on South  Gilbert  Street and East
Washington Street,  and additional offices in Coralville and North Liberty.  The
Bank  is  actively  engaged  in  all  areas  of  commercial  banking,  including
acceptance of demand, savings and time deposits; making commercial, real estate,
agricultural and consumer loans;  maintaining night and safe deposit facilities;
and  performing  collection,  exchange and other banking  services  tailored for
individual customers. The trust department administers estates,  personal trusts
and pension and profit-sharing funds and, in connection therewith, provides farm
management  and  investment  advisory and  custodial  services for  individuals,
corporations  and  nonprofit  organizations.  The loan  activity  of the Bank is
diversified,   with  commercial  and  agricultural  loans,  real  estate  loans,
automobile,  installment  and other consumer loans composing the majority of its
loan portfolio.  In addition,  the Bank earns  substantial fees from originating
mortgages which are sold in the secondary residential real estate market.

The Bank's Board of Directors has established a formal loan origination  policy.
In general,  the loan origination  policy requires  individual lenders to reduce
the risk of credit  loss to the Bank by  requiring  that,  among  other  things,
minimum loan to value ratios be maintained,  evidence of  appropriate  levels of
insurance be carried by borrowers and documenting  appropriate types and amounts
of collateral and sources of expected repayment.

The Bank's  business  is not  seasonal,  except that loan  origination  fees are
higher  during  the  spring  and  summer  months.  The Bank  has not  undertaken
significant  new services during the current year or services which might exceed
the limits of its human and data processing capabilities.

Iowa City and  Coralville  are located on  Interstate  80 in Eastern  Iowa.  The
communities have a population of approximately 80,000. The University of Iowa in
Iowa City has over 27,000 students and 15,000 employees,  including employees of
the University of Iowa Hospitals and Clinics.  Johnson  County,  Iowa has one of
the strongest  economies in Iowa and has had substantial  growth in the past ten
years.  The  area  is  known  for  its  educational  institutions,  health  care
facilities, cultural and sports events and retail centers.

The commercial  banking business in Iowa is highly competitive and the Company's
bank competes with other  commercial  banks,  credit  unions,  brokerage  firms,
finance companies, insurance companies, and other financial institutions.

<PAGE>


Part 1.

Item 1.  Business (continued)

Iowa's banking laws regarding  interstate  banking and interstate  branching are
currently more restrictive  than many other states.  Prior to 1991, Iowa banking
law prohibited  interstate banking altogether,  except for certain grandfathered
rights extended to the largest bank holding company conducting business in Iowa,
Norwest Corporation, which is headquartered in Minnesota. Since January 1, 1991,
Iowa  banking  law has been less  restrictive  by  allowing  limited  interstate
banking by permitting  financial  institutions  whose operations are principally
conducted in Illinois, Missouri, Nebraska, South Dakota, Minnesota, or Wisconsin
to conduct business in Iowa by acquiring an existing Iowa banking  organization.
Conversely,  Iowa financial  institutions may expand  operations into Iowa's six
neighboring  states,  provided such  expansion is  accomplished  by  acquisition
rather than by branching.  Interstate  branching by out-of-state banks into Iowa
is still  expressly  prohibited  by Iowa  statutes.  Iowa also  currently  has a
deposit  concentration  limit  of 10% on the  amount  of  deposits  that any one
banking organization can control and continue to acquire banks, which applies to
both in-state and out-of-state banks. Iowa also has a 35% limit on the aggregate
amount of deposits all  out-of-state  banking  organizations  can control within
Iowa.

In  recent  years,  Norwest  Corporation,   Firstar  Corporation  and  Boatmen's
Bancshares,  Inc.  have  acquired  a number of  independent  banks  and  smaller
multi-bank  holding  companies  in  various  metropolitan  areas of  Iowa.  Each
operates  under a single  charter  in Iowa.  To date  none of the  Bank's  local
competitors  have been purchased by the larger regional or national bank holding
companies.

As with its law regarding  interstate  banking and branching,  Iowa's intrastate
branching statutes are also rather restrictive when compared with those of other
states.  Generally,  bank  branch  offices  may only be  operated or acquired in
counties  contiguous  to or cornering  upon the county in which the bank has its
principal place of business. Also, a bank in Iowa may not establish a new branch
office in a city in which there exists an office of another bank,  other than by
acquisition  of an  existing  office or bank.  Furthermore,  the  number of bank
branch  offices  allowed  within a municipal  corporation or an urban complex is
limited to four  offices in  populations  of  100,000 or less,  five  offices in
populations  of  over  100,000  to  200,000,  and  six  offices  in  areas  with
populations  over  200,000.   However,   some  of  Iowa's  intrastate  branching
limitations  regarding  geographic  location of branch offices and the number of
branch  offices which may be  established in an urban complex may be overcome by
merging  two  or  more  affiliated  banking  organizations  that  have  been  in
continuous  operation  in Iowa for at least five years into a "united  community
bank."

In September 1994, Congress passed interstate banking and branching legislation,
which would (1) permitted nationwide  interstate banking effective September 29,
1995, (2) would permit interstate bank branching effective June 1, 1997, and (3)
increased  each  state's  deposit   concentration   limit  to  30%,  subject  to
ratification by each particular  state. If Iowa elects to do so, it can continue
to (1) limit the means by which an  out-of-state  bank may acquire a bank within
the state,  (2) prohibit  out-of-state  banks from branching into the state, and
(3) set its own deposit concentration limit.

At this time it is  uncertain  what  competitive  impact any  future  interstate
banking developments or Iowa banking legislation might have upon the Company and
the Bank.

The Bank is in direct  competition  for  deposits,  loans  and  other  financial
related  business with other financial  institutions in Johnson County,  Iowa as
follows:

                                                                    Approximate
                                                                    Assets As Of
                                                                    December 31,
                                                                        1995
                                                                   -------------
                                                                   (In Millions)

            Largest competing bank                                 $         391
            Next largest competing bank                                      305
            Next largest competing bank                                       70
            Largest competing credit union                                   117
<PAGE>

Part I

Item 1.  Business (continued)

No  material  portion of the Bank's  deposits  has been  obtained  from a single
person or a few persons.  Accordingly,  management  of the Bank has no reason to
believe that the loss of the deposits of any person or few persons  would have a
materially  adverse  effect on the Bank's  operations or erode its deposit base.
Approximately   5.8%  of  the  Bank's  loans  have  been  made  to  farmers  for
agricultural  purposes. The agricultural sector of the economy has been cyclical
with a general trend toward fewer and larger farms. The Bank has not experienced
a  material  adverse  effect  on  its  business  as  a  result  of  defaults  on
agricultural loans and expects none in the future.

The  Registrant  does not  engage  in any  business  activities  apart  from its
ownership of the Bank and therefore does not encounter any  competition  for its
services other than as described above for the Bank.

The  Registrant  and the Bank have  undertaken no material  research  activities
during the last three years relating to research and development activities.

The Registrant is regulated by the Federal Reserve Bank.

The Bank is regulated by the Federal Deposit Insurance Corporation and the State
of Iowa Division of Banking.

The  Registrant  had no full-time  employees as of December 31, 1995,  while the
Bank had 147 regular and 53 part-time employees.

The following  consolidated  statistical  information reflects selected balances
and operations of the Registrant and the Bank for the periods indicated. Average
refers to an average monthly basis for the periods stated.

The following tables shown (1) average  balances of assets and liabilities,  (2)
interest  income and expense on a tax equivalent  basis,  (3) interest rates and
differential and (4) changes in interest income and expense.

         AVERAGE BALANCES
         (Daily Average Basis)

                                                       Year Ended December 31,
                                                  ------------------------------
                                                     1995      1994       1993
                                                  --------   --------   --------
                                                           (In Thousands)
ASSETS
  Cash and due from banks ......................  $  9,795   $  9,951   $  8,608
  Taxable securities ...........................    95,747    102,608     91,253
  Nontaxable securities ........................    19,528     18,775     17,772
  Federal funds sold ...........................     8,980      5,181     17,650
  Loans, net ...................................   311,592    277,774    256,840
  Property and equipment, net ..................     6,685      5,861      5,581
  Other assets .................................     7,484      7,560      6,183
                                                  --------   --------   --------
                                                  $459,811   $427,710   $403,887
                                                  ========   ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY
  Noninterest-bearing demand deposits ..........  $ 36,085   $ 34,409   $ 29,496
  Interest-bearing demand deposits .............    37,249     45,220     40,337
  Savings deposits .............................    74,146     71,291     71,301
  Time deposits ................................   226,251    209,602    201,325
  Securities sold under agreements to repurchase     9,424      5,832      5,150
  FHLB borrowings ..............................    28,965     17,473     15,308
  Debt of ESOP plan ............................      --           73        271
  Other liabilities ............................     2,978      2,680      2,688
  Redeemable common stock held by
  Employee Stock Ownership Plan ................     5,241      4,913      4,425
  Stockholders' equity .........................    39,472     36,217     33,586
                                                  --------   --------   --------
                                                  $459,811   $427,710   $403,887
                                                  ========   ========   ========
<PAGE>

Part I

Item 1.  Business (continued)


         INTEREST INCOME AND EXPENSE
                                                       Year Ended December 31,
                                                     ---------------------------
                                                      1995      1994      1993
                                                     -------   -------   -------
                                                           (In Thousands)
INCOME
  Loans (1) ......................................   $27,506   $23,473   $22,864
  Taxable securities .............................     5,189     5,158     4,876
  Nontaxable securities (1) ......................     1,567     1,575     1,589
  Federal funds sold .............................       519       212       524
                                                     -------   -------   -------
      Total interest income ......................   $34,781   $30,418   $29,853
                                                     -------   -------   -------

EXPENSE
  Interest-bearing demand deposits ...............   $   894   $ 1,039   $ 1,093
  Savings deposits ...............................     2,618     1,625     1,926
  Time deposits ..................................    12,673    10,857    11,342
  Securities sold under agreements to repurchase .       409       204       184
  FHLB borrowings ................................     1,874     1,105       963
  Interest portion of Employee Stock
    Ownership Plan contribution ..................      --           4        12
                                                     -------   -------   -------
      Total interest expense .....................   $18,468   $14,834   $15,520
                                                     -------   -------   -------
      Net interest income ........................   $16,313   $15,584   $14,333
                                                     =======   =======   =======

(1) Presented on a tax equivalent basis using a federal tax rate of 34%.


         INTEREST RATES AND INTEREST DIFFERENTIAL

                                                         Year Ended December 31,
                                                         -----------------------
                                                         1995     1994     1993
                                                         -----    -----   ------
Average yields:
  Taxable securities ................................    5.42%    5.03%    5.34%
  Nontaxable securities .............................    5.29     5.54     5.92
  Nontaxable securities (tax equivalent basis) ......    8.02     8.39     8.94
  Loans (1) .........................................    8.74     8.34     8.79
  Loans (tax equivalent basis) ......................    8.83     8.45     8.90
  Federal funds sold ................................    5.78     4.09     2.97
  Interest-bearing demand deposits ..................    2.40     2.30     2.71
  Savings deposits ..................................    3.53     2.28     2.70
  Time deposits .....................................    5.60     5.18     5.63
  Securities sold under agreements to repurchase ....    4.34     3.50     3.57
  Interest on FHLB borrowings .......................    6.47     6.32     6.29
  Debt of Employee Stock Ownership Plan .............    0.00     5.48     4.43
  Yield on average interest earning assets ..........    7.98     7.52     7.78
  Rate on average interest-bearing liabilities ......    4.91     4.24     4.65
  Net interest spread (2) ...........................    3.07     3.28     3.13
  Net interest margin (3) ...........................    3.74     3.85     3.73

(1) Nonaccruing  loans are not significant and have been included in the average
    loan balances for purposes of this computation.

(2) Net  interest  spread  is  the  difference  between  the  yield  on  average
    interest-earning assets and the yield on average interest-paying liabilities
    stated on a tax  equivalent  basis  using a federal  tax rate of 34% for the
    three years presented and a state tax rate of 5% for 1993, 1994 and 1995.

(3) Net  interest  margin is net interest  income,  on a tax  equivalent  basis,
    divided by average interest-earning assets.

<PAGE>


PART I

Item 1.  Business (continued)

CHANGE IN INTEREST INCOME AND EXPENSE

                                                Change Due  Change Due    Total
                                                To Volume    To Rates    Change
                                                ----------  ----------  --------
                                                          (In Thousands)
Year ended December 31, 1995: 
    Change in interest income:
      Loans ..............................        $ 2,945    $ 1,088    $ 4,033
      Taxable securities .................           (356)       387         31
      Nontaxable securities ..............             62        (70)        (8)
      Federal funds sold .................            196        111        307
                                                  -------    -------    -------
                                                  $ 2,847    $ 1,516    $ 4,363
                                                  -------    -------    -------
  Change in interest expense:
    Interest-bearing demand deposits .......      $  (189)   $    44    $  (145)
    Savings deposits .......................           68        925        993
    Time deposits ..........................          899        917      1,816
    Securities sold under agreements to 
      repurchase ...........................          148         57        205
    Interest on FHLB borrowings ............          742         27        769
    Other ..................................           (2)        (2)        (4)
                                                  -------    -------    -------
                                                  $ 1,666    $ 1,968    $ 3,634
                                                  -------    -------    -------
  Change in net interest income ............      $ 1,181    $  (452)   $   729
                                                  =======    =======    =======

Year ended December 31, 1994: 
    Change in interest income:
      Loans .............................         $ 1,802    $(1,193)   $   609
      Taxable securities ................             578       (296)       282
      Nontaxable securities .............              87       (101)       (14)
      Federal funds sold ................            (461)       149       (312)
                                                  -------    -------    -------
                                                  $ 2,006    $(1,441)   $   565
                                                  -------    -------    -------
  Change in interest expense:
    Interest-bearing demand deposits .......      $   123    $  (177)   $   (54)
    Savings deposits .......................           --       (301)      (301)
    Time deposits ..........................          451       (936)      (485)
    Securities sold under agreements to 
      repurchase ...........................           24         (4)        20
    Interest on FHLB borrowings ............          137          5        142
    Other ..................................          (10)         2         (8)
                                                  -------    -------    -------
                                                  $   725    $(1,411)   $  (686)
                                                  -------    -------    -------
  Change in net interest income ............      $ 1,281    $   (30)   $ 1,251
                                                  =======    =======    =======
           
Rate/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.  Loan fees  included in  interest  income are not  material.  Interest on
nontaxable securities and loans is shown at tax equivalent amounts.
<PAGE>



PART I


Item 1.  Business (continued)

LOANS

The following table shows the composition of loans (before deducting the reserve
for loan losses) as of December 31, 1995, 1994, 1993, 1992 and 1991:

<TABLE>

                                                                                         December 31,
                                                        ----------------------------------------------------------------------------
                                                          1995             1994             1993             1992             1991
                                                        --------         --------         --------         --------         --------
                                                                                       (In Thousands)
<S>                                                     <C>              <C>              <C>              <C>              <C>

Agricultural ..................................         $ 19,000         $ 17,826         $ 17,117         $ 16,430         $ 15,372
Commercial and financial ......................           26,810           26,024           24,721           24,121           28,517
Real estate, construction .....................            7,937            6,933            7,006            4,759            3,930
Real estate, mortgage .........................          239,899          225,342          195,527          185,869          148,787
Loans to individuals ..........................           31,640           30,906           24,380           22,787           21,485
                                                        --------         --------         --------         --------         --------
          Total ...............................         $325,286         $307,031         $268,751         $253,966         $218,091
                                                        ========         ========         ========         ========         ========
</TABLE>

There were no foreign loans outstanding for any of the years presented.

MATURITY DISTRIBUTION OF LOANS

The following table shows the principal payments due on loans as of December 31,
1995:

<TABLE>

                                                                       Amount          One Year            One To          Over Five
                                                                      Of Loans        Or Less (1)        Five Years           Years
                                                                      --------        -----------        ----------        ---------
                                                                                              (In Thousands)
<S>                                                                   <C>             <C>                <C>               <C>

   Commercial, financial and agricultural ..................          $ 45,810          $ 21,150          $ 16,992          $  7,668
   Real estate, construction and mortgage ..................           247,836            44,445           140,446            62,945
   Other ...................................................            31,640             7,702            17,738             6,200
                                                                      --------          --------          --------          --------
                                                                      $325,286          $ 73,297          $175,176          $ 76,813
                                                                      ========          ========          ========          ========
Interest rates on loans are as follows:

   Fixed rate ..............................................          $237,484          $ 57,710          $154,307          $ 25,467
   Variable rate ...........................................            87,802            15,587            20,869            51,346
                                                                      --------          --------          --------          --------
                                                                      $325,286          $ 73,297          $175,176          $ 76,813
                                                                      ========          ========          ========          ========
<FN>

(1) The Bank writes a significant  portion of the commercial  loans as six-month
    notes. However, a significant amount of these notes are renewed when due.

</FN>
</TABLE>
<PAGE>



PART I


Item 1.  Business (continued)

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The  following  table   summarizes  the  Registrant's   nonaccrual,   past  due,
restructured  and  impaired  loans as to  interest  or  principal  payment as of
December 31 for each of the years presented:
<TABLE>

                                                         1995         1994         1993          1992          1991
                                                        ------       ------      --------       ------        ------
                                                                              (In Thousands)
         <S>                                            <C>           <C>        <C>            <C>           <C>

         Nonaccrual loans ......................        $  489       $   --      $     --       $   47        $   54
         Accruing loans past
            due 90 days or more .................          417          822         1,064          463           567
         Restructured loans ....................            --           --            --           --            --
         Impaired loans ........................         5,465          N/A           N/A          N/A           N/A
</TABLE>

The  Registrant  does not have a significant  amount of loans which are past due
less than 90 days on which  there are  serious  doubts as to the  ability of the
borrowers to comply with the loan repayment terms.

Loans are placed on nonaccrual status when management believes the collection of
future  interest is not reasonably  assured.  Interest income was not materially
affected by this classification.

The  Registrant has no individual  borrower or borrowers  engaged in the same or
similar  industry  exceeding  10% of total loans.  The  Registrant  has no other
interest-bearing  assets, other than loans, that meet the nonaccrual,  past due,
restructured or potential problem loan criteria.

No allowance for losses has been recognized for impaired loans because the loans
have been  charged off to the net present  value of the future cash flows or the
fair value of the collateral if the loan is collateral dependent.

<PAGE>



PART I


Item 1.  Business (continued)

SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the Registrant's loan loss experience for each of
the last five years:

<TABLE>
                                                                                       Year Ended December 31,
                                                                     ---------------------------------------------------------------
                                                                       1995         1994          1993          1992           1991
                                                                     -------       ------        ------        -------       -------
                                                                                             (In Thousands)
<S>                                                                  <C>           <C>           <C>            <C>          <C>
Amount of loan loss allowance
  at beginning of year .......................................       $6,210        $5,775        $5,190        $4,650        $4,100
                                                                     ------        ------        ------        ------        ------
Charge-offs:
  Agriculture ................................................       $  101        $  423        $  270        $  444        $   75
  Commercial and financial ...................................          387           334           326           418           425
  Real estate, mortgage ......................................          180           172           165            97           258
  Loans to individuals .......................................          254           131           300           441           193
                                                                     ------        ------        ------        ------        ------
                                                                     $  922        $1,060        $1,061        $1,400        $  951
                                                                     ------        ------        ------        ------        ------
Recoveries:
  Agriculture ................................................       $  218        $  368        $  247        $  131        $   72
  Commercial and financial ...................................          226           206           213            93            45
  Real estate, mortgage ......................................          149           154            87           522           640
  Loans to individuals .......................................          137           126           178           135            95
                                                                     ------        ------        ------        ------        ------
                                                                     $  730        $  854        $  725        $  881        $  852
                                                                     ------        ------        ------        ------        ------
Net charge-offs ..............................................       $  192        $  206        $  336        $  519        $   99
                                                                     ------        ------        ------        ------        ------
Provision for loan losses (1) ................................       $  722        $  641        $  921        $1,059        $  649
                                                                     ------        ------        ------        ------        ------
Balance of loan loss allowance at end of year ................       $6,740        $6,210        $5,775        $5,190        $4,650
                                                                     ======        ======        ======        ======        ======

Ratio of net charge-offs during year to average
    loans outstanding ........................................          .06%          .07%          .13%          .22%          .05%
                                                                     ======        ======        ======        ======        ======

<FN>
The balance of the loan loss  allowance has not been  allocated by type of loan.
Management  regularly reviews the loan portfolio and does not expect any unusual
material  amount to be  charged  off  during  1996 that  would be  significantly
different than the years ended December 31, 1995, 1994, 1993, 1992 and 1991.

(1) For financial  reporting  purposes,  management  regularly  reviews the loan
    portfolio  and  determines a provision for loan losses based upon the impact
    of economic  conditions on the borrower's  ability to repay, past collection
    experience,  the risk  characteristics  of the loan portfolio and such other
    factors  which deserve  current  recognition.  For income tax purposes,  the
    allowance is maintained at the maximum allowable amount.
</FN>
</TABLE>
<PAGE>



PART I


Item 1.  Business (continued)

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The Bank reviews and places in risk categories specific  borrowings.  Based upon
the risk category  assigned,  the Bank allocates a percentage,  as determined by
management,  for a required  allowance  needed.  The Bank's risk  categories are
similar to those used by federal and state  regulatory  agencies  and consist of
the following:

   (1) Potential Watch and Watch
   (2) Problem
   (3) Substandard
   (4) Doubtful

In addition,  bank management also reviews and where determined necessary allows
for specific  allowances  based upon reviews of specific  borrowers and provides
general allowances for areas which management believes are of higher credit risk
(agricultural  loans and constructed  model real estate homes as of December 31,
1995).

A summary of the components of the allowance for loan loss, by risk element,  as
of December 31, 1995 is as follows:

                                                                  (In Thousands)

Potential Watch and Watch Loans ..............................        $1,460
Substandard ..................................................           900
Specific borrowers ...........................................         1,875
Constructed model real estate homes ..........................           729
Agricultural loans ...........................................           250

Anticipated charge-offs of the above categories are not determinable at December
31, 1995;  however,  the Bank has no reason to expect actual  charge-offs  to be
significantly different from historical charge-offs.


INVESTMENT SECURITIES

The following tables show the carrying value of the investment securities as of
December 31, 1995, 1994 and 1993 and the maturities and yield of the investment
securities as of December 31, 1995:

                                                           December 31,
                                                --------------------------------
                                                  1995        1994        1993
                                                --------    --------    --------
                                                         (In Thousands)
Carrying value:
  U. S. Treasury securities ................    $ 41,275    $ 52,475    $ 74,160
  Obligations of other U. S. Government
      agencies and corporations ............      55,537      36,458      32,373
  Obligations of states and political
      subdivisions .........................      21,443      19,255      18,797
  Federal Home Loan Bank stock .............       3,281       1,862       1,564
                                                --------    --------    --------
                                                $121,536    $110,050    $126,894
                                                ========    ========    ========
<PAGE>


PART 1

Item 1.  Business (Continued)

                                                            December 31, 1995
                                                         -----------------------
                                                                       Weighted
                                                         Carrying      Average
                                                           Value        Yield
                                                         --------      --------
                                                              (In Thousands)
Type and maturity grouping:
  U. S. Treasury maturities:
  Within 1 year .....................................    $ 13,000        4.67%
  From 1 to 5 years .................................      28,275        5.82
                                                         --------
           Total ....................................    $ 41,275
                                                         --------
Obligations to other U. S. Government agencies
  and corporations, maturities:
  Within l year .....................................    $  7,393        4.43%
  From 1 to 5 years .................................      48,144        5.98
                                                         --------
           Total ....................................    $ 55,537
                                                         --------
Obligations of states and political subdivisions,
  maturities:
  Within 1 years ....................................    $  2,686        8.62%
  From 1 to 5 years .................................      10,753        7.83
  From 5 to 10 years ................................       7,939        7.37
  Over 10 years .....................................          65       10.25
                                                         --------
                                                         $ 21,443
                                                         --------
Federal Home Loan Bank stock ........................    $  3,281        7.30
                                                         --------
                                                         $121,536
                                                         ========

The yields are  computed on a  tax-equivalent  basis using a federal tax rate of
34% and a state tax rate of 5%.

As of December  31, 1995,  there were no  investment  securities  of any issuer,
other than securities of the U. S. Government and U. S. Government  agencies and
corporations, exceeding 10% of stockholders' equity.

The weighted  average  yield is based on the  amortized  cost of the  investment
securities.

<PAGE>



PART I


Item 1.  Business (continued)

DEPOSITS

The following  tables show the average  deposits and rates paid on such deposits
for the years ended December 31, 1995,  1994 and 1993 and the composition of the
certificates issued in excess of $100,000 as of December 31, 1995:
<TABLE>

                                                                                   December 31,
                                                       ----------------------------------------------------------------------
                                                         1995     Rate              1994     Rate              1993     Rate
                                                       --------  ------           --------  ------           --------  ------
<S>                                                    <C>       <C>              <C>       <C>              <C>       <C>

Average noninterest-bearing deposits ..............    $ 36,085    - -%           $ 34,409    - -%           $ 29,496    - -%
Average interest-bearing demand deposits ..........      37,249   2.40              45,220   2.30              40,337   2.71
Average savings deposits ..........................      74,146   3.53              71,291   2.28              71,301   2.70
Average time deposits .............................     226,251   5.60             209,602   5.18             201,325   5.63
                                                       --------                   --------                   --------
                                                       $373,731                   $360,522                   $342,459
                                                       ========                   ========                   ========

</TABLE>

                                                           Amount         Rate
                                                           ------         -----
Time certificates issued in amounts of $100,000
  or more as of December 31, 1995 with maturity in:
  3 months or less ....................................    $ 5,195        6.06%
  3 through 6 months ..................................      8,956        5.59
  6 through 12 months .................................      6,572        5.61
  Over 12 months ......................................      8,728        6.23
                                                           -------
                                                           $29,451
                                                           =======

RETURN ON STOCKHOLDERS' EQUITY AND ASSETS

The  following  table  presents the return on average  stockholders'  equity and
average assets for the years ended December 31, 1995, 1994 and 1993:

                                                            December 31,
                                                  ------------------------------
                                                   1995        1994        1993
                                                  ------      ------      ------

Return on assets ...........................       1.14%       1.15%       1.16%
Return on stockholders' equity .............      13.32       13.62       13.91
Dividend payout ratio ......................      24.12       23.83       22.92
Stockholders' equity to assets ratio .......       8.58        8.47        8.32

SHORT-TERM BORROWINGS

The following table shows outstanding balances,  weighted average interest rates
at year end, maximum month-end balances, average month-end balances and weighted
average  interest  rates of federal funds  purchased and  securities  sold under
agreements to repurchase during 1995, 1994 and 1993:

                                                    1995       1994       1993
                                                  --------   --------   --------
                                                      (Amounts In Thousands)

Outstanding as of December 31 .................   $10,019    $ 7,043    $ 4,489
Weighted average interest rate at year end ....      4.25%      3.85%      2.80%
Maximum month-end balance .....................   $12,028    $10,652    $ 6,361
Average month-end balance .....................     9,424      5,832      5,150
Weighted average interest rate for the year ...      4.34%      3.50%      3.57%

<PAGE>


PART I

Item 1.  Business (continued)

FEDERAL HOME LOAN BANK BORROWINGS

The following  table shows  outstanding  month-end  balances,  weighted  average
interest rates at year end,  maximum  month-end  balances,  average balances and
weighted average interest rates during 1995, 1994 and 1993:

                                                    1995       1994       1993
                                                  --------   --------   --------

Outstanding as of December 31 .................   $30,727    $20,758    $15,790
Weighted average interest rate at year end ....      6.29%      6.30%      6.20%
Maximum month-end balance .....................   $35,758    $20,758    $15,790
Average month-end balance .....................    28,965     17,473     15,308
Weighted average interest rate for the year ...      6.47%      6.32%      6.29%


Item 2.  Properties

The  Registrant's  office  and the  office  of the Bank is  located  at 131 Main
Street,  Hills,  Iowa. The main office is a one-story brick building  containing
approximately  8,600 square feet,  the major  portion of which was built in 1977
and remodeled in 1986. A two-story  addition to the main office was completed in
1984, which increased the facilities of the main office by  approximately  5,600
square feet.

The Iowa City  office of the Bank at 1401 South  Gilbert  Street is a  one-story
brick building  containing  approximately  7,200 square feet which includes five
drive-up teller lanes and two 24-hour  automatic teller machines.  In the Spring
of 1995, a 4,200  square foot  addition at an  approximate  cost of $600,000 was
completed,  adding  additional  retail banking space. The Coralville office is a
two-story building built in 1972 that contains  approximately 16,700 square feet
of space.  That  office is  equipped  with four  drive-up  teller  lanes and one
24-hour  automatic  teller  machine.  A 2,800 square foot renovated and expanded
building in North Liberty,  Iowa was opened for business in 1986. That office is
a full-service  location  including  three drive-up  teller lanes and a drive-up
automatic teller machine.

All of the  above  properties  are  owned by the  Bank,  free  and  clear of any
mortgages or other encumbrances of any type.

The Bank leases an office at 132 East  Washington  Street in downtown  Iowa City
with  approximately  2,500  square  feet.  The office has two 24-hour  automatic
teller  machines and two private  offices in addition to a tellers' and customer
service area. The Bank has options to renew the lease to 2001.


Item 3.  Legal Proceedings

There are no material pending legal proceedings.

The Bank holds no properties  which are the subject of hazardous  waste clean-up
investigations.


Item 4.  Submission of Matters to a Vote of Security Holders

No matters  were  submitted  to a vote of security  holders for the three months
ended December 31, 1995.

<PAGE>


PART II

Item 5.  Market for the Registrant's Common Stock and
         Related Security Holder Matters

The Registrant  does not believe that an established  trading market exists with
respect to its common stock. Its stock is not listed with any exchange or quoted
in an automated quotation system of a registered securities association,  nor is
there any  broker/dealer  acting as a market maker for its stock.  A bid and ask
price is quoted in an Iowa City local  paper and the quotes  are  provided  by a
local broker. The Registrant's stock is not actively traded.

During 1995, the  Registrant's  stock transfer records reflect that 1,774 shares
were  traded in a total of fifteen  transactions.  While the  Registrant  has no
direct  knowledge of the selling price for these shares,  based upon information
informally  related  by  shareholders,  it  believes  that in 1995 the  range of
selling  price of shares was $94 to $100 per share.  During  1994,  7,586 shares
were traded in a total of 13 transactions. The selling price of these shares was
believed to be in the $83 to $94 range.  As of December 31, 1995, the Registrant
has 934 shareholders.

The  Registrant  paid  aggregate  annual  cash  dividends  in 1995  and  1994 of
$1,268,000 and  $1,171,000,  respectively,  or $2.60 per share in 1995 and $2.40
per share in 1994. In January 1996, the Registrant  declared and paid a dividend
of $2.85 per share  totaling  $1,390,000.  The decision to declare any such cash
dividends in the future and the amount  thereof  rests within the  discretion of
the Board of Directors and will remain  subject to, among other things,  certain
regulatory restrictions imposed on the payment of dividends by the Bank, and the
future earnings, capital requirements and financial condition of the Registrant.

The Iowa  Banking  Act was  amended  effective  January  1, 1991 to  permit  the
acquisition  of  assets  of  certain  Iowa  banks and  Iowa-based  bank  holding
companies by regional bank holding  companies subject to newly enacted statutory
criteria  and  the  prior  approval  of  the  Iowa   Superintendent  of  Banking
(Superintendent).   The  1991  legislation   changed  but  did  not  repeal  the
pre-existing  Iowa law  which  permits  the  acquisition  of Iowa  banks by bank
holding  companies  within  limitations  based  upon the ratio of the  aggregate
amount of Iowa-based  time and demand  deposits of the  controlled  banks to the
total of the time and demand deposits of all Iowa banks.

The new law permitted an Iowa-based  bank holding company to exempt itself for a
specific  period of time from  acquisition  under the new law by a regional bank
holding  company if a resolution  was passed by its Board of Directors and filed
with the Superintendent  before January 1, 1991. On December 21, 1990, the Board
of Directors adopted a resolution  exempting the Company under the new law for a
period ending June 30, 1990,  unless  renewed as provided  under the Iowa law. A
certified copy of the resolution is filed annually with the Superintendent,  the
latest  extending the exemption from December 31, 1995 to December 31, 1996. The
new law also  prohibits  a regional  bank  holding  company  from  acquiring  an
Iowa-based bank holding company unless each of its subsidiary  banks has been in
existence  and  continuously  operated as a bank for five or more  years.  It is
unclear  what,  if any impact,  this  provision  will have on the market for the
Company's stock.
<PAGE>



PART II


Item 6.  Selected Financial Data

         CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>

                                                                 1995          1994           1993           1992            1991
                                                              ---------      ---------      ---------      ---------      ----------
<S>                                                           <C>            <C>            <C>            <C>            <C>

YEAR-END TOTALS
  Total assets ..........................................     $ 484,607      $ 444,912      $ 417,043      $ 393,581      $ 354,023
  Investment securities:
    Available for sale ..................................       100,093         90,795        108,097           --             --
    Held to maturity ....................................        21,443         19,255         18,797        106,073        102,857
  Federal funds sold ....................................        16,080          7,500          3,768         19,893         20,150
  Loans, net ............................................       318,546        300,821        262,976        248,776        213,441
  Deposits ..............................................       392,257        372,838        353,486        334,052        312,579
  Federal Home Loan Bank notes ..........................        30,727         20,758         15,790         15,000           --
  Redeemable common stock ...............................         5,271          5,210          4,616          4,234          3,855
  Stockholders' equity ..................................        43,277         36,447         35,943         32,009         28,717

EARNINGS
  Interest income .......................................     $  33,978      $  29,583      $  29,031      $  30,593      $  31,341
  Interest expense ......................................        18,468         14,834         15,520         17,546         19,325
  Provision for loan losses .............................           722            641            921          1,059            649
  Other income ..........................................         3,438          3,311          4,181          3,433          2,700
  Other expenses ........................................        10,975         10,640         10,299          9,163          8,375
  Applicable income taxes ...............................         1,994          1,845          1,799          1,837          1,603
  Net income ............................................         5,257          4,934          4,673          4,421          4,089

PER SHARE
  Net income ............................................     $   10.71      $   10.07      $    9.60      $    9.12      $    8.44
  Cash dividends ........................................          2.60           2.40           2.20           1.95           1.65
  Book value as of December 31 ..........................         88.71          74.72          73.71          66.04          59.25
  Increase (decrease) in book value due to:
    ESOP obligation and debt ............................        (10.80)        (10.68)         (9.87)         (9.54)         (9.16)
    Unrealized gains (losses) on debt securities ........           .61          (5.32)           .58           --             --

</TABLE>
<PAGE>



PART II


Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations

Financial Position

The consolidated  balance sheet of the Registrant  (hereafter referred to as the
"Company") as of December 31, 1995 reflects total assets of $484,607,000,  total
liabilities of $441,330,000,  and  stockholders'  equity of $43,277,000.  During
1995, total assets  increased  $39,695,000 or 8.92% from December 31, 1994 while
deposits and repurchase  agreements  increased 5.90% or $22,395,000.  Investment
securities,  which are primarily  classified  as available  for sale,  increased
$9,298,000  in 1995.  Due to lower  interest  rates,  the  unrealized  losses on
investment  securities  as of  December  31, 1994 of  $4,119,000  had changed to
unrealized  gains of  $472,000  as of  December  31,  1995.  Federal  funds sold
increased   $8,580,000  in  1995  and  net  loans   increased   $17,725,000   to
$318,546,000,  reflecting  another year of loan growth  driven  primarily by the
demand for single family residential mortgages. During 1995, the deposits of the
Bank grew 5.21%, a lower rate of growth than in recent years.  Savings  accounts
increased from  $66,521,000 at the end of 1994 to $85,502,000 as of December 31,
1995 while the amount of time certificates remained nearly unchanged since 1994.
During 1995, the Bank  increased its borrowings  from the Federal Home Loan Bank
by a net of $10,000,000 to provide some of the funding for loan growth.

Net Income

Net income for the year ended December 31, 1995 totaled $5,257,000,  an increase
of 6.55% from the $4,934,000  reported in 1994. Net income for 1994 was $261,000
or 5.59% greater than 1993 net income of $4,673,000.  The increase in net income
for 1995 was primarily  attributable  to an increase in the average  balances of
earning assets plus increased fee income for trust and deposit account  charges.
In  addition,  the  reduction  of  F.D.I.C.  insurance  premiums  in 1995  was a
significant factor.  Earnings per common share totaled $10.71,  $10.07 and $9.60
for the years ended December 31, 1995, 1994 and 1993, respectively.

The Company's return on average assets was 1.14% in 1995, slightly less than the
1.15% and 1.16% for 1994 and 1993. The return on average stockholders' equity is
a measure of how  effectively  the Company  has  generated  income on  available
capital.  Return on average  stockholders'  equity  totaled  13.32%,  13.62% and
13.91% in 1995, 1994 and 1993, respectively.

<PAGE>


PART II

Item 7.  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  assets  over  the  interest  expense  of the  interest-bearing
liabilities. The measure is shown on a tax-equivalent basis to make the interest
earned on taxable and nontaxable assets more comparable.

Net interest income on a tax equivalent basis changed in 1995 as follows:
<TABLE>

                                                                                               INTEREST INCOME
                                                                                ----------------------------------------------
                                                                                             Increase (Decrease)
                                                      Change In     Change In   ----------------------------------------------
                                                       Average       Average       Volume            Rate              Net
                                                       Balance        Rate         Changes         Changes           Change
                                                   --------------   ---------   ------------   --------------   --------------
                                                                           (Amounts In Thousands)
           <S>                                     <C>              <C>         <C>            <C>              <C> 
           Loans, net                              $       33,818     .38%      $      2,945   $        1,088   $        4,033
           Taxable securities                              (6,861)    .39               (356)             387               31
           Nontaxable securities                              753    (.37)                62              (70)              (8)
           Federal funds sold                               3,799    1.69                196              111              307
                                                   --------------               ------------   --------------   --------------
                                                   $       31,509               $      2,847   $        1,516   $        4,363
                                                   ==============               ============   ==============   ==============

                                                                                               INTEREST EXPENSE
                                                                                ----------------------------------------------
           Interest-bearing demand
             deposits                              $       (7,971)    .10%      $       (189)  $           44   $         (145)
           Savings deposits                                 2,855    1.25                 68              925              993
           Time deposits                                   16,649     .42                899              917            1,816
           Securities sold under agreements
             to repurchase                                  3,592     .84                148               57              205
           Other debt                                         (73)    .15                 (2)              (2)              (4)
           FHLB borrowings                                 11,492                        742               27              769
                                                   --------------               ------------   --------------   --------------
                                                   $       26,544               $      1,666   $        1,968   $        3,634
                                                   ==============               ============   ==============   ==============

           Change in net interest income                                        $      1,181   $         (452)  $          729
                                                                                ============   ==============   ==============

</TABLE>

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


         (Tax Equivalent Basis)                            1995    1994    1993
         ----------------------                           ------  ------  ------

Yield on average interest-earning assets ...............   7.98%   7.52%   7.78%
Rate on average interest-bearing liabilities ...........   4.91    4.24    4.65

Net interest spread ....................................   3.07    3.28    3.13
Effect of noninterest bearing funds ....................    .67     .57     .60

Net interest margin (tax equivalent interest income
   divided by average interest earning assets) .........   3.74%   3.85%   3.73%

<PAGE>


PART II

Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations (continued)

Loan Losses

The provision for loan losses was $722,000, $641,000 and $921,000 for 1995, 1994
and 1993.  Charge-offs,  net of recoveries were $192,000 for 1995,  $206,000 for
1994 and $336,000 for 1993.

The allowance for loan losses  totaled  $6,740,000 at December 31, 1995 compared
to  $6,210,000  at  December  31,  1994.  The  percentage  of the  allowance  to
outstanding   loans  was  2.07%  and  2.02%  at  December  31,  1995  and  1994,
respectively.  Agricultural  loans  totaled  $19,000,000  at December  31, 1995.
Management has an ongoing concern about  agricultural loans due to unpredictable
commodity  prices,  the  effects of weather on crop  production,  and  continued
uncertainties regarding government programs.  Therefore,  the allowance for loan
losses has been established to reflect this concern.

The economy  remains  strong in the Bank's trade area of Johnson  County,  Iowa.
Unemployment  remains low, the  University  of Iowa  enrollment  is stable,  the
University  of Iowa  Hospitals  and Clinics  continue to grow and,  for the most
part, area businesses have maintained  stable employment  levels.  The allowance
for loan losses is an estimate by the Bank to reserve for loan losses based upon
management's  evaluation  of the  total  loan  portfolio  and  current  economic
conditions.  There are no trends or uncertainties  that are reasonably likely to
have a material effect on the allowance for loan losses in the near-term.

Other Income

Noninterest  income  continues  to be very  important.  Fees  and  other  income
increased from  $3,311,000 in 1994 to $3,438,000 in 1995.  Total other income in
1993  was  $4,181,000.  Fees  received  from  loans  originated  and sold in the
secondary  market totaled  $294,000,  $402,000 and $1,337,000 for 1995, 1994 and
1993,  respectively.  Trust fees increased  $74,000 in 1995 to $755,000 and grew
$114,000 in 1994.  These  increases are due largely to  additional  assets under
management and not due to fee increases.  Increases in deposit  account  charges
and  other  fees in 1995 of  $57,000  to  $2,500,000  compared  to the  $166,000
increase  between  1994 and 1993 and were due to the volume of new  accounts and
selected  increases in deposit  account  fees.  Other  income for 1995  includes
investment  securities  losses of $111,000 compared to $215,000 in 1994 and none
in 1993. The securities  losses were taken primarily in the last quarter of 1995
and 1994 to remove low yielding  investment  securities and to take advantage of
higher return yields available upon reinvestment of the proceeds.

Other Expenses

Other  expenses for the years ended  December  31,  1995,  1994 and 1993 totaled
$10,975,000,  $10,640,000 and $10,299,000,  respectively. The increases in these
expenses totaled $335,000 and $341,000 in 1995 and 1994, respectively. The total
of other  expenses  increased  3.15% and 3.31% for the years ended  December 31,
1995 and 1994. Of these increases, $365,000 in 1995 and $360,000 in 1994 related
to salaries and employee benefits.  The number of full-time equivalent employees
at December  31, 1995 was 173,  compared to 162 at December  31, 1994 and 158 at
December 31, 1993. For 1995, the increase in salaries is a result of eleven more
full-time  equivalent  employees  and  normal  salary  increases.  Increases  in
salaries  affect other payroll related  expenses such as payroll taxes,  medical
and  health  benefits  and the ESOP and  profit-sharing  contributions.  Medical
insurance  costs  were  contained  in 1995 and 1994 as a  result  of the  Bank's
partial  self-insurance  plan which has had  favorable  experience.  The Bank is
responsible  for all claims up to a ceiling  amount per  employee  with the Bank
being  insured  for excess  claims  per  employee  and toal  claims for all bank
employees.

<PAGE>


PART II

Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations (continued)

Occupancy and furniture and equipment  expenses totaled  $1,891,000,  $1,701,000
and  $1,609,000  for  the  years  ended  December  31,  1995,   1994  and  1993,
respectively.  An  increase  of  $190,000 in 1995  resulted  from  increases  in
property taxes, repairs and maintenance,  depreciation on new computer equipment
and depreciation on the new equipment and building in Iowa City. The increase of
$92,000  from 1993 to 1994 is the result of  increases  in property  taxes,  and
overall  increases in repairs,  maintenance,  and  depreciation  on new computer
equipment.

F.D.I.C.  insurance  expense has decreased  from $793,000 in 1994 to $424,000 in
1995. This decrease of $369,000 resulted from a premium  retroactively  adjusted
back to June 1, 1995 from $.23 per $100 in deposits to $.04.  The Bank's premium
for 1996 will be $200,000,  to change depending on the total insurance fund that
is accumulated for all banks.

Other operating expenses totaled  $2,443,000,  $2,378,000 and $2,562,000 for the
years  ended  December  31,  1995,  1994  and  1993.   Other  expenses   include
professional  fees,  outside  services,   marketing  and  business   promotions,
insurance,  and other expenses.  For 1994,  other operating  expenses  decreased
$184,000 which included  decreases in professional fees of $56,000 and marketing
of $94,000.

Income Taxes

Income tax expense was $1,994,000, $1,845,000 and $1,799,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.  The corresponding percentage of
tax expense  compared to income before  income taxes is 27.5% in 1995,  27.2% in
1994 and 27.8% in 1993.

Impact of Recently Issued Accounting Standards

The adoption of new accounting  standards had no effect on financial position or
results of  operations  in 1995,  and the  adoption of several  recently  issued
standards is not expected to have a significant effect.

Liquidity and Capital Resources

An important  factor in the earnings  performance  of the Bank is the ability to
maintain a proper  balance  between  rate  sensitive  assets and rate  sensitive
liabilities.  Liquidity  management  involves  the ability to meet the cash flow
requirements  of  depositors  desiring to withdraw  funds or  borrowers  needing
funds. The Bank maintains an asset/liability committee which meets at least once
a month to review the interest rate  sensitivity  position and to review various
strategies as to interest  rate risk  management.  In addition,  the Bank uses a
simulation  model to  review  various  assumptions  relating  to  interest  rate
movement.  The model  attempts  to limit rate risk even if it appears the Bank's
asset and liability  maturities are perfectly  matched and a favorable  interest
margin is present.

<PAGE>



PART II


Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations (continued)

Interest Rate Sensitivity

At December 31, 1995,  the  Company's  interest  rate  sensitivity  report is as
follows (in thousands):
<TABLE>


                                     Repricing
                                     Maturities                                             More Than
                                    Immediately   2-30      31-90      91-180    181-365    One Year     Total
                                    ----------- --------   --------   --------   --------   ---------  --------
<S>                                 <C>         <C>        <C>        <C>        <C>        <C>        <C>
Earning assets:
  Federal funds sold .............   $ 16,080   $   --     $   --     $   --     $   --     $   --     $ 16,080
  Investment securities ..........       --          300      2,300      5,302     15,081     98,553    121,536
  Loans ..........................       --       30,545     15,421     28,155     51,589    199,576    325,286
                                     --------   --------   --------   --------   --------   --------   --------
              Total earning assets   $ 16,080   $ 30,845   $ 17,721   $ 33,457   $ 66,670   $298,129   $462,902
                                     --------   --------   --------   --------   --------   --------   --------
Sources of funds:
  Interest-bearing checking and
    savings accounts .............   $ 45,266   $   --     $   --     $   --     $   --     $ 75,699   $120,965
  Certificates of deposit ........       --        7,842     15,620     41,474     49,732    113,697    228,365
  Other borrowings - FHLB ........       --         --         --         --        5,032     25,695     30,727
  Repurchase agreements ..........     10,019       --         --         --         --         --       10,019
                                     --------   --------   --------   --------   --------   --------   --------
                                     $ 55,285   $  7,842     15,620   $ 41,474   $ 54,764   $215,091   $390,076
  Other sources ..................       --         --         --         --         --       72,826     72,826
                                     --------   --------   --------   --------   --------   --------   --------
              Total sources ......   $ 55,285   $  7,842   $ 15,620   $ 41,474   $ 54,764   $287,917   $462,902
                                     --------   --------   --------   --------   --------   --------   --------
  Repricing differences ..........   $(39,205)  $ 23,003   $  2,101   $ (8,017)  $ 11,906   $ 10,212   $   --
                                     ========   ========   ========   ========   ========   ========   ========
</TABLE>

A portion of the interest-bearing  checking,  savings, and money market accounts
have been  included in the above table as maturing  immediately  and the rest of
these  deposits are shown as more than one year.  The  classifications  are used
because the Bank's  historical  data  indicates that these have been very stable
deposits without much interest rate  fluctuation.  Historically,  these accounts
would not need to be adjusted upward as quickly in a period of rate increases so
the interest risk exposure would be less than the repricing schedule indicates.

<PAGE>



PART II


Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations (continued)

Inflation

Inflation  has an impact on the growth of total  assets and has  resulted in the
need to  increase  equity  capital to maintain  an  appropriate  equity to asset
ratio. The results of operations have been affected by inflation, but the effect
has been minimal.

Capital

As of December 31, 1995 and 1994,  equity before  deducting for the maximum cash
obligation related to ESOP was $48,548,000 and $41,657,000,  respectively.  This
measure of equity as a percent of total  assets was 10.02% at December  31, 1995
and 9.36% at December 31, 1994.  These  ratios are  competitive  with the Bank's
peers.  As of December  31, 1995,  total equity was 8.93% of assets  compared to
8.19% of  assets at the  prior  year end.  The  ability  of the  Company  to pay
dividends  to its  shareholders  is  dependent  upon the  earnings  and  capital
adequacy of the  subsidiary  bank,  which  affects the Bank's  dividends  to the
Company. The Bank is subject to certain statutory and regulatory restrictions on
the amount it may pay in  dividends.  In order to  maintain  acceptable  capital
ratios  in the  subsidiary  bank,  certain  of its  retained  earnings  are  not
available  for the payment of  dividends.  Retained  earnings  available for the
payment  of  dividends  to the  Company  total  approximately  $8,700,000  as of
December 31, 1995.

The  Company  and  the  Bank  are  subject  to  the  Federal  Deposit  Insurance
Corporation Improvement Act of 1991 and the Bank is subject to Prompt Corrective
Action  Rules  as  determined  and  enforced  by  the  Federal  Reserve.   These
regulations  establish  minimum  capital  requirements  which  member banks must
maintain.

As  of  December  31,  1995,   risk-based   capital   standards  require  8%  of
risk-weighted  assets.  At  least  half of that 8% must  consist  of Tier I core
capital (common stockholder's equity,  noncumulative  perpetual preferred stock,
and minority interest in the equity accounts of consolidated subsidiaries),  and
the  remainder  may  be  Tier  II   supplementary   capital   (perpetual   debt,
intermediate-term   preferred  stock,   cumulative   perpetual,   long-term  and
convertible  preferred  stock, and loan loss reserve up to a maximum of 1.25% of
risk-weighted assets). Total risk-weighted assets are determined by weighing the
assets according to their risk characteristics.  Certain off-balance sheet items
(such as standby letters of credit and firm loan  commitments) are multiplied by
"credit  conversion  factors" to translate  them into balance sheet  equivalents
before assigning them risk weightings. Any bank having a capital ratio less than
the 8% minimum  required level must within 60 days submit to the Federal Reserve
a plan  describing  the means and  schedule by which the Bank shall  achieve the
applicable minimum capital ratios.

A comparison  of capital as of December 31, 1995 with  minimum  requirements  is
presented below:

                                                       Actual  
                                                ------------------    Minimum
                                                Company      Bank  Requirements
                                                -------     ------ ------------

Tier I Risk-Based Capital .............          14.33%     14.10%      4%
Total Risk-Based Capital ..............          15.59      15.36       8
Leverage Ratio ........................           9.96       9.80       3

<PAGE>


PART II

Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations (continued)

Commitments and Trends

In February  1996, the Company  announced the stock  purchase of a Lisbon,  Iowa
bank  holding  company and the  purchase  of certain  assets and  assumption  of
deposits of the Kalona,  Iowa branch  office of  Boatmen's  Bank Iowa,  N.A. The
Lisbon  bank  has  approximately   $16.5  million  in  assets  and  deposits  of
approximately  $15 million.  The Kalona office has assets of  approximately  $23
million and  deposits of  approximately  $23 million.  It is expected  that both
banks will be owned by the Company and operated as separately  chartered  banks.
Both acquisitions are subject to various regulatory approvals. It is anticipated
that both acquisitions will be completed in the third quarter of 1996.

The  acquisitions  of the two banks is  expected  to  require an  investment  of
approximately  $6,000,000 and the funds for the  acquisitions are expected to be
provided from cash and the maturities of investment securities.

Other than the previously  mentioned  acquisitions,  the Company has no material
commitments  or plans  which will  materially  affect its  liquidity  or capital
resources.  The  acquisition of property and equipment may be in cash purchases,
or they may be financed if favorable terms are available.

As of December 31,  1995,  the Company is of the opinion that there are no known
trends or  uncertainties  which are expected that will have a material effect on
the financial condition of the Company.


Item 8.  Financial Statements and Supplementary Data

The  financial  statements  are included on Pages 25 through 47. The  Registrant
does not meet the  requirements  of Item 302 of  Regulation  S-K to include  the
supplementary financial information required by that item.



<PAGE>






                          INDEPENDENT AUDITOR'S REPORT




To the Board of Directors
   and Stockholders
Hills Bancorporation
Hills, Iowa


               We have audited the accompanying  consolidated  balance sheets of
Hills  Bancorporation  and  subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years ended December 31, 1995, 1994 and 1993. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.


               We conducted our audits in  accordance  with  generally  accepted
auditing  standards.  Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.


               In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects,  the financial position of Hills
Bancorporation  and subsidiary as of December 31, 1995 and 1994, and the results
of their  operations and their cash flows for the years ended December 31, 1995,
1994 and 1993 in conformity with generally accepted accounting principles.




                             /s/ McGLADREY & PULLEN, LLP
                             ---------------------------


Iowa City, Iowa
January 25, 1996, except for Note 13, as to which the
   date is February 7, 1996

<PAGE>





                              HILLS BANCORPORATION


                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1995 and 1994
                      (In Thousands, Except Share Amounts)

<TABLE>


               ASSETS                                               1995        1994
                                                                  ---------   ---------
<S>                                                               <C>         <C>

Cash and due from banks (Note 9) ..............................   $  11,883   $  10,805
Investment securities (Note 2):
   Available for sale (amortized cost 1995 $99,621;
      1994 $94,914) ...........................................     100,093      90,795
   Held to maturity (fair value 1995 $21,754;
      1994 $18,924) ...........................................      21,443      19,255
Federal funds sold ............................................      16,080       7,500
Loans, net (Notes 3, 7 and 10) ................................     318,546     300,821
Property and equipment, net (Note 4) ..........................       6,996       6,350
Accrued interest receivable ...................................       4,446       3,776
Deferred income taxes, net (Note 8) ...........................       1,474       2,935
Other assets ..................................................       3,646       2,675
                                                                  ---------   ---------
                                                                  $ 484,607   $ 444,912
                                                                  =========   =========
      LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
   Noninterest-bearing deposits ...............................   $  42,927   $  35,470
   Interest-bearing deposits (Note 5) .........................     349,330     337,368
                                                                  ---------   ---------
               Total deposits .................................   $ 392,257   $ 372,838
   Securities sold under agreements to repurchase .............      10,019       7,043
   Federal Home Loan Bank notes (Note 7) ......................      30,727      20,758
   Accrued interest payable ...................................       1,885       1,548
   Other liabilities ..........................................       1,171       1,068
                                                                  ---------   ---------
                                                                  $ 436,059   $ 403,255
                                                                  ---------   ---------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 13)

REDEEMABLE COMMON STOCK HELD BY EMPLOYEE STOCK
   OWNERSHIP PLAN (ESOP) (Note 6) .............................   $   5,271   $   5,210
                                                                  ---------   ---------

STOCKHOLDERS' EQUITY (Note 9)
   Capital stock, no par value; authorized
      2,000,000 shares; issued 1995 487,868 shares;
      1994 487,773 shares .....................................   $   8,925   $   8,915
   Retained earnings ..........................................      39,325      35,336
   Unrealized gains (losses) on debt securities, net ..........         298      (2,594)
                                                                  ---------   ---------
                                                                  $  48,548   $  41,657
   Less maximum cash obligation related to ESOP shares (Note 6)       5,271       5,210
                                                                  ---------   ---------
                                                                  $  43,277   $  36,447
                                                                  ---------   ---------
                                                                  $ 484,607   $ 444,912
                                                                  =========   =========
</TABLE>

See Notes to Financial Statements.

<PAGE>


                              HILLS BANCORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME
                  Years Ended December 31, 1995, 1994 and 1993
                      (In Thousands, Except Share Amounts)

<TABLE>


                                                        1995         1994          1993
                                                      ---------    ---------    ---------
<S>                                                   <C>          <C>          <C>  
Interest income:
   Interest and fees on loans .....................   $  27,236    $  23,173    $  22,572
   Interest on investment securities:
      Taxable .....................................       5,189        5,158        4,883
      Nontaxable ..................................       1,034        1,040        1,052
   Interest on federal funds sold .................         519          212          524
                                                      ---------    ---------    ---------
                Total interest income .............   $  33,978    $  29,583    $  29,031
                                                      ---------    ---------    ---------

Interest expense:
   Interest on deposits ...........................   $  16,185    $  13,521    $  14,361
   Interest on securities sold under agreements
      to repurchase ...............................         409          204          184
   Interest on FHLB borrowings ....................       1,874        1,105          963
   Other ..........................................        --              4           12
                                                      ---------    ---------    ---------
                Total interest expense ............   $  18,468    $  14,834    $  15,520
                                                      ---------    ---------    ---------

                Net interest income ...............   $  15,510    $  14,749    $  13,511

Provision for loan losses (Note 3) ................         722          641          921
                                                      ---------    ---------    ---------
                Net interest income after provision
                  for loan losses .................   $  14,788    $  14,108    $  12,590
                                                      ---------    ---------    ---------

Other income:
   Loan origination fees ..........................   $     294    $     402    $   1,337
   Trust fees .....................................         755          681          567
   Deposit account charges and fees ...............       1,606        1,500        1,449
   Other fees and charges .........................         894          943          828
   Investment securities losses (Note 2) ..........        (111)        (215)        --
                                                      ---------    ---------    ---------
                                                      $   3,438    $   3,311    $   4,181
                                                      ---------    ---------    ---------
Other expenses:
   Salaries and employee benefits .................   $   5,492    $   5,127    $   4,767
   Occupancy ......................................         792          712          691
   Furniture and equipment ........................       1,099          989          918
   F.D.I.C. insurance .............................         424          793          753
   Office supplies and postage ....................         725          641          608
   Other ..........................................       2,443        2,378        2,562
                                                      ---------    ---------    ---------
                                                      $  10,975    $  10,640    $  10,299
                                                      ---------    ---------    ---------
                Income before income taxes ........   $   7,251    $   6,779    $   6,472

Federal and state income taxes (Note 8) ...........       1,994        1,845        1,799
                                                      ---------    ---------    ---------

                Net income ........................   $   5,257    $   4,934    $   4,673
                                                      =========    =========    =========

Average common and common equivalent shares .......     490,928      489,782      486,690
                                                      =========    =========    =========
Earnings per common and common equivalent share ...   $   10.71    $   10.07    $    9.60
                                                      =========    =========    =========
</TABLE>


See Notes to Financial Statements.

<PAGE>



                              HILLS BANCORPORATION


         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 6 AND 9)
                  Years Ended December 31, 1995, 1994 and 1993
                        (In Thousands, Except Share Data)

<TABLE>
                                                                                                         Less
                                                                                                        Maximum
                                                                              Unrealized                 Cash
                                                                                 Gains       Less      Obligation
                                                                                On Debt      ESOP       Related
                                                        Capital    Retained   Securities,    Debt       To ESOP
                                                         Stock     Earnings      Net       Guarantee     Shares      Total
                                                       --------    --------   -----------  ---------   ----------- --------
<S>                                                    <C>         <C>        <C>          <C>         <C>         <C>

Balance, December 31, 1992 .........................   $  8,668    $ 27,966    $   --      $   (391)   $ (4,234)   $ 32,009
   Issuance of 2,922 shares of common stock (Note 6)        230        --          --          --          --           230
   Payment on debt of ESOP .........................       --          --          --           196        --           196
   Change related to ESOP shares ...................       --          --          --          --          (382)       (382)
   Net income ......................................       --         4,673        --          --          --         4,673
   Cash dividends ($2.20 per share) ................       --        (1,066)       --          --          --        (1,066)
   Cumulative effect of accounting change ..........       --          --           283        --          --           283
                                                       --------    --------    --------    --------    ---------   --------
Balance, December 31, 1993 .........................   $  8,898    $ 31,573    $    283    $   (195)   $  (4,616)  $ 35,943
   Issuance of 370 shares of common stock ..........         34        --          --          --          --            34
   Redemption of 219 shares of common stock ........        (17)       --          --          --          --           (17)
   Payment on debt of ESOP .........................       --          --          --           195        --           195
   Change related to ESOP shares ...................       --          --          --          --          (594)       (594)
   Net income ......................................       --         4,934        --          --          --         4,934
   Cash dividends ($2.40 per share) ................       --        (1,171)       --          --          --        (1,171)
   Unrealized (losses) on debt securities, net .....       --          --        (2,877)       --          --        (2,877)
                                                       --------    --------    --------    --------    ---------   --------
Balance, December 31, 1994 .........................   $  8,915    $ 35,336    $ (2,594)   $   --      $ (5,210)   $ 36,447
   Issuance of 203 shares of common stock ..........         20        --          --          --          --            20
   Redemption of 108 shares of common stock ........        (10)       --          --          --          --           (10)
   Change related to ESOP shares ...................       --          --          --          --           (61)        (61)
   Net income ......................................       --         5,257        --          --          --         5,257
   Cash dividends ($2.60 per share) ................       --        (1,268)       --          --          --        (1,268)
   Unrealized gains on debt securities, net ........       --          --         2,892        --          --         2,892
                                                       --------    --------    --------    --------    ---------   --------
Balance, December 31, 1995 .........................   $  8,925    $ 39,325    $    298    $   --      $  (5,271)  $ 43,277
                                                       ========    ========    ========    ========    =========   ========
</TABLE>

See Notes to Financial Statements.

<PAGE>



                              HILLS BANCORPORATION


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1995, 1994 and 1993
                                 (In Thousands)

<TABLE>

                                                                                     1995        1994        1993
                                                                                   --------    --------    --------
<S>                                                                                 <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income ..................................................................   $  5,257    $  4,934    $  4,673
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation .............................................................        837         703         639
      Provision for loan losses ................................................        722         641         921
      Compensation paid by issuance of common stock ............................         10          17         230
      Deferred income taxes ....................................................       (238)       (145)       (245)
      (Increase) in accrued interest receivable ................................       (670)        (57)         (5)
      Amortization of bond discount ............................................        494         764         951
      (Increase) in other assets ...............................................       (971)        (14)     (2,113)
      Increase in accrued interest and other
         liabilities ...........................................................        440          92         122
                                                                                   --------    --------    --------
               Net cash provided by operating activities .......................   $  5,881    $  6,935    $  5,173
                                                                                   --------    --------    --------

CASH FLOWS FROM  INVESTING  ACTIVITIES  
   Proceeds  from  maturities of investment securities:
      Available for sale .......................................................   $ 19,404    $ 29,216    $   --
      Held to maturity .........................................................      2,653       2,674      46,304
   Proceeds from sales of available for sale securities ........................     11,013       8,961        --
   Purchases of investment securities:
      Available for sale .......................................................    (35,563)    (26,180)       --
      Held to maturity .........................................................     (4,896)     (3,184)    (67,603)
   Federal funds sold, net .....................................................     (8,580)     (3,732)     16,125
   Loans made to customers, net of collections .................................    (18,447)    (38,485)    (15,121)
   Purchases of property and equipment .........................................     (1,483)     (1,210)     (1,199)
                                                                                   --------    --------    --------
               Net cash (used in) investing activities .........................   $(35,899)   $(31,940)   $(21,494)
                                                                                   --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in deposits ....................................................   $ 19,419    $ 19,352    $ 19,434
   Net increase (decrease) in securities
      sold under agreements to repurchase ......................................      2,976       2,554      (1,004)
   Borrowings from FHLB ........................................................     15,000       5,000         790
   Payments on FHLB notes ......................................................     (5,031)        (32)       --
   Dividends paid ..............................................................     (1,268)     (1,171)     (1,066)
                                                                                   --------    --------    --------
               Net cash provided by financing activities .......................   $ 31,096    $ 25,703    $ 18,154
                                                                                   --------    --------    --------

               Increase in cash and due from banks .............................   $  1,078    $    698    $  1,833

CASH AND DUE FROM BANKS
   Beginning ...................................................................     10,805      10,107       8,274
                                                                                   --------    --------    --------
   Ending ......................................................................   $ 11,883    $ 10,805    $ 10,107
                                                                                   ========    ========    ========
</TABLE>

See Notes to Financial Statements.
<PAGE>


                              HILLS BANCORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1995, 1994 and 1993
                                 (In Thousands)


<TABLE>

                                                           1995       1994        1993
                                                         --------   --------    --------
<S>                                                      <C>        <C>         <C>
SUPPLEMENTAL DISCLOSURES 
   Cash payments for:
      Interest paid to depositors and others .........   $ 15,868   $ 13,417    $ 14,614
      Interest paid on other obligations .............      2,263      1,313       1,166
      Income taxes ...................................      2,099      1,981       2,068

   Noncash financing transactions:
      Increase in stockholders' equity related
         to ESOP debt ................................   $   --     $    195    $    196
      Increase in maximum cash obligation
         related to ESOP shares ......................         61        594         382
      Net unrealized gains (losses) on debt securities      4,591     (4,593)        474

</TABLE>

See Notes to Financial Statements.

<PAGE>


                              HILLS BANCORPORATION

                          NOTES TO FINANCIAL STATEMENTS




Note 1. Nature of Activities and Significant Accounting Policies

         Nature of activities:

         Hills  Bancorporation  (the  "Company") is a one-bank  holding  company
         engaged in the business of banking through its wholly-owned subsidiary,
         Hills Bank and Trust Company,  Hills, Iowa (the "Bank").  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,  and North Liberty,
         Iowa.  It operates  the main bank in Hills and has office  locations in
         downtown Iowa City, on South  Gilbert  Street in Iowa City,  Coralville
         and North Liberty. The Bank competes with other financial  institutions
         and nonfinancial  institutions  providing financial products.  Although
         the  loan  activity  of the Bank is  diversified  with  commercial  and
         agricultural  loans,  real estate loans,  automobile,  installment  and
         other consumer loans,  the Bank's credit is concentrated in real estate
         loans.

         Accounting estimates:

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions   that  affect  the  reported  amount  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

         Principles of consolidation:

         The  consolidated  financial  statements  include  the  accounts of the
         Company and its wholly-owned subsidiary,  Hills Bank and Trust Company.
         All  significant  intercompany  balances  and  transactions  have  been
         eliminated in consolidation.

         Investment securities:

         Held-to-maturity securities consist solely of debt securities which the
         Company has the positive intent and ability to hold to maturity and are
         stated at amortized cost.

         Available-for-sale securities consist of debt securities and marketable
         equity  securities  not  classified  as  trading  or  held-to-maturity.
         Available-for-sale  securities are stated at fair value, and unrealized
         holding gains and losses,  net of the related deferred tax effect,  are
         reported as a separate component of stockholders' equity.

         Premiums and discounts on investments in debt  securities are amortized
         over  the  contractual  lives  of  those  securities.   The  method  of
         amortization  results in a constant effective yield on those securities
         (the  interest  method).  Interest on debt  securities is recognized in
         income as accrued.  Realized  gains and losses are  included in income,
         determined  on the basis of the cost of the specific  securities  sold.
         There were no trading securities as of December 31, 1995 and 1994.

         Loans:

         Loans are  stated at the  amount of unpaid  principal,  reduced  by the
         allowance for loan losses.

         The  allowance for loan losses is  established  through a provision for
         loan losses charged to expense. Loans are charged against the allowance
         when management  believes the  collectibility of principal is unlikely.
         The  allowance  for loan  losses is  maintained  at a level  considered
         adequate to provide for losses that can reasonably be anticipated.  The
         allowance is increased by provisions  charged to expense and is reduced
         by net  charge-offs.  The Bank  makes  continuous  reviews  of the loan
         portfolio and considers  current economic  conditions,  historical loss
         experience,  review of  specific  problem  loans and other  factors  in
         determining the adequacy of the allowance.
<PAGE>


         On January 1, 1995, the Company adopted Financial  Accounting Standards
         Board  (FASB)  Statement  of Financial  Accounting  Standards  No. 114,
         "Accounting  by Creditors for Impairment of a Loan," as amended by FASB
         Statement No. 118,  "Accounting by Creditors for Impairment of a Loan -
         Income  Recognition  and  Disclosures,"  which  requires  loans  to  be
         considered  impaired when, based on current  information and events, it
         is probable  the Company  will not be able to collect all amounts  due.
         The portion of the  allowance  for loan losses  applicable  to impaired
         loans has been  computed  based on the present  value of the  estimated
         future cash flows of interest  and  principal  discounted  at the loans
         effective  interest  rate or on the fair  value of the  collateral  for
         collateral  dependent  loans.  The entire  change in  present  value of
         expected  cash  flows  of  impaired  loans  or of  collateral  value is
         reported  as bad debt  expense in the same  manner in which  impairment
         initially  was  recognized  or as a reduction in the amount of bad debt
         expense that otherwise would be reported. The effect of the adoption of
         these statements was not material.

         The accrual of interest income on impaired loans is discontinued  when,
         in the  opinion  of  management,  there is  reasonable  doubt as to the
         borrower's  ability to meet payments of interest or principal when they
         become due. Interest income on impaired loans is recognized on the cash
         basis.

         Loan fees and  origination  costs are  reflected  in the  statement  of
         income as collected or incurred.  Compared to the net deferral  method,
         this practice has no significant effect on income.

         Property and equipment is stated at cost less accumulated depreciation.
         Depreciation is computed using primarily declining-balance methods over
         the estimated useful lives of 7-40 years for buildings and improvements
         and 3-20 years for furniture and equipment.

         Deferred income taxes:

         Deferred  income taxes are provided under the liability  method whereby
         deferred tax assets are recognized for deductible temporary differences
         and net operating loss, and tax credit  carryforwards  and deferred tax
         liabilities are recognized for taxable temporary differences. Temporary
         differences are the differences  between the reported amounts of assets
         and liabilities and their tax bases. Deferred tax assets are reduced by
         a valuation  allowance  when, in the opinion of management,  it is more
         likely than not that some or all of the deferred tax assets will not be
         realized.  Deferred  tax assets and  liabilities  are  adjusted for the
         effects of changes in tax laws and rates on the date of enactment.

         Stock options:

         Compensation  expense for stock issued  through  stock options plans is
         accounted  for using the  intrinsic  value based  method of  accounting
         prescribed  by APB  Opinion  No. 25,  "Accounting  for Stock  Issued to
         Employees."  Under  this  method,   compensation  is  measured  as  the
         difference  between the estimated market value of the stock at the date
         of award  less  the  amount  required  to be paid  for the  stock.  The
         difference, if any, is charged to expense over the periods of service.

         Common stock held by ESOP:

         The  Company's  maximum  cash  obligation  related  to these  shares is
         classified  outside  stockholders'  equity  because  the shares are not
         readily traded and could be put to the Company for cash.

         Trust assets:

         Trust assets,  other than cash deposits,  held by the Bank in fiduciary
         or  agency  capacities  for its  customers  are not  included  in these
         statements since they are not assets of the Company.

         Earnings per common and common equivalent share:

         Earnings  per common  and common  equivalent  share are  determined  by
         dividing net income by the weighted average number of common and common
         equivalent shares  outstanding  during the year.  Dilutive common stock
         equivalents  related to the stock option plan were determined using the
         treasury stock method.  Earnings per share and common equivalent shares
         assuming  full  dilution are the same as earnings per common and common
         equivalent share.

         Statement of cash flows:

         For purposes of reporting cash flows,  cash and due from banks includes
         cash on hand  and  amounts  due from  banks  (including  cash  items in
         process of  clearing).  Cash flows from loans  originated  by the Bank,
         deposits and federal funds purchased and sold are reported net.

<PAGE>


         Recently issued accounting standards:

         The  Company  believes  the  adoption  of  recently  issued  accounting
         standards  will  not  have a  material  or  significant  impact  on its
         consolidated financial statements.

         Fair value of financial instruments:

         FASB  Statement  No. 107,  "Disclosures  About Fair Value of  Financial
         Instruments,"  requires  disclosure  of fair  value  information  about
         financial instruments,  whether or not recognized in the balance sheet,
         for which it is  practicable  to estimate  that  value.  In cases where
         quoted  market  prices  are not  available,  fair  values  are based on
         estimates  using present  value or other  valuation  techniques.  Those
         techniques  are   significantly   affected  by  the  assumptions  used,
         including the discount rate and estimates of future cash flows. In that
         regard,  the derived fair value estimates  cannot be  substantiated  by
         comparison  to  independent  markets  and, in many cases,  could not be
         realized in  immediate  settlement  of the  instrument.  Statement  107
         excludes certain financial instruments and all nonfinancial instruments
         from its disclosure requirements. Accordingly, the aggregate fair value
         amounts presented do not represent the underlying value of the Company.

         The  following  methods  and  assumptions  were used by the  Company in
         estimating the fair value of its financial instruments:

              Off-balance sheet instruments:

              Fair  values for  outstanding  letters of credit are based on fees
              currently  charged to enter into similar  agreements,  taking into
              account   the   remaining   terms  of  the   agreements   and  the
              counterparties' credit standing. The fair value of the outstanding
              letters of credit is not  believed to be  significant  at December
              31, 1995. Unfunded loan commitments are not valued since the loans
              are generally priced at market at the time of funding.

              Cash and cash equivalents and federal funds sold:

              The carrying  amounts  reported in the balance  sheet for cash and
              short-term instruments approximate their fair values.

              Investment securities:

              Fair values for  investment  securities are based on quoted market
              prices,   where  available.   If  quoted  market  prices  are  not
              available,  fair  values  are  based on  quoted  market  prices of
              comparable instruments.

              Loans receivable:

              For  variable-rate  loans  that  reprice  frequently  and  with no
              significant  change  in  credit  risk,  fair  values  are based on
              carrying  values.  The fair values for other loans are  determined
              using  estimated  future cash flows,  discounted  at the  interest
              rates  currently  being  offered for loans with  similar  terms to
              borrowers  with similar  credit  quality.  The carrying  amount of
              accrued interest receivable approximates its fair value.

              Deposit liabilities:

              The fair values of demand  deposits equal their  carrying  amounts
              which represent the amount payable on demand. The carrying amounts
              for   variable-rate,   fixed-term   money   market   accounts  and
              certificates of deposit are estimated using a discounted cash flow
              calculation that applies interest rates currently being offered on
              certificates  to  a  schedule  of  aggregated   expected   monthly
              maturities on time deposits.

              Short-term borrowings:

              The  carrying  amounts  borrowings  under  repurchase   agreements
              approximate their fair values.

              Long-term borrowings:

              The fair  values of the Bank's  long-term  borrowings  (other than
              deposits) are estimated using discounted cash flow analyses, based
              on the Bank's  current  incremental  borrowing  rates for  similar
              types of borrowing arrangements.

<PAGE>


Note 2. Investment Securities

         The amortized cost and fair value of debt securities available for sale
         are as follows:

                                                Gross       Gross
                                  Amortized   Unrealized  Unrealized      Fair
                                    Cost        Gains       Losses        Value
                                  ---------   ----------  ----------    --------
                                              (Amounts In Thousands)

December 31, 1995:
   U. S. Treasury ..........     $ 41,094     $    330     $    149     $ 41,275
   U. S. Government
      agencies and
      corporations .........       58,527          511          220       58,818
                                 --------     --------     --------     --------
            Total ..........     $ 99,621     $    841     $    369     $100,093
                                 ========     ========     ========     ========


December 31, 1994:
   U. S. Treasury ...........    $54,894      $     2     $ (2,421)     $ 52,475
   U. S. Government
      agencies and
      corporations ..........     40,020          --        (1,700)       38,320
                                 -------      -------     --------      --------
            Total ...........    $94,914      $     2     $ (4,121)     $ 90,795
                                 =======      =======     ========      ========

         The amortized cost and fair value of debt  securities  held to maturity
         are as follows:

                                               Gross      Gross
                                 Amortized  Unrealized  Unrealized    Fair
                                   Cost       Gains       Losses      Value
                                 ---------  ----------  ----------   -------
                                            (Amounts In Thousands)
December 31, 1995:
   States and political
      subdivisions ...........   $21,443     $   387     $    76     $21,754
                                 =======     =======     =======     =======

December 31, 1994:
   States and political
      subdivisions ...........   $19,255     $   144     $  (475)    $ 18,924
                                 =======     =======     =======     ========

         Gross  losses  realized  on  sales  of  investment  securities  totaled
         $111,000, $215,000 and none for the years ended December 31, 1995, 1994
         and 1993.

         The contractual  maturity  distribution of investment  securities as of
         December 31, 1995 is summarized as follows:

                                       Available For Sale     Held To Maturity
                                       ------------------    -------------------
                                       Amortized    Fair     Amortized    Fair
                                          Cost      Value      Cost       Value
                                       ---------  --------   ---------  --------
                                                 (Amounts In Thousands)

Due in one year or less ............   $ 20,393   $ 20,274   $  2,686   $  2,706
Due after one year through
   five years ......................     79,228     79,819     10,753     10,919
Due after five years through
   ten years .......................       --         --        7,939      8,058
Due over ten years .................       --         --           65         71
                                       --------   --------   --------   --------
            Total ..................   $ 99,621   $100,093   $ 21,443   $ 21,754
                                       ========   ========   ========   ========

<PAGE>

         As of December 31, 1995 investment  securities with a carrying value of
         $27,139  were  pledged  to  collateralize  public  and trust  deposits,
         short-term borrowings, and for other purposes, as required or permitted
         by law.


Note 3. Loans

         The composition of loans is as follows:

                                                             December 31,
                                                       -------------------------
                                                         1995             1994
                                                       --------         --------
                                                         (Amounts In Thousands)

Agricultural .................................         $ 19,000         $ 17,826
Commercial and financial .....................           26,810           26,024
Real estate:
   Construction ..............................            7,937            6,933
   Mortgage ..................................          239,899          225,342
Loans to individuals .........................           31,640           30,906
                                                       --------         --------
                                                       $325,286         $307,031
Less allowance for loan losses ...............            6,740            6,210
                                                       --------         --------
                                                       $318,546         $300,821
                                                       ========         ========

         Changes in the allowance for loan losses are as follows:

                                                    Year Ended December 31,
                                              ----------------------------------
                                                1995        1994          1993
                                              -------      -------      --------
                                                    (Amounts In Thousands)

Balance, beginning ......................     $ 6,210      $ 5,775      $ 5,190
   Provision charged to expenses ........         722          641          921
   Recoveries ...........................         730          854          725
   Loans charged off ....................        (922)      (1,060)      (1,061)
                                              -------      -------      -------
Balance, ending .........................     $ 6,740      $ 6,210      $ 5,775
                                              =======      =======      =======

         Information  about impaired loans as of and for the year ended December
         31, 1995 is as follows:

          Loans receivable for which there is a 
               related allowance for credit losses         $   --
          Loans receivable for which there is no 
               related allowance for credit losses          5,465
                                                           ------
         Total impaired loans                              $5,465
                                                           ======


          Related allowance for credit losses              $  - -
          Average balance                                   5,617
          Interest income recognized                          491

         No allowance for credit losses has been  recognized  for impaired loans
         because the loans have been charged off to the net present value of the
         future cash flows or to the fair value of the collateral if the loan is
         collateral dependent.


<PAGE>



Note 4. Property and Equipment

         The major classes of property and  equipment and the total  accumulated
         depreciation are as follows:

                                                   December 31,
                                              --------------------
                                                1995         1994
                                              -------      -------
                                             (Amounts In Thousands)

Land ....................................     $ 1,362      $ 1,362
Buildings and improvements ..............       5,358        4,620
Furniture and equipment .................       6,900        6,256
                                              -------      -------
                                              $13,620      $12,238
Less accumulated depreciation ...........       6,624        5,888
                                              -------      -------
            Net .........................     $ 6,996      $ 6,350
                                              =======      =======



Note 5. Interest-Bearing Deposits

         A summary of these deposits is as follows:

                                                             December 31,
                                                      --------------------------
                                                        1995              1994
                                                      --------          --------
                                                        (Amounts In Thousands)

NOW and other demand .......................          $ 35,463          $ 47,008
Savings ....................................            85,502            66,521
Time, $100,000 and over ....................            29,451            27,252
Other time .................................           198,914           196,587
                                                      --------          --------
                                                      $349,330          $337,368
                                                      ========          ========


Note 6. Employee Benefit Plans

         The Company has an Employee Stock Ownership Plan established to provide
         retirement  benefits for its  employees.  The Plan borrowed  $1,953,000
         from a bank in 1985 and acquired 57,400 shares of the Company's  stock,
         which  were  pledged  as  collateral  on the  bank  note.  The  Company
         committed to annual ESOP  contributions  sufficient to service the debt
         until  the  debt  was  retired  in  1994  and  has  made  discretionary
         contributions   normally  in  the  maximum  amount   permitted  by  IRS
         regulations.

         The Company's contribution to the Plan has been allocated as follows:

                                              1995           1994           1993
                                              ----           ----           ----
                                                    (Amounts In Thousands)

Compensation ......................           $ 76           $ 67           $513
Interest ..........................            --               4             12
                                              ----           ----           ----
                                              $ 76           $ 71           $525
                                              ====           ====           ====



<PAGE>



         In the event a terminated plan  participant  desires to sell his or her
         shares of the  Company  stock,  or for certain  employees  who elect to
         diversify  their  account  balances,  the  Company  may be  required to
         purchase the shares from the participant at their fair market value. To
         the extent that shares of common stock held by the ESOP are not readily
         traded,  a sponsor must reflect the maximum cash obligation  related to
         those securities  outside of stockholders'  equity.  As of December 31,
         1995,  52,711  shares  held by the  ESOP,  at a fair  value of $100 per
         share, have been reclassified from stockholders' equity to liabilities.

         In 1994,  the  Company  adopted  a  profit-sharing  plan  with a 401(k)
         feature  which  provides  for  discretionary  annual  contributions  in
         amounts to be determined by the Board of Directors.  The profit-sharing
         contribution totaled $419,000 for 1995 and $464,000 for 1994.

         The Company has a Stock  Incentive  Plan for certain key  employees and
         directors  whereby 43,600 shares of common stock have been reserved for
         awards in the form of stock  options or stock  awards.  A Stock  Option
         Committee grants options at prices equal to the fair value of the stock
         at the date of the grant.  Options expire 10 years from the date of the
         grant.  Directors may exercise options immediately and officers' rights
         under the plan vest over a five-year period from the date of the grant.
         Additional   compensation  is  accrued  equivalent  to  the  amount  of
         dividends  that would have been paid on the stock had the options  been
         exercised. Such compensation is payable upon exercise of the options.

         The  committee  is  authorized  to grant  awards  of  common  stock and
         authorized  the  issuance  of 203 and 370  shares of common  stock to a
         group of employees in 1995 and 1994, respectively.

         A summary of the stock option transactions are as follows:

                                                    Number
                                                      Of              Option
                                                    Shares             Price
                                                    ------            ------

Balance, January 1, 1994 ..................         15,523         $76.00-$78.50
   Exercised ..............................           --
   Forfeited ..............................           --
                                                    ------
Balance, December 31, 1994 ................         15,523
   Exercised ..............................           --
   Forfeited ..............................           --
                                                    ------
Balance, December 31, 1995 ................         15,523         $76.00-$78.50
                                                    ======

         As of December 31, 1995,  options for 7,535 shares of common stock were
         exercisable.


Note 7. Federal Home Loan Bank Borrowings

         As of December 31, 1995 the borrowings were as follows:

                                                                  (In Thousands)

Due August 31, 1996, 5.41% .................................          $ 5,000
Due August 29, 1997, 6.60% .................................            5,000
Due June 5, 1998, 5.74% ....................................           10,000
Due August 5, 1999, 6.57% ..................................            5,000
Due February 22, 2000, 7.73% ...............................            5,000
Due August 11, 2008, 6.00% .................................              727
                                                                      -------
                                                                      $30,727
                                                                      =======

         The borrowings are  collateralized  by 1-4 family mortgage loans with a
         face amount of $46,090. 


<PAGE>



Note 8. Income Taxes

         Income taxes for the years ended  December 31, 1995,  1994 and 1993 are
         summarized as follows:

                                        1995             1994             1993
                                      -------          -------          --------
                                                (Amounts In Thousands)

Current:
   Federal ..................         $ 1,828          $ 1,630          $ 1,718
   State ....................             404              360              326
Deferred ....................            (238)            (145)            (245)
                                      -------          -------          -------
                                      $ 1,994          $ 1,845          $ 1,799
                                      =======          =======          =======

         Deferred  income tax  liabilities  and assets arose from the  following
         temporary differences:

                                                    December 31,
                                              ------------------------
                                               1995     1994     1993
                                              ------   ------   ------
                                                (Amounts In Thousands)

Deferred income tax assets:
   Unrealized losses on debt securities ...   $   --   $1,525   $   --
   Allowance for loan losses ..............    2,135    1,938    1,760
   Certain accrued expenses ...............      166      107       96
   Other ..................................       43       24       24
                                              ------   ------   ------
            Gross tax assets ..............   $2,344   $3,594   $1,880
                                              ------   ------   ------
Deferred income tax liabilities:
   Property and equipment .................   $  591   $  570   $  535
   FHLB dividends .........................      105       80       80
   Unrealized gains on debt securities ....      174       --      190
   Other ..................................       --        9       --
                                              ------   ------   ------
            Gross tax liabilities .........      870      659      805
                                              ------   ------   ------
            Net deferred income tax asset .   $1,474   $2,935   $1,075
                                              ======   ======   ======

         The net  change  in the  deferred  income  taxes  for the  years  ended
         December  31,  1995,  1994  and  1993  is  reflected  in the  financial
         statements as follows:

                                                    Year Ended December 31,
                                              ----------------------------------
                                                1995        1994          1993
                                              -------      -------      --------
                                                 (Amounts In Thousands)

Statement of income .....................     $  (238)     $  (145)     $  (245)
Statement of stockholders' equity .......       1,699       (1,715)         190
                                              -------      -------      -------
                                              $ 1,461      $(1,860)     $   (55)
                                              -------      -------      -------





<PAGE>


         The income tax provisions  for the years ended December 31, 1995,  1994
         and 1993 are less than the amounts  computed  by  applying  the maximum
         effective  federal  income tax rate to the income  before  income taxes
         because of the following items:

                           1995                 1994                 1993
                    -------------------  -------------------  ------------------
                                  % Of                 % Of                % Of
                                 Pretax               Pretax              Pretax
                     Amount      Income   Amount      Income   Amount     Income
                    -------      ------  -------      ------  -------     ------
                                 (Amounts In Thousands)

Expected
   provision ....   $ 2,465       34.0%  $ 2,305       34.0%  $ 2,200      34.0%
Tax-exempt
   interest .....      (530)      (7.3)     (551)      (8.1)     (543)     (8.4)
Interest
   expense
   limitation ...        87        1.2        75        1.1        68       1.1
State income
   taxes, net
   of federal
   income tax
   benefit ......       245        3.4       225        3.3       247       3.8
Income tax
   credits ......      (250)      (3.5)     (195)      (2.9)     (110)     (1.7)
Other ...........       (23)       (.3)      (14)       (.2)      (63)     (1.0)
                    -------      ------  -------      ------  -------     ------
                    $ 1,994       27.5%  $ 1,845       27.2%  $ 1,799      27.8%
                    =======      ======  =======      ======  =======     ======

Note 9. Regulatory Capital  Requirements,  Restrictions on Subsidiary  Dividends
        and Cash Restrictions

         Federal regulatory  agencies have adopted various capital standards for
         financial  institutions,  including  risk-based capital standards.  The
         primary objectives of the risk-based capital framework are to provide a
         more  consistent  system for comparing  capital  positions of financial
         institutions  and to  take  into  account  the  different  risks  among
         financial institutions' assets and off-balance sheet items.

         Risk-based capital standards include  requirements for a minimum Tier 1
         capital to assets  ratio  (leverage  ratio).  In  addition,  regulatory
         agencies  consider the published  capital  levels as minimum levels and
         may  require a  financial  institution  to  maintain  capital at higher
         levels.

         A  comparison  of the Bank's  capital as of December  31, 1995 with the
         minimum requirements is presented below.

                                                                      Minimum
                                                            Actual  Requirements
                                                            ------- ------------

Tier 1 Risk-Based Capital .....................              14.10%     4.00%
Total Risk-Based Capital ......................              15.36      8.00
Leverage Ratio ................................               9.80      3.00

         According  to FDIC capital  guidelines,  the Bank is  considered  to be
         "Well Capitalized."

         The  ability of the Company to pay  dividends  to its  stockholders  is
         dependent  upon  dividends  paid by the Bank.  The Bank is  subject  to
         certain statutory and regulatory  restrictions on the amount it may pay
         in dividends. To maintain acceptable capital ratios in the Bank certain
         of  its  retained  earnings  are  not  available  for  the  payment  of
         dividends.  To  maintain a ratio of  capital to assets of 8%,  retained
         earnings  which could be available  for the payment of dividends to the
         Company total approximately $8,700,000 as of December 31, 1995.

         The Bank is required to maintain  reserve  balances in cash or with the
         Federal  Reserve  Bank.   Reserve  balances   totaled   $3,389,000  and
         $4,764,000 as of December 31, 1995 and 1994, respectively.


Note 10. Related Party Transactions

          Certain  directors  of the Company and  companies  with which they are
          affiliated and certain  principal  officers are customers of, and have
          banking  transactions  with,  the  Bank  in  the  ordinary  course  of
          business.  Such  indebtedness has been incurred on  substantially  the
          same  terms,  including  interest  rates  and  collateral,   as  those
          prevailing  at the time for  comparable  transactions  with  unrelated
          persons.
<PAGE>

         The  following  is an  analysis  of the changes in the loans to related
         parties during the years ended December 31, 1995 and 1994:

                                                       Year Ended December 31,
                                                     ---------------------------
                                                       1995              1994
                                                     -------            --------
                                                       (Amounts In Thousands)

Balance, beginning .......................           $ 9,011            $ 8,097
   Advances ..............................             1,327              1,493
   Collections ...........................              (790)              (579)
                                                     -------            -------
Balance, ending ..........................           $ 9,548            $ 9,011
                                                     =======            =======


         Deposits from related parties are accepted subject to the same interest
         rates and terms as those from nonrelated parties.


Note 11. Fair Value of Financial Instruments

         The carrying value and estimated fair values of the Company's financial
         instruments as of December 31, 1995 and 1994 are as follows:

<TABLE>

                                                 1995                   1994
                                         ---------------------  --------------------
                                          Carrying  Estimated   Carrying  Estimated
                                           Amount   Fair Value   Amount   Fair Value
                                          --------  ----------  --------  ----------
                                                     (Amounts In Thousands)
<S>                                       <C>       <C>         <C>       <C>

Cash and due from
   banks ..............................   $ 11,883   $ 11,883   $ 10,805   $ 10,805
Federal funds sold ....................     16,080     16,080      7,500      7,500
Investment securities .................    121,536    121,847    110,050    109,719
Loans .................................    318,546    321,553    300,821    300,101
Accrued interest
   receivable .........................      4,446      4,446      3,776      3,776
Deposits ..............................    392,257    394,390    372,838    371,703
Securities sold under
   agreements to
   repurchase .........................     10,019     10,019      7,043      7,043
Borrowings from
   Federal Home Loan
   Bank ...............................     30,727     30,973     20,758     20,854
Accrued interest
   payable ............................      1,885      1,885      1,548      1,548

                                               Face Amount          Face Amount
                                               -----------          -----------
Off-balance sheet
   instruments:
   Loan commit-
      ments $ .........................     50,456    $    --   $ 61,976   $     --
   Letters of credit ..................      5,822         --      4,694         --


</TABLE>


<PAGE>




Note 12. Parent Company Only Financial Information

         Following is condensed  financial  information  of the Company  (parent
         company only):

                                 BALANCE SHEETS
                           December 31, 1995 and 1994
                             (Amounts In Thousands)

                             ASSETS                         1995       1994
                                                          --------   --------

 Cash .................................................   $    316   $    271
 Investment securities available for sale .............        300        300
 Investment in subsidiary bank ........................     47,727     40,852
 Other assets .........................................        205        234
                                                          --------   --------
             Total assets .............................   $ 48,548   $ 41,657
                                                          ========   ========

    LIABILITIES AND STOCKHOLDERS' EQUITY
 Liabilities ..........................................   $     --   $     --
                                                          --------   --------
 Redeemable common stock held by ESOP ...............     $  5,271   $  5,210
                                                          --------   --------
 Stockholders' equity:
    Capital stock .....................................   $  8,925   $  8,915
    Retained earnings .................................     39,325     35,336
    Unrealized gains (losses) on debt
       securities, net ................................        298     (2,594)
                                                          --------   --------
                                                          $ 48,548   $ 41,657
    Less maximum cash obligation related
       to ESOP shares .................................      5,271      5,210
                                                          --------   --------
             Total stockholders' equity ...............   $ 43,277   $ 36,447
                                                          --------   --------
             Total liabilities and stockholders' equity   $ 48,548   $ 41,657
                                                          ========   ========



                              STATEMENTS OF INCOME
                  Years Ended December 31, 1995, 1994 and 1993
                             (Amounts In Thousands)



                                                    1995      1994        1993
                                                  -------    -------    -------

Interest on investment securities .............   $    20    $    11    $    12
Dividends received from subsidiary ............     1,272      1,212      1,164
Operating expenses ............................       (20)       (20)       (69)
                                                  -------    -------    -------
            Income before income taxes
              and equity in subsidiary's
              undistributed income ............   $ 1,272    $ 1,203    $ 1,107
Income tax benefit (expense) ..................         2          5         23
                                                  -------    -------    -------
                                                  $ 1,274    $ 1,208    $ 1,130
Equity in subsidiary's undistributed
   income .....................................     3,983      3,726      3,543
                                                  -------    -------    -------
            Net income ........................   $ 5,257    $ 4,934    $ 4,673
                                                  =======    =======    =======



<PAGE>


                            STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1995, 1994 and 1993
                             (Amounts In Thousands)



                                              1995       1994       1993
                                             -------    -------    -------

Cash flows from operating activities:
   Net income ............................   $ 5,257    $ 4,934    $ 4,673
   Noncash items included in net income:
      Undistributed earnings of subsidiary    (3,983)    (3,726)    (3,543)
      (Increase) in other assets .........        39        123        (12)
      Increase (decrease) in liabilities .      --         --          (23)
                                             -------    -------    -------
            Net cash provided by operating
              activities .................   $ 1,313    $ 1,331    $ 1,095
                                             -------    -------    -------
Cash flows from investing activities:
   Proceeds from maturities of investment
      securities .........................   $   300    $   300    $     3
   Purchase of investment securities .....      (300)      (300)      --
                                             -------    -------    -------
            Net cash provided by investing
              activities .................   $    --    $    --    $     3
                                             -------    -------    -------
Cash flows (used in) financing activities,
   cash dividends paid ...................   $(1,268)   $(1,171)   $(1,066)
                                             -------    -------    -------
            Increase in cash .............   $    45    $   160    $    32
Cash balance:
   Beginning .............................       271        111         79
                                             -------    -------    -------
   Ending ................................   $   316    $   271    $   111
                                             =======    =======    =======


Note 13. Commitments and Contingencies

         Concentrations of credit risk:

         All of the Bank's loans,  commitments to extend credit, unused lines of
         credit and outstanding letters of credit have been granted to customers
         within the Bank's  market area.  Investments  in  securities  issued by
         state and  political  subdivisions  within  the  state of Iowa  totaled
         approximately $8,619,000.  The concentrations of credit by type of loan
         are set forth in Note 3.  Outstanding  letters of credit  were  granted
         primarily to commercial borrowers.  Although the Bank has a diversified
         loan portfolio,  a substantial portion of its debtors' ability to honor
         their  contracts is dependent  upon the economic  conditions in Johnson
         County, Iowa.

         Contingencies:

         In the normal course of business, the Bank is involved in various legal
         proceedings. In the opinion of management, any liability resulting from
         such proceedings would not have a material adverse effect on the Bank's
         financial statements.


<PAGE>


         Financial instruments with off-balance sheet risk:

         The Bank is 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 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 December 31, 1995 and 1994 is as follows:

                                                             1995      1994
                                                           -------   -------
                                                          (Amounts In Thousands)

Firm loan commitments and unused portion of 
   lines of credit:
   Home equity loans ...............................       $ 2,333   $ 2,298
   Credit card participations ......................         5,123     5,175
   Commercial, real estate and
      home construction ............................        18,103    27,178
   Commercial lines ................................        24,897    27,325
Outstanding letters of credit ......................         5,822     4,694

         Commitments  to extend  credit are  agreements to lend to a customer as
         long as there  is no  violation  of any  condition  established  in the
         contract.  Since many of the commitments are expected to expire without
         being  drawn  upon,  the total  commitment  amounts do not  necessarily
         represent future cash requirements.  The Bank evaluates each customer's
         credit  worthiness on a  case-by-case  basis.  The amount of collateral
         obtained,  if deemed necessary by the Bank upon extension of credit, is
         based on management's  credit evaluation of the party.  Collateral held
         varies,  but  may  include  accounts  receivable,   crops,   livestock,
         inventory,   property  and  equipment,   residential  real  estate  and
         income-producing commercial properties.  Credit card participations are
         the  unused  portion  of  the  holders'  credit  limits.  Such  amounts
         represent the maximum amount of additional unsecured borrowings.

         Outstanding letters of credit are the conditional commitments issued by
         the Bank to guarantee  the  performance  of a customer to a third party
         and  collateralize  the  customer's  borrowing  arrangement  with other
         creditors.  The credit risk  involved  in issuing  letters of credit is
         essentially  the same as that involved in extending loan  facilities to
         customers. Collateral held varies as specified above and is required in
         instances which the Bank deems necessary.


Note 14. Subsequent Events

         As of February 7, 1996, the Company entered into agreements to purchase
         a bank and a branch  location  of  another  bank in nearby  Lisbon  and
         Kalona, Iowa,  respectively.  The purchase  transactions are subject to
         regulatory  approval  and are  expected  to be  completed  in the third
         quarter of 1996.  Total assets to be acquired in the  transactions  are
         approximately $39 million.  The transactions are expected to require an
         investment of  approximately  $6 million which will be funded from cash
         and the maturities of investment securities.


<PAGE>


PART II

Item  9.  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure

          None


<PAGE>



PART III


Item 10. Directors and Executive Officers of the Registrant

         Information concerning directors is contained in the Registrant's Proxy
         Statement  under  the  heading  "Information  Concerning  Nominees  for
         Election as Directors" and "Information Concerning Directors Other Than
         Nominees," which sections are incorporated herein by this reference.

         The following  table sets forth the name, age and principal  occupation
         of the Executive  Officers of the Registrant and Executive  Officers of
         the Bank.  All  officers  of the  Registrant  and the Bank are  elected
         annually for one-year terms of office.
<TABLE>

                                                                                                              Year First
                                                      Position With Registrant Or Bank                         Elected
                                                          And Principal Occupation                            Officer Of
                                                          And Employment During The                           Registrant
     Name                     Age                             Past Five Years                                   (Bank)
     ----                     ---                     ---------------------------------                       ----------
<S>                           <C>   <C>                                                                       <C>

Dwight O. Seegmiller ......   43    Director of Registrant and Bank; President, Registrant and Bank              1986
                                                                                                                (1975)

William H. Olin, D.D.S ....   72    Director of Registrant and Bank; Chairman of the Board, Bank;                1984
                                      Vice-President of the Registrant; Dentist, University of Iowa
                                      Hospitals and Clinics

Earlis Rohret .............   71    Director of Registrant and Bank; Vice-President of the Registrant; Farmer    1984

James G. Pratt ............   47    Treasurer of Registrant; Senior Vice-President and Controller of Bank        1985
                                      from January 1986 to present                                              (1982)

Thomas J. Cilek ...........   49    Secretary of Registrant; Senior Vice-President of Bank from August 1986      1988
                                      to present                                                                (1986)

</TABLE>

Item 11. Executive Compensation

         Information  required  by this item is  contained  in the  Registrant's
         Proxy  Statement  under  the  heading   "Executive   Compensation   and
         Benefits," which section is incorporated herein by this reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management

         Information  required  by this item is  contained  in the  Registrant's
         Proxy  Statement  under the  heading  "Security  Ownership  of  Certain
         Beneficial   Owners  and   Management"   and   "Report   on   Executive
         Compensation,"   which  sections  are   incorporated   herein  by  this
         reference.


Item 13. Certain Relationships and Related Transactions

         Information  required  by this item is  contained  in the  Registrant's
         Proxy   Statement  under  the  heading  "Loans  To  and  Certain  Other
         Transactions  With Executive  Officers and Directors," which section is
         incorporated herein by this reference.


<PAGE>


PART IV

Item 14. Exhibits, Financial Statements, Schedules,
         and Reports on Form 8-K

                                                                       Form 10-K
                                                                       Reference

         (a) 1. Financial Statements

                Independent  auditor's  report on the  financial  
                    statements                                               
                Consolidated  balance sheets as of December 31, 
                    1995 and 1994                                            
                Consolidated  statements of income for the years 
                    ended  December 31,  1995,   1994  and  1993             
                Consolidated   statements  of stockholders' equity 
                    for the years ended December 31, 1995, 1994
                    and 1993                                                  
                Consolidated  statements of cash flows for the years
                    ended  December  31,  1995,  1994  and  1993      
                Notes to financial statements                             

         (a) 2. Financial Statements Schedules

                All schedules are omitted because they are not applicable or not
                required, or because the required information is included in the
                consolidated financial statements or notes thereto.

         (a) 3. Exhibits

                Exhibit  3 -  Articles  of  Incorporation  and  Bylaws  filed as
                Exhibit 3 of Form 10-K for the year ended  December 31, 1993 are
                incorporated by reference.

                Exhibit  10(a) - Material  Contract  (Employee  Stock  Ownership
                Plan)  filed as  Exhibit  10(a) in Form 10-K for the year  ended
                December 31, 1993 is incorporated by reference.

                Exhibit 10(b) - Material  Contract (1993 Stock  Incentive  Plan)
                filed as Exhibit 10 (b) in Form 10-K for the year ended December
                31, 1993 is incorporated by reference.

                Exhibit  10(c)  -  Material   Contract  is  attached   (Deferred
                Compensation Plans)

                Exhibit 11 - Statement  Re  Computation  of Earnings  Per Common
                Share.

                Exhibit 21 - Subsidiaries  of the Registrant.

                Exhibit 23 - Consent of Accountants.

                Exhibit 27 - Financial Data Schedule.

         (b) Reports on Form 8-K:

             There  were no  reports  on Form  8-K for the  three  months  ended
             December 31, 1995.



<PAGE>


SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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  3/25/96                    By /s/ Dwight O. Seegmiller
                                    --------------------------------------------
                                    Dwight O. Seegmiller, Director and President

Date  3/25/96                    By /s/ James G. Pratt
                                    --------------------------------------------
                                    James G. Pratt, Treasurer and Chief 
                                      Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.


Date  3/25/96                    By /s/ Willis M. Bywater
                                    --------------------------------------------
                                    Willis M. Bywater, Director

Date  3/25/96                    By /s/ Thomas J. Gill
                                    --------------------------------------------
                                    Thomas J. Gill, Director

Date  3/25/96                    By /s/ Donald H. Gringer
                                    --------------------------------------------
                                    Donald H. Gringer, Director

Date  3/25/96                    By /s/ Richard W. Oberman
                                    --------------------------------------------
                                    Richard W. Oberman, Director

Date  3/25/96                    By /s/ William H. Olin
                                    --------------------------------------------
                                    William H. Olin, Director

Date  3/25/96                    By /s/ Theodore H. Pacha
                                    --------------------------------------------
                                    Theodore H. Pacha, Director

Date  3/25/96                    By /s/ Ann S. Rhodes
                                    --------------------------------------------
                                    Ann M. Rhodes, Director

Date  3/25/96                    By /s/ Earlis Rohret
                                    --------------------------------------------
                                    Earlis Rohret, Director

Date  3/25/96                    By /s/ Ronald E. Stutsman
                                    --------------------------------------------
                                    Ronald E. Stutsman, Director

Date  3/25/96                    By /s/ Earl M. Yoder
                                    --------------------------------------------
                                    Earl M. Yoder, Director




<PAGE>




                              HILLS BANCORPORATION
                       ANNUAL REPORT ON FORM 10-K FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 1995

                                  EXHIBIT INDEX

                                                              Page Number
                                                           In the Sequential
Exhibit                                                     Numbering System
Number                  Description                        For 1995 Form 10-K
-------                 -----------                        ------------------
10   Material contracts

11   Statement Re Computation of Earnings Per Common Share 

21   Subsidiaries of the Registrant ...................... 

23   Consent of Independent Certified Public Accountants . 

27   Financial Data Schedule .............................